The interim financial statements have been prepared by PGE and, in the opinion of management, reflect all material adjustments which are necessary for a fair statement of results for the interim period presented. Certain information and footnote disclosures made in the last annual report on Form 10-K have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and allocated to interim periods based on the estimates of operating time expired, benefit received or activity associated with the interim period. Accordingly, such costs are subject to year-end adjustment. It is PGE's opinion that, when the interim statements are read in conjunction with the 2000 Annual Report on Form 10-K, the disclosures are adequate to make the information presented not misleading.

Reclassifications - Certain amounts in prior years have been reclassified to conform to current year presentation.

Trojan Investment Recovery - In 1993, PGE sought full recovery of and a rate of return on its Trojan plant costs, including decommissioning, in a general rate case filing with the OPUC. The filing was a result of PGE's decision earlier in the year to cease commercial operation of Trojan as a part of its least cost planning process. In 1995, the OPUC issued a general rate order which granted the Company recovery of, and a rate of return on, 87% of its remaining investment in Trojan plant costs and full recovery of its estimated decommissioning costs through 2011.

Numerous challenges, appeals and requested reviews have been filed in Marion County, Oregon Circuit Court, Oregon Court of Appeals and with the Oregon Supreme Court on the issue of the OPUC's authority under Oregon law to grant recovery of and a return on the Trojan investment. The primary plaintiffs in the litigation have been the Citizens' Utility Board (CUB) and the Utility Reform Project (URP). Rulings issued to date by the Circuit Court and the Court of Appeals have been inconsistent on the issue. The Court of Appeals issued the latest ruling in 1998, stating that the OPUC does not have the authority to allow PGE to recover a return on the Trojan investment, but upheld the OPUC's authorization of PGE's recovery of the Trojan investment. PGE and the OPUC requested the Oregon Supreme Court to conduct a review of the Court of Appeals decision on the return on investment issue. In addition, URP requested the Oregon Supreme Court to review the Court of Appeals decision on the return of investment issue. The Supreme Court has indicated it will conduct a review.

In 2000, PGE entered into settlement agreements with CUB and the staff of the OPUC of the litigation related to PGE's recovery of its investment in the Trojan plant. Under the agreements, CUB agreed to withdraw from the litigation and support the settlement as the means to resolve the Trojan litigation. The settlement, which was approved by the OPUC, allowed PGE to remove from its balance sheet the remaining before-tax investment in Trojan of approximately $180 million at September 30, 2000, along with several largely offsetting regulatory liabilities. The largest of such amounts consisted of before-tax credits of approximately $79 million in customer benefits related to the previous settlement of power contracts with two other utilities and about $80 million remaining obligation under terms of the Enron/PGC merger. The settlement also allows PGE recovery of approximately $47 million in income tax benefits related to the Trojan investment which had been flowed to customers in prior years; such amount is being recovered from PGE customers, with no return on the unamortized balance, over an approximate five year period. After offsetting the investment in Trojan with these credits and prior tax benefits, the remaining Trojan regulatory asset balance of approximately $5 million (after tax) was expensed. As a result of the settlement, PGE's investment in Trojan is no longer included in rates charged to customers, either through a return of or a return on that investment. The URP has challenged the settlement agreements and the OPUC order. Collection of decommissioning costs at Trojan is unaffected by the settlement agreements or the OPUC order.

With CUB's withdrawal, the URP is the one remaining significant adverse party in the litigation. The URP has indicated it plans to continue to challenge the orders that allow PGE recovery of and a return on its investment in Trojan. The Oregon Supreme Court's review is on hold pending resolution of the URP's latest challenge with the OPUC.

Management cannot predict the ultimate outcome of the above litigation. However, it believes that the outcome of this matter will not have a material adverse impact on the financial condition of the Company, but may have a material impact on the results of operations for a future reporting period.

PGE engages in both wholesale trading and non-trading activities in certain energy-related commodity contracts. On January 1, 2001, PGE adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires that derivative instruments be recorded on the balance sheet as an asset or liability measured at fair value and that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

SFAS No. 133 requires that as of the date of adoption, the difference between the fair value of derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle.

PGE engages in trading activities with other utilities and power marketers, currently utilizing electricity forward contracts and natural gas swaps and futures, to take advantage of price movements in electricity and natural gas in order to optimize the results of its operations. Under SFAS No. 133, changes in the fair value of such derivative instruments are reflected in current earnings in purchased power and fuel expense.

In the first quarter of 2001, PGE recorded in earnings an after-tax unrealized gain of $8 million on electricity forward contracts and natural gas swaps and futures. Future changes in the fair value of electricity forward contracts and natural gas swaps and futures entered into for trading purposes will continue to be reflected in current earnings. Previously, gains and losses from energy trading contracts were included in earnings under Emerging Issues Task Force (EITF) Issue 98-10, "Accounting for Energy Trading and Risk Management Activities". As a result, no transition adjustment was recorded upon adoption of SFAS No. 133.

PGE also enters into commodity contracts primarily for the purpose of managing its exposure to market fluctuations on commodity prices to achieve lower net power costs for its retail customers. Currently, the Company utilizes electricity and natural gas forward contracts and natural gas swaps to mitigate the impact of such market volatility.

As PGE's primary business is to serve its retail customers, electricity and natural gas forward contracts that are anticipated to serve the Company's regulated retail load are considered subject to the "normal purchases and normal sales" exception of SFAS No. 133. Other non-trading activities consist of certain natural gas forwards and swaps that qualify as cash flow hedges of forecasted transactions, and certain natural gas swaps with no hedging designation. Such activities are intended to protect against variability in expected future cash flows due to associated price risk and are utilized to manage overall fuel costs for PGE's retail customers.

Electricity and natural gas forward contracts subject to the "normal purchases and normal sales" exception of SFAS No. 133 are not required to be recorded at fair value. As required by SFAS No. 133, gains and losses from natural gas forward and swap contracts that qualify as cash flow hedges are recorded in Other Comprehensive Income (OCI), a component of common equity. These gains and losses from cash flow hedges will be reclassified from OCI to earnings in purchased power and fuel expense upon transaction settlement. Gains and losses from natural gas swaps with no hedging designation are recorded currently in earnings in purchased power and fuel expense.

Upon adoption of SFAS No. 133 on January 1, 2001, PGE recorded in earnings an after-tax gain of $11 million from a cumulative effect of a change in accounting principle. This transition adjustment represents the fair value of non-trading natural gas swaps in PGE's retail portfolio. The Company also recorded in earnings an after-tax first quarter unrealized loss of $1 million on non-trading natural gas swaps.

Also, upon adoption of SFAS No. 133 on January 1, 2001, PGE recorded in OCI a cumulative effect adjustment of $35 million (after-tax), representing the fair value of certain non-trading natural gas forward contracts and natural gas purchase swaps used to manage the price of anticipated natural gas purchases. In the first quarter of the year, a $4 million after-tax gain in new contracts and changes in fair values was recognized in OCI; in addition, an $8 million after-tax gain was reclassified to earnings from OCI for contracts that settled during the period. No gains or losses were reclassified into earnings during the quarter for the discontinuance of cash flow hedges or for hedge ineffectiveness. As of March 31, 2001, the maximum length of time over which PGE is hedging its exposure to such transactions is two years. Of the $35 million transition adjustment, $8 million was reclassified into earnings in the first quarter of 2001, with an estimated $16 million to be reclassified to earnings in the remaining nine months of the year. The Company estimates that of the $31 million OCI balance at March 31, 2001, gains totaling $24 million will be reclassified into earnings within the next twelve months.

The impact of PGE's adoption of SFAS No. 133 is dependent upon certain pending interpretations of the statement, which are currently under consideration, including those related to the application of the normal purchases and normal sales exception (i.e. electric utility's practice of "bookouts" and "net scheduling" of power contracts). For purposes of determining the impact upon adoption, the Company has elected to treat under the normal purchases and normal sales exception certain contracts for the purchase and sale of electricity that may be booked out or net scheduled. The interpretation of this issue is currently under consideration by the Financial Accounting Standards Board (FASB).

If the FASB ultimately rules that bookouts and net scheduling meet the net settlement provisions of the statement, as amended, then the affected power contracts would not qualify for the normal purchases and normal sales exception and would be required to be fair valued pursuant to SFAS No. 133. This may cause the amounts stated above and the relative impact on PGE's financial statements to be materially different. However, pursuant to the regulatory process, the Company believes that any required revision that may impact PGE's results of operations and financial condition would be mitigated by the application of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation".

PGE's comprehensive income, net of taxes, is as follows (in millions):

As PGE's generation and long-term power contracts provide only a portion of its customers' load, the Company has relied increasingly upon short-term wholesale power purchase contracts and wholesale spot market purchases. To assure supply and reliability to its retail customers, PGE buys and sells power in a wholesale market in which prices have become increasingly volatile.

On February 20, 2001, the OPUC authorized PGE to defer, for future ratemaking treatment, any changes from net variable power costs which differ from a baseline approved by the Commission. Under the mechanism, PGE shares with its retail customers any changes in retail power costs outside of a pre-determined range, from a baseline amount of $176 million, for the period January through September 2001. PGE expects to recover, or refund, one-half (50%) of retail power costs that deviate from the baseline by more than $35 million, up to $56 million, and 90% of retail power costs that deviate from the baseline by more than $56 million.

In a subsequent proceeding, PGE will request the recovery (or refund) of the deferred amount in accordance with the mechanism described above. The amount expected to be recovered from, or refunded to, customers is included within unamortized regulatory assets or liabilities on the balance sheet and within depreciation and amortization expense on the income statement.

In the first quarter of 2001, PGE's net variable power costs, as calculated under terms agreed to with the OPUC, exceeded the year-to-date baseline amount. Under terms of the power cost mechanism, approximately $3.5 million was deferred, representing one-half of the $7 million in calculated excess variable power costs. Due to continued power cost volatility in the region, the Company cannot estimate the amount of deferred costs at the end of the nine-month period covered by this mechanism. Any amount to be collected from, or refunded to, customers would be subject to events over the next six months and a review by the Commission.

As of March 31, 2001, PGE had approximately $128 million of accounts receivable that may be affected by the financial condition of two major California utilities. Remaining payments totaling approximately $56 million were owed by Southern California Edison Company (SCE) under terms of a 1996 agreement providing for the termination of a Power Sales Agreement between the two companies. SCE has made its scheduled monthly payments in 2001 under the termination agreement. In addition, balances of approximately $63 million and $9 million were owed the Company by the California Independent System Operator (ISO) and California Power Exchange (PX), respectively, for wholesale electricity sales made from November 2000 through February 2001. The Company estimates the majority of this amount was for sales by the ISO and PX to SCE and Pacific Gas & Electric Company (PG&E).

PGE made limited sales to the ISO and PX in early 2001, primarily under federal order. On March 9, 2001, the FERC issued an order directing 13 electricity suppliers, including PGE, to supply additional information regarding January 2001 and February 2001 wholesale power sales to California. Such order includes a potential refund of approximately $3.2 million applicable to PGE. In accordance with the order, the Company has responded with an initial filing containing additional information regarding the applicable sales. The FERC has in turn responded with a request for further information; the Company is in the process of compiling additional data in response to this request.

On March 9, 2001, the PX filed for bankruptcy, and on April 6, 2001, PG&E filed a voluntary petition for relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, PG&E retains control of its assets and is authorized to operate its business as a debtor in possession while subject to the jurisdiction of the Bankruptcy Court.

Several options are being considered within the state of California to resolve these issues, with the governor, state legislature, and others actively working towards resolution. Such options include the sale of SCE's transmission assets to the State, with the proceeds used to pay outstanding power purchase obligations, and recent legislation authorizing the state's Department of Water Resources to buy power on behalf of the state's utility customers, funded from the sale of bonds issued by the State.

PGE is pursuing collection of all past due amounts. It has established a general credit reserve for amounts due under its wholesale electricity contracts totaling $15.4 million at March 31, 2001.

PGE has retained legal counsel on the bankruptcy matter and has numerous options, including legal, regulatory, and other means to pursue collection of amounts ultimately not received. Due to uncertainties surrounding both the bankruptcy filing and the California power situation, management cannot predict the ultimate realization of these receivables, nor can it reasonably estimate any possible loss.

Management believes that the ultimate outcome of these matters will not have a material adverse impact on the financial condition of the Company. However, it may have a material impact on the results of operations for future reporting periods.

In the first quarter of 2001, contractual issues were resolved with the vendor that was to provide the storage containers required for the Independent Spent Fuel Storage Installation (ISFSI) project at Trojan. A new contract was signed with another vendor for the completion of ISFSI fuel loading. Pending license amendment and approval by the Nuclear Regulatory Commission, fuel-loading activity will resume in the fourth quarter of 2002, with completion expected by the end of 2003. It is not expected that this change will materially affect the Company's total decommissioning cost estimate.

Enron and Sierra Pacific Resources announced on April 26, 2001, that they have entered into a mutual agreement to terminate their purchase and sale agreement for PGE. In anticipation of the proposed sale, PGE capitalized certain system integration costs, the disposition of which has not yet been determined.

The following review of PGE's results of operations should be read in conjunction with the Consolidated Financial Statements.

Due to seasonal fluctuations in electricity sales, as well as the price of wholesale energy and fuel costs, quarterly operating earnings are not necessarily indicative of results to be expected for calendar year 2001.

PGE earned $43 million in the first quarter of 2001 compared to $39 million in 2000. The results include a positive $11 million cumulative effect of a change in accounting principle resulting from the Company's adoption on January 1, 2001 of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (see Note 3, Price Risk Management, in the Notes to Financial Statements for further information).

Income before the effect of the accounting change was $32 million, a $7 million decrease from the first quarter of 2000. Such decrease was due primarily to losses in the market value of trust owned life insurance assets. Lower margins on energy sales were largely offset by decreased operating expenses during the quarter.

Total operating revenues increased $369 million (93%) compared to the first quarter of 2000, due almost entirely to higher prices for energy sold in the wholesale market. Wholesale revenues increased $366 million (from $114 million to $480 million), as prices rose almost six-fold from last year's first quarter due to the combined effect of higher natural gas prices, below normal hydro conditions, and market forces within the region. Wholesale sales volume decreased 36%, as available power purchases were used to replace lower hydro generation to meet first quarter retail load requirements. Retail revenues decreased about $1 million on energy sales that decreased about 4% from last year's first quarter, as mild weather and conservation offset an approximate 4,800 increase in the average number of retail customers served. Other operating revenues increased $4 million due to higher sales of natural gas, as the Company's Beaver turbine generating plant economically utilized oil during part of the first quarter.