SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
Registrant; State of Incorporation; IRS Employer
COMMISSION FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
1-5532 PORTLAND GENERAL CORPORATION 93-0909442
(an Oregon Corporation)
121 SW Salmon Street
Portland, Oregon 97204
(503) 464-8820
1-5532-99 PORTLAND GENERAL ELECTRIC COMPANY 93-0256820
(an Oregon Corporation)
121 SW Salmon Street
Portland, Oregon 97204
(503) 464-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
Portland General Corporation
Common Stock, $3.75 par value per share New York Stock Exchange
Pacific Stock Exchange
Portland General Electric Company
8.25% Quarterly Income Debt Securities
(Junior Subordinated Deferrable Interest Debentures, Series A) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Portland General Corporation
None
Portland General Electric Company,
7.75% Series, Cumulative Preferred Stock, no par value
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______.
The aggregate market value of Portland General Corporation voting stock held by
non-affiliates of the registrant as of February 28, 1997 (based on the last
sales price on the New York Stock Exchange as of such date) was $2 billion.
The number of shares outstanding of the registrants' common stocks as of
February 28, 1997 was:
Portland General Corporation 51,391,536
Portland General Electric Company 42,758,877
(owned by Portland General Corporation)
DOCUMENT INCORPORATED BY REFERENCE
The information required to be included in Part III hereof is incorporated by
reference from Portland General Corporation's definitive proxy statement to be
filed on or about May 27, 1997.
2
DEFINITIONS
The following abbreviations or acronyms used in the text and notes are defined
below:
Abbreviations
OR ACRONYMS TERM
Beaver..............................Beaver Combustion Turbine Plant
Bethel..............................Bethel Combustion Turbine Plant
Boardman............................Boardman Coal Plant
Bonneville Pacific..................Bonneville Pacific Corporation
BPA.................................Bonneville Power Administration
Centralia...........................Centralia Coal Plant
COB.................................California/Oregon Border
Colstrip............................Colstrip Units 3 and 4 Coal Plant
Coyote Springs......................Coyote Springs Generation Plant
CUB.................................Citizen's Utility Board
CWL.................................Columbia Willamette Leasing, Inc.
DEQ.................................Oregon Department of Environmental Quality
EFSC................................Oregon Energy Facility Siting Counsel
Enron...............................Enron Corp
EPA.................................Environmental Protection Agency
FASB................................Financial Accounting Standards Board
FERC................................Federal Energy Regulatory Commission
Financial Statements................Refers to Financial Statements of Portland General
included in Part II, Item 8 of this report.
Holdings............................Portland General Holdings, Inc.
Intertie............................Pacific Northwest Intertie Transmission Line
IOUs................................Investor-Owned Utilities
IRS.................................Internal Revenue Service
kWh.................................Kilowatt-Hour
MMBtu...............................Million British thermal units
MW..................................Megawatt
MWa.................................Average megawatts
MWh.................................Megawatt-hour
NRC.................................Nuclear Regulatory Commission
NYMEX...............................New York Mercantile Exchange
OPUC or the Commission..............Oregon Public Utility Commission
Portland General or PGC.............Portland General Corporation
PGE or the Company..................Portland General Electric Company
PUD.................................Public Utility District
Regional Power Act..................Pacific Northwest Electric Power Planning
and Conservation Act
SFAS................................Statement of Financial Accounting Standards
issued by the FASB
WPPSS or Supply System..............Washington Public Power Supply System
Trojan..............................Trojan Nuclear Plant
Tule................................Tule Hub Services Company
USDOE...............................United States Department of Energy
WAPA................................Western Area Power Authority
WNP-3...............................Washington Public Power Supply System Unit 3
Nuclear Project
WSCC................................Western Systems Coordinating Council
3
TABLE OF CONTENTS
PAGE
Definitions................................................................. 3
PART I
Item 1. Business..................................................... 5
Portland General Corporation............................... 5
Portland General Electric Company.......................... 5
Portland General Holdings, Inc............................ 16
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security
Holders..................................................... 20
Executive Officers of the Registrant........................ 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................. 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 55
Item 13. Certain Relationships and Related Transactions............. 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 55
Signatures................................................................. 57
Exhibit Index.............................................................. 59
Appendix - PGE Financial Information....................................... 65
4
PART I
ITEM 1. BUSINESS
PORTLAND GENERAL CORPORATION - HOLDING COMPANY
GENERAL
Portland General Corporation (Portland General or PGC), an electric utility
holding company, was organized in December 1985. Portland General Electric
Company (PGE or the Company), an electric utility company and Portland
General's principal operating subsidiary, accounts for substantially all of
Portland General's assets, revenues and net income. Portland General is also
the parent company of Portland General Holdings, Inc. (Holdings), which
provides organizational separation for Portland General's nonutility businesses
(see page 16). Portland General is exempt from regulation under the Public
Utility Holding Company Act of 1935, except Section 9(a)(2) thereof relating to
the acquisition of securities of other public utility companies.
As of December 31, 1996, Portland General and its subsidiaries had 2,649
employees compared to 2,562 and 2,536 at December 31, 1995 and 1994,
respectively.
PROPOSED MERGER
During 1996 Portland General entered into an Amended and Restated Agreement and
Plan of Merger (Merger Agreement) with Enron Corp (Enron) and Enron Oregon
Corp. (New Enron), a wholly-owned subsidiary of Enron. Under the terms of the
Merger Agreement Portland General will merge into New Enron (Merger) and each
share of
the common stock of Portland General will be converted into one share of the
common stock of New Enron. Immediately prior to the consummation of the Merger,
Enron will merge into New Enron for the purpose of reincorporating Enron in
Oregon (Reincorporation Merger). The Merger Agreement provides that if certain
regulatory reforms are enacted, the structure of the transaction contemplated
by the Merger Agreement will be revised to eliminate the Reincorporation
Merger. The Merger has been approved by both companies' boards of
directors, shareholders, and the FERC. However, before the Merger can be
completed, approvals and consents must be obtained from the NRC and
the OPUC (see Item 7., Management's Discussion and Analysis of Financial
Condition and Results of Operations).
PORTLAND GENERAL ELECTRIC COMPANY - ELECTRIC UTILITY
GENERAL
PGE, incorporated in 1930, is an electric utility engaged in the generation,
purchase, transmission, distribution, and sale of electricity in the State of
Oregon. PGE also sells energy to wholesale customers throughout the western
United States. PGE's Oregon service area is 3,170 square miles, including
54 incorporated cities of which Portland and Salem are the largest, within a
state-approved service area allocation of 4,070 square miles. PGE estimates
that at the end of 1996 its service-area population was approximately
1.4 million, constituting approximately 44% of the state's population. At
December 31, 1996 PGE served approximately 668,000 customers.
As of December 31, 1996, PGE had 2,587 employees. This compares to 2,533 and
2,502 PGE employees at December 31, 1995 and 1994, respectively.
5
OPERATING REVENUES
PGE serves a diverse retail customer base. Residential customers constitute
the largest customer class and account for 40% of the retail demand and 44% of
retail revenues. Residential demand is highly sensitive to the effects of
weather. Commercial customers consume 39% and industrial customers 17% of
retail revenues. Since 1994 commercial demand has grown by nearly 10%, making
this the Company's most rapidly growing customer class. Despite a 20% increase
in sales to high technology customers during 1996, industrial demand decreased
nearly 3% in 1996 due to continued production cut backs by both paper
manufacturers and metal fabricators. The commercial and industrial classes are
not dominated by any single industry. While the 20 largest customers
constitute 20% of retail demand, they represent 10 different industrial groups
including paper manufacturing, high technology, metal fabrication,
transportation equipment, and health services. No single customer represents
more than 5% of PGE's retail load.
Wholesale revenues continue to make a significant contribution to Company
revenues providing over 17% of total operating revenues for 1996. PGE actively
markets wholesale power throughout the western United States and has more than
tripled its level of sales since 1994. A majority of PGE's wholesale sales
were to its traditional customers comprised of IOUs, federal agencies,
municipalities and PUDs. However, most of the Company's wholesale growth has
come through sales to marketers and brokers, relatively new entrants to the
increasingly competitive wholesale electric energy market. These sales are
predominantly of a short-term nature.
Sustained revenue growth will be more challenging in future periods. During
1996 PGE worked with the OPUC staff and other interested parties to develop a
plan that addressed significant savings resulting from
lower natural gas and purchased power prices. This resulted in a $55 million
annual rate reduction effective December 1, 1996. Also, in a move to position
for the future, PGE has launched several experimental programs that allow
certain of its largest customers to acquire electricity at market based prices.
These programs resulted in annual rate reductions of $15 million.
As the electric utility industry moves toward deregulation retail customers
will ultimately have the ability to purchase energy from any electric utility
or power supplier. Consequently PGE will have to compete with other energy
suppliers for customers within its traditionally exclusive service territory.
Increased competition is expected to result in lower prices and less revenue
per customer.
While PGE's participation in the wholesale
marketplace has resulted in significant increases in wholesale revenues,
primarily from short-term transactions, these revenues are also vulnerable to
industry changes. FERC mandated open access to transmission facilities, the
advent of NYMEX electricity contracts, and
the entrance of power marketers, brokers, and independent power producers has
resulted in increased competition, reduced margins and increased risks
associated with all transactions, especially the long-term ones.
6
PGE's operating revenues from customers peak during the winter season. The
following table summarizes operating revenues and kWh sales for the years ended
December 31:
1996 1995 1994
Operating Revenues (thousands)
Residential $ 426,777 $379,485 $360,651
Commercial 345,646 335,607 315,156
Industrial 149,289 153,347 147,347
Public Street Lighting 11,108 11,311 11,205
Tariff Revenues 932,820 879,750 834,359
Accrued (Collected) Revenues (27,142) (2,973) 10,644
Retail 905,678 876,777 845,003
Wholesale 193,726 94,967 105,911
Other 10,427 9,884 8,041
Total Operating Revenues $1,109,831 $981,628 $958,955
Kilowatt-Hours Sold (millions)
Residential 7,073 6,622 6,704
Commercial 6,475 6,285 6,142
Industrial 3,909 4,056 3,863
Public Street Lighting 102 102 93
Retail 17,559 17,065 16,802
Wholesale 10,188 3,383 2,701
Total kWh Sold 27,747 20,448 19,503
For additional information on year-to-year revenue trends, see Item 7.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
REGULATION
The OPUC, a three-member commission appointed by the Governor, approves PGE's
retail rates and establishes conditions of utility service. The OPUC ensures
that prices are fair and equitable and provides PGE an opportunity to earn a
fair return on its investment. In addition, the OPUC regulates the issuance of
securities and prescribes the system of accounts to be kept by Oregon
utilities.
PGE is also subject to the jurisdiction of the FERC with regard to the
transmission and sale of wholesale electric energy, licensing of hydroelectric
projects and certain other matters.
Construction of new generating facilities requires a permit from EFSC.
The NRC regulates the licensing and decommissioning of nuclear power plants.
In 1993 the NRC issued a possession-only license amendment to PGE's Trojan
operating license and in early 1996 approved the Trojan Decommissioning Plan.
Approval of the Trojan Decommissioning Plan by the NRC and EFSC has allowed PGE
to commence decommissioning activities. Trojan will be subject to NRC
regulation until Trojan is fully decommissioned, all nuclear fuel is removed
from the site and the license is terminated. The Oregon Department of Energy
also monitors Trojan.
7
OREGON REGULATORY MATTERS
INDUSTRY RESTRUCTURING
Historically the OPUC has approached the issues of retail competition on an
informal, utility-by-utility basis, rather than through generic, broad-based
proceedings. However, in June 1996 the OPUC began an investigation into
restructuring the state's electric utility industry by meeting with state
utility executives, customers, environmental advocates and other interested
parties to discuss how competition in the generation of electric power could be
introduced and when to allow customers access to competing power suppliers.
Four specific issues were the focus of subsequent meetings: how an electricity
distribution company would operate and be regulated; how energy efficiency and
other public purpose programs will be offered and funded in a restructured
environment; what treatment is appropriate for utility investment in a
generating plant that is no longer economic; and whether vertical integration
of electrical utilities should be discouraged or prohibited. The OPUC has
stated its intent to use these discussions to prepare itself for action on the
competitive initiatives that can be implemented under its direct authority and
to work with the legislature in assessing proposals for restructuring.
The staff of the OPUC has recommended that the commission open a proceeding to
develop a policy for the treatment of transition costs for electric utilities.
Transition or stranded costs are costs a utility would not recover in a fully
competitive environment. The proposed issues to be discussed include: how
should a utility's transition costs be determined; what portion of these costs
should be recovered from customers; and what types of charges should be used
for transition cost recovery. Discussions have begun on an informal basis to
sort through issues and establish consensus before moving to a more formal
process of written comments and a proposed order.
MARGINAL COST
In February 1997 the OPUC held a prehearing conference to establish a framework
for investigating methods for estimating the marginal cost of service for
electric utilities. Marginal costs are the cost of adding an additional
customer to a utility system. This investigation was prompted by challenges
from the CUB that current methods assign too much cost to the residential
customer class. The OPUC anticipates adoption of an order in 1997. Specific
marginal cost estimates and rate spread and rate decisions will be made in
subsequent rate cases and other proceedings as needed.
Retail Price v. Inflation graph comparing
PGE retail price (cents per KWh) to Portland CPI:
Retail Price CPI
1987 4.93 110.9
1988 4.77 114.7
1989 4.69 120.3
1990 4.57 127.4
1991 4.69 134
1992 4.79 139.9
1993 4.86 144.7
1994 4.97 148.9
1995 5.16 153.2
1996 5.31 158.6
1996 RATE SETTLEMENT
During 1996 PGE worked with the OPUC staff and other interested parties to
develop a plan for dealing with significant savings which resulted from lower
natural gas and power purchase prices. This decision resulted in $55 million
in annual rate reductions that began December 1, 1996. The rate reductions
will result in an after tax earnings decrease of approximately $32 million for
1997. In addition, the order incorporated $15 million in rate reductions
previously approved by the OPUC resulting in total 1997 rate reductions of $70
million.
TROJAN INVESTMENT RECOVERY
In April 1996 a circuit court judge in Marion County, Oregon found that the
OPUC could not authorize PGE to collect a return on its undepreciated
investment in Trojan contradicting a November 1994 ruling from the same court.
The ruling was the result of an appeal of PGE's 1995 general rate order which
granted PGE recovery of, and a return on, 87 percent of its remaining
investment in Trojan.
The November 1994 ruling, by a different judge of the same court, upheld the
Commission's 1993 Declaratory Ruling (DR-10). In DR-10 the OPUC ruled that
PGE could recover and earn a return on its undepreciated Trojan investment,
provided certain conditions were met. The Commission relied on a 1992 Oregon
Department of Justice opinion issued by the Attorney General's office
8
stating
that the Commission had the authority to set prices including recovery of and
return on investment in plant that is no longer in service.
The 1994 ruling was appealed to the Oregon Court of Appeals and stayed pending
the appeal of the Commission's March 1995 order. Both PGE and the OPUC have
separately appealed the April 1996 ruling which was combined with the appeal of
the November 1994 ruling at the Oregon Court of Appeals.
For further information regarding the legal challenges to the OPUC's authority
to grant recovery for PGE's Trojan investment see Item 3, Legal proceedings.
LEAST COST ENERGY PLANNING
In August 1996 the OPUC acknowledged PGE's 1995-1997 Integrated Resource Plan
(IRP). The OPUC adopted Least Cost Energy Planning for all energy utilities in
Oregon with the goal of selecting the mix of options that yields an adequate
and reliable supply of energy at the least cost to the utilities and customers.
The 1995-1997 IRP reflects: the recognition that the geographic area PGE
presently serves no longer defines its customer base; the accelerated pace of
technological change; transition of a key fuel, natural gas, to a market
commodity; and the development of a vibrant electricity marketplace. The IRP
outlines a strategy which emphasizes: (1) the purchase of energy in the
marketplace at competitive prices, (2) acquisition of energy efficiency at
reduced levels while maintaining market presence and capability for possible
future increases when justified, (3) economical use of existing assets and (4)
the use of other supply-side actions, including acquisition of renewable
resources.
RESIDENTIAL EXCHANGE PROGRAM
The Regional Power Act (RPA), passed in 1980, attempted to resolve
growing power supply and cost inequities between customers of government and
publicly owned utilities, who have priority access to the low-cost power from
the federal hydroelectric system, and the customers of IOUs. The RPA
created the residential exchange program which exists to ensure that all
residential and farm
customers in the region, the vast majority of which are served by IOUs, receive
similar benefits from the publicly funded federal power system. Exchange
program benefits are passed directly to residential and farm customers. The
exchange benefit for PGE residential and small farm customers totaled $58
million for calendar year 1996. In its 1996 rate case, the BPA initially
proposed a $33 million annual reduction in the exchange benefit beginning
October 1, 1996. However,
recent congressional legislation partially restored the RPA exchange
benefit so
that the reduction was only $14 million for the BPA's 1997 fiscal year. The
amount of future residential exchange benefits is among the subjects of current
regional discussions regarding BPA's role in the region. PGE and the BPA have
engaged in negotiations about the possibility of a BPA buy out and termination
of the exchange program.
DECOUPLING
An experimental decoupling program adopted by the OPUC set monthly revenue
targets associated with retail loads. To the extent weather-adjusted retail
revenues exceeded or fell short of target revenues, PGE will refund or collect
the difference from customers over an 18-month period. At the end of 1996 PGE's
estimated liability to customers was $5 million. The program expired at the
end of 1996.
ENERGY EFFICIENCY
PGE has promoted the efficient use of electricity for over two decades and has
invested over $80 million in Demand Side Management (DSM) measures.
Current DSM programs provide a range of services to all classes of PGE
customers. These programs seek to capitalize on windows of opportunity in
which DSM measures are most cost-effective, such as new residential and
commercial construction, and the replacement and renovation markets. PGE
continues to provide a weatherization program for eligible low-income families.
PGE recognizes the value of and remains committed to encouraging the efficient
use of energy. With the prospect of increased competition and customer choice,
PGE is focusing its DSM programs more toward customer needs and wants. PGE is
also focusing on developing a regional solution to funding and delivering
energy efficiency in a competitive environment.
9
BONDABLE CONSERVATION INVESTMENT
In late 1996, the OPUC designated $81 million of PGE's energy efficiency
investment as Bondable Conservation Investment, pursuant to recent Oregon
legislation, and authorized the issuance of conservation
bonds collateralized
by an OPUC assured future revenue stream. Subsequently, PGE issued a 10 year
conservation bond which is expected to provide an estimated $21 million in
present value savings to customers while granting PGE immediate recovery of its
energy efficiency program expenditures. The OPUC assured future revenues
collected from
customers will pay the debt service obligations on the bond.
COMPETITION AND MARKETING
GENERAL
Recent progress toward greater customer choice and direct access to customers
by all competitors has been dramatic and underscores the theme of competition
and prospective deregulation in the electric utility industry. The National
Energy Policy Act of 1992 (Energy Act) granted the FERC authority to order
wholesale wheeling between utilities. In 1996 the FERC issued Order 888
requiring non-discriminatory open access transmission by all public utilities
that own interstate transmission. The Energy Act reserved the right to order
true "retail wheeling" to the individual states. Retail wheeling is the
movement of electric energy produced and sold by another entity over an
electric utility's transmission and distribution system to a retail customer in
the utility's service territory. Retail wheeling would permit retail customers
to purchase electric capacity and energy from any electric utility or power
supplier. In 1996 the OPUC began an investigation into restructuring the
state's electric utility industry by meeting with state utility executives,
customers, environmental advocates and other interested parties. The Governor
of Oregon has issued objectives for restructuring and it is expected that
several bills proposing retail competition will be introduced during the 1997
Oregon Legislative session.
RETAIL COMPETITION AND MARKETING
PGE operates within a state-approved service area and under current regulation
is substantially free from direct retail competition with other electric
utilities. PGE's competitors within its Oregon service territory include other
fuel suppliers, such as the local natural gas company, which compete with PGE
for the residential and commercial space and water heating market. In addition
there is the potential of a loss of PGE service territory to the creation of
public utility districts by voters. In the near term much of the Company's
business is likely to remain regulated with progress toward increased retail
competition taking place in stages. For example, basic residential electric
service is likely to remain regulated with competition introduced slowly, while
industrial service may see the rapid development of competition. Deregulation
of other industries such as telecommunications has led to a host of new
suppliers, products and services. The same is expected for the electric
industry as more and more groups of customers will have increasing degrees of
choice and alternative suppliers from whom to purchase.
Increased competition presents both a threat and an opportunity. Portland
General is preparing to meet varying levels of competition from traditional
and non-traditional sources in the various retail markets within PGE's service
territory as well as throughout the western United States. Much of Portland
General's growth potential may no longer be limited by service territory
boundaries or activities traditionally subject to regulation. Portland General
has begun to look beyond traditional boundaries for opportunities to serve
customers with energy related products and services allowable in the current
regulated markets and the emerging unregulated markets. For example, Portland
General, through a wholly-owned non-regulated subsidiary was recently selected
to be the City of Palm Springs new energy services partner in a strategic
alliance designed to help the city develop a municipal utility.
PGE will continue to deliver quality electric service
within the core markets that make up PGE's current service territory
by focusing on
traditional values like reliability, cost management, resource acquisition,
effective energy efficiency services, safe operations and responsive customer-
oriented service. In addition, Portland General, through PGE and new non-
regulated subsidiaries, will continue to develop and provide an array of
products and services to PGE's existing and prospective customers. This
includes
power quality-related services and lighting maintenance; power services, such
as load following and system control; utility services, such as automated
billing services and outage management; and retail services, such as power
quality and time-of-day rates.
10
PGE has implemented several experimental tariff schedules during the past two
years that have allowed certain of its larger customers to acquire electricity
at market based prices. Eligible customers have the opportunity to purchase
energy at prices that reflect actual market conditions. The tariffs are
presently limited to a combined 250 MW of participating customer load or 12% of
total PGE retail load.
PGE is evaluating a power delivery service tariff which, if approved by the
OPUC, will allow large industrial and commercial customers to purchase a
portion of their electricity needs from any provider.
In November 1996 Portland General and Enron committed to submit to
the OPUC within 60 days of the Merger completion, a plan to open PGE's
service area to
competition. The plan will allow residential, commercial and industrial
customers to choose their energy provider and will include a proposal to
separate PGE generating facilities from its transmission and distribution
system. In addition, this plan will include a proposal for the
treatment of transition or stranded costs. This action will position the
generating side of the
organization to compete more effectively in an open marketplace, and will allow
the distribution side to focus on customer service.
WHOLESALE COMPETITION AND MARKETING
During the last few years, the western United States has become a vibrant
marketplace for the trading of electricity in which PGE has been an active
participant. Wholesale sales continue to contribute to
Company revenues. During 1996 PGE's wholesale revenues increased 104% over
1995 levels with wholesale activities accounting for 18% of total revenues and
37% of total sales.
The advent of NYMEX electricity contracts and broker markets has increased
price
discovery. This, along with the entrance of numerous power marketers, brokers,
and independent power producers has reduced margins significantly and
increased risks. During 1996, the average price of PGE's wholesale sales
decreased 33%.
The FERC has taken steps to provide a framework for increased competition in
the electric industry. In 1996 the FERC issued Order 888 requiring non-
discriminatory open access transmission by all public utilities that own
interstate transmission. The final rule requires utilities to file tariffs
that offer others the same transmission services they provide themselves under
comparable terms and conditions. This rule also allows public utilities to
recover stranded costs in accordance with the terms, conditions and procedures
set forth in Order 888. The ruling requires reciprocity from municipals,
cooperatives and federal power marketers receiving service under the tariff.
The new rules became effective July 1996 and are expected to result in
increased competition, lower prices and more choices to wholesale energy
customers.
The Company's transmission system connects winter-peaking utilities in the
Northwest and Canada, which have access to low-cost hydroelectric generation,
with summer-peaking wholesale customers in California and the Southwest, which
have higher-cost fossil fuel generation. PGE has used this system to purchase
and sell in both markets depending upon the relative price and availability of
power, water conditions, and seasonal demand from each market. Under its open
access tariff the Company will lose any competitive advantage it may have had
through the use of its transmission assets for wholesale transactions. Open
access may provide new opportunities as the Company has equal access to the
transmission capabilities of other utilities.
PGE, along with a number of other public and private Northwest utilities and
the BPA have signed a memorandum of understanding to create an independent
transmission grid operator (IndeGo). Under the agreement, IndeGo would assume
responsibility for day to day operation of main transmission lines which are
directly owned by the various parties. The parties would maintain ownership of
the lines, as well as responsibility for repair and upgrades.
POWER SUPPLY
Growth within PGE's service territory as well as its aggressive wholesale
marketing plans have underscored the Company's need for sources of reliable,
low-cost energy supplies. The demand for energy within PGE's service territory
has experienced an average annual growth rate of approximately 2.5% over the
last 10 years. Wholesale demand has experienced significant increases. In
1996 alone PGE's wholesale sales increased by over 200%. PGE has relied
increasingly on short-term purchases to supplement its existing base of
generating resource and long-term power contracts to meet its energy needs.
Short-term purchases include spot market, or secondary, purchases as well as
firm purchases for periods less than one year in duration. The availability of
short-term firm purchase agreements and PGE's ability to renew these contracts
on a month by month basis has enabled PGE to minimize risk and enhance its
ability to provide reliable low cost energy to retail
11
customers. The
emergence of NYMEX electricity futures contracts and open transmission are
expected to place competitive pressures on the price of short-term power as
well as enhance its availability. Northwest hydro conditions also have a
significant impact on regional power supply. Plentiful water conditions can
lead to surplus power and the economic displacement of more expensive thermal
generation.
GENERATING CAPABILITY
PGE's existing hydroelectric, coal-fired and gas-fired plants are important
resources
for the Company, providing 2,119 MW of generating capability (see Item 2.,
Properties, for a full listing of PGE's generating facilities). PGE's lowest-
cost producers are its eight hydroelectric projects on the Clackamas, Sandy,
Deschutes, and Willamette rivers in Oregon. In 1996 generation from PGE's
hydroelectric facilities met 9% of the Company's total load. These facilities,
operate under federal licenses, which will be up for renewal between the years
2001 and 2006.
PURCHASED POWER
PGE has long-term power contracts with four hydro projects on the mid-Columbia
River which provide PGE with 590 MW of firm capacity. PGE also has firm
contracts, ranging in term from one to 30 years, to purchase 675 MW, primarily
hydro-generated, from other Pacific Northwest utilities. In addition, PGE has
long-term exchange contracts with summer-peaking Southwest utilities to help
meet its winter-peaking requirements. These resources, along with short-term
contracts, provide PGE with sufficient firm capacity to serve its peak loads.
January reserve margin for WSCC region
available capability less peak load (megawatts & percent)
MEGAWATTS PERCENT
1992 34,689 35.2
1993 22,997 21.7
1994 31,033 31.0
1995 28,693 28.8
1996 31,125 29.3
1997 27,490 27.4
1998 29,671 28.1
1999 29,234 27.6
2000 28,500 26.3
2001 25,340 24.3
SYSTEM RELIABILITY AND THE WSCC
PGE relies on wholesale market purchases within the WSCC in conjunction with
its base of generating resources to supply its resource needs and maintain
system reliability. The WSCC is geographically the largest of the nine
regional electric reliability councils. The WSCC performs an essential role in
developing and monitoring established reliability criteria guides and
procedures to ensure continued reliability of the electric system. During the
last few years, the area covered by WSCC has become a dynamic marketplace for
the trading of electricity. This area, which includes 11 Western states, is
very diverse in climates. Peak loads occur at different times of the year in
the different regions within the WSCC area. Energy loads in the Southwest peak
in summer due to air conditioning; northern loads peak during winter heating
months. Further, according to WSCC forecasts, the nearly 80 electric
organizations participating in the WSCC, which include utilities, independent
power producers and transmission utilities, have sufficient generating capacity
to cover loads 25% to 30% greater than anticipated peak loads for each month of
the year beyond the year 2000, even assuming adverse water conditions.
Favorable water conditions have the ability to further increase energy
supplies.
This generating capacity and the resultant wholesale power in the WSCC has made
the traditional utility reserve margin less relevant. The need for an
individual utility to maintain a reserve margin of 20% or higher in order to
assure that it has the capacity to meet, without interruption, customer peak
energy needs is no longer necessary.
TRADING FLOOR OPERATIONS
PGE's trading floor operation integrates the Company's wholesale
trading, fuels, energy supply, power operations and price risk management
functions. The trading floor activities seek to enhance PGE's low-cost supply
of energy to meet retail and wholesale loads.
12
1996 Actual Power Sources pie chart:
(megawatt hours)
Combustion Turbines: 7% (1,864,000)
PGE Hydro: 9% (2,702,000)
Coal: 9% (2,657,000)
Purchased Power: 75% (21,813,000)
1997 Forecasted Power Sources pie chart:
(megawatt hours)
PGE Hydro: 9% (3,048,000)
Coal: 9% (3,390,000)
Combustion Turbines: 7% (2,330,000)
Purchased Power: 73% (23,889,000)
YEAR IN REVIEW
PGE generated 25% of its load requirements in 1996 compared with 36% in 1995.
Firm and secondary purchases met the remaining load. Low gas prices, increased
competition, and abundant hydro power resulting from above average
precipitation in the Columbia River basin
contributed to the availability of inexpensive power and the economic
displacement of more expensive thermal generation.
During 1996, PGE's peak load was 3,888 MW, of which 49% was met through
economical short-term purchases. PGE's firm resource capacity, including
short-term purchase agreements totaled approximately 4,759 MW as of December
31, 1996.
1997 OUTLOOK
The early predictions of water conditions indicate they will be above normal in
1997 but not quite as favorable as those experienced in 1996. Efforts to
restore salmon runs on the Columbia and Snake rivers may reduce hydro
generation which would adversely affect the supply and
price of purchased power.
RESTORATION OF SALMON RUNS
Several species of salmon found in the Snake River, a major tributary of the
Columbia River, have been granted protection under the Federal Endangered
Species Act (ESA). In an effort to help restore these fish, the federal
government has reduced the amount of water allowed to flow through the turbines
at the hydro electric dams on the Snake and Columbia River while the young
salmon are migrating to the ocean. This has resulted in reduced amounts of
electricity generated at the dams. Favorable hydro conditions helped mitigate
the affect of these actions in 1996. Similar conditions are expected in 1997.
If this practice is continued in future years it could mean less water
available in the fall and winter for generation when demand for electricity in
the Pacific Northwest is highest. Although PGE does not own any hydroelectric
facilities on the Columbia and Snake rivers, it does buy large amounts of
energy from the agencies which do.
Several other species of salmon have been proposed for protection under the
ESA. Actions taken to protect these species will not be in affect for several
years. It is unclear how these potential ESA listings will impact future hydro
operations.
PGE's hydroelectric projects are located on rivers with depressed but not
endangered salmon runs. PGE biologists are working with state and federal
natural resource agencies to ensure PGE's hydro operations are compatible with
the survival and enhancement of these populations of salmon. PGE does not
expect that any actions will be taken that will have an adverse impact on PGE
hydro operations in the foreseeable future.
13
FUEL SUPPLY
PGE manages its fuel supply contracts as part of its trading floor operations.
Fuel supply contracts are negotiated to support annual planned plant
operations. Flexibility in contract terms is sought to allow for the most
economic dispatch of PGE's thermal resources in conjunction with the current
market price of wholesale power.
COAL
BOARDMAN
PGE has an agreement to purchase coal for Boardman through the year 2000.
The agreement
does not require a minimum amount of coal to be purchased, allowing PGE to
obtain coal from other sources. During 1996 PGE did not take deliveries under
this contract but purchased coal under favorable short-term agreements. Coal
purchases in 1996 contained less than 0.4% of sulfur by weight and emitted less
than the EPA allowable limit of 1.2 pounds of sulfur dioxide per MMBtu when
burned. The coal, from surface mining operations in Montana and Wyoming, was
subject to federal, state and local regulations. Coal is delivered to Boardman
by rail under a contract which expires in 2002.
COLSTRIP
Coal for Colstrip Units 3 and 4, located in southeastern Montana, is provided
under contract with Western Energy Company, a wholly owned subsidiary of
Montana Power Company. The contract provides that the coal delivered will not
exceed a maximum sulfur content of 1.5% by weight. The Colstrip plant has
sulfur dioxide removal equipment to allow operation in compliance with EPA's
source-performance emission standards.
CENTRALIA
Coal for Centralia Units 1 and 2, located in Southwestern Washington, is
provided under contract with PacifiCorp doing business as PacifiCorp Electric
Operations. Most of Centralia's coal requirements are expected to be provided
under this contract for the foreseeable future.
SULFUR TYPE OF POLLUTION
PLANT CONTENT CONTROL EQUIPMENT
Boardman, OR 0.3% Electrostatic precipitators
Centralia, WA 0.7% Electrostatic precipitators
Colstrip, MT 0.7% Scrubbers and precipitators
NATURAL GAS
In addition to the agreements discussed below, the Company utilizes short-term
and spot market purchases to secure transportation capacity and gas supplies
sufficient to fuel plant operations.
BEAVER
PGE owns 90% of the Kelso-Beaver Pipeline which directly connects its Beaver
generating station to Northwest Pipeline, an interstate gas pipeline operating
between British Columbia and New Mexico. During 1996, PGE had access to 76,000
MMBtu/day of firm transportation capacity, enough to operate Beaver at a 70%
load factor.
COYOTE SPRINGS
The Coyote Springs generating station utilizes 41,000 MMBtu/day of firm
transportation on three interconnected pipeline systems accessing the gas
fields in Alberta, Canada. Coyote Spring's two-year gas
supply contracts expire in October 1997. Gas supplies and transportation
capacity are sufficient to fully fuel Coyote Springs. Minimum purchase
requirements represent 75% of the plant's capacity.
14
ENVIRONMENTAL MATTERS
PGE operates in a state recognized for environmental leadership. PGE's
environmental stewardship policy emphasizes minimizing waste in its operations,
minimizing environmental risk and promoting energy efficiency.
ENVIRONMENTAL REGULATION
PGE's current and historical operations are subject to a wide range of
environmental protection laws covering air and water quality, noise, waste
disposal, and other environmental issues. PGE is also subject to the Federal
Rivers and Harbors Act of 1899 and similar Oregon laws under which it must
obtain permits from the U.S. Army Corps of Engineers or the Oregon Division of
State Lands to construct facilities or perform activities in navigable waters
of the State. The EPA regulates the proper use, transportation, cleanup and
disposal of polychlorinated biphenyls (PCBs). State agencies or departments
which have direct jurisdiction over environmental matters include the
Environmental Quality Commission, the DEQ, the Oregon Department of Energy and
EFSC. Environmental matters regulated by these agencies include the siting and
operation of generating facilities and the accumulation, cleanup and disposal
of toxic and hazardous wastes.
ENVIRONMENTAL CLEANUP
PGE is involved with others in the environmental clean-up of PCB contaminants
at various sites as a potentially responsible party (PRP). The cleanup effort
is considered complete at several sites which are awaiting consent orders from
the appropriate regulatory agencies. These and future cleanup costs are not
expected to be material.
AIR/WATER QUALITY
The Clean Air Act (Act) requires significant reductions in emissions of sulfur
dioxide, nitrogen oxide and other contaminants over the next several years.
Coal-fired plant operations will be affected by these emission limitations.
State governments are also charged with monitoring and administering certain
portions of the Act. Each state is required to set guidelines that at least
equal the federal standards.
Boardman was assigned sufficient emission allowances by the EPA to operate
after the year 2000 at a 60% to 67% capacity factor without having to further
reduce emissions. If needed PGE will purchase additional allowances to meet
excess capacity needs. Centralia will be required to reduce emissions by the
year 2000. The owner-operator utility has recommended the installation of
scrubbers. It is not anticipated that Colstrip will be required to reduce
emissions because it utilizes scrubbers. However, future legislation, if
adopted, could affect plant operations and increase operating costs or reduce
coal-fired capacity.
Boardman's air contaminant discharge permit, issued by the DEQ, has no
limitations on power production. This permit expires in the year 2001. The
water pollution control facilities permit for Boardman expired in May 1991.
The DEQ is processing the permit application and renewal is expected. In the
interim, Boardman is permitted to continue operating under the terms of the
original permit.
DEQ air contaminant discharge permits for the combustion turbine generators at
Bethel expired in 1995 and were replaced by new federal permits. Bethel was
one of the first plants in the nation to successfully pass the more rigorous
federal permitting process. DEQ still limits night operations of Bethel to one
unit due to noise considerations. Maximum plant operations are allowed during
the day. The combustion turbines are allowed to operate on either natural gas
or oil.
PGE is no longer accepting oil shipments by river for its Beaver plant in order
to eliminate the risk of an oil spill into the Columbia River. Instead, the
rail off-loading facility has been upgraded. This plant is normally fired by
natural gas, and only small amounts of oil are used.
15
PORTLAND GENERAL HOLDINGS, INC. - NONUTILITY BUSINESSES
GENERAL
Holdings is a wholly owned subsidiary of Portland General and is the parent
company of Portland General's subsidiaries engaged in leveraged leasing,
administrative services for electric futures trading, telecommunications and
non-regulated energy services. Holdings has provided organizational separation
from PGE and financial flexibility and support for the operation of non-utility
businesses. The assets and businesses of Holdings are primarily its
investments in its subsidiaries.
LEASING
COLUMBIA WILLAMETTE LEASING (CWL)
CWL acquires and leases capital equipment on a leveraged basis. During 1996,
CWL made no new investments in leveraged leases. CWL's investment portfolio
consists of six commercial aircraft, two container ships, approximately 5,500
containers, coal, tank, and hopper railroad cars, a truck assembly plant, an
acid treatment facility, and a wood chipping facility, totaling $151 million of
net investment. No new investments are expected or planned for the foreseeable
future.
16
ITEM 2. PROPERTIES
PORTLAND GENERAL CORPORATION
Discussion regarding nonutility properties is included in the previous section.
PORTLAND GENERAL ELECTRIC COMPANY
PGE's principal plants and appurtenant generating facilities and storage
reservoirs are situated on land owned by PGE in fee or land under the control
of PGE pursuant to valid existing leases, federal or state licenses, easements,
or other agreements. In some cases meters and transformers are located upon
the premises of customers. The Indenture securing PGE's first mortgage bonds
constitutes a direct first mortgage lien on substantially all utility property
and franchises, other than expressly excepted property. The map below shows
PGE's Oregon service territory and location of generating facilities:
OREGON
17
Generating facilities owned by PGE are set forth in the following table:
PGE Net MW
Capability
FACILITY Location Fuel
WHOLLY OWNED:
Faraday Clackamas River Hydro 44
North Fork Clackamas River Hydro 54
Oak Grove Clackamas River Hydro 44
River Mill Clackamas River Hydro 23
Pelton Deschutes River Hydro 108
Round Butte Deschutes River Hydro 300
Bull Run Sandy River Hydro 22
Sullivan Willamette River Hydro 16
Beaver Clatskanie, OR Gas/Oil 500
Bethel Salem, OR Gas/Oil 116
Coyote Springs Boardman, OR Gas/Oil 241
PGE
JOINTLY OWNED: INTEREST
Boardman Boardman, OR Coal 330 @ 65.0%
Centralia Centralia, WA Coal 33 @ 2.5%
Colstrip 3 & 4 Colstrip, MT Coal 288 @ 20.0%
Trojan Rainier, OR Nuclear - @ 67.5%
2,119
PGE holds licenses under the Federal Power Act for its hydroelectric generating
plants. Five licenses expire during the
years 2001 to 2006. FERC requires that
a notice of intent to relicense these projects be filed approximately five
years prior to expiration of the license. PGE is actively pursuing the renewal
of these licenses. The State of Oregon also has licensed all or portions of
five hydro plants. For further information see the Hydro Relicensing
discussion in Item 7., Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Following the 1993 Trojan closure, PGE was granted a possession-only license
amendment by the NRC. In early 1996 PGE received NRC approval of its Trojan
decommissioning plan. See Note 12, Trojan Nuclear Plant, in the Notes to the
Financial Statements for further information.
LEASED PROPERTIES
Combustion turbine generators at Bethel and Beaver are leased by PGE. These
leases expire in 1999. PGE leases its headquarters complex in downtown
Portland and the coal-handling facilities and certain railroad cars for
Boardman.
18
ITEM 3. LEGAL PROCEEDINGS
NONUTILITY
PORTLAND GENERAL HOLDINGS, INC. V. DELOITTE & TOUCHE, ET AL, THIRD JUDICIAL
DISTRICT COURT FOR SALT LAKE COUNTY
On January 22, 1992, Holdings filed a complaint alleging Deloitte & Touche and
certain individuals associated with Bonneville Pacific misrepresented the
financial condition of Bonneville Pacific. The complaint alleges that Holdings
relied on fraudulent statements and omissions by Deloitte & Touche and the
individual defendants in acquiring a 46% interest in and making loans to
Bonneville Pacific starting in September 1990. Holdings alleges, among other
things, the existence of transactions in which generation projects developed or
purchased by Bonneville Pacific were transferred at exaggerated valuations or
artificially inflated prices to Bonneville Pacific's affiliated entities,
Bonneville Pacific related parties or third parties. The suit claims that
Bonneville Pacific's books, as audited by Deloitte & Touche, led Holdings to
conclude wrongly that Bonneville Pacific's management was effective and could
achieve the profitable sale of certain assets, as called for in Holdings'
purchase agreement with Bonneville Pacific. Holdings is seeking approximately
$228 million in damages.
UTILITY
SOUTHERN CALIFORNIA EDISON COMPANY V. PGE, U.S. DISTRICT COURT FOR THE DISTRICT
OF OREGON
The settlement by PGE and SCE of this case has been approved by the FERC and
the California Public Utility Commission and needs no further approvals.
The settlement terminates a long-term contract and releases all
previous claims asserted in the legal dispute. SCE's annual payments under
the settlement will be $15 million from 1997 through 1999 and $32
million from 2000 through 2002.
UTILITY REFORM PROJECT V. OPUC, MULTNOMAH COUNTY CIRCUIT COURT
On February 18, 1992 the Utility Reform Project (URP) filed a complaint in
Multnomah County Oregon Circuit Court asking the OPUC to set aside and rescind
OPUC Order No. 91-1781 which authorized PGE a temporary rate increase to
recover a portion of the excess power costs incurred during the 1991 Trojan
outage. URP and the OPUC agreed to stay the case pending OPUC hearings on the
OPUC order. On February 22, 1992 the
OPUC issued an order approving the rate increase. The case is currently under
a stay. PGE has not intervened in this case. This case remains inactive.
COLUMBIA STEEL CASTING CO., INC. V. PGE, PACIFICORP, AND MYRON KATZ, NANCY
RYLES AND RONALD EACHUS, NINTH CIRCUIT COURT OF APPEALS
On June 19, 1990 Columbia Steel filed a complaint for declaratory judgment,
injunctive relief and damages in U.S. District Court for the District of Oregon
contending that a 1972 territory allocation agreement between PGE and
PacifiCorp, dba Pacific Power & Light Company (PP&L), which was subsequently
approved by the OPUC and the City of Portland, does not give PGE the exclusive
right to serve them nor does it allow PP&L to deny service to them. Columbia
Steel is seeking an unspecified amount in damages amounting to three times the
excess power costs paid over a 10 year period.
19
On July 3, 1991 the Court ruled that the Agreement did not allocate customers
for the provision of exclusive services and that the 1972 order of the OPUC
approving the Agreement did not order the allocation of territories and
customers. Subsequently, on August 19, 1993 the Court ruled that Columbia
Steel was entitled to receive from PGE approximately $1.4 million in damages
which represented the additional costs incurred by Columbia Steel for electric
service from July 1990 to July 1991, trebled, plus costs and attorney's fees.
PGE appealed to the U.S. Court of Appeals for the Ninth Circuit which, on July
20, 1995, issued an opinion in favor of PGE, reversing the judgment and
ordering judgment to be entered in favor of PGE. Columbia Steel
filed a
petition for reconsideration and on December 27, 1996 , the Ninth Circuit Court
of Appeals reversed its earlier decision, ruling in favor of Columbia Steel.
The case has been remanded to the US District Court for a new determination of
damages for service
rendered from early 1989 to July 1991.
PGE has asked for reconsideration by the Ninth Circuit.
CITIZEN'S UTILITY BOARD OF OREGON V. PUBLIC UTILITY COMMISSION OF OREGON AND
UTILITY REFORM PROJECT AND COLLEEN O'NEIL V. PUBLIC UTILITY COMMISSION OF
OREGON, MARION COUNTY OREGON CIRCUIT COURT
The Citizen's Utility Board (CUB) appealed a 1994 ruling from the Marion County
Circuit Court which upheld the order of the OPUC in its Declaratory Ruling
proceeding (DR-10). In the DR-10 proceeding, PGE filed an Application with the
OPUC requesting a Declaratory Ruling regarding recovery of the Trojan
investment and decommissioning costs. On August 9, 1993 the OPUC issued the
declaratory ruling. In its ruling, the OPUC agreed with an opinion issued by
the Oregon Department of Justice (Attorney General) stating that under current
law, the OPUC has Authority to allow recovery of and a return on Trojan
investment and future decommissioning costs.
In PGE's 1995 general rate case, the OPUC issued an order granting PGE full
recovery of Trojan Decommissioning costs and 87% of its remaining investment in
the plant. The URP filed an appeal of the OPUC's order. URP alleges that the
OPUC lacks authority to allow PGE to recover Trojan costs through its rates.
The complaint seeks to remand the case back to the OPUC and have all costs
related to Trojan immediately removed from PGE's rates.
The CUB also filed an appeal challenging the portion of the OPUC's order issued
in PGE's 1995 general rate case that authorized PGE to recover a return on its
remaining investment in Trojan. CUB alleges that the OPUC's decision is not
based upon evidence received in the rate case, is not supported by substantial
evidence in the record of the case, is based on an erroneous interpretation of
law and is outside the scope of the OPUC's discretion, and otherwise violates
constitutional or statutory provisions. CUB seeks to have the order modified,
vacated, set aside or reversed.
On April 4, 1996 a circuit court judge in Marion County, Oregon rendered a
decision that contradicted a November 1994 ruling from the same court. The
1996 decision found that the OPUC could not authorize PGE to collect a return
on its undepreciated investment in Trojan currently in PGE's rate base. Both
the 1994 and 1996 circuit court decisions have been appealed to the Oregon
Court of Appeals where they have been consolidated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special shareholder meeting on November 12, 1996 in Portland, Oregon the
shareholders of Portland General's common stock voted to approve the
transactions contemplated by the Merger Agreement between Portland General,
Enron Corp, and Enron Oregon Corp. The results of voting were as follows:
FOR AGAINST ABSTAIN
39,250,549 716,681 505,289
20
EXECUTIVE OFFICERS OF PORTLAND GENERAL CORPORATION AND PORTLAND GENERAL
ELECTRIC (*)
NAME AGE BUSINESS EXPERIENCE
PGC/PGE
Ken L. Harrison 54 Appointed to current position of
Chairman of the Board, Chief Chairman of the Board and Chief
Executive Officer Executive Officer on December 1, 1988
President and President of Portland General since
August 4, 1992. Served as President of
Portland General Electric from June 1987
until September 1989. Reappointed
President of PGE on January 1, 1996.
Alvin Alexanderson 49 Appointed to current position on
Senior Vice President December 12, 1995. Served as Vice
General Counsel and Secretary President, Rates and Regulatory Affairs
from February 1991 until appointed to
current position. Previously served
as President of Portland General
Exchange from May 1988 until February
1991.
David K. Carboneau 50 Appointed to current position on
Vice President January 28, 1997. Served as Vice
Utility Service and President, Information Technology
Telecommunications from January 1, 1996 until appointed
to current position. Previously
served as Vice President, Thermal
and Power Operations from September
1995 to January 1996. Served as Vice
President, Administration from October
1992 to September 1995. Served as Vice
President, Information Resources from
October 1989 to October 1992. For four
years prior to October 1989, served as
an executive officer of PGE.
Joseph M. Hirko 40 Appointed to Senior Vice President on
Senior Vice President September 12, 1995. Has served as
Chief Financial Officer Vice President-Finance, Chief Financial
Officer and Chief Accounting Officer
since December 1991. Served as
Treasurer beginning in June 1989.
Served as Vice President, Portland
General Financial Services, Inc. from
November 1985 until June 1989.
Donald F. Kielblock 55 Appointed to current position on October
Vice President - PGC/PGE 4, 1989. Previously served as General
Human Resources Manager, Information Services of PGE
until appointed to current position.
PGE
Richard E. Dyer 54 Appointed to current position on
Senior Vice President September 12, 1995. Previously served
Power Supply as Vice President and General Manager
of Power Resources and Marketing from
August 1994 until appointed to current
position. Served as Vice President, PGE
Marketing and Supply from July 1991 to
August 1994. Served as PGC Vice
President and Assistant to the Chairman
of the Board from October 1990 until
July 1991.
Peggy Y. Fowler 45 Appointed to current position on
Executive Vice President November 5, 1996. Served as Senior Vice
Chief Operating Officer President, Energy Services from
September 1995 until appointed to
current position. Served as Vice
President, Distribution and Power
Production from January 1990 to
September 1995. Served as General
Manager, Hydro Production and
Transmission from September 1989 to
January 1990.
Pamela Lesh 40 Appointed to current position on
Vice President November 5, 1996. Served as Director of
Rates and Regulatory Affairs Marketing Strategy from May 1996 until
appointed to current position. Served
as Director of Rates and Regulatory
Affairs from January 1992 to May 1996.
Frederick D. Miller 55 Appointed to Senior Vice President on
Senior Vice President November 5, 1996. Served as Director of
Public Affairs and Corporate Executive Department, State of Oregon,
Services from 1987 until appointed to Vice
President, Public Affairs and Corporate
Services on October 15, 1992.
<FN>
(*) Officers are listed as of January 31, 1997. The officers are elected to
serve for a term of one year or until their successors
are elected and qualified.
</FN>
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PORTLAND GENERAL CORPORATION
Portland General's common stock is publicly held and traded on the New York and
Pacific Stock Exchanges. The table below reflects the dividends on Portland
General's common stock and the stock price ranges as reported by THE WALL
STREET JOURNAL for 1996 and 1995.
1996 1995
QUARTER 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
High 31-1/2 30-7/8 38-5/8 44-3/4 20-7/8 23-1/4 25-3/4 29-1/4
Low 28-1/2 27-3/4 28 37-5/8 18-7/8 20-1/4 21-5/8 25-1/4
Closing price 30-3/4 30-7/8 38-3/8 42 20-7/8 22-3/8 25-5/8 29-1/8
Cash dividends
declared (cents) 32 32 32 32 30 30 30 30
The approximate number of shareholders of record as of December 31, l996
was 38,189.
PORTLAND GENERAL ELECTRIC COMPANY
PGE is a wholly owned subsidiary of Portland General. PGE's common stock is
not publicly traded. Aggregate cash dividends declared on common stock were as
follows (thousands of dollars):
QUARTER 1996 1995
First $14,966 $11,545
Second 17,959 11,545
Third 56,014 13,682
Fourth 16,248 13,684
PGE is restricted, without prior OPUC approval, from making any dividend
distributions to Portland General that would reduce PGE's common equity capital
below 36% of total capitalization.
22
ITEM 6. SELECTED FINANCIAL DATA
PORTLAND GENERAL CORPORATION
FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
(thousands of dollars except per share amounts)
Operating Revenues $1,111,816 $983,582 $959,409 $946,829 $883,266
Net Operating Income 224,559 195,576 154,296 158,181 163,500
Income from Continuing
Operations 129,536{1} 81,036{2} 93,058 89,118 89,623
Gain from Discontinued
Operations{3} - - 6,472 - -
Net Income $129,536{1} $ 81,036{2} $ 99,530 $ 89,118 $ 89,623
Earnings per Average
Common Share
Continuing Operations $ 2.53 $ 1.60 $ 1.86 $ 1.88 $ 1.93
Discontinued Operations{3} - - .13 - -
$ 2.53 $ 1.60 $ 1.99 $ 1.88 $ 1.93
Dividends Declared
per Common Share $ 1.28 $ 1.20 $ 1.20 $ 1.20 $ 1.20
Total Assets $3,583,249 $3,448,017 $3,559,271 $3,449,328 $3,140,625
Long-Term Obligations{4} 963,042 930,556 885,814 912,994 937,938
PORTLAND GENERAL ELECTRIC COMPANY
FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
(thousands of dollars)
Operating Revenues $1,109,831 $981,628 $958,955 $944,531 $880,098
Net Operating Income 224,746 195,186 153,208 154,200 160,037
Net Income 155,915 92,787{2} 106,118 99,744 105,562
Total Assets $3,398,212 $3,245,597 $3,354,151 $3,226,674 $2,920,980
Long-Term Obligations{4} 963,042 930,556 855,814 872,994 887,938
<FN>
NOTES TO THE TABLES ABOVE:
1 Includes $18 million charge for merger costs
2 Includes a loss of $50 million from regulatory disallowances.
3 Reflects the results of discontinued real estate operations.
4 Includes long-term debt, preferred stock subject to mandatory redemption
requirements and long-term capital
lease obligations.
</FN>
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Portland General reported 1996 earnings of $130 million or $2.53 per share,
compared to $81 million or $1.60 per share for 1995. 1996 results include $18
million of after-tax merger related costs. 1995 earnings include a $50 million
after-tax charge to income related to the OPUC's rate orders disallowing
certain deferred power costs and 13% of PGE's remaining investment in Trojan.
Excluding the effect of merger related costs and regulatory disallowances,
income from continuing operations would have been $148 million and $131
million, respectively.
PGE ACCOUNTS FOR SUBSTANTIALLY ALL OF PORTLAND GENERAL'S ASSETS, REVENUES AND
NET INCOME. THE FOLLOWING DISCUSSION FOCUSES ON PGE UTILITY OPERATIONS, UNLESS
OTHERWISE NOTED.
Operating Revenue and Net Income (Loss) graph:
($ Millions):
Operating Net
Revenue Income
1992 883 90
1993 947 89
1994 959 100
1995 984 81
1996 1112 130
PGE Electricity Sales graph:
(Billions of kWh)
1992 Residential 6.3
Commercial 5.8
Industrial 3.6
Wholesale 2.7
1993 Residential 6.8
Commercial 6.0
Industrial 3.8
Wholesale 1.6
1994 Residential 6.7
Commercial 6.2
Industrial 3.9
Wholesale 2.7
1995 Residential 6.6
Commercial 6.4
Industrial 4.1
Wholesale 3.3
1996 Residential 7.1
Commercial 6.6
Industrial 3.9
Wholesale 10.2
1996 COMPARED TO 1995
Strong operating earnings reflected the benefits of low variable power costs
due to optimal hydro conditions and a competitive wholesale market. Sales
growth due to a growing retail customer base, along with favorable weather
conditions contributed to new record peak loads for both the summer and winter
periods.
Retail revenues exceeded the prior year by $29 million, largely due to rate
increases accompanied by 3% higher energy sales. These increases were partially
offset by revenue refund provisions for SAVE adjustments and certain state tax
benefits.
Favorable weather conditions contributed to higher energy sales in both
residential and commercial classes. In January and February mean temperatures
were colder than average by 2.6 and 4.5 degrees respectively, and temperatures
in August and September were warmer than average by 3.1 and 3.2 degrees
respectively.
Industrial loads declined 3.8% due to weak demand from paper manufacturers and
metals fabricators despite benefiting from growth in the high-tech industries.
During 1996, PGE revenues decreased $20 million due to adjustments related to
SAVE refund provisions, decoupling revenues and certain state tax benefits.
Wholesale revenues exceeded 1995 levels by $99 million due to aggressive
marketing efforts. Sales increased by 6.8 million MWh over 1995, however,
average sales prices decreased by 33%.
The price of variable power dropped 18% in 1996, averaging 13 mills versus 15.9
mills (10 mills = 1 cent) last year. Total costs increased only $23 million or
8%, despite a 36% rise in total Company energy requirements. Optimal hydro
conditions brought steep reductions in the cost of secondary power, as well as
the cost of firm power purchased from the mid-Columbia projects. Power
purchases amounted to 75% of total PGE load in 1996 at an average cost of 13.9
mills compared to 18.3 mills in 1995.
24
PGE hydro projects generated 9% of the Company's energy needs, an 11% increase
in production levels. PGE's thermal plants operated efficiently, and with the
addition of Coyote Springs, average overall costs dropped to 6.1 mills from 8.0
mills in 1995. Excluding Coyote Springs, thermal plants generation was down
13% due to economic displacement early in the year.
RESOURCE MIX/VARIABLE POWER COSTS
Average Variable
Resource Mix Power Cost (Mills/KWh)
1996 1995 1996 1995
Generation 25% 36% 6.1 8.0
Firm Purchases 62% 39% 14.6 22.7
Secondary Purchases 13% 25% 10.4 11.3
Total 100% 100% 13.0 15.9
Operating expenses (excluding variable power, depreciation and income taxes)
were $32 million or 12% higher than 1995. The increase is primarily due to
additional costs associated with fixed natural gas transportation, storm
related repair and maintenance projects and increased customer support.
Incremental operating costs associated with Coyote Springs, which was placed in
operation in late 1995, were offset by decreased costs at other thermal
facilities resulting from economic displacement. Throughout the year PGE was
able to economically dispatch or displace thermal generation in response to
movements in the cost of short-term power and the availability of low-cost
hydro power.
Depreciation and amortization increased $20 million, or 15%,
due primarily to depreciation related to Coyote Springs.
Excluding regulatory disallowances of $50 million in 1995, other income
declined $9 million due to a reduced return on regulatory assets
and the absence of equity AFDC.
Interest charges are $7 million above 1995 due to reduced AFDC
and higher levels of short-term debt. Preferred dividend
requirements were down $7 million due to the retirement of nearly $80 million
in preferred stock in 1995.
Operating Expenses graph:
($ Millions)
1992 Operating Costs 327
Variable Power 222
Depreciation 99
1993 Operating Costs 283
Variable Power 311
Depreciation 122
1994 Operating Costs 262
Variable Power 347
Depreciation 124
1995 Operating Costs 271
Variable Power 294
Depreciation 134
1996 Operating Costs 306
Variable Power 317
Depreciation 155
1995 COMPARED TO 1994
Strong operating earnings reflected the benefits of low variable power costs
due to improved hydro conditions, lower natural gas prices and a competitive
wholesale market. The Company also benefited from continued sales growth and a
retail price increase.
Retail revenues increased $32 million, or nearly 4%, due largely to the
Company's general rate increase and continued load growth. An average 5%
general rate increase effective in 1995, coupled with a 263,000 MWh increase in
energy sales, resulted in $45 million of additional revenue. An increase in
retail customers of 14,600 and a continuing strong local economy resulted in
weather-adjusted load growth of 2.8%. Industrial customers contributed the
major portion of load growth for the year due to the recent expansion of high-
technology and supporting industries in the region. Weather-adjusted load for
residential customers increased 1.2% over 1994. Over 12,900 residential
customers were added during 1995. Retail revenue increases were partially
offset by warmer than normal weather during winter heating months which
decreased residential demand for energy, and a decrease in accrued revenues, a
result of fewer power cost deferrals and SAVE incentive revenues.
25
Wholesale sales contributed $95 million or approximately 10% of total operating
revenues. The Company's aggressive marketing efforts resulted in a 25%
increase in sales; however, revenues declined $11 million as average prices
decreased 28%.
Variable power costs fell $54 million, or 15%, despite increased Company load
as the average cost of power decreased from 19.1 to 15.9 mills (10 mills = 1
cent). Improved hydro conditions, mild weather, cheaper natural gas, and
competition among suppliers all contributed to abundant and low-cost supplies
of secondary energy in the region. Company hydro generation increased 20%, or
412,000 MWh, reflecting good water conditions on the Clackamas River system
similar to those experienced throughout the West. Energy purchases were up 28%
due to increased loads and economic displacement of thermal generation, while
abundant supplies of energy drove secondary prices below 1994 levels.
Secondary purchases averaged 11.3 mills, ranging from 1.8 to 28 mills, compared
to an average 20.1 mills in 1994.
Throughout the year PGE was able to economically dispatch or displace thermal
generation in response to movements in the cost of short-term power. Low-cost
hydro significantly displaced PGE thermal generation, which decreased 32% from
1994. Beaver generated electricity at 38% lower cost due to favorable gas
prices.
Operating expenses (excluding variable power costs, depreciation and income
taxes) were $10 million, or 4%, higher primarily due to storm damages incurred
in December 1995. A combination of wind and ice storms caused a record number
of customer outages in PGE's service territory. Repair efforts to restore
customers' service included around the clock efforts from PGE personnel and
contract crews at a total cost exceeding $10 million, of which PGE is self-
insured for the first $5 million.
A March 1995 general rate order disallowed recovery of 13% of PGE's Trojan
investment resulting in a $37 million after-tax charge to income. PGE also
recorded a $13 million after-tax third quarter loss as a result of an OPUC
order which disallowed recovery of a portion of the Company's deferred power
costs.
Depreciation increased $10 million, or 8%, largely due to higher depreciation
rates effective with the Company's general rate increase. Income taxes
increased $18 million primarily due to an increase in before- tax operating
income. The Company benefited from a one-time state tax refund of
approximately $4 million which contributed to a lower effective tax rate for
the year.
The construction of Coyote Springs accounted for the increases in capitalized
interest during each year, which partially offset a corresponding increase in
interest expense. Income also includes a $5 million charge for increased
charitable donations.
CASH FLOW
Utility Capital Expenditures graph:
($ Millions)
1992 159
1993 149
1994 243
1995 232
1996 185
PORTLAND GENERAL CORPORATION
Portland General requires cash to pay dividends to its common shareholders, to
provide funds to its subsidiaries, to meet debt service obligations and for
day-to-day operations. Sources of cash are dividends from PGE, leasing
rentals, short- and intermediate-term borrowings, and the sale of Portland
General's common stock. In order to meet periodic liquidity and operational
needs, Portland General maintains a $20 million one-year credit facility.
In February 1996 the Board of Directors approved an increase in PGC's quarterly
dividend from $.30 to $.32 per share. This was the first change in Portland
General's dividend since 1990.
Portland General received $103 million in dividends from PGE. In addition,
Portland General received $3 million in proceeds from the issuance of new
shares of common stock under its Dividend Reinvestment and Optional Cash
Payment Plan (DRIP).
26
PORTLAND GENERAL ELECTRIC COMPANY
CASH PROVIDED BY OPERATIONS is used to meet the day-to-day cash requirements
of PGE. Supplemental cash is obtained from external borrowings as needed.
PGE maintains varying levels of short-term debt, primarily in the form of
commercial paper, which serve as the primary form of daily liquidity with 1996
balances ranging from $83 million to $251 million. PGE has committed borrowing
facilities totaling $200 million which are used as backup for PGE's commercial
paper facility.
A significant portion of cash provided by operations comes from depreciation
and amortization of utility plant, charges which are recovered in customer
revenues but require no current cash outlay. Changes in accounts receivable
and accounts payable can also be significant contributors or users of cash.
Improved cash flow for 1996 reflects a higher percentage of cash revenues
combined with lower variable power costs.
INVESTING ACTIVITIES include generation, transmission and distribution
facilities improvements, as well as energy efficiency programs. 1996 capital
expenditures of $185 million were primarily for the expansion and upgrade of
the transmission and distribution system. Annual capital expenditures are
expected to be approximately $170 million over the next few years. The
majority of anticipated capital expenditures are for improvements to the
Company's expanding distribution system to support the addition of new
customers.
The Company does not anticipate construction of new generating resources in the
foreseeable future. The Company will continue to make energy efficiency
expenditures similar to 1996 levels.
FINANCING ACTIVITIES provide supplemental cash for day-to-day operations and
capital requirements as needed. During 1996 both Standard & Poor's Investor
Services (S&P) and Moody's Investor Services (Moody's) reviewed and upgraded
PGE's debt ratings. S&P upgraded PGE's senior secured debt from A- to A, its
unsecured debt from BBB+ to A-, and commercial paper from A2 to A1 with a
Stable Outlook. Similarly Moody's upgraded the Company's debt ratings, raising
PGE's secured debt from A3 to A2, unsecured debt from Baa1 to A3 and commercial
paper from P2 to P1. The improved ratings, especially on short-term debt,
should help lower the Company's future borrowing costs. During 1997 internal
funding is expected to cover the Company's capital expenditures.
During 1996 the Company issued $170.6 million of long-term debt. The proceeds
were used to retire $97.6 million in long-term debt and to pay down outstanding
short-term debt.
Also in 1996 PGE redeemed the final 200,000 outstanding shares of its
8.10% preferred stock, at par. The $20 million redemption leaves only the
Company's 7.75% preferred stock outstanding which has sinking fund requirements
beginning in 2002.
The issuance of additional First Mortage Bonds and preferred stock requires
PGE to meet earnings coverage and security provisions set forth in the Articles
of Incorporation and the Indenture securing its First Mortgage Bonds. As of
December 31, 1996, PGE had the capability to issue additional First
Mortgage Bonds and preferred stock in amounts sufficient to meet its capital
requirements.
27
FINANCIAL AND OPERATING OUTLOOK
PORTLAND GENERAL CORPORATION - HOLDING COMPANY
PROPOSED MERGER
GENERAL
During 1996 Portland General entered into an Amended and Restated Agreement and
Plan of Merger (Merger Agreement) with Enron Corp (Enron) and Enron Oregon
Corp. (New Enron), a wholly-owned subsidiary of Enron. Under the terms of the
Merger Agreement Portland General will merge into New Enron (Merger) and each
share of
the common stock of Portland General will be converted into one share of the
common stock of New Enron. Immediately prior to the consummation of the Merger,
Enron will merge into New Enron for the purpose of reincorporating Enron in
Oregon (Reincorporation Merger). The Merger Agreement provides that if certain
regulatory reforms are enacted, the structure of the transaction contemplated
by the Merger Agreement will be revised to eliminate the Reincorporation
Merger. The Merger has been approved by both companies' boards of
directors, shareholders, and the FERC. However, before the Merger can be
completed, approvals and consents must be obtained from the NRC and the
OPUC.
APPROVALS AND CONSENTS
OPUC - PGE is subject to the jurisdiction of the OPUC with respect to its
electric utility operations. The approval of the OPUC is required for any
transaction in which a person seeks to acquire the power to exercise any
substantial influence over the policies and actions of a public utility subject
to the OPUC's
jurisdiction. Upon completion of the Merger, Enron will be the sole owner of
PGE common stock. On August 30, 1996, Enron filed an application with the OPUC
seeking approval of the Merger. The OPUC must approve the merger if they find
that it will serve the customers of PGE in the public interest. In making that
finding the OPUC may consider whether the change in ownership of PGE will
impair the ability of the utility to provide adequate service at just and
reasonable rates. The Staff of the OPUC issued a
preliminary recommendation that the OPUC approve the merger application,
subject to certain conditions. Portland General and Enron have entered into
discussions with the Staff which are intended to settle differences over the
proposed conditions. There is no assurance that the parties will reach
agreement. An OPUC decision on the merger application was expected by the end
of March 1997. However, there is no assurance that the OPUC will have rendered
a decision by that time.
FERC - The FERC approved the Merger, without conditions, on February 26, 1997.
OTHER - Consent and approval of the Merger is still pending before the NRC.
OPERATIONS AFTER THE BUSINESS COMBINATION
When the merger is complete, Portland General will cease to exist. PGE,
Portland General's utility subsidiary will retain its name, most of its
functions and maintain its principal corporate offices in Portland, Oregon. It
will be a subsidiary of Enron, an integrated natural gas company headquartered
in Houston, Texas. Essentially all of Enron's operations are conducted
through its subsidiaries
and affiliates which are principally engaged in the gathering, transportation
and wholesale marketing of natural gas; the exploration and production of
natural gas and crude oil; the production, purchase, transportation and
marketing of natural gas liquids and refined petroleum products; the
independent development, promotion, construction and operation of power plants,
natural gas liquids facilities and pipelines; and the non-price regulated
purchasing and marketing of energy related commitments.
ACCOUNTING TREATMENT
The Merger will be accounted for by Enron as a purchase for financial reporting
purposes. PGE will continue to report its assets and liabilities at historical
cost.
28
PORTLAND GENERAL ELECTRIC COMPANY - ELECTRIC UTILITY
COMPETITION
The Energy Policy Act of 1992 (Energy Act) set the stage for change in federal
and state regulations aimed at increasing both wholesale and retail competition
in the electric industry. The Energy Act eased restrictions on independent
power production and granted authority to the FERC to mandate open access for
the wholesale transmission of electricity.
The FERC has taken steps to provide a framework for increased competition in
the electric industry. In 1996 the FERC issued Order 888 requiring non-
discriminatory open access transmission by all public utilities that own
interstate transmission. The final rule requires utilities to file tariffs
that offer others the same transmission services they provide themselves under
comparable terms and conditions. This rule also allows public utilities to
recover stranded costs in accordance with the terms, conditions and procedures
set forth in Order 888. The ruling requires reciprocity from municipals,
cooperatives and federal power marketers receiving service under the tariff.
The new rules became effective July 1996 and are expected to result in
increased competition, lower prices and more choices to wholesale energy
customers.
In February 1997 PGE signed a long-term transmission agreement with Washington
Water Power (WWP) under these new rules. WWP will receive 100 MW of firm
transmission capacity through the end of 1997 and a total 200 MW of firm
transmission capacity from January 1998 through the end of the year 2001.
PGE, along with a number of other public and private Northwest utilities and
the BPA have signed a memorandum of understanding to create an independent
transmission grid operator (IndeGo). Under the agreement, IndeGo would assume
responsibility for day to day operation of main transmission lines which are
directly owned by the various parties. The parties would maintain ownership of
the lines, as well as responsibility for repair and upgrades.
FERC actions apply only to the wholesale transmission of electricity. Terms
and conditions of retail transmission service are subject to individual state
regulation. Since the passage of the Energy Act, various state utility
commissions have addressed proposals which would allow retail customers direct
access to generation suppliers, marketers, brokers and other service providers
in a competitive marketplace for energy services (retail wheeling). It is
expected that several bills proposing retail competition will be introduced
during the 1997 Oregon legislative session.
PGE has initiated several experimental tariff schedules during the past two
years that have allowed certain of its larger customers to acquire electricity
at market based prices. Eligible customers have the opportunity to purchase
energy at prices that reflect actual market conditions. The tariffs are
limited to a total of 250 MW or 12% of total PGE retail load.
PGE has filed a tariff which, upon approval by the OPUC,
will allow large industrial and commercial customers to purchase as much
as one-third of their electricity needs from any provider. This Power Delivery
Service Tariff initially will be available for up to 75 megawatts of load per
year. If the OPUC approves the merger of Portland General and Enron, affected
customers will be allowed to purchase 100 percent of their electricity through
the tariff, up to 225 megawatts per year. Absent OPUC approval of the merger,
PGE will phase in the tariff over a longer period of time.
In November 1996 Portland General and Enron committed to submit to the OPUC
within 60 days of the merger completion a plan to open PGE's service area to
competition. The plan will allow residential, commercial and industrial
customers to choose their energy provider and will include a proposal to
separate PGE generating facilities from its transmission and distribution
system. In addition, the plan will include a proposal
for the treatment of transition or stranded costs. The action will position
the generating side of the organization to
compete more effectively in an open marketplace, and will allow the
distribution side to focus on quality of service, safety and reliability.
29
REGULATORY MATTERS
Industry Restructuring - Historically the OPUC has approached the issues of
retail competition on an informal, utility-by-utility basis, rather than
through generic, broad-based proceedings. However, in June 1996 the OPUC began
an investigation into restructuring the state's electric utility industry by
meeting with state
utility executives, customers, environmental advocates and
other interested parties to discuss how competition in the generation of
electric power could be introduced and when to allow customers access to
competing power suppliers.
Four specific issues were the focus of subsequent meetings: how an electricity
distribution company would operate and be regulated; how energy efficiency and
other public purpose programs will be offered and funded in a restructured
environment; what treatment is appropriate for utility investment in a
generating plant that is no longer economic; and whether vertical integration
of electrical utilities should be discouraged or prohibited. The OPUC has
stated its intent to use these discussions to prepare for action on the
competitive initiatives that can be implemented under its direct authority and
to work with the legislature in assessing proposals for restructuring.
It remains to be determined what effect future competitive factors may have on
retail rates in Oregon and the Company's ability to fully recover remaining
regulation assets.
1996 RATE SETTLEMENT - During 1996 PGE worked with the OPUC staff and other
interested parties to develop a plan for dealing with significant savings which
resulted from lower natural gas and power purchase prices. This resulted in
$55 million in annual rate reductions that began December 1, 1996. The rate
reductions will result in an after tax earnings decrease of approximately $32
million for 1997. In addition, the order incorporated $15 million in rate
reductions previously approved by the OPUC resulting in total 1997 rate
reductions of $70 million.
BONDABLE CONSERVATION INVESTMENT - In late 1996, the OPUC designated $81
million of PGE's energy efficiency investment as Bondable Conservation
Investment, pursuant to recent Oregon legislation, and authorized issuance of
conservation bonds collateralized by an OPUC assured future revenue stream.
Subsequently, PGE issued a 10 year conservation bond which is expected to
provide an estimated $21 million in present value savings to customers while
granting PGE immediate recovery of its energy efficiency program expenditures.
The OPUC assured future revenues collected from customers will pay debt service
obligations.
TROJAN INVESTMENT RECOVERY - In April 1996 a circuit court judge in Marion
County, Oregon found that the OPUC could not authorize PGE to collect a return
on its undepreciated investment in Trojan contradicting a November 1994 ruling
from the same court. The ruling was the result of an appeal of PGE's 1995
general rate order which granted PGE recovery of, and a return on, 87 percent
of its remaining investment in Trojan.
The November 1994 ruling, by a different judge of the same court, upheld the
Commission's 1993 Declaratory Ruling (DR-10). In DR-10 the OPUC ruled that
PGE could recover and earn a return on its undepreciated Trojan investment,
provided certain conditions were met. The Commission relied on a 1992 Oregon
Department of Justice opinion issued by the Attorney General's office stating
that the Commission had the authority to set prices including recovery of and
on investment in plant that is no longer in service.
The 1994 ruling was appealed to the Oregon Court of Appeals and stayed pending
the appeal of the Commission's March 1995 order. Both PGE and the OPUC have
separately appealed the April 1996 ruling which was combined with the appeal of
the November 1994 ruling at the Oregon Court of Appeals.
For further information regarding the legal challenges to the OPUC's authority
to grant recovery for PGE's Trojan investment see Item 3., Legal proceedings.
LEAST COST ENERGY PLANNING - In August 1996 the OPUC acknowledged PGE's 1995-
1997 Integrated Resource Plan (IRP). The OPUC adopted Least Cost Energy
Planning for all energy utilities in Oregon with the goal of selecting the mix
of options that yields an adequate and reliable supply of energy at the least
cost to the utilities and customers. The 1995-1997 IRP reflects: the
recognition that the geographic area PGE presently serves no longer defines our
customer base; the accelerated pace of technological change; transition of a
key fuel, natural gas, to a market commodity; and the development of a vibrant
electricity marketplace.
30
The IRP outlines a strategy which emphasizes: (1) the
purchase of energy in the marketplace at competitive prices, (2) acquisition of
energy efficiency at reduced levels while maintaining market presence and
capability for possible future increases when justified, (3) economical use of
our existing assets and (4) the use of other supply-side actions, including
acquisition of renewable resources.
RETAIL CUSTOMER GROWTH AND ENERGY SALES
Weather adjusted retail energy sales grew less than 1 percent during 1996,
reflecting cutbacks by paper manufacturers and metal fabricators.
Nevertheless, the Company benefited from continued growth in residential sales
of 1.8% with the addition of nearly 15,500 new customers as well as increased
commercial sales which rose 3%. Industrial sales, although negatively affected
in 1996 by weak demand from the paper manufacturers and metals fabricators,
continues to benefit from growth in the high-tech and transportation sectors.
Rising demand from the high-tech industry in Oregon combined with continued
gains in residential and commercial customer classes is expected to contribute
to 6.7% load growth for 1997.
WHOLESALE SALES
The surplus of electric generating capability in the Western U.S., the entrance
of numerous wholesale marketers and brokers into the market, and open access
transmission is contributing to increasing pressure on the price of power. In
addition the development of financial markets and NYMEX electricity contract
trading
has led to increased price discovery available to market participants, further
adding to the competitive pressure on wholesale margins. During 1996 PGE's
wholesale revenues increased 104% over 1995 levels with wholesale activity
accounting for 18% of
total revenues and 37% of total sales. In future years PGE will continue its
participation in the wholesale marketplace to balance its supply of power to
meet the needs of its retail customers, manage risk and to administer PGE's
current long-term wholesale contracts. Due to increasing volatility and
reduced margins resulting from increased competition, long-term wholesale
marketing activites will be performed by PGE's non-regulated affiliates.
COMMODITY PRICE RISK MANAGEMENT
The Company is exposed to market risk arising from the need to purchase fuel
for its generating units (both natural gas and coal) as well as the direct
purchase and sale of wholesale electricity in support of its retail and
wholesale markets. PGE operates without a power cost adjustment tariff, and
therefore adjustments for power costs above or below those used in existing
general tariffs are not automatically reflected in retail customers' rates.
Through the formation of the trading floor, PGE integrated its wholesale
trading, fuels, energy supply, power operations and price risk management
functions. The
Company must purchase energy to serve its wholesale markets. This along with
the development of a broader, more competitive wholesale electricity market,
means the Company must actively hedge its market price risk.
The Company uses financial instruments, such as commodity futures, options,
forwards and swaps, to hedge the price of natural gas and electricity and
reduce its exposure to fluctuations in these commodities. In addition to
hedging activities, financial instruments are used for trading purposes.
PGE trades instruments on the New York
Mercantile Exchange as well as in the over the counter market. Consequently
the Company is exposed to credit risk in the event of non-performance by the
counterparties and has established guidelines to mitigate that risk.
POWER & FUEL SUPPLY
PGE's base of hydro and thermal generating capacity provides the Company with
the flexibility needed to respond to seasonal fluctuations in the demand for
electricity both within its service territory and from its wholesale customers.
PGE plans to generate 27% of its energy requirements during 1997, approximately
the same level achieved during 1996.
PGE maintains flexibility in fuel supply contracts to allow for the economic
dispatch of PGE's thermal resources in conjunction with hydro operations and
the current market price of wholesale power. The Company benefits from a
strategic location which places it adjacent to two competing natural gas
pipelines with access to three significant producing basins. Firm
transportation on both pipelines provides an adequate supply of natural gas to
meet plant generating capacities. In addition, the Company maintains a
flexible portfolio of physical supply which relies heavily on short-term
agreements and spot-market purchases of fuel to meet plant operations.
31
During 1996 the Company relied on wholesale purchases to supply approximately
75% of its energy needs, and expects to purchase approximately 73% of its 1997
load requirements. PGE has long-term power contracts with four hydro projects
on the mid-Columbia River which provide PGE with 590 MW. Early forecasts
indicate above average water conditions for 1997. However, efforts to restore
salmon runs on the Columbia and Snake Rivers may reduce the amount of water
available for generation which could affect the supply, availability and price
of purchased power. Additional factors that could affect the availability and
price of purchased power include weather conditions in the Northwest during
winter months and in the Southwest during summer months, as well as the
performance of major generating facilities in both regions.
PGE has increasingly relied upon short-term purchases to meet its energy needs.
The Company anticipates that an active wholesale market and a surplus of
generating capacity within the WSCC should provide sufficient wholesale energy
available at competitive prices to supplement Company generation and purchases
under existing firm power contracts.
RESTORATION OF SALMON RUNS - Several species of salmon found in the Snake
River, a major tributary of the Columbia River, have been granted protection
under the Federal Endangered Species Act (ESA). In an effort to help restore
these fish, the federal government has reduced the amount of water allowed to
flow through the turbines at the hydro electric dams on the Snake and Columbia
River while the young salmon are migrating to the ocean. This has resulted in
reduced amounts of electricity generated at the dams. Favorable hydro
conditions helped mitigate the affect of these actions in 1996. Similar
conditions are expected in 1997. If this practice is continued in future years
it could mean less water available in the fall and winter for generation when
demand for electricity in the Pacific Northwest is highest. Although PGE does
not own any hydroelectric facilities on the Columbia and Snake rivers, it does
buy large amounts of energy from the agencies which do.
Several other species of salmon have been proposed for protection under the
ESA. Actions taken to protect these species will not be in affect for several
years. It is unclear how these potential ESA listings will impact future hydro
operations.
PGE's hydroelectric projects are located on rivers with depressed but not
endangered salmon runs. PGE biologists are working with state and federal
natural resource agencies to ensure PGE's hydro operations are compatible with
the survival and enhancement of these populations of salmon. PGE does not
expect that any actions will be taken that will have an adverse impact on PGE
hydro operations in the foreseeable future.
HYDRO RELICENSING
PGE HYDRO - PGE's hydroelectric plants are some of the Company's most valuable
resources supplying economical generation and flexible load following
capabilities. Company-owned hydro generation produced 2.7 million MWh of
renewable energy in 1996, meeting 9% of PGE's load. PGE's hydroelectric
plants, operate under federal licenses, which will be up for renewal between
the years 2001 and 2006. PGE officially began the relicensing process for its
408-MW Pelton Round Butte Project in July 1996. The Confederated Tribes of
Warm Springs, currently the licensee for a powerhouse located at the
reregulating dam (one of three dams within the Pelton Round-Butte Project),
have also filed a notice stating their intent to seek a license for the entire
project. Should relicensing not be completed prior to the expiration of the
original license, annual licenses will be issued, usually under the original
terms and conditions.
The relicensing process includes the involvement of numerous interested parties
such as governmental agencies, public interest groups and communities, with
much of the focus on environmental concerns. PGE has already performed many
pre-filing activities including nearly 50 public meetings with such groups.
The cost of relicensing includes legal and filing fees as well as the cost of
environmental studies, possible fish passage measures and wildlife habitat
enhancements. Relicensing cost may be a significant factor in determining
whether a project remains cost-effective after a new license is obtained,
especially for smaller projects. Although FERC has never denied an application
or issued a license to anyone other than the incumbent licensee, there is no
assurance that a new license will be granted to PGE.
32
MID-COLUMBIA HYDRO - PGE's long-term power purchase contracts with certain
public utility districts in the state of Washington expire between 2005 and
2018. Certain Idaho Electric Utility Co-operatives have initiated proceedings
with FERC seeking to change the allocation of generation from the Priest Rapids
and Wanapum dams between electric utilities in the region upon the expiration
of the current contracts. An initial decision was issued in December 1996 by
the presiding FERC administrative law judge. This decision does not
substantially change PGE's share of power from these two dams. This decision is
expected to be appealed.
PGE will continue to seek renewal of these contracts
under terms and conditions similar to the original. For further information
regarding the power purchase contracts on the mid-Columbia dams, including
Priest Rapids and Wanapum, see Note 8, Commitments, in the Notes to Financial
Statements.
NUCLEAR DECOMMISSIONING
In 1996 the NRC and EFSC approved PGE's Trojan decommissioning plan. The plan,
which estimates PGE's cost to decommission Trojan at $358 million in nominal
dollars (actual dollars to be spent in each year), represents a site-specific
decommissioning estimate performed for Trojan by an engineering firm
experienced in decommissioning nuclear plants. This estimate assumes that the
majority of decommissioning activities will occur between 1997 and 2001, after
the spent fuel has been transferred to a temporary dry spent fuel storage
facility. The plan anticipates final site restoration activities will begin in
2018 after PGE completes shipment of spent fuel to a USDOE facility (see Note
12, Trojan Nuclear Plant, for further discussion of the decommissioning plan
and other Trojan issues). Current decommissioning activities are focused on
the licensing, planning and construction of a temporary dry spent fuel storage
facility and the removal of the Trojan reactor vessel.
33
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Portland General Corporation's management is responsible for the preparation
and presentation of the consolidated financial statements in this report.
Management is also responsible for the integrity and objectivity of the
statements. Generally accepted accounting principles have been used to prepare
the statements, and in certain cases informed estimates have been used that are
based on the best judgment of management.
Management has established, and maintains, a system of internal accounting
controls. The controls provide reasonable assurance that assets are
safeguarded, transactions receive appropriate authorization, and financial
records are reliable. Accounting controls are supported by written policies
and procedures, an operations planning and budget process designed to achieve
corporate objectives, and internal audits of operating activities.
Portland General's Board of Directors includes an Audit Committee composed
entirely of outside directors. It reviews with management, internal auditors
and independent auditors the adequacy of internal controls, financial
reporting, and other audit matters.
Arthur Andersen LLP is Portland General's independent public accountant. As a
part of its annual audit, selected internal accounting controls are reviewed in
order to determine the nature, timing and extent of audit tests to be
performed. All of the corporation's financial records and related data are
made available to Arthur Andersen LLP. Management has also endeavored to
ensure that all representations to Arthur Andersen LLP were valid and
appropriate.
Joseph M. Hirko
Senior Vice President,
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Portland General Corporation:
We have audited the accompanying consolidated balance sheets of Portland
General Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Portland General Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
January 20, 1997
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES $ 1,111,816 $ 983,582 $ 959,409
OPERATING EXPENSES
Purchased power and fuel 316,729 293,589 347,125
Production and distribution 81,968 63,841 61,891
Maintenance and repairs 55,508 47,532 47,391
Administrative and other 115,881 108,067 100,596
Depreciation and amortization 154,670 134,423 124,081
Taxes other than income taxes 52,513 51,490 52,151
777,269 698,942 733,235
OPERATING INCOME BEFORE INCOME TAXES 334,547 284,640 226,174
INCOME TAXES 109,988 89,064 71,878
NET OPERATING INCOME 224,559 195,576 154,296
OTHER INCOME (DEDUCTIONS)
Regulatory disallowances - net of income taxes of $25,542 - (49,567) -
Interest expense (79,180) (79,128) (71,653)
Allowance for funds used during construction 1,642 11,065 4,314
Preferred dividend requirement - PGE (2,793) (9,644) (10,800)
Other - net of income taxes (14,692) 12,734 16,901
INCOME FROM CONTINUING OPERATIONS 129,536 81,036 93,058
DISCONTINUED OPERATIONS
Gain on disposal of real estate operations -
net of income taxes of $4,226 - - 6,472
NET INCOME $ 129,536 $ 81,036 $ 99,530
COMMON STOCK
Average shares outstanding 51,144,462 50,766,916 49,896,685
Earnings per average share
Continuing operations $2.53 $1.60 $1.86
Discontinued operations - - 0.13
Earnings per average share $2.53 $1.60 $1.99
Dividends declared per share $1.28 $1.20 $1.20
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS)
BALANCE AT BEGINNING OF YEAR $ 135,885 $ 118,676 $ 81,159
NET INCOME 129,536 81,036 99,530
ESOP TAX BENEFIT AND OTHER (2,093) (2,872) (1,705)
263,328 196,840 178,984
DIVIDENDS DECLARED ON COMMON STOCK 65,516 60,955 60,308
BALANCE AT END OF YEAR $ 197,812 $ 135,885 $ 118,676
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
35
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31 1996 1995
(THOUSANDS OF DOLLARS)
ASSETS
ELECTRIC UTILITY PLANT - ORIGINAL COST
Utility plant (includes Construction Work
in Progress of $36,919 and $33,382) $ 2,899,746 $ 2,754,280
Accumulated depreciation (1,124,337) (1,040,014)
1,775,409 1,714,266
Capital leases - less amortization of $30,569 and $27,966 6,750 9,353
1,782,159 1,723,619
OTHER PROPERTY AND INVESTMENTS
Leveraged leases 150,695 152,666
Trojan decommissioning trust, at market value 78,448 68,774
Corporate Owned Life Insurance less loans of $26,411 and $26,432 83,666 74,574
Contract termination receivable 111,447 -
Other investments 29,745 28,603
454,001 324,617
CURRENT ASSETS
Cash and cash equivalents 29,802 11,919
Accounts and notes receivable 125,314 104,815
Unbilled and accrued revenues 53,317 64,516
Inventories, at average cost 32,903 38,338
Prepayments and other 17,613 16,953
258,949 236,541
DEFERRED CHARGES
Unamortized regulatory assets
Trojan investment 275,460 301,023
Trojan decommissioning 282,131 311,403
Income taxes recoverable 195,592 217,366
Debt reacquisition costs 28,063 29,576
Conservation investments - secured 80,102 -
Energy efficiency programs 11,974 77,945
Other 22,575 24,322
WNP-3 settlement exchange agreement 163,217 168,399
Miscellaneous 29,026 33,206
1,088,140 1,163,240
$ 3,583,249 $ 3,448,017
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock, $3.75 par value per share 100,000,000 shares authorized,
51,317,828 and 51,013,549 shares outstanding $ 192,442 $ 191,301
Other paid-in capital - net 584,272 574,468
Unearned compensation (3,072) (8,506)
Retained earnings 197,812 135,885
971,454 893,148
Cumulative preferred stock of subsidiary
Subject to mandatory redemption 30,000 40,000
Long-term debt 933,042 890,556
1,934,496 1,823,704
CURRENT LIABILITIES
Long-term debt and preferred stock due within one year 92,559 105,114
Short-term borrowings 92,027 170,248
Accounts payable and other accruals 149,255 133,405
Accrued interest 14,372 16,247
Dividends payable 17,386 16,668
Accrued taxes 30,985 15,151
396,584 456,833
OTHER
Deferred income taxes 614,576 652,846
Deferred investment tax credits 47,314 51,211
Deferred gain on contract termination 112,697 -
Trojan decommissioning and transition costs 357,844 379,179
Miscellaneous 119,738 84,244
1,252,169 1,167,480
$ 3,583,249 $ 3,448,017
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
36
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS)
CASH PROVIDED (USED) BY -
OPERATIONS:
Net income $ 129,536 $ 81,036 $ 99,530
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 118,929 102,266 94,217
Amortization of WNP-3 exchange agreement 5,182 4,910 4,695
Amortization of Trojan investment 24,244 24,884 26,738
Amortization of Trojan decommissioning 14,041 13,336 11,220
Amortization of deferred charges - other 5,034 (1,777) 2,712
Deferred income taxes - net (19,979) (9,555) 37,396
Other noncash revenues (1,697) (5,037) (2,570)
Regulatory Disallowances - 49,567 -
Changes in working capital:
(Increase) Decrease in receivables (9,381) (14,687) (22,952)
(Increase) Decrease in inventories 5,435 (7,189) 3,264
Increase (Decrease) in payables 40,052 22,122 (5,105)
Other working capital items - net (644) 1,957 (18,104)
Trojan decommissioning expenditures (8,231) (10,927) (3,360)
Deferred charges - other 35,454 (9,472) 13,987
Miscellaneous - net 7,772 15,108 5,897
345,747 256,542 247,565
INVESTING ACTIVITIES:
Utility construction - new resources - (49,096) (87,537)
Utility construction - other (184,717) (158,198) (131,675)
Energy efficiency programs (12,318) (25,013) (23,745)
Rentals received from leveraged leases 29,623 21,204 20,886
Nuclear decommissioning trust deposits (15,435) (16,598) (11,220)
Nuclear decommissioning trust withdrawals 7,888 13,521 -
Discontinued operations - - 26,288
Other (10,659) (1,465) (14,058)
(185,618) (215,645) (221,061)
FINANCING ACTIVITIES:
Short-term borrowings - net (78,221) 21,650 (10,816)
Borrowings from Corporate Owned Life Insurance - 4,679 21,731
Long-term debt issued 170,590 147,138 74,631
Long-term debt retired (127,661) (69,445) (49,882)
Repayment of nonrecourse borrowings for
leveraged leases (25,535) (18,741) (18,046)
Preferred stock retired (20,000) (79,704) (20,000)
Common stock issued 3,380 10,299 50,074
Dividends paid (64,799) (62,396) (59,856)
(142,246) (46,520) (12,164)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 17,883 (5,623) 14,340
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF YEAR 11,919 17,542 3,202
CASH AND CASH EQUIVALENTS AT THE END
OF YEAR $ 29,802 $ 11,919 $ 17,542
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest, net of amounts capitalized $ 76,105 $ 66,584 $ 60,852
Income taxes 111,630 86,778 31,539
<FN>
The accompanying notes are an integral part of these
consolidated statements.
</FN>
37
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS
NATURE OF OPERATIONS
Portland General Corporation is an electric utility holding company. PGE, an
electric utility company and Portland General's principal operating subsidiary,
accounts for substantially all of Portland General's assets, revenues and net
income.
During 1996 Portland General entered into an Amended and Restated
Agreement and Plan of Merger (Merger Agreement) with Enron Corp (Enron)
and Enron Oregon Corp. (New Enron), a wholly-owned subsidiary of Enron.
The Merger will be accounted for by Enron as a purchase for financial
reporting purposes. PGE will continue to report its assets and
liabilities at historical cost (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations).
PGE is engaged in the generation, purchase, transmission, distribution, and
sale of electricity in the State of Oregon. PGE also sells energy to wholesale
customers, predominately utilities throughout the western United States. PGE's
Oregon service area is 3,170 square miles, including 54 incorporated cities, of
which Portland and Salem are the largest, within a state-approved service area
allocation of 4,070 square miles. At the end of 1996, PGE's service area
population was approximately 1.4 million, constituting approximately 44% of the
state's population. At December 31, 1996, PGE served approximately 668,000
customers.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of Portland General
and all of its majority-owned subsidiaries. Significant intercompany balances
and transactions have been eliminated.
BASIS OF ACCOUNTING
Portland General and its subsidiaries' financial statements conform to
generally accepted accounting principles. In addition, PGE's accounting
policies are in accordance with the requirements and the ratemaking practices
of regulatory authorities having jurisdiction.
USE OF ESTIMATES
The preparation of financial statements require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified for comparative purposes.
REVENUES
PGE accrues estimated unbilled revenues for services provided from the meter
read date to month-end.
PURCHASED POWER
PGE credits purchased power costs for the net amount of benefits received
through a power purchase and sale contract with the BPA. Reductions in
purchased power costs that result from this exchange are passed directly to
PGE's residential and small farm customers in the form of lower prices.
DEPRECIATION
PGE's depreciation is computed on the straight-line method based on the
estimated average service lives of the various classes of plant in service.
Depreciation expense as a percent of the related average depreciable plant in
service was approximately 4.3% in 1996, 4.0% in 1995 and 3.8% in 1994.
The cost of renewal and replacement of property units is charged to plant,
while repairs and maintenance costs are charged to expense as incurred.
The cost of
utility property units retired, other than land, is charged to accumulated
depreciation.
38
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC)
AFDC represents the pretax cost of borrowed funds used for construction
purposes and a reasonable rate for equity funds. AFDC is capitalized as part
of the cost of plant and is credited to income but does not represent current
cash earnings. The average rates used by PGE were 5.52%, 7.16%, and 4.65% for
the years 1996, 1995 and 1994, respectively.
INCOME TAXES
Portland General files a consolidated federal income tax return. Portland
General's policy is to collect for tax liabilities from subsidiaries that
generate taxable income and to reimburse subsidiaries for tax benefits utilized
in its tax return. Deferred income taxes are provided for temporary
differences between financial and income tax reporting. Amounts recorded for
Investment Tax Credits (ITC) have been deferred and are being amortized to
income over the approximate lives of the related properties, not to exceed
25 years. See Notes 3 and 3A, Income Taxes, for more details.
INVESTMENT IN LEASES
CWL, a subsidiary of Holdings, acquires and leases capital equipment. Leases
that qualify as direct financing leases and are substantially financed with
nonrecourse debt at lease inception are accounted for as leveraged leases.
Recorded investment in leases is the sum of the net contracts receivable and
the estimated residual value, less unearned income and deferred ITC. Unearned
income and deferred ITC are amortized to income over the life of the leases to
provide a level rate of return on net equity invested.
The components of CWL's net investment in leases as of December 31, 1996 and
1995, are as follows (thousands of dollars):
1996 1995
Lease contracts receivable $460,061 $508,190
Nonrecourse debt service (345,450) (389,619)
Net contracts receivable 114,611 118,571
Estimated residual value 84,604 84,610
Less - Unearned income ( 39,435) (41,134)
Investment in leveraged leases 159,780 162,047
Less - Deferred ITC (9,085) (9,381)
Investment in leases, net $150,695 $152,666
CASH AND CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less are
classified as cash equivalents.
DERIVATIVE FINANCIAL INSTRUMENTS
PGE uses financial instruments such as commodity futures, options, forwards and
swaps to hedge against exposures to interest rate, foreign currency and
commodity price risks. The objective of PGE's hedging program is to mitigate
risks due to market fluctuations associated with external financings or the
purchase of natural gas, electricity and related products. Gains and losses
from derivatives that reduce commodity price risks are recognized as fuel or
purchased power expense. Gains and losses on financial instruments that reduce
interest rate risk of future debt issuances are deferred and amortized over the
life of the related debt as an adjustment to interest expense.
Company policy also allows the use of the financial instruments, noted above,
for trading purposes. Gains or losses on financial instruments that are used
for trading purposes or otherwise do not qualify for hedge accounting are
recognized in income on a current basis (see Note 7, Other Financial
Instruments for further information).
WNP-3 SETTLEMENT EXCHANGE AGREEMENT
The WNP-3 Settlement Exchange Agreement, which has been excluded from PGE's
rate base, is an intangible asset with the carrying amount being amortized over
the life of the related agreement.
39
REGULATORY ASSETS AND LIABILITIES
The Company is subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71). When the requirements of SFAS No. 71 are met PGE defers, or
accrues revenue for, certain costs which would otherwise be charged to expense,
if it is probable that future rates will permit recovery of such costs
(regulatory assets). In addition PGE defers, or accrues a liability for,
certain revenues, gains or cost reductions which would otherwise be reflected
in income but through the ratemaking process ultimately will be refunded to
customers (regulatory liabilities).
These regulatory assets and liabilities are reflected as deferred charges,
accrued revenues and other liabilities in the financial statements and are
amortized over the period in which they are included in billings to customers.
Regulatory assets and liabilities reflected in the Consolidated Balance Sheets
as of December 31 relate to the following:
1996 1995
(thousands of dollars)
Regulatory Assets
Trojan-related 557,591 612,426
Income taxes recoverable 195,592 217,366
Debt reacquisition and other 50,638 53,898
Conservation investments - secured 80,102 -
Energy efficiency programs 11,974 77,945
Total Regulatory Assets $895,897 $961,635
Regulatory Liabilities
Deferred gain on SCE Termination $112,697 -
Miscellaneous 35,893 11,081
Total Regulatory Liabilities $148,590 $ 11,081
As of December 31, 1996, all of the Company's regulatory assets and
liabilities are being reflected in rates charged to customers over periods
ranging from approximately 5 to 28 years. Based on rates in place at year end
1996, the Company estimates that it will collect the majority of its regulatory
assets within the next 10 years and substantially all of its regulatory assets
within the next 20 years.
In late 1996, the OPUC designated $81 million of PGE's energy efficiency
investment as Bondable Conservation Investment, pursuant to recent Oregon
legislation, and approved PGE's request to issue conservation bonds
collateralized by an OPUC assured future revenue stream. Subsequently, PGE
issued a 10 year conservation bond providing savings to customers while
granting PGE immediate recovery of its energy efficiency program expenditures.
Future revenues collected from customers will pay debt service obligations.
NOTE 2 -EMPLOYEE BENEFITS
PENSION PLAN
Portland General has a non-contributory defined benefit pension plan (the Plan)
covering substantially all of its employees. Benefits under the Plan are based
on years of service, final average pay and covered compensation. Portland
General's policy is to contribute annually to the Plan at least the minimum
required under the Employee Retirement Income Security Act of 1974 but not more
than the maximum amount deductible for income tax purposes. The Plan's assets
are held in a trust and consist primarily of investments in common stocks,
corporate bonds and U.S. government issues.
Portland General determines net periodic pension expense according to the
principles of SFAS No. 87, "Employers' Accounting for Pensions". Differences
between the actual and expected return on Plan assets are included in net
amortization and deferral and are considered in the determination of future
pension expense.
40
The following table sets forth the Plan's funded status and amounts recognized
in Portland General's financial statements (thousands of dollars):
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $174,540 and $174,694 $187,847 $187,977
Effect of projected future compensation levels 38,841 34,345
Projected benefit obligation (PBO) 226,688 222,322
Plan assets at fair value 323,717 295,516
Plan assets in excess of PBO 97,029 73,194
Unrecognized net experience gain (95,055) (71,691)
Unrecognized prior service costs amortized
over 13- to 16-year periods 11,846 13,180
Unrecognized net transition asset being
recognized over 18 years (15,660) (17,618)
Pension liability $ (1,840) $ (2,935)
1996 1995 1994
ASSUMPTIONS:
Discount rate used to calculate PBO 7.50% 7.00% 8.50%
Rate of increase in future compensation levels 5.50 5.00 6.50
Long-term rate of return on assets 8.50 8.50 8.50
COMPONENTS OF NET PERIODIC PENSION EXPENSE
(THOUSANDS OF DOLLARS):
Service cost $ 6,940 $ 5,500 $ 6,199
Interest cost on PBO 15,911 15,722 14,693
Actual return on plan assets (39,542) (61,377) 6,011
Net amortization and deferral 15,596 37,830 (25,971)
Net periodic pension expense/(benefit) $ (1,095) $ (2,325) $ 932
OTHER POST-RETIREMENT BENEFIT PLANS
Portland General accrues for health, medical and life insurance costs during
the employees' service years, in accordance with SFAS No. 106. PGE receives
recovery for the annual provision in customer rates. Employees are covered
under a Defined Dollar Medical Benefit Plan which limits Portland General's
obligation by establishing a maximum contribution per employee. The
accumulated benefit obligation for post-retirement health and life insurance
benefits at December 31, 1996 was $27 million, for which there were $28 million
of assets held in trust. The benefit obligation for post-retirement health and
life insurance benefits at December 31, 1995 was $30 million.
Portland General also provides senior officers with additional benefits under
an unfunded Supplemental Executive Retirement Plan (SERP). Projected benefit
obligations for the SERP are $15 million at December 31, 1996 and 1995.
DEFERRED COMPENSATION
Portland General provides certain employees with benefits under an unfunded
Management Deferred Compensation Plan (MDCP). Obligations for the MDCP are $30
million and $25 million at December 31, 1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
Portland General has an Employee Stock Ownership Plan (ESOP) which is a part of
its 401(k) retirement savings plan. Employee contributions up to 6% of base
pay are matched by employer contributions in the form of ESOP common stock.
Shares of common stock to be used to match contributions by PGE employees were
purchased from a $36 million loan from PGE to the ESOP trust in late 1990.
This loan is presented in the common equity section as unearned compensation.
Cash contributions from PGE and dividends on shares held
41
in the trust are used to pay the debt service on PGE's loan. As the loan is
retired, an equivalent amount of stock is allocated to employee accounts.
Contributions to the ESOP, combined with dividends on unallocated shares were
used to pay principal and interest on PGE's loan. These amounts are not
material. Shares of common stock used to match contributions by employees of
Portland General and its non-regulated subsidiaries are purchased on the open
market.
NOTE 3 - INCOME TAXES
The following table shows the detail of taxes on income and the items used in
computing the differences between the statutory federal income tax rate and
Portland General's effective tax rate. NOTE: The table does not include
income taxes related to 1994 gains on discontinued real estate operations
(thousands of dollars):
1996 1995 1994
Income Tax Expense:
Currently payable
Federal $102,066 $ 77,845 $41,833
State 21,472 9,230 7,072
123,538 87,075 48,905
Deferred income taxes
Federal (13,401) (15,359) 22,269
State (2,539) (6,741) 4,472
(15,940) (22,100) 26,741
Investment tax credit adjustments (4,193) (5,725) (4,145)
$103,405 $ 59,250 $ 71,501
Provision Allocated to:
Operations $109,988 $ 89,064 $ 71,878
Other income and deductions (6,583) (29,814) (377)
$103,405 $ 59,250 $ 71,501
Effective Tax Rate Computation:
Computed tax based on
statutory federal income
tax rates applied to
income before income taxes $ 81,529 $ 49,101 $ 57,596
Increases (Decreases) resulting from:
Flow through depreciation 9,497 6,715 8,283
Regulatory disallowance - 3,470 -
State and local taxes - net 11,719 4,857 8,953
State of Oregon refund - (3,668) -
Investment tax credits (4,193) (5,725) (4,145)
Excess deferred taxes (750) (700) (767)
Merger expenses 3,724 - -
Preferred dividend requirement 912 3,155 3,526
Other 967 2,045 (1,945)
$103,405 $ 59,250 $ 71,501
Effective tax rate 44.4% 42.2% 43.5%
42
As of December 31, 1996 and 1995, the significant components of the Company's
deferred income tax assets and liabilities were as follows (thousands of
dollars):
1996 1995
DEFERRED TAX ASSETS
Plant-in-service $ 64,471 $ 86,721
Other 61,012 60,245
125,483 146,966
DEFERRED TAX LIABILITIES
Plant-in-service (414,417) (448,049)
Energy efficiency programs (32,026) (30,314)
Trojan abandonment (69,315) (54,335)
WNP-3 exchange contract (59,302) (60,489)
Leasing (136,478) (142,606)
Other (7,918) (43,470)
(719,456) (779,263)
Less current deferred taxes (430) (414)
Less valuation allowance (20,173) (20,135)
Total $(614,576) $(652,846)
Portland General has recorded deferred tax assets and liabilities for all
temporary differences between the financial statement and tax basis of assets
and liabilities. Valuation allowances represent capital loss carryforwards
that presently cannot be offset with capital gains.
43
NOTE 4 - COMMON AND PREFERRED STOCK
COMMON AND PREFERRED STOCK
CUMULATIVE PREFERRED
COMMON STOCK OF SUBSIDIARY Other
Number $3.75 Par Number $100 Par No-Par Paid-in Unearned
OF SHARES VALUE OF SHARES VALUE VALUE CAPITAL COMPENSATION*
(thousands of dollars
except share amounts)
December 31, 1993 47,634,653 $178,630 1,497,040 $119,704 $30,000 $519,058 $(19,151)
Sales of stock 2,864,839 10,743 - - - 40,390 -
Redemption of stock (4,000) (15) (200,000) (20,000) - 2,055 -
Repayment of ESOP loan
and other - - - - - 2,412 5,515
December 31, 1994 50,495,492 $189,358 1,297,040 $ 99,704 $30,000 $563,915 $(13,636)
Sales of stock 539,057 2,022 - - - 9,355 -
Redemption of stock (21,000) (79) (797,040) (79,704) - 2,778 -
Repayment of ESOP loan
and other - - - - - (1,580) 5,130
December 31, 1995 51,013,549 $191,301 500,000 $20,000 $30,000 $574,468 $ (8,506)
Sales of stock 350,778 1,315 - - - 5,335 -
Redemption of stock (46,499) (174) (200,000) (20,000) - 449 -
Tax benefits stock options,
repayment of ESOP loan
and other - - - - - 4,020 5,434
December 31, 1996 51,317,828 $192,442 300,000 $ - $30,000 $584,272 $(3,072)
<FN>
*See the discussion of stock compensation plans below and Note 2, Employee
Benefits, for a description of the ESOP.
</FN>
COMMON STOCK
As of December 31, 1996, Portland General had reserved 2,333,386 and 8,185
authorized but unissued common shares for issuance under its dividend
reinvestment plan and employee stock purchase plan, respectively.
CUMULATIVE PREFERRED STOCK
The 7.75% series preferred stock has an annual sinking fund requirement which
requires the redemption of 15,000 shares at $100 per share beginning in 2002.
At its option, PGE may redeem, through the sinking fund, an additional 15,000
shares each year. All remaining shares shall be mandatorily redeemed by sinking
fund in 2007. This series is only redeemable by operation of the sinking fund.
PGE's cumulative preferred stock consisted
of:
At December 31, 1996 1995
(thousands of dollars)
Subject to mandatory redemption
No par value 30,000,000 shares authorized
7.75% Series 300,000 shares outstanding $30,000 $30,000
$100 par value, 2,500,000 shares authorized
8.10% Series 200,000 shares outstanding - 20,000
Current sinking fund - (10,000)
$30,000 $40,000
44
No dividends may be paid on common stock or any class of stock over which the
preferred stock has priority unless all amounts required to be paid for
dividends and sinking fund payments have been paid or set aside, respectively.
COMMON DIVIDEND RESTRICTION OF SUBSIDIARY
PGE is restricted from paying dividends or making other distributions to
Portland General without prior OPUC approval to the extent such payment or
distribution would reduce PGE's common stock equity capital below 36% of its
total capitalization. At December 31, 1996, PGE's common stock equity capital
was 49% of its total capitalization.
STOCK COMPENSATION PLANS
Portland General has authorized 2.3 million shares of Portland General common
stock under its Long-Term Incentive Plan (LTIP). Stock options represent the
majority of activity under this plan. Stock option plan activity is as
follows:
Option Price
Options Per Share
December 31, 1993 856,800 $14-$22.25
Granted 32,000 $13-$18.125
Exercised (10,000) $15.75
Canceled (43,500) $14-$22.25
December 31, 1994 835,300 $13-$22.25
Granted 88,600 $17-$25
Exercised (114,400) $14.75 -$18.125
Canceled (17,000) $14 -$20
December 31, 1995 792,500 $13 -$25
Granted 373,029 $25 - $43.50
Exercised (306,930) $14 - $25
Canceled (31,096) $14 - $37.625
December 31, 1996 827,503 $13 - $43.25
Stock options exercisable
at December 31, 1996 473,870 $13 -$25
At December 31, 1996, 831,946 common shares were available for issuance under
the LTIP.
Portland General accounts for stock-based compensation plans under APB Opinion
25. Due to a limited number of Portland General stock options granted on an
annual basis, the amount of compensation expense, which would be required to be
disclosed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", is not material.
45
NOTE 5 - SHORT-TERM BORROWINGS
At December 31, 1996, Portland General and PGE had total committed lines of
credit of
$220 million. Portland General has a $20 million committed facility expiring
in July 1997. PGE has a committed facility of $200 million expiring in July
2000. These lines of credit have annual fees of 0.10% and do not require
compensating cash balances. The facilities are used primarily as backup for
both commercial paper and borrowings from commercial banks under uncommitted
lines of credit. At December 31, 1996, there were no outstanding borrowings
under the committed facilities.
PGE has a $200 million commercial paper facility. Unused committed lines of
credit must be at least equal to the amount of PGE's commercial paper
outstanding. Commercial paper and lines of credit borrowings are at rates
reflecting current market conditions.
Short-term borrowings and related interest rates were as follows:
1996 1995 1994
AS OF YEAR-END: (thousands of dollars)
Aggregate short-term debt outstanding
Commercial paper $ 83,027 $170,248 $148,598
Bank loans 9,000 - -
Weighted average interest rate*
Commercial paper 5.6% 6.1% 6.2%
Bank loans 7.3 - -
Unused committed lines of credit $220,000 $215,000 $215,000
FOR THE YEAR ENDED:
Average daily amounts of short-term
debt outstanding
Commercial paper 158,259 111,366 138,718
Bank loans $ 7,013 $ 206 $ 1,273
Weighted daily average interest rate*
Commercial paper 5.6 6.3 4.5
Bank loans 5.8% 6.5% 4.3%
Maximum amount outstanding
during the year $251,462 $170,248 $174,082
<FN>
* Interest rates exclude the effect of commitment fees, facility
fees and other financing fees.
</FN>
46
NOTE 6 - LONG-TERM DEBT
The Indenture securing PGE's First Mortgage Bonds constitutes a direct first
mortgage lien on substantially all utility property and franchises, other than
expressly excepted property.
Schedule of long-term debt at December 31 1996 1995
(thousands of dollars)
First Mortgage Bonds
Maturing 1996 through 2001
5.875 % Series due June 1, 1996 $ - $ 5,066
6.60% Series due October 1, 1997 15,063 15,363
Medium-term notes 5.65% - 9.00% 295,000 210,000
Maturing 2002 - 2007 6.47% - 9.07% 168,000 260,595
Maturing 2021 - 2023 7.75% - 9.46% 195,000 195,000
673,063 686,024
Pollution Control Bonds
Port of Morrow, Oregon, variable rate
(Average 3.5% - 4.3% for 1996), due 2013 & 29,400 23,600
2031
City of Forsyth, Montana, variable rate
(Average variable rates 3.4%- 3.5% for
1996), due 2013-2016 118,800 118,800
Amount held by trustee (8,236) (8,152)
Port of St. Helens, Oregon, variable rate due
2010 and 2014 (Average variable rates 3.4% - 3.5% 51,600 51,600
for 1996)
191,564 185,848
Other
8.25% Junior Subordinated Deferrable Interest Debentures,
due December 31, 2035 75,000 75,000
Portland General medium-term notes 8.09% due - 30,000
1996
6.91% Conservation Bonds maturing monthly to 79,790 -
2006
Capital lease obligations 6,750 9,353
Other (566) (555)
160,974 113,798
1,025,601 985,670
Long-term debt due within one year (92,559) (95,114)
Total long-term debt $ 933,042 $ 890,556
The following principal amounts of long-term debt become due
through regular maturities (thousands of dollars):
1997 1998 1999 2000 2001
Maturities:
PGE $92,559 $71,073 $102,124 $32,222 $57,737
47
NOTE 7 - OTHER FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS -The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity
of those instruments.
OTHER INVESTMENTS - Other investments approximate market value.
REDEEMABLE PREFERRED STOCK - The fair value of redeemable
preferred stock is based on quoted market prices.
LONG-TERM DEBT - The fair value of long-term debt is estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to Portland General for debt of
similar remaining maturities.
The estimated fair values of financial instruments are as follows
(thousands of dollars):
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Preferred stock subject to
mandatory redemption $ 30,000 $ 31,455 $ 50,000 $ 52,900
Long-term debt
PGC (Parent only) $ - $ - $ 30,000 $ 30,531
PGE 939,627 959,668 946,872 994,996
$939,627 $959,668 $976,872 $1,025,527
Interest rate swaps in net
receivable position - $582 - -
NON-TRADING ACTIVITIES
Commodity - Company policy allows the use of financial
instruments such as commodity futures, options and swap contracts
to hedge the price of natural gas and electricity and reduce the
Company's exposure to market fluctuations in these commodities.
In 1996 hedge transactions consisted of commodity futures and
swap contracts where the Company receives from or makes payments
to counterparties based on the differential between a fixed price
and an index reference price for natural gas or electricity. The
Company is exposed to credit risk in the event of non-performance
by the counterparties and has established guidelines to mitigate
this risk.
At December 31, 1996 and 1995 outstanding futures and swap contracts related to
natural gas had an absolute notional contract quantity of 6,085,000 million
British thermal units (MMBtu) and 4,500,000 MMBtu's, respectively. In
addition, outstanding swap contracts related to electricity had an absolute
notional contract quantity of 1,410,000 Mwh and 256,000 Mwh as of December 31,
1996 and 1995, respectively. The commodity futures and swap contracts extend
for a period of up to three years. Recognition of gains
or losses on hedging instruments is deferred until the underlying
physical transaction occurs. Upon recognition, these gains or
losses are recognized in income as a reduction to or increase in
purchased power and fuel expense.
48
The estimated fair value of
outstanding natural gas financial instruments was $5,153,000 at
December 31, 1996
and $(261,000) at December 31, 1995. The
estimated fair value of outstanding electricity financial
instruments was $(375,000) at December 31, 1996 and $(335,000) at
December 31, 1995.
INTEREST RATE - In August 1996 PGE entered into a 3 year interest
rate swap agreement with a notional amount of $50 million. This
puts PGE in a floating rate position on the additional $50
million of long term debt issued in August 1996. At December 31,
1996, the fair value PGE would receive if the interest rate swap
agreement was terminated is not material.
TRADING ACTIVITIES
In addition to hedging activities, Company policy allows the use
of the financial instruments noted above for trading purposes in
support of Company operations. Realized and unrealized gains or
losses on commodity-based financial instruments that do not
qualify as hedges are recognized in income on a current basis in
purchased power and fuel expense. Net losses arising from
natural gas trading activities during the period ended December
31, 1996 were $4,481,000. Net gains arising from electricity
trading activities during the period ended December 31, 1996 were
$260,000. At December 31, 1996 outstanding swap and option contracts related
to natural gas had an absolute notional contract quantity of 280,000 MMBtu's.
In addition, outstanding futures, swap and option contracts related to
electricity had an absolute notional contract quantity of 1,099,000 Mwh as of
December 31, 1996. The commodity futures, swaps and option contracts extend
for a period of up to two years. The Company is exposed to credit risk in
the event of non-performance by the counterparties and has
established guidelines to mitigate this risk.
The fair value of the financial instruments as of December 31,
1996 and the average fair value of those instruments held during
the year are as follows (thousands of dollars):
AVERAGE FAIR VALUE
FAIR VALUE AS OF FOR THE YEAR ENDED (A)
12/31/96 12/31/96
PRODUCT ASSETS LIABILITIES ASSETS LIABILITIES
Natural Gas $ 48 $ 360 $ 52 $ 528
Electricity $2,296 $2,469 $1,181 $1,476
<FN>
(a) Computed using the ending balance at each month end.
</FN>
NOTE 8 - COMMITMENTS
NATURAL GAS AGREEMENTS
PGE has long-term agreements for transmission of natural gas from
domestic and Canadian sources to natural gas-fired generating
facilities. The agreements provide firm pipeline capacity.
Under the terms of these agreements, PGE is committed to paying
capacity charges of approximately $16 million annually in 1997
through 2001, and $124 million over the remaining years of the
contracts which expire at varying dates from 1998 to 2015. PGE
has the right to assign unused capacity to other parties.
PURCHASE COMMITMENTS
Purchase commitments outstanding (principally construction
at PGE) which include coal and railroad service agreements
totaled approximately $63 million at December 31, 1996.
Cancellation of these purchase agreements could result in
cancellation charges.
PURCHASED POWER
PGE has long-term power purchase contracts with certain public
utility districts in the state of Washington and with the City of
Portland, Oregon. PGE is required to pay its proportionate share
of the operating and debt service costs of the hydro projects
whether or not they are operable.
49
Selected information is summarized as follows (thousands of
dollars):
ROCKY PRIEST PORTLAND
REACH RAPIDS WANAPUM WELLS HYDRO
Revenue bonds outstanding at
December 31, 1996 $200,011 $186,785 $209,130 $183,920 $ 36,825
PGE's current share of:
Output 12.0% 13.9% 18.7% 21.8% 100%
Net capability (megawatts) 154 128 194 177 36
Annual cost, including debt service:
1996 $5,300 $3,700 $4,700 $5,700 $4,300
1995 4,900 3,900 4,700 5,700 4,300
1994 4,500 3,400 4,800 6,600 4,600
Contract expiration date 2011 2005 2009 2018 2017
PGE's share of debt service costs, excluding interest, will be
approximately $8 million for 1997, $5 million for 1998, $6
million for 1999 and 2000, and $7 million for 2001. The minimum
payments through the remainder of the contracts are estimated to
total $87 million.
PGE has entered into long-term contracts to purchase power from
other utilities in the West. These contracts will require fixed
payments of up to $26 million in 1997 through 1999, $23 million
in 2000, and $21 million in 2001. After that date, capacity
contract charges will average $19 million annually until 2016.
LEASES
PGE has operating and capital leasing arrangements for its
headquarters complex, combustion turbines and the coal-handling
facilities and certain railroad cars for Boardman. PGE's
aggregate rental payments charged to expense amounted to $22
million for 1996, 1995 and 1994. PGE has capitalized its
combustion turbine leases. However, these leases are considered
operating leases for ratemaking purposes.
Future minimum lease payments under non-cancelable leases are as
follows (thousands of dollars):
YEAR ENDING OPERATING LEASES
DECEMBER 31 CAPITAL LEASES (NET OF SUBLEASE RENTALS) TOTAL
1997 $ 3,016 $ 19,988 $ 23,004
1998 3,016 19,446 22,462
1999 1,388 20,007 21,395
2000 - 20,053 20,053
2001 - 20,326 20,326
Remainder - 190,800 190,800
Total 7,420 $290,620 $298,040
Imputed Interest (670)
Present Value of
Minimum Future
Net Lease Payments $ 6,750
Included in the future minimum operating lease payments schedule above
is approximately $124 million for Portland General's and PGE's
headquarters complex.
50
NOTE 9 - WNP-3 SETTLEMENT EXCHANGE AGREEMENT
PGE is selling energy received under a WNP-3 Settlement Exchange
Agreement (WSA) to WAPA for 25 years which began in October 1990.
Revenues from the WAPA sales contract and market sales are used to support the
carrying
value of PGE's investment. A portion of the energy under the WSA
contract is sold at market prices.
The energy received by PGE under WSA is the result of a settlement
related to litigation surrounding the abandonment of WNP-3. PGE
receives about 65 average annual MW for approximately 30 years from BPA
under the WSA which began in 1987. In exchange, PGE will make available to BPA
energy from
its combustion turbines or from other available sources at an agreed-to
price.
In light of declining market prices for wholesale power, an evaluation
of expected future cash flows was completed in late 1996. The
Company's best estimates, given reasonable operating assumptions and
revenue projections, show that cash flow is expected to be sufficient to
support the carrying value of PGE's investment.
PGE will continue to monitor related cash flows in light of the
continued competitive pressure on electricity prices, as well as
possible changes in contractual terms, conditions, and obligations.
NOTE 10 - JOINTLY-OWNED PLANT
At December 31, 1996, PGE had the following investments in jointly owned
generating plants (thousands of dollars):
MW PGE % PLANT ACCUMULATED
FACILITY LOCATION FUEL CAPACITY INTEREST IN SERVICE DEPRECIATION
Boardman Boardman, OR Coal 508 65.0 $375,133 $188,352
Colstrip 3&4 Colstrip, MT Coal 1,440 20.0 452,762 205,259
Centralia Centralia, WA Coal 1,310 2.5 9,715 5,880
The dollar amounts in the table above represent PGE's share of each
jointly owned plant. Each participant in the above generating plants
has provided its own financing. PGE's share of the direct expenses of
these plants is included in the corresponding operating expenses on
Portland General's and PGE's consolidated income statements.
NOTE 11 - LEGAL MATTERS
BONNEVILLE PACIFIC LAWSUIT - On October 7, 1996 the bankruptcy court
approved the settlement entered into by Portland General and Portland
General Holdings (collectively referred to as Portland) with the
Bonneville Pacific Corporation's (Bonneville) bankruptcy trustee
(Trustee). Pursuant to the settlement, Bonneville and its estate
released all claims and causes of action, including those asserted in
the Trustee's civil action against Portland and its current and former
officers and directors. In exchange, Portland released any and all
claims against Bonneville, its estate and related entities and
individuals relating to its equity investment in and loans to
Bonneville, except that Portland will retain ownership of 2 million
shares of Bonneville common stock. The settlement with the trustee
will not have a
material impact on Portland General's results of operations.
In early 1997 Portland received payments for certain litigation and
settlement costs in other matters related to the Bonneville Pacific
lawsuit. These payments will be recognized into income during the
first quarter of 1997.
TROJAN INVESTMENT RECOVERY - In April 1996 a circuit court judge in
Marion County, Oregon found that the OPUC could not authorize PGE to
collect a return on its undepreciated investment in Trojan contradicting
a November 1994 ruling from the same court. The ruling was the result
of an appeal of PGE's 1995 general rate order which granted PGE recovery
of, and a return on, 87 percent of its remaining investment in Trojan.
51
The November 1994 ruling, by a different judge of the same court, upheld
the Commission's 1993 Declaratory Ruling (DR-10). In DR-10 the OPUC
ruled that PGE could recover and earn a return on its undepreciated
Trojan investment, provided certain conditions were met. The Commission
relied on a 1992 Oregon Department of Justice opinion issued by the
Attorney General's office stating that the Commission had the authority
to set prices including recovery of and on investment in plant that is
no longer in service.
The 1994 ruling was appealed to the Oregon Court of Appeals and stayed
pending the appeal of the Commission's March 1995 order. Both PGE and
the OPUC have separately appealed the April 1996 ruling which were
combined with the appeal of the November 1994 ruling at the Oregon Court
of Appeals.
Management believes that the authorized recovery of and on the Trojan
investment and decommissioning costs will be upheld and that these legal
challenges will not have a material adverse impact on the results of
operations or financial condition of the Company for any future
reporting period.
OTHER LEGAL MATTERS - Portland General and certain of its subsidiaries
are party to various other claims, legal actions and complaints arising
in the ordinary course of business. These claims are not considered
material.
NOTE 12 - TROJAN NUCLEAR PLANT
PLANT SHUTDOWN AND TRANSITION COSTS - PGE is a 67.5% owner of Trojan.
In early 1993, PGE ceased commercial operation of the nuclear plant.
Since plant closure, PGE has committed itself to a safe and economical
transition toward a decommissioned plant. Remaining transition costs
associated with operating and maintaining the spent fuel pool and
securing the plant until dismantlement begins in 1998 are estimated at
$24 million and will be paid from current operating funds.
DECOMMISSIONING - In 1996, PGE received approval of the decommissioning
plan submitted to the NRC and EFSC during 1995. The plan estimates
PGE's cost to decommission Trojan at $358 million, reflected in nominal
dollars (actual dollars expected to be spent in each year). The plan
represents a site-specific decommissioning estimate performed for Trojan
by an engineering firm experienced in estimating the cost of
decommissioning nuclear plants. This estimate assumes that the majority
of decommissioning activities will occur between 1997 and 2001, while
fuel management costs extend through the year 2018. Final site
restoration activities are anticipated to begin in 2018 after PGE
completes shipment of spent fuel to a USDOE facility (see the Nuclear
Fuel Disposal discussion below). The cost estimate is adjusted
periodically due to refinement of the timing and scope of certain
dismantlement activities. Stated in 1996 dollars, the current
decommissioning cost estimate is $256 million.
TROJAN DECOMMISSIONING LIABILITY
(thousands of dollars)
Estimate - 12/31/94 $351,294
Updates filed with NRC - 11/16/95 7,084
358,378
Expenditures through 12/31/96 (24,144)
Liability - 12/31/96 $334,234
Decommissioning $334,234
Transition costs 23,610
Total Trojan obligation $357,844
PGE is collecting $14 million annually through 2011 from customers for
decommissioning costs. These amounts are deposited in an external trust
fund which is limited to reimbursing PGE for activities covered in
Trojan's decommissioning plan. Funds were withdrawn during 1996 to
cover the costs of planning and licensing activities in support of the
independent spent fuel storage installation and the reactor vessel and
internals removal project. Decommissioning funds are
invested primarily in investment-grade, tax-exempt and U.S. Treasury
bonds. Year-end balances are valued at market.
Earnings on the trust fund are used to reduce the amount of
decommissioning
costs to be collected from customers. PGE expects any future changes in
estimated decommissioning costs to be incorporated in future revenues to
be collected from customers.
52
INVESTMENT RECOVERY - The OPUC issued an order in March 1995 authorizing
PGE to recover all of the estimated costs of decommissioning Trojan and
87% of the remaining investment in the plant. Amounts are to be
collected over Trojan's original license period ending in 2011.
The OPUC's order and the agency's authority to grant recovery of the
Trojan investment under Oregon law are being challenged in state courts.
Management believes that the authorized recovery of the Trojan
investment and decommissioning costs will be upheld and that these legal
challenges will not have a material adverse impact on the results of
operations or financial condition of the Company for any future
reporting period.
DECOMMISSIONING TRUST ACTIVITY
(thousands of dollars)
Beginning Balance $68,774 $58,485
ACTIVITY
Contributions 15,435 16,598
Gain 2,127 7,212
Disbursements (7,888) (13,521)
Ending Balance $78,448 $68,774
NUCLEAR FUEL DISPOSAL AND CLEANUP OF FEDERAL PLANTS - PGE contracted
with the USDOE for permanent disposal of its spent nuclear fuel in
federal facilities at a cost of .1 cent per net kilowatt-hour sold at
Trojan which the Company paid during the period the plant operated.
Significant delays are expected in the USDOE acceptance schedule of
spent fuel from domestic utilities. The federal repository, which was
originally scheduled to begin operations in 1998, is now estimated to
commence operations no earlier than 2010. This may create difficulties
for PGE in disposing of its high-level radioactive waste by 2018.
However, federal legislation has been introduced which, if passed, would
require USDOE to provide interim storage for high- level waste until a
permanent site is established. PGE intends to build an interim storage
facility at Trojan to house the nuclear fuel until a federal site is
available.
The Energy Policy Act of 1992 provided for the creation of a
Decontamination and Decommissioning Fund to finance the cleanup of USDOE
gas diffusion plants. Funding comes from domestic nuclear utilities and
the federal government. Each utility contributes based on the ratio of
the amount of enrichment services the utility purchased to the total
amount of enrichment services purchased by all domestic utilities prior
to the enactment of the legislation. Based on Trojan's 1.1% usage of
total industry enrichment services, PGE's portion of the funding
requirement is approximately $17 million. Amounts are funded over 15
years beginning with the USDOE's fiscal year 1993. Since enactment, PGE
has made the first five of the 15 annual payments with the first payment
made in September 1993.
NUCLEAR INSURANCE - The Price-Anderson Amendment of 1988 limits public
liability claims that could arise from a nuclear incident and provides
for loss sharing among all owners of nuclear reactor licenses. Because
Trojan has been permanently defueled, the NRC has exempted PGE from
participation in the secondary financial protection pool covering losses
in excess of $200 million at other nuclear plants. In addition, the NRC
has reduced the required primary nuclear insurance coverage for Trojan
from $200 million to $100 million following a 3 year cool-down period of
the nuclear fuel that is still on-site. The NRC has allowed PGE to
self-insure for on-site decontamination. PGE continues to carry non-
contamination property insurance on the Trojan plant at the $155 million
level.
NOTE 13 -SCE CONTRACT TERMINATION AGREEMENT
In March 1996, PGE and SCE entered into a termination agreement for the
Power Sales Agreement between the two companies. The FERC and the CPUC
have approved terms and conditions of the agreement.
The agreement requires that SCE pay PGE $141 million over the next 6
years ($15 million per year in 1997 through 1999 and $32 million per
year in 2000 through 2002). PGE recorded a discounted receivable in
the amount of $112.7 million of which $1.25 million was received in 1996.
Disposition of the gain has been
deferred pending OPUC determination of the appropriate regulatory
treatment.
53
QUARTERLY COMPARISON FOR 1996 AND 1995 (UNAUDITED)
PORTLAND GENERAL CORPORATION
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
1996
Operating revenues $300,581 $233,425 $260,091 $317,719
Net operating income 66,744 51,675 44,742 61,398
Net income 49,362 33,679 20,541 25,954
Common stock
Average shares outstanding 51,063,105 51,109,790 51,158,923 51,243,669
Earnings per average share{1} $ .97 $.66 $.40 $.51
1995
Operating revenues $259,177 $219,892 $222,612 $281,901
Net operating income 49,553 47,179 40,266 58,578
Net income/(loss) (1,954) 32,403 14,181 36,406
Common stock
Average shares outstanding 50,591,449 50,697,040 50,798,082 50,976,781
Earnings/(loss) per average share{1} $(.04) $.64 $.28 $.71
<FN>
{1}As a result of dilutive effects of shares issued during the period,
quarterly earnings per share cannot be added to
arrive at annual earnings per share.
</FN>
PORTLAND GENERAL ELECTRIC COMPANY
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(THOUSANDS OF DOLLARS)
1996
Operating revenues $300,195 $232,921 $259,656 $317,059
Net operating income 66,816 51,850 45,514 60,566
Net income 50,104 34,914 27,919 42,978
Income available for
common stock 49,118 34,269 27,338 42,397
1995
Operating revenues $258,891 $218,476 $222,240 $282,021
Net operating income 49,388 46,499 39,902 59,397
Net income 640 34,800 16,789 40,558
Income/(loss) available for
common stock (1,943) 32,383 14,409 38,294
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10-13. INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
PORTLAND GENERAL CORPORATION
Information for Items 10-13 is incorporated by reference to Portland General's
definitive proxy statement to be filed on or about May 27, 1997. Executive
officers of Portland General are listed on page 21 of this report.
PORTLAND GENERAL ELECTRIC COMPANY
Information for Items 10-13 is incorporated by reference to Portland General's
definitive proxy statement to be filed on or about May 27, 1997. Executive
officers of Portland General Electric are listed on page 21 of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
PORTLAND GENERAL CORPORATION AND PORTLAND GENERAL ELECTRIC COMPANY
(a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NO.
PGC PGE
FINANCIAL STATEMENTS
Report of Independent Public Accountants 34 66
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1996 35 67
Consolidated Statements of Retained Earnings for each of
the three years in the period ended December 31, 1996 35 67
Consolidated Balance Sheets at December 31, 1996 and 1995 36 68
Consolidated Statement of Cash Flows for each of the three
years in the period ended December 31, 1996 37 69
Notes to Financial Statements 38 70
FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which they
are required or because the required information is given in the financial
statements or notes thereto.
EXHIBITS
See Exhibit Index on Page 59 of this report.
(B) REPORT ON FORM 8-K
PGC PGE
November 1, 1996 - Item 5. Other Events: X X
The OPUC staff revised response to rate plan.
55
(B) REPORT ON FORM 8-K PGC PGE
November 12, 1996 - Item 5. Other Events: X X
Shareholders approve merger with Enron Corp.
November 12, 1996 - Item 5. Other Events: X X
The OPUC staff stipulation for settlement on rate proposal.
November 26, 1996 - Item 5. Other Events: X X
The OPUC approves rate settlement.
January 16, 1997 - Item 5. Other Events: X X
Preliminary merger recommendation from the OPUC staff.
January 24, 1997 - Item 5. Other Events: X X
Settlement conferences suspended.
February 14, 1997 - Item 5. Other Events: X X
Settlement conferences continued.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Portland General Corporation
March 3, 1997 By /S/ KEN L. HARRISON
Ken L. Harrison
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman of the Board and
/S/ KEN L. HARRISON Chief Executive Officer March 3, 1997
Ken L. Harrison
Senior Vice President,
/S/ JOSEPH M. HIRKO Chief Financial Officer March 3, 1997
Joseph M. Hirko
*Gwyneth Gamble Booth
Peter J. Brix
*Carolyn S. Chambers
*John W. Creighton, Jr.
*Richard Geary
*Ken L. Harrison
*Jerry E. Hudson Directors March 3, 1997
*Jerome J. Meyer
*Randolph L. Miller
*Bruce G. Willison
*By /S/ JOSEPH E. FELTZ
(Joseph E. Feltz, Attorney-in-Fact)
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Portland General Electric Company
March 3, 1997 By /S/ KEN L. HARRISON
Ken L. Harrison
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman of the Board and
/S/ KEN L. HARRISON Chief Executive Officer March 3, 1997
Ken L. Harrison
Senior Vice President
/S/ JOSEPH M. HIRKO Chief Financial Officer March 3, 1997
Joseph M. Hirko
*Gwyneth Gamble Booth
Peter J. Brix
*Carolyn S. Chambers
*John W. Creighton, Jr.
*Ken L. Harrison
*Jerry E. Hudson Directors March 3, 1997
*Richard Geary
*Jerome J. Meyer
*Randolph L. Miller
*Bruce G. Willison
*By /S/ JOSEPH E. FELTZ
(Joseph E. Feltz, Attorney-in-Fact)
58
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION
* Amended and Restated Agreement and Plan of Merger, dated
as of July 20, 1996 and amended and restated as of
September 24, 1996 among Enron Corp, Enron Oregon Corp
and Portland General Corporation [Amendment 1 to
S4 Registration Nos. 333-13791 and 333-13791-1, dated
October 10, 1996, Exhibit No. 2.1]. X X
(3) ARTICLES OF INCORPORATION AND BYLAWS
* Restated Articles of Incorporation of Portland General
Corporation [Pre-effective Amendment No. 1 to Form S-4,
Registration No. 33-1987, dated December 31, 1985,
Exhibit (B)]. X
* Certificate of Amendment, dated July 2, 1987, to the
Articles of Incorporation limiting the personal
liability of directors of Portland General Corporation
[Form 10-K for the fiscal year ended December 31, 1987,
Exhibit (3)]. X
* Copy of Articles of Incorporation of Portland General
Electric Company [Registration No. 2-85001, Exhibit (4)]. X
* Certificate of Amendment, dated July 2, 1987, to the
Articles of Incorporation limiting the personal
liability of directors of Portland General Electric
Company [Form 10-K for the fiscal year ended
December 31, 1987, Exhibit (3)]. X
* Form of Articles of Amendment of the New Preferred
Stock of Portland General Electric Company
[Registration No. 33-21257, Exhibit (4)]. X
* Bylaws of Portland General Corporation as amended on
February 5, 1991 [Form 10-K for the fiscal year
ended December 31, 1990, Exhibit (10)]. X
* Bylaws of Portland General Electric Company as
amended on October 1, 1991 [Form 10-K for the fiscal
year ended December 31, 1991, Exhibit (3)]. X
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
* Portland General Electric Company Indenture of Mortgage
and Deed of Trust dated July 1, 1945;
* Fortieth Supplemental Indenture, dated October 1,
1990 [Form 10-K for the fiscal year ended December 31,
1990, Exhibit (4)]. X X
59
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(4) * Forty-First Supplemental Indenture dated December 1,
CONT. 1991 [Form 10-K for the fiscal year ended December 31, X X
1991, Exhibit (4)].
* Forty-Second Supplemental Indenture dated April 1, 1993
[Form 10-Q for the quarter ended March 31, 1993,
Exhibit (4)]. X X
* Forty-Third Supplemental Indenture dated July 1, 1993
[Form 10-Q for the quarter ended September 30, 1993,
Exhibit (4)]. X X
* Forty-Fourth Supplemental Indenture dated August 1, 1994
[Form 10-Q for the quarter ended September 30, 1994,
Exhibit (4)]. X X
* Forty-Fifth Supplemental Indenture dated May 1, 1995
[Form 10-Q for the quarter ended June 30, 1995,
Exhibit (4)]. X X
Forty-Sixth Supplemental Indenture dated August 1, 1996
(Filed herewith). X X
Other instruments which define the rights of holders of
long-term debt not required to be filed herein will be
furnished upon written request.
(10) MATERIAL CONTRACTS
* Residential Purchase and Sale Agreement with the
Bonneville Power Administration [Form 10-K for the
fiscal year ended December 31, 1981, Exhibit (10)]. X X
* Power Sales Contract and Amendatory Agreement Nos. 1 and
2 with Bonneville Power Administration [Form 10-K for
the fiscal year ended December 31, 1982, Exhibit (10)]. X X
The following 12 exhibits were filed in conjunction with the
1985 Boardman/Intertie Sale:
* Long-term Power Sale Agreement, dated November 5, 1985
[Form 10-K for the fiscal year ended December 31, 1985,
Exhibit (10)]. X X
* Long-term Transmission Service Agreement, dated
November 5, 1985 [Form 10-K for the fiscal year
ended December 31, 1985, Exhibit (10)]. X X
* Participation Agreement, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31,
1985, Exhibit (10)]. X X
60
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(10) * Lease Agreement, dated December 30, 1985 [Form 10-K
CONT. for the fiscal year ended December 31, 1985,
Exhibit (10)]. X X
* PGE-Lessee Agreement, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31,
1985, Exhibit (10)]. X X
* Asset Sales Agreement, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31,
1985, Exhibit (10)]. X X
* Bargain and Sale Deed, Bill of Sale and Grant of
Easements and Licenses, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31,
1985, Exhibit (10)]. X X
* Supplemental Bill of Sale, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31,
1985, Exhibit (10)]. X X
* Trust Agreement, dated December 30, 1985 [Form 10-K
for the fiscal year ended December 31, 1985, Exhibit (10)]. X X
* Tax Indemnification Agreement, dated December 30, 1985
[Form 10-K for the fiscal year ended December 31, 1985,
Exhibit (10)]. X X
* Trust Indenture, Mortgage and Security Agreement, dated
December 30, 1985 [Form 10-K for the fiscal year ended
December 31, 1985, Exhibit (10)]. X X
* Restated and Amended Trust Indenture, Mortgage and
Security Agreement, dated February 27, 1986 [Form 10-K
for the fiscal year ended December 31, 1985, Exhibit (10)]. X X
_______________________________________________________________________________
* Portland General Corporation Outside Directors'
Deferred Compensation Plan, 1996 Restatement
dated January 1, 1996 [Form 10-Q for the quarter
ended June 30, 1996, Exhibit (10)]. X X
* Portland General Corporation Outside Directors'
Deferred Compensation Plan, Amendment No. 1
dated October 18, 1996 [Form 10-Q for the quarter
ended June 30, 1996, Exhibit (10)]. X X
Portland General Corporation Outside Directors'
Deferred Compensation Plan, 1996 Restatement,
Amendment No. 2 dated November 4, 1996
(filed herewith). X X
61
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(10) * Portland General Corporation Retirement Plan for
CONT. Outside Directors, 1996 Restatement dated January 1, 1996
[Form 10-Q for the quarter ended June 30, 1996,
Exhibit (10)]. X X
* Portland General Corporation Outside Directors' Life
Insurance Benefit Plan, 1996 Restatement dated
January 1, 1996 [Form 10-Q for quarter ended
June 30, 1996, Exhibit (10)]. X X
* Portland General Corporation Outside Directors' Life
Insurance Benefit Plan, 1996 Restatement, Amendment
No. 1 dated September 10, 1996 [Form 10-Q for the
quarter ended September 31, 1996, Exhibit (10)]. X X
* Portland General Corporation Outside Directors' Stock
Compensation Plan, Amended and Restated December 6,
1996 [Form 10-K for the fiscal year ended December 31, X
1991, Exhibit (10)].
Portland General Corporation Outside Directors' Stock
Compensation Plan, Amendment No. 1 dated October 2,
1996 (filed herewith). X
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
* Portland General Corporation Management Deferred
Compensation Plan, 1996 Restatement dated January 1,
1996 [Form 10-Q for the quarter ended June 30, 1996,
Exhibit (10)]. X X
* Portland General Corporation Management Deferred
Compensation Plan, Amendment No. 1 dated October 18,
1996 [Form 10-Q for the quarter ended June 30, 1996,
Exhibit (10)]. X X.
Portland General Corporation Management Deferred
Compensation Plan, 1996 Restatement, Amendment No. 2
dated November 4, 1996 (filed herewith). X
* Portland General Corporation Senior Officers Life
Insurance Benefit Plan, 1996 Restatement Amendment No. 1
dated October 22, 1996 [Form 10-Q for the quarter ended
March 31, 1996, Exhibit (10)]. X X
* Portland General Corporation Annual Incentive Master Plan
[Form 10-K for the fiscal year ended December 31, 1987,
Exhibit (10)]. X X
* Portland General Corporation Annual Incentive Master Plan,
Amendments No. 1 and No. 2 dated March 5, 1990 [Form
10-K for the fiscal year ended December 31, 1989, Exhibit
(10)]. X X
62
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(10) * Portland General Electric Company Annual Incentive Master
CONT. Plan [Form 10-K for the fiscal year ended December 31, 1987,
Exhibit (10)]. X
* Portland General Electric Company Annual Incentive Master
Plan, Amendments No. 1 and No. 2 dated March 5, 1990
[Form 10-K for the fiscal year ended December 31, 1989,
Exhibit (10)]. X
* Portland General Corporation Supplemental Executive
Retirement Plan, 1996 Restatement dated January 1, 1996
[Form 10-Q for the quarter ended March 31, 1996,
Exhibit (10)]. X X
* Portland General Corporation Supplemental Executive
Retirement Plan, Amendment No. 1 dated January 1, 1991,
[Form 10-K for the fiscal year ended December 31, 1991, X X
Exhibit (10)].
* Change in Control Severance Agreement, effective October 1,
1994 [Form 10-K for the fiscal year ended December 31, 1994,
Exhibit (10)]. X X
Portland General Corporation Amended and Restated 1990
Long-Term Incentive Master Plan, 1996 Restatement
dated September 10, 1996 (filed herewith). X
* Portland General Corporation 1990 Long-Term Incentive
Master Plan, Amendment No. 1 dated February 8, 1994
[Form 10-K for the fiscal year ended December 31, 1993,
Exhibit (10)]. X
(23) CONSENTS OF EXPERTS AND COUNSEL
Portland General Corporation Consent of Independent
Public Accountants (filed herewith). X
Portland General Electric Company Consent of Independent
Public Accountants (filed herewith). X
(24) POWER OF ATTORNEY
Portland General Corporation Power of Attorney
(filed herewith). X
Portland General Electric Company Power of Attorney
(filed herewith). X
63
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER EXHIBIT PGC PGE
(99) ADDITIONAL EXHIBITS
Form 11-K relating to Employee Stock Purchase Plan of
Portland General Corporation. X
_________________________________
* Incorporated by reference as indicated.
Note: Although the Exhibits furnished to the Securities and Exchange
Commission with the Form 10-K have been omitted herein, they will be
supplied upon written request and payment of a reasonable fee for
reproduction costs. Requests should be sent to:
Joseph M. Hirko
Senior Vice President
Chief Financial Officer
Portland General Corporation
121 SW Salmon Street
Portland, OR 97204
64
APPENDIX
PORTLAND GENERAL ELECTRIC COMPANY
TABLE OF CONTENTS
PART II
PAGE
ITEM 8. FINANCIAL STATEMENTS AND NOTES ...................... 67
65
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
PGE's management is responsible for the preparation and presentation of the
consolidated financial statements in this report. Management is also
responsible for the integrity and objectivity of the statements. Generally
accepted accounting principles have been used to prepare the statements, and in
certain cases informed estimates have been used that are based on the best
judgment of management.
Management has established, and maintains, a system of internal accounting
controls. The controls provide reasonable assurance that assets are
safeguarded, transactions receive appropriate authorization, and financial
records are reliable. Accounting controls are supported by written policies
and procedures, an operations planning and budget process designed to achieve
corporate objectives, and internal audits of operating activities.
PGE's Board of Directors includes an Audit Committee composed entirely of
outside directors. It reviews with management, internal auditors and
independent auditors the adequacy of internal controls, financial reporting,
and other audit matters.
Arthur Andersen LLP is PGE's independent public accountant. As a part of its
annual audit, selected internal accounting controls are reviewed in order to
determine the nature, timing and extent of audit tests to be performed. All of
the corporation's financial records and related data are made available to
Arthur Andersen LLP. Management has also endeavored to ensure that all
representations to Arthur Andersen LLP were valid and appropriate.
Joseph M. Hirko
Senior Vice President,
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of
Portland General Electric Company:
We have audited the accompanying consolidated balance sheets of Portland
General Electric Company and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Portland General Electric
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Portland, Oregon,
January 20, 1997
66
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS)
OPERATING REVENUES $ 1,109,831 $ 981,628 $ 958,955
OPERATING EXPENSES
Purchased power and fuel 316,729 293,589 347,125
Production and distribution 81,968 63,841 61,891
Maintenance and repairs 55,508 47,532 47,389
Administrative and other 111,308 106,128 97,987
Depreciation and amortization 154,586 134,340 124,003
Taxes other than income taxes 52,325 51,489 52,038
Income taxes 112,661 89,523 75,314
885,085 786,442 805,747
NET OPERATING INCOME 224,746 195,186 153,208
OTHER INCOME (DEDUCTIONS)
Regulatory disallowances - net of income taxes of $25,542 - (49,567) -
Allowance for equity funds used during construction - 3,257 271
Other 5,234 8,415 15,500
Income taxes 1,451 4,272 377
6,685 (33,623) 16,148
INTEREST CHARGES
Interest on long-term debt and other 68,116 69,667 61,493
Interest on short-term borrowings 9,042 6,917 5,788
Allowance for borrowed funds used during construction (1,642) (7,808) (4,043)
75,516 68,776 63,238
NET INCOME 155,915 92,787 106,118
PREFERRED DIVIDEND REQUIREMENT 2,793 9,644 10,800
INCOME AVAILABLE FOR COMMON STOCK $ 153,122 $ 83,143 $ 95,318
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS)
BALANCE AT BEGINNING OF YEAR $ 246,282 $ 216,468 $ 179,297
NET INCOME 155,915 92,787 106,118
ESOP TAX BENEFIT & OTHER (2,093) (3,570) (1,705)
400,104 305,685 283,710
DIVIDENDS DECLARED
Common stock 105,187 50,456 56,442
Preferred stock 2,793 8,947 10,800
107,980 59,403 67,242
BALANCE AT END OF YEAR $ 292,124 $ 246,282 $ 216,468
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
67
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31 1996 1995
(THOUSANDS OF DOLLARS)
ASSETS
ELECTRIC UTILITY PLANT - ORIGINAL COST
Utility plant (includes Construction Work in Progress of
$36,919 and $33,382) $ 2,899,746 $ 2,754,280
Accumulated depreciation (1,124,337) (1,040,014)
1,775,409 1,714,266
Capital leases - less amortization of 6,750 9,353
$30,569 and $27,966
1,782,159 1,723,619
OTHER PROPERTY AND INVESTMENTS
Contract termination receivable 111,447 -
Trojan decommissioning trust, at market 78,448 68,774
value
Corporate Owned Life Insurance, less loans 51,410 44,635
of $ 26,411 and $26,432
Other investments 20,700 24,943
262,005 138,352
CURRENT ASSETS
Cash and cash equivalents 19,477 2,241
Accounts and notes receivable 145,372 102,592
Unbilled and accrued revenues 53,317 64,516
Inventories, at average cost 32,903 38,338
Prepayments and other 16,476 15,619
267,545 223,306
DEFERRED CHARGES
Unamortized regulatory assets
Trojan investment 275,460 301,023
Trojan decommissioning 282,131 311,403
Income taxes recoverable 195,592 217,366
Debt reacquisition costs 28,063 29,576
Conservation investments - secured 80,102 -
Energy efficiency programs 11,974 77,945
Other 22,575 24,322
WNP-3 settlement exchange agreement 163,217 168,399
Miscellaneous 27,389 30,286
1,086,503 1,160,320
$ 3,398,212 $ 3,245,597
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock, $3.75 par value per share,
100,000,000 shares authorized,
42,758,877 shares outstanding $ 160,346 $ 160,346
Other paid-in capital - net 475,055 466,325
Retained Earnings 292,124 246,282
Cumulative preferred stock
Subject to mandatory redemption 30,000 40,000
Long-term debt 933,042 890,556
1,890,567 1,803,509
CURRENT LIABILITIES
Long-term debt and preferred stock due 92,559 75,114
within one year
Short-term borrowings 92,027 170,248
Accounts payable and other accruals 144,712 132,064
Accrued interest 14,372 15,442
Dividends payable 17,117 14,956
Accrued taxes 31,485 12,870
392,272 420,694
OTHER
Deferred income taxes 497,734 525,391
Deferred investment tax credits 47,314 51,211
Deferred gain on contract termination 112,697 -
Trojan decommissioning and transition costs 357,844 379,179
Miscellaneous 99,784 65,613
1,115,373 1,021,394
$ 3,398,212 $ 3,245,597
<FN>
The accompanying notes are an integral part of
these consolidated balance sheets.
</FN>
68
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994
(THOUSANDS OF DOLLARS)
CASH PROVIDED (USED IN)
OPERATIONS:
Net Income $ 155,915 $ 92,787 $ 106,118
Non-cash items included in net income:
Depreciation and amortization 118,845 102,183 94,140
Amortization of WNP-3 exchange agreement 5,182 4,910 4,695
Amortization of Trojan investment 24,244 24,884 26,738
Amortization of Trojan decommissioning 14,041 13,336 11,220
Amortization of deferred charges - other 5,397 (1,777) 2,712
Deferred income taxes - net (9,071) 1,714 25,720
Regulatory disallowances - 49,567 -
Changes in working capital:
(Increase) Decrease in receivables (32,025) (11,539) (29,678)
(Increase) Decrease in inventories 5,435 (7,189) 3,264
Increase (Decrease) in payables 38,233 13,196 (3,470)
Other working capital items - net (841) 1,946 (20,754)
Trojan decommissioning expenditures (8,231) (10,927) (3,360)
Deferred items - other 34,772 (9,472) 13,987
Miscellaneous - net 5,464 8,871 7,103
357,360 272,490 238,435
INVESTING ACTIVITIES:
Utility construction - new resources - (49,096) (87,537)
Utility construction - other (184,717) (158,198) (131,675)
Energy efficiency programs (12,318) (25,013) (23,745)
Nuclear decommissioning trust deposits (15,435) (16,598) (11,220)
Nuclear decommissioning trust withdrawals 7,888 13,521 -
Other investments (4,431) (8,624) (9,954)
(209,013) (244,008) (264,131)
FINANCING ACTIVITIES:
Short-term debt - net (78,221) 21,650 18,678
Borrowings from Corporate Owned Life Insurance - 4,679 21,731
Long-term debt issued 170,590 147,138 74,631
Long-term debt retired (97,661) (69,445) (29,882)
Preferred stock retired (20,000) (79,704) (20,000)
Common stock issued - - 41,055
Dividends paid (105,819) (60,149) (73,026)
(131,111) (35,831) 33,187
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 17,236 (7,349) 7,491
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF YEAR 2,241 9,590 2,099
CASH AND CASH EQUIVALENTS AT THE END
OF YEAR $ 19,477 $ 2,241 $ 9,590
______________________________________________________________________________________________________________
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest, net of amounts capitalized $ 73,396 $ 64,136 $ 55,995
Income taxes 108,277 94,327 44,918
______________________________________________________________________________________________________________
<FN>
The accompanying notes are an integral part of these
consolidated statements.
</FN>
69
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Certain information, necessary for a sufficient understanding of PGE's
financial condition and results of operations, is substantially the same as
that disclosed by Portland General in this report. Therefore, the following
PGE information is incorporated by reference to Part II of Portland General's
Form 10-K on the following page numbers.
PAGE
Notes to Financial Statements
Note 1A. Summary of Significant Accounting Policies 38
Note 2A. Employee Benefits 40
Note 4B. Preferred Stock 44
Note 6A. Long-Term Debt 47
Note 7A. Other Financial Instruments 48
Note 8A. Commitments 49
Note 9A. WNP-3 Settlement Exchange Agreement 51
Note 10A. Jointly-Owned Plant 51
Note 11A. Legal Matters 51
Note 12A. Trojan Nuclear Plant 52
Note 13A. SCE Contract Termination Agreement 53
Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
70
NOTE 3A -INCOME TAXES
The following table shows the detail of taxes on income and the items used in
computing the differences between the statutory federal income tax rate and
PGE's effective tax rate (thousands of dollars):
1996 1995 1994
Income Tax Expense
Currently payable
Federal $ 98,320 $ 74,089 $ 40,680
State & local 21,963 9,448 8,536
120,283 83,537 49,216
Deferred income taxes
Federal (4,500) (11,631) 24,856
State & local (676) (6,648) 4,811
(5,176) (18,279) 29,667
Investment tax credit adjustments (3,897) (5,549) (3,946)
$111,210 $ 59,709 $ 74,937
Provision Allocated to:
Operations $112,661 $ 89,523 $ 75,314
Other income and deductions (1,451) (29,814) (377)
$111,210 $ 59,709 $ 74,937
Effective Tax Rate Computation:
Computed tax based on statutory
federal income tax rates applied
to income before income taxes $ 93,494 $ 53,374 $ 63,369
Flow through depreciation 9,460 7,389 8,080
Regulatory disallowance - 3,456 -
State and local taxes - net 11,975 5,552 9,839
State of Oregon refund - (4,346) -
Investment tax credits (3,897) (5,549) (3,946)
Excess deferred tax (750) (700) (767)
Other 928 533 (1,638)
$111,210 $ 59,709 $ 74,937
Effective tax rate 41.6% 39.2% 41.4%
71
As of December 31, 1996 and 1995, the significant components of PGE's deferred
income tax assets and liabilities were as follows (thousands of dollars):
1996 1995
DEFERRED TAX ASSETS
Plant-in-service $ 64,471 $ 86,721
Other 20,563 23,339
85,034 110,060
DEFERRED TAX LIABILITIES
Plant-in-service (414,417) (448,049)
Energy efficiency programs (32,026) (30,314)
Trojan abandonment (69,315) (54,335)
WNP-3 exchange contract (59,302) (60,489)
Other (7,897) (42,470)
(582,957) (635,657)
Less current deferred taxes 189 206
Total $(497,734) $(525,391)
PGE has recorded deferred tax assets and liabilities for all temporary
differences between the financial statement bases and tax bases of assets and
liabilities.
NOTE 4A - COMMON STOCK
COMMON STOCK
Number of $3.75 Par Other Paid-in Unearned
Shares Value Capital Compensation
(thousands of dollars)
December 31, 1993 40,458,877 $151,721 $433,978 $(17,799)
Sales of stock 2,300,000 8,625 32,430 -
Redemption of preferred stock - - 2,119 -
Repayment of ESOP loan and other - - 1,481 5,203
December 31, 1994 42,758,877 160,346 470,008 (12,596)
Redemption of preferred stock - - 3,093 -
Repayment of ESOP loan and other - - 338 5,482
December 31, 1995 42,758,877 160,346 473,439 (7,114)
Redemption of preferred stock - - 2,195 -
Repayment of ESOP loan and other - - 1,677 4,858
December 31, 1996 42,758,877 $160,346 $477,311 $(2,256)
COMMON STOCK
Portland General is the sole shareholder of PGE common stock. PGE is
restricted, without prior OPUC approval, from paying dividends or making other
distributions to Portland General to the extent such payment or distribution
would reduce PGE's common stock equity capital below 36% of total
capitalization. At December 31, 1996, PGE's common stock equity capital was
49% of its total capitalization.
72
NOTE 5A - SHORT-TERM BORROWINGS
At December 31, 1996, PGE had total committed lines of credit of $220 million.
PGE has a committed facility of $200 million expiring in July 2000. The
line of
credit has an annual fee of 0.10% and does not require compensating cash
balances. The facilities are used primarily as backup for both commercial
paper and borrowings from commercial banks under uncommitted lines of credit.
At December 31, 1996, there were no outstanding borrowings under the committed
facilities.
PGE has a $200 million commercial paper facility. Unused committed lines of
credit must be at least equal to the amount of PGE's commercial paper
outstanding. Commercial paper and lines of credit borrowings are at rates
reflecting current market conditions.
Short-term borrowings and related interest rates were as follows:
1996 1995 1994
AS OF YEAR-END: (thousands of dollars)
Aggregate short-term debt outstanding
Commercial paper $ 83,027 $170,248 $148,598
Bank loans 9,000 - -
Weighted average interest rate*
Commercial paper 5.6% 6.1% 6.2%
Bank loans 7.3
Unused committed lines of credit $200,000 $200,000 $200,000
FOR THE YEAR ENDED:
Average daily amounts of short-term
debt outstanding
Commercial paper 158,259 111,366 126,564
Bank loans $ 5,265 $ 206 $ 1,273
Weighted daily average interest rate*
Commercial paper 5.6 6.3 4.6
Bank loans 5.7% 6.5% 4.3%
Maximum amount outstanding
during the year $251,462 $170,248 $159,482
<FN>
* Interest rates exclude the effect of commitment fees, facility
fees and other financing fees.
</FN>
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