Item 1. Business
Portland General Corporation - Holding Company
Portland General Corporation (Portland General), 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 is presently involved in leveraged leasing and the liquidation of its real estate investments. 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, 1993, Portland General and its subsidiaries had 2,618 regular employees compared to 3,253 and 3,256 at December 31, 1992 and 1991, respectively.
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. In addition, PGE sells energy in the wholesale market to other utilities, primarily in the State of California. Its 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 the population of its service area at the end of 1993 was approximately 1.3 million, constituting approximately 45% of the state's population. At December 31, 1993 PGE served over 620,000 customers.
In early 1993, PGE ceased commercial operation of the Trojan Nuclear Plant (Trojan). PGE determined that the likelihood of increasing costs made continued operation not cost effective. 5
Retail (including other) revenues increased $94 million in 1993 primarily due to a $49 million increase in accrued revenues related to the future recovery of incremental power costs, and the combination of retail load growth of 2.6% and cooler weather during the early months of 1993 which increased sales of electricity 5%.
1992 retail (including other) revenues increased $17 million over 1991 due primarily to revenues related to a temporary price increase to recover a portion of excess power costs incurred during the March 1991 to February 1992 Trojan outage.
Due to replacement of Trojan generation, excess low-cost power was not readily available for resale which drove wholesale revenues down $30 million. 1992 wholesale revenues declined $23 million due to poor hydro conditions experienced in the region which reduced surplus power and limited PGE's ability to make nonfirm resales.
Regulation
PGE is subject to regulation by the Oregon Public Utility Commission (PUC), which consists of a three-member commission appointed by the Governor. The PUC approves PGE's retail rates and establishes conditions of utility service. The PUC ensures that prices are fair and equitable and provides PGE an opportunity to earn a fair return on its investment. In addition, the PUC 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 Federal Energy Regulatory Commission (FERC) with regard to the transmission and sale of electric energy between utilities as well as with respect to licensed hydroelectric projects and certain other matters.
Construction of new generating facilities requires a permit from the Energy Facility Siting Council, a council of the Oregon Department of Energy. This council reviews the Company's need for energy and the resulting environmental impact of the generating plant.
The Nuclear Regulatory Commission (NRC) regulates the licensing, construction, operation and decommissioning of nuclear power plants. In 1993 the NRC issued PGE a possession only license amendment to its Trojan operating license allowing it to own the reactor and nuclear fuel but not to operate the facility. This license amendment eliminates certain operating requirements that are unnecessary for a permanently shut down and defueled reactor. PGE will continue to be subject to NRC regulation until the Trojan plant is fully decommissioned, all nuclear fuel is removed from the site to a U.S. Department of Energy facility and its license is terminated. The Oregon Department of Energy also monitors Trojan.
Oregon Regulatory Matters
General Rate Filing
On November 8, 1993 PGE filed a request with the PUC to increase electric prices by an average of 5.1% beginning January 1, 1995. Commercial and industrial customers rates would increase, on average, 3.2%. The proposed increase in average annual revenues is $43 million, after the effects of the Regional Power Act exchange credit. PGE requested a return on equity of 11.5%, down from the current authorized return of 12.5%. If approved, this would be PGE's first general price increase since 1991.
Power Cost Deferrals
PGE has operated without a power cost adjustment provision in its rates since late 1987 which necessitates separate filings with the PUC to recover increases in power costs. In February 1993 the PUC authorized PGE to defer, for later collection, 80% of the incremental costs incurred from December 4, 1992 to March 31, 1993 to replace power no longer generated by Trojan. In January 1994 the PUC authorized PGE to start collecting this power cost deferral beginning in April 1994.
In August 1993 the PUC authorized PGE to defer, for later collection, 50% of the incremental replacement power costs incurred from July 1, 1993 to March 31, 1994, subject to a review of PGE earnings.
1993 Residential and Small Farm Customer Price Increase
Under provisions of the Regional Power Act (RPA) PGE exchanges higher-cost power for lower-cost federal hydroelectric power with BPA and passes the benefits to residential and small farm customers.
In September 1993 the PUC approved PGE's request to raise its electricity prices to residential and small farm customers an average of 7.8%, or $28.6 million in annual revenues, effective October 1, 1993 to pass through the Bonneville Power Administration's (BPA) nearly 16% price increase. BPA's price increase reduces the power exchange credit that is passed through to PGE residential and small farm customers.
1992 Temporary Rate Increase
The PUC granted PGE recovery of a portion of its incremental power costs incurred during Trojan's 1991 extended outage. PGE was allowed to recover 90% of the excess power costs incurred from November 1, 1991 until Trojan returned to service in early March 1992. Revenue collections started on January 1, 1992, with commercial and industrial rates increasing 4.8% and residential rates increasing 0.6%. On April 7, 1992, the PUC approved the Company's request to decrease the rate at which it was recovering excess power costs. Residential rates decreased 0.5% while commercial and industrial rates decreased 3.3%. Revenue collections were completed in June 1993. The PUC's temporary rate increase order has been challenged by the Utility Reform Project. See Item 3, Legal Proceedings.
Energy Efficiency
PGE and the PUC are working together to provide the appropriate financial incentives for PGE's energy efficiency programs. PGE is allowed a return on energy efficiency program expenditures. PGE and the PUC also developed the Share All Value Equitably (SAVE) program to remove a financial disincentive and encourage PGE to aggressively pursue cost-effective energy efficiency measures. SAVE, which began in 1991 consists of a lost revenue component and a shared savings incentive that rewards PGE with additional revenues for a portion of the difference between the equivalent cost a new generation and the cost of the energy efficiency measures. The shared savings component of the SAVE tariff can result in a penalty if the amount of energy savings falls short of the established benchmark levels. During the first three years of the program, PGE exceeded benchmarks set by the PUC, and qualified programs achieved an annualized 35 average megawatts of saved energy.
1991 General Rate Increase
The PUC authorized PGE a $27 million, or 3.4%, rate increase which became effective February 5, 1991. The tariff change represented PGE's first general price increase since 1984. The PUC set PGE's allowed return on common shareholders' equity at 12.5%, a decrease from 12.75%. The price increase covered higher operating costs, including programs to improve efficiency and safety at Trojan. Additional revenues were granted to cover higher depreciation and decommissioning provisions for Trojan. The PUC also allowed PGE to recover, over ten years, $29 million of costs associated with terminating a prior coal supply contract for Boardman.
Prior Years
Prior to the 1991 general rate increase, general prices had not increased since 1984. Between 1985 and 1990, PGE had price reductions totaling $79 million in revenue requirements including refunds of excess tax credits.
In October 1989, PGE lowered residential and small farm customer prices by 3.8%, or $11 million in annual revenue requirements. The lower prices resulted from increased benefits under the provisions of the RPA.
In January 1989 revenue requirements were reduced $12 million as a result of the completion of PGE's recovery of abandoned nuclear project costs.
Litigation Settlement
In July 1990, PGE reached an out- of-court settlement with the PUC on two of three rate matters being litigated. PGE had sought judicial review of the three rate matters related to a 1987 general case. In 1989, PGE reserved $89 million for an unfavorable outcome on these three issues. As a result of the settlement, $16 million, or $.35 per share, was restored to income during the 1990 third quarter.
The settlement resolved the dispute regarding treatment of accelerated amortization of certain investment tax credits (ITC) and 1986-1987 interim relief. PGE restored ITC in a manner consistent with the way the PUC had ordered that it be treated for ratemaking purposes. As settlement of the interim relief issue, PGE refunded $17 million to its customers over a 12-month period beginning November 1, 1991. The settlement, however, did not resolve the issue regarding the gain on the sale of a portion of the Boardman/Intertie assets, which the parties continue to litigate. PGE's position is that 28% of the gain should be allocated to customers. The 1987 rate order 8 allocated 77% of the gain to customers. PGE has fully reserved this amount which is being amortized over a 27-year period in accordance with the rate order.
In PGE's general rate filing filed November 8, 1993 PGE proposes to accelerate the amortization of the Boardman gain to customers from 27 years to three years, starting in January 1995, as part of a comprehensive settlement of the outstanding litigation on this issue.
Least Cost Energy Planning
The PUC 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. "Demand side" options (ie, conservation and load management) as well as traditional "supply side" options (ie, generation and purchase of power) are evaluated. Although utility management continues to be fully responsible for decision-making, the process allows the PUC and the public to participate in resource planning. Ratemaking decisions are not made in the planning process. However, participation by the PUC and the public may reduce the uncertainty regarding the ratemaking treatment of the acquisition of new resources. PGE filed its first Least Cost Energy Plan (LCP) with the PUC in October 1990, and the PUC subsequently reviewed and acknowledged PGE's plan. The plan is updated every two years.
In August 1992, PGE submitted its draft 1992 LCP to the PUC. Included in the LCP was PGE's plan for an orderly phase-out of Trojan by 1996. In January 1993, PGE submitted an update to its LCP reflecting its decision to immediately shut down Trojan. The PUC acknowledged the LCP plan on June 11, 1993.
Competition and Marketing
Retail Competition
PGE competes with a local natural gas utility for residential and commercial customers' space and water heating. PGE captures the majority of the space and water heating market for new multi- family construction, but most new single-family homes are built with natural gas heat and hot water. PGE operates within a state-approved service area and is substantially free from direct competition with other electric utilities.
Competition in the industrial market has increased in recent years due to the availability and low price of natural gas. To meet this competition, PGE is working to retain customers by assisting them with energy- related decisions. Neighboring retail electric utilities are becoming another competitive factor. In 1990, two of PGE's industrial customers approached other utilities to investigate obtaining power at a lower price. PGE has signed a settlement agreement with Pacific Power & Light (PP&L) permitting PP&L to serve one of these customers and is continuing to serve the other customer. See Item 3, Legal Proceedings for more information.
Cogeneration is another form of competition. However, PGE also views it as an opportunity to invest in joint projects which earn a return and provide additional resources to meet PGE's load growth and to replace Trojan's output.
Retail Marketing
PGE recognizes that all customers do not have the same energy needs and that they do no all value a product equally. Some customers require more reliable services to reduce outage costs. Other price sensitive customers prefer reduced service levels to achieve a lower electric bill. PGE continues to work with customers to develop and deliver kWh products and services that meet different customers' needs.
Meeting customer needs while promoting energy efficiency means employing demand side management strategies. Demand side management includes influencing market growth through high value electrical applications, managing wise use of electricity through energy efficiency and managing capacity demand through load shaping. PGE and the PUC developed the SAVE program (see discussion on page 8) to remove a financial disincentive from energy efficiency measures.
The most successful programs under PGE's SAVE incentive tariff include low-flow showerheads, the Super Good Cents program which encourages energy-efficient construction, the Commercial Rationalization program for construction of energy-efficient commercial buildings, commercial and industrial lighting, and a program to encourage industrial customers to install more efficient motors. 9
PGE also has programs for residential energy audits, low- income weatherization, more efficient lighting and appliances, and the repair and replacement of water heaters.
Among the other services provided to commercial and industrial customers, PGE and subsidiaries offer power quality services and high voltage maintenance services for customer-owned equipment. PGE's Energy Resource Center provides commercial and other customers with technical assistance and training for energy-related business issues. Commercial customers can receive a design review of energy efficiency systems for their buildings.
The U.S. Environmental Protection Agency (EPA) has selected PGE as the first utility in the Pacific Northwest to participate in its Green Lights program. This program encourages the largest businesses and industries to use energy-efficient lighting. PGE is working with its customers to help them qualify for the Green Lights program. In addition, PGE is the first U.S. utility to become a member of Power Smart, an international organization that promotes energy efficiency through marketing and product endorsements.
PGE has joined with the Oregon Superintendent of Public Instruction and other utilities to develop a curriculum to encourage teachers, students, and parents to use energy more efficiently in their homes. A related plan is designed to make school facilities more energy- efficient.
Wholesale Sales
Energy sales to other utilities depend on the availability of surplus power in the Pacific Northwest, access to transmission systems, changing prices of fossil fuels, competition from alternative suppliers, and the demand for power by other utilities. Power supply and transmission assets, including a partial ownership in the AC Intertie, provide valuable linkages to a wide array of wholesale customers.
The AC Intertie is a transmission line with a total capacity of 4,800 megawatts that links winter-peaking northwest utilities with summer-peaking wholesale customers in California.
Currently, PGE has total scheduling capability for 950 megawatts on the AC Intertie including 150 MW gained from the recent capacity expansion. PGE and BPA completed expansion of the capacity of the AC Intertie in 1993. PGE has traded 100 megawatts of this scheduling capability to BPA for 100 megawatts of scheduling capability on BPA's DC Intertie in order to reach additional wholesale customers in the Southwest. The January 1994 earthquake experienced in the Los Angeles area removed the DC intertie from service. Until repaired, this outage limits PGE's ability to make wholesale sales to the southwest region.
FERC can now order wholesale transmission access, wholesale wheeling, of electric power. Wholesale wheeling allows independent power producers and utilities to market excess power to other utilities over wide geographic areas. PGE's ownership of 950 megawatts of transmission rights on the Pacific Northwest Intertie provides access to power and wholesale customers beyond PGE's service territory.
Power Supply
PGE's decision in January 1993 to immediately cease operation of Trojan (see Note 6, Trojan Nuclear Plant) ended 17 years of operation during which the plant provided about a quarter of PGE's annual energy requirements. PGE is replacing this output and meeting new load growth with a mix of demand-side and supply- side resources, including renewables, cogeneration, combined-cycle combustion turbines, and energy purchases from other utilities.
Removing this major generating plant from service increased the importance of PGE's existing hydroelectric and thermal resources. Hydro power is a key economic resource for the Company. In addition to company- owned hydroelectric projects, PGE relies on long term power contracts with four hydro projects on the mid-Columbia River. PGE also purchases surplus energy, primarily hydro- generated, from other Pacific Northwest utilities. Operation of the gas-fired Beaver plant (Beaver) continues to benefit from a larger natural gas pipeline. This pipeline, completed in 1993, gives PGE assured access to natural gas markets, enabling Beaver generation to be competitive with other resources in the Pacific Northwest. The Boardman coal- fired plant (Boardman) has run as a base load plant since lower- cost coal supply contracts were negotiated in 1990. 10
Generating Capability
PGE has 1,911 megawatts of generating capability, which consists of hydroelectric, coal-fired and gas-fired plants. PGE's lowest-cost producers are its eight hydroelectric projects on the Clackamas, Sandy, Deschutes, and Willamette rivers in Oregon. With the decision to permanently close Trojan, PGE lost 745 megawatts of generating capability.
Purchased Power
Long-term firm power contracts with four hydro projects on the mid-Columbia River in central Washington state provide PGE with 669 megawatts. A long-term contract with the BPA for 250 megawatts of capacity expired in 1991 and was replaced with 550 megawatts of new long-term (3 to 23 years) firm contracts from several utilities. In addition, PGE has long- term exchange contracts with summer-peaking California utilities to help meet its winter-peaking requirements.
During 1993 PGE negotiated new firm power purchase contracts ranging from two to four years for the purchase of 300 MW to replace capacity and energy previously supplied by Trojan. These agreements, with companies in the Northwest and Southwest, will help meet the Company's needs until new resources are brought on-line in the 1995/96 timeframe.
These and other sources provide PGE with a total of 2,095 megawatts of firm capacity to serve PGE's peak loads. PGE also has access to surplus energy in the "spot market", referred to as secondary energy, which is utilized to meet customers' needs when it is economical to do so, and to provide replacement energy during plant maintenance outages.
Reserve Margin
Reserve margin is the amount of firm resource capacity in excess of customer demand during a period of peak loads. Based on its generating plants and firm purchased power contracts in place as of December 31, 1993, capacity available to PGE compared with historical peak loads is:
Source: Megawatts PGE-owned hydro plants 609 Coal-fired plants 652 Gas-fired plants 650 Firm power purchase contracts 2,095 Total 4,006
Peak Load: System record (Dec. 1990) 3,698 1993 peak (Jan.) 3,441
PGE has access to spot-market purchases (referred to as secondary energy) during peak demand.
Year in Review
PGE generated 42% of its load requirements in 1993 compared with 58% in 1992. Trojan operated at a 48% capacity factor in 1992. Firm and secondary purchases primarily replaced Trojan generation in 1993.
Below average precipitation in some parts of the Columbia River basin reduced the availability of inexpensive hydro power on the secondary market in 1993. Regional water conditions were about 83% of normal. Poor water conditions in the region drove secondary prices up, causing Beaver to be a more economical source of energy. Beaver produced 13% more energy than in 1992. 11
1994 Forecast
The combination of power purchases and increased internal generation will continue to be utilized to replace Trojan's energy. PGE expects to purchase 57% of its 1994 load requirement. The early predictions of water conditions indicate they will be about 75% of normal. A high run-off in late spring is expected because of water release for fisheries. Early spring and summer run-off will likely be low due to the low water content of the snow pack in the Columbia River Basin.
PGE plans to operate Beaver at a 38% capacity factor, the same level experienced in 1993. Boardman will continue to operate as a base-load plant.
Outlook
PGE's Least Cost Energy Plan (see the discussion on page 9) focuses on meeting customers' current and anticipated future energy needs with cogeneration, additional natural gas-fired combined-cycle combustion turbines, wind power, geothermal, energy efficiency, repowering existing resources and efficiency improvements to generating and transmission facilities. Energy efficiency programs include demand-side measures such as load management and encouraging more efficient use of electricity by customers. PGE plans on meeting 45% of new load growth needs with energy efficiency programs.
PGE is beginning construction of the Coyote Springs Generation Project (Coyote Springs). This project will be a 220 megawatt cogeneration facility constructed near Boardman as part of the Trojan replacement resource portfolio. Coyote Springs is expected to be completed in the fall of 1995.
The Company is reviewing plans to bring an additional 380 average megawatts (MWa) of new resources on-line by 1997. Average megawatts are calculated by converting the total annual output of a resource into an hourly average.
Until new generating resources come on line PGE will utilize a combination of additional internal generation and short and medium-term power 12 purchase contracts. Price and supply of these power purchases will be of particular importance until PGE brings new resources on-line. Adequate supplies of secondary energy are expected to be available to meet customer demand. The completion of the third intertie in 1993 increased PGE's access to surplus energy in California and Arizona. However, potential curtailments of power supply and voltage instability could result if unusual weather- related events or loss of generating resources occur in the region.
The January, 1994 earthquake in the Los Angeles area caused damage to the direct current (DC) intertie. PGE expects this transmission loss to affect the supply of power from the southwest to the Pacific northwest. As a result, the price of secondary power may be affected.
Restoration of Salmon Runs - The Snake River chinook salmon has been listed as a threatened species and the Snake River sockeye salmon has been listed as endangered under the federal
Endangered Species Act (ESA). The National Marine Fisheries Service (NMFS) has appointed a 7- member team to develop a recovery plan to reestablish these fish runs. This plan was completed in November 1993 and is now undergoing public comment. The plan proposes changes to current river operations. Some environmental organizations are calling for major improvements in fish passage around hydro projects on the Snake and lower Columbia rivers during the spring and summer by increasing the amount of water released from the reservoirs. This could mean less water will be available for release from the reservoirs in the fall and winter, resulting in less electricity generated at the hydro projects. NMFS is required to consider the economic impact as well as biological value of the proposed measures.
Much of the regional impact from reduced power generation could be mitigated by increasing the region's seasonal power exchanges with California. California has peak energy needs in the summer while the Pacific Northwest has peaks in the winter. BPA estimates that proposed Columbia and Snake river flows would have only a small impact on power generation. BPA estimates the cost of power to replace lost generation would result in a retail rate increase of less than 2%. However, the final recovery plan could alter this estimate.
PGE is closely monitoring this process and the potential impact of the proposals on its operations. PGE does not own hydro projects on the lower Columbia or Snake rivers although PGE purchases power from facilities located on these rivers. PGE's biologists are working with state and federal agencies to ensure that its hydro operations are compatible with the survival of both hatchery and wild salmon and steelhead trout. PGE does not expect the ESA process to significantly impact its generation or long-term purchased power contracts. However, the costs of secondary purchased power may increase throughout the region during low- water years.
Fuel Supply
Nuclear
Since the permanent closure of Trojan in January 1993 PGE has terminated all uranium conversion, enrichment and fabrication contracts. Termination costs were approximately $4.5 million. In addition PGE terminated, at no cost, a uranium supply contract from an Australian source and assigned its remaining uranium supply contract from a domestic source to a third party, permanently relieving PGE of any future obligations associated with either contract. PGE sold its remaining inventory of enriched and natural uranium.
Coal
PGE has an agreement with Cyprus AMAX Coal Sales Company (in 1993 AMAX Coal Company merged with Cyprus Coal Sales Corporation to become Cyprus AMAX Coal Sales Corporation) to supply coal to Boardman through the year 2000. The agreement does not require a minimum amount of coal to be purchased, leaving PGE free to obtain coal from other sources. PGE did not take deliveries from AMAX under this agreement in 1993 because lower priced coal was available on the spot market. The coal purchased contained less than 0.5% of sulfur by weight and emitted less than the EPA allowable limit of 1.2 pounds of sulfur dioxide per MMBtu (million British thermal units) when burned. The coal is from both surface mining operations and underground operations, each subject to federal, state, and local regulations. Railroad transportation to Boardman represents the single largest component of the total cost of the coal. In 1993 PGE negotiated a favorable railroad transportation rate with the Union Pacific Railroad and Western Railroad Properties. PGE believes it will continue to have several coal supply sources and will be able to continue meeting Boardman's needs.
Coal for Colstrip 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 plant design includes sulfur dioxide removal equipment to allow operation in compliance with EPA's source performance emission standards.
Coal for Centralia 1 and 2, located in southwestern Washington, is provided under contract with PacifiCorp doing business as PacifiCorp Electric Operations. The plant will need to implement a blending (adding low-sulphur coal to the current supply), co-firing (adding natural gas to the fuel mix), or other strategies to achieve compliance with EPA's source performance emission standards. The majority of Centralia's coal requirements are expected to be provided under this contract.
Natural Gas
PGE has short-term agreements with various suppliers to purchase gas during the winter peak demand period. PGE also utilizes spot-market purchases of gas when necessary.
PGE owns 90% of a pipeline which directly connects Beaver to Northwest Pipeline, an interstate gas pipeline operating between British Columbia and New Mexico. Beginning in June 1993 PGE has access to 30,000 MMBtu/day of Northwest Natural Gas's capacity on Northwest Pipeline. Increased access to gas supplies improves the cost effectiveness and reliability of gas transportation to the plant. This agreement also allows for an increase to 76,000 MMBtu/day in November 1995.
PGE also signed an agreement in 1993 with Pacific Gas Transmission to provide 41,000 MMBtu/day of capacity on its natural gas pipeline. This service is scheduled to start on or after November 1995, when PGE's new gas-fired resources come on line.
Environmental Matters
PGE operates in a state recognized for environmental leadership. PGE's commitment to environmental stewardship resulted in the adoption of a corporate environmental policy in 1991. The policy asserts PGE's commitment to minimize waste in its operations, minimize environmental risk and take the lead in promoting energy efficiency.
Environmental Regulation
PGE is subject to regulation by federal, state, and local authorities with regard to air and water quality, noise, waste disposal and other environmental issues. PGE is also subject to the 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 or in waters of the State. The EPA regulates the proper use, transportation, clean up and disposal of Polychlorinated biphenyls (PCBs). State agencies or departments which have direct jurisdiction over environmental matters include the Environmental Quality Commission, the Department of Environmental Quality (DEQ), the Oregon Department of Energy, and the Energy Facility Siting Council. Environmental matters regulated by these agencies include the siting and operation of generating facilities and the accumulation, clean-up and disposal of toxic and hazardous wastes.
Air/Water Quality
Congress passed amendments to the Clean Air Act (Act) in 1990 that will renew and intensify national efforts to reduce air pollution. Significant 14 reductions in emissions of sulfur dioxide, nitrogen oxide and other air toxic contaminants will be required over the next several years. Coal-fired plant operations will be affected by these emission limitations.
Federal implementing standards under the Act are being drafted at the present time. 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.
On March 5, 1993, the EPA issued its final allocation of emission allowances. Boardman was assigned sufficient allowances to operate after the year 2000 at a 60 to 67% capacity factor without having to further reduce emissions or to buy additional credits. Centralia will be required to reduce emissions by the year 2000 and the owners are examining several options such as installing scrubbers, converting to lower-sulfur coal or natural gas, or purchasing emission allowances. It is not anticipated that Colstrip will be required to reduce emissions because it utilizes scrubbers.
In addition, Congress is currently considering other legislation to reduce emissions of gases that are thought to cause global atmospheric warming. The burning of coal, oil, and natural gas by electric utilities is thought to be a source of these pollutants. Legislation, if adopted, could significantly increase PGE operating costs and reduce coal-fired capacity.
Boardman's air contaminant discharge permit, issued by the DEQ, has no restrictions on plant operations. This permit expires in 1994 and will be automatically extended until a new permit is issued under new permit rules being reviewed by the EPA for final approval. 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.
The wastewater discharge permit for Beaver expires in 1994. DEQ is currently reviewing the permit renewal application.
DEQ air contaminant discharge permits for the combustion turbine generators at Bethel expire in 1995. The existing air permits will automatically be extended until new permits are issued under new air permit rules being reviewed by the EPA for final approval. The current permits allow unrestricted plant operations except for a limitation whereby only one Bethel unit may operate at night due to noise limitations. The combustion turbines are allowed to operate on either natural gas or oil.
PGE has developed an emergency oil spill response plan for the fuel oil storage tanks and unloading dock at Beaver. This plan has been submitted to the Coast Guard, EPA and DEQ in compliance with new federal and state oil spill regulations. The plan includes employee training and the probable acquisition of clean up equipment.
Environmental Clean Up
PGE, as a "potentially responsible party", is involved with others in environmental clean up of PCB contaminants at various sites. The clean up effort is underway and is anticipated to take several years to complete. The total cost of clean up is presently estimated at $27 million. PGE's share is approximately $3 million.
Human Resources
As of December 31, 1993, PGE had 2,577 regular employees, including 224 employees at Trojan, compared to 3,157 and 3,094 employees at December 31, 1992 and 1991, respectively.
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 presently engaged in leveraged leasing and the liquidation of its real estate investment. 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 its investments in its subsidiaries. Portland General has determined to no longer pursue development in the independent power and real estate businesses, and has recorded write-offs and reserves for related phase-out costs.
Leasing
Portland General Financial Services, Inc
Portland General Financial Services (PGFS) is the parent company of Columbia Willamette Leasing (CWL), which acquired and leases capital equipment on a leveraged basis. CWL accounts for essentially all of the assets and earnings of PGFS. During 1993 and 1992, CWL made no new investments in leveraged leases. CWL's investment portfolio consists of six commercial aircraft, two container ships, 5,500 containers, coal, tank, and hopper railroad cars, a truck assembly plant, an acid treatment facility, and a wood chipping facility, totaling $454 million in original cost. No new investments are expected or planned for the foreseeable future.
Independent Power Production
PowerLink Corporation
PowerLink Corporation (PowerLink) was Portland General's entry into the independent power business. During 1992 Portland General sold PowerLink.
Investment in Bonneville Pacific Corporation
In October 1990, Holdings purchased 20% of the common stock of Bonneville Pacific, an independent power producer headquartered in Salt Lake City, Utah. Over the next six months, Holdings purchased additional shares of Bonneville Pacific common stock, increasing its investment to 46% of the outstanding stock. Holdings also has outstanding loans of $28 million to Bonneville Pacific and its subsidiaries. In November 1991, Portland General announced that it was halting further investments, and Holdings wrote off its equity investment in and loans to Bonneville Pacific. In addition, Holdings' representatives resigned from Bonneville Pacific's board of directors. These decisions were based in part on Bonneville Pacific underperforming expectations, the impairment of the investment in Bonneville Pacific and the inability of Bonneville Pacific to meet project sell-down commitments under the original purchase agreement. Bonneville Pacific has filed for protection under Chapter 11 of the Federal Bankruptcy Code. Holdings has instituted legal proceedings with regard to its investment in Bonneville Pacific. See Note 3, Loss From Independent Power and Note 14, Legal Matters, in the Notes to the Financial Statements and Item 3. Legal Proceedings for more information.
Real Estate
Columbia Willamette Development Company
Projects in Columbia Willamette Development Company's (CWDC) development portfolio include an upscale retirement community and single family residential developments. The process of liquidating the projects is expected to be substantially completed during 1994. See Note 2, Real Estate - Discontinued Operations, in Notes to the Financial Statements. 16
Item 2.
Item 2. Properties
Portland General Corporation
Discussion regarding nonutility properties is included in the previous section.
Portland General Electric Company
Generating facilities owned by PGE are set forth in the following table:
(*) Officers are listed as of January 31, 1994. The officers are elected to serve for a term of one year or until their successors are elected and qualified. 23
PART II
Item 5.
Item 5. Market for the 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 1993 and 1992.
The approximate number of shareholders of record as of December 31, l993 was 48,521.
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):
PGE is restricted, without prior PUC approval, from making any dividend distributions to Portland General that would reduce PGE's common equity capital below 36% of total capitalization. 24
Item 6.
Item 6. Selected Financial Data
Portland General Corporation
Portland General Electric Company
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial and Operating Outlook
Trojan Related Issues
Shutdown - In early 1993, Portland General Electric Company (PGE or the Company) ceased commercial operation of the Trojan Nuclear Plant (Trojan). PGE made the decision to shut down Trojan as part of its least cost planning process, a biennial process whereby PGE evaluates a mix of energy options that yield an adequate and reliable supply of electricity at the least cost to the utility and to its customers. On June 3, 1993 the Oregon Public Utility Commission (PUC) acknowledged PGE's Least Cost Plan.
Decommissioning Estimate - The 1993 nuclear decommissioning estimate of $409 million represents a site-specific decommissioning cost estimate performed for Trojan by an experienced decommissioning engineering firm. This cost estimate assumes that the majority of decommissioning activities will occur between 1998 and 2002, after construction of a temporary dry spent fuel storage facility. The final decommissioning activities will occur in 2018 after PGE completes shipment of spent fuel to a United States Department of Energy (USDOE) facility.
The decommissioning cost estimate includes the cost of decommissioning planning, removal and burial of irradiated equipment and facilities as required by the Nuclear Regulatory Commission (NRC); building demolition and nonradiological site remediation; and fuel management costs including licensing, surveillance and $75 million of transition costs. Transition costs are the costs associated with operating and maintaining the spent fuel pool and securing the plant until dismantlement can begin.
The 1992 decommissioning cost estimate of $411 million was based upon a study performed on a nuclear plant similar to Trojan and included the cost of dismantlement activities performed
during the years 1996 through 2002, monitoring of stored spent fuel through 2018 and $130 million of miscellaneous closure and transition costs ($43 million was amortized to nuclear operating expenses during 1993).
The 1992 estimate and the 1993 site- specific estimate are reflected in the Company's financial statements in nominal dollars (actual dollars expected to be spent in each year). The difference between the 1992 and the 1993 cost estimates, reflected in nominal dollars, is due to the application of a higher inflation factor, the timing of decommissioning activities and certain changes in assumptions, such as decommissioning the temporary dry spent fuel storage facility and shipping highly activated reactor components to the USDOE repository in 2018, which are included in the 1993 estimate. Both the 1992 cost estimate and the 1993 site- specific cost estimate reflected in 1993 (current) dollars are $289 million.
Assumptions used to develop the site- specific cost estimate represent the best information PGE has currently. However, the Company is continuing its analysis of various options which could change the timing and scope of dismantling activities. Presently, PGE is planning to accelerate the timing of large component removal which could reduce overall decommissioning costs. PGE plans to submit a detailed decommissioning work plan to the NRC in mid-1994. The Company expects any future changes in estimated decommissioning costs to be incorporated in future revenues to be collected from customers.
Investment Recovery - PGE filed a general rate case on November 8, 1993, which addresses recovery of Trojan plant costs, including decommissioning. In late February 1993, the PUC granted PGE accounting authorization to continue using previously approved depreciation and decommissioning rates and lives for its Trojan investment.
Least cost analysis assumed that recovery of the Trojan plant investment, including future decommissioning costs, would be granted by the PUC. Regarding the authority of the PUC to grant recovery, the Oregon Department of Justice (Attorney General) issued an opinion that the PUC may allow rate recovery of total plant costs, including operating expenses, taxes, decommissioning costs, return of capital invested in the plant and return on the undepreciated investment. While the Attorney General's opinion does not guarantee recovery of costs associated with the shutdown, it does clarify that under current law the PUC has authority to allow recovery of such costs in rates. 26
PGE asked the PUC to resolve certain legal and policy questions regarding the statutory framework for future ratemaking proceedings related to the recovery of the Trojan investment and decommissioning costs. On August 9, 1993, the PUC issued a declaratory ruling agreeing with the Attorney General's opinion discussed above. The ruling also stated that the PUC will favorably consider allowing PGE to recover in rates some or all of its return on and return of its undepreciated investment in Trojan, including decommissioning costs, if PGE meets certain conditions. PGE believes that its general rate filing provides evidence that satisfies the conditions established by the PUC. In February 1993 the Citizens' Utility Board of Oregon appealed the ruling to the Marion County Circuit Court.
Management believes that the PUC will grant future revenues to cover all, or substantially all, of Trojan plant costs with an appropriate return. However, future recovery of the Trojan plant investment and future decommissioning costs requires PUC approval in a public regulatory process. Although the PUC has allowed PGE to continue, on an interim basis, collection of these costs in the same manner as prescribed in the Company's last general rate proceeding, the PUC has yet to address recovery of costs related to a prematurely retired plant when the decision to close the plant was based upon a least cost planning process. Due to uncertainties inherent in a public process, management cannot predict, with certainty, whether all, or substantially all, of the $367 million Trojan plant investment and $356 million of future decommissioning costs will be recovered. Management believes the ultimate outcome of this public regulatory process will not have a material adverse effect on the financial condition, liquidity or capital resources of Portland General. However, it may have a material impact on the results of operations for a future reporting period.
The Company's independent accountants are satisfied that management's assessment regarding the ultimate outcome of the regulatory process is reasonable. Due to the inherent uncertainties in the regulatory process discussed above, the magnitude of the amounts involved and the possible impact on the results of operations for a future reporting period, the Company's independent accountants have added a paragraph to their audit report to give emphasis to this matter.
General Rate Filing
On November 8, 1993, the Company filed a request with the PUC to increase electric prices by an average of 5% beginning January 1, 1995. Commercial and industrial customers' rates would increase, on average, 3.2%. The proposed increase in average annual revenues is $43 million, after the effects of the Regional Power Act exchange credit. PGE requested a return on equity of 11.5%, down from the current authorized return of 12.5%. If approved, this would be the Company's first general price increase since 1991.
The increase in the cost of power, driven by higher priced purchased power and increased fuel costs, is the single largest factor behind the need to request an increase in prices. Other operating factors that contributed to the request are federal tax increases and capital improvements to PGE's distribution system. Helping to offset these cost increases are cost savings at Trojan, property tax reductions and customer growth. In addition, the Company is proposing to accelerate the return to customers of profits from the 1985 sale of a portion of the Boardman Coal Plant (Boardman) from 27 years to three years. In the 1987 rate proceeding the PUC ordered PGE to allocate 77% of the gain to customers over a 27 year period.
The general rate filing includes PGE's request for continued recovery of Trojan costs including decommissioning, operating expenses, taxes, return of capital invested in the plant and return on the undepreciated investment. PGE's current rates include recovery of these Trojan costs. The Company expects a PUC decision in late 1994.
Recovery of power cost deferrals is addressed in separate rate proceedings, not in the general rate filing (see the discussion of Power Cost Recovery below).
Customer Growth and Revenues
Customer growth in PGE's service territory was evident with the addition of 11,000 retail customers in 1993. This growth accounted for a 2.6% increase in weather-adjusted retail sales. In 1993, 9,300 residential customers were added to the system, compared to 9,400 in 1992. The Company estimates retail load growth in 1994 to be approximately the same as the growth experienced in 1993.
Power Cost Recovery
The Company is incurring substantial near-term power costs to replace Trojan generation. PGE's Power Cost Adjustment Tariff (PCA) was eliminated in 1987. As a result, adjustments for power costs above or below those used in existing general tariffs are not automatically reflected in 27
customers' rates. In February 1993, the PUC authorized PGE to defer, for later collection, 80% of the incremental power costs incurred from December 4, 1992, to March 31, 1993, to replace Trojan generation. In January 1994, the PUC authorized PGE to start collecting this power cost deferral beginning in April 1994.
In August 1993, the PUC authorized PGE to defer, for later collection, 50% of the incremental replacement power costs incurred from July 1, 1993, to March 31, 1994, subject to a review of PGE earnings. This power cost deferral authorization does not immediately affect customer rates. However, PGE expects future rates to allow recovery of these costs.
Power Supply
The combination of power purchases and internal generation will continue to be utilized to replace Trojan's energy until new generating resources come on line by 1996. PGE expects to purchase approximately 57% of its 1994 load requirement. The early predictions of 1994 water conditions indicate they will be about 75% of normal. However, adequate supplies of secondary energy are expected to be available to meet customer demand. The completion of the third intertie in 1993 increased the Company's access to surplus energy and sales opportunities in California and Arizona.
The January 1994 earthquake in the Los Angeles area caused damage to the direct current (DC) intertie. PGE expects this transmission loss to affect the supply of power from the Southwest to the Pacific Northwest. As a result, the price of secondary power, and the Company's wholesale efforts, may be affected. PGE has 100 MW of scheduling capability on the DC line to reach wholesale customers in the Southwest.
Restoration of Salmon Runs - The Snake River chinook salmon has been listed as a threatened species and the Snake River sockeye salmon has been listed as endangered under the federal Endangered Species Act. The National Marine Fisheries Service has proposed minor changes to current river operations in a draft recovery plan that is undergoing public comment. Proposals to restore these salmon runs include measures to increase the river flows on the Snake and lower Columbia rivers during the spring to allow salmon to reach the Pacific Ocean faster, resulting in less water available for power generation in the fall and winter months. Although Company-owned hydro projects are not located on these rivers, future costs of secondary purchased power will likely increase throughout the region during low-water years.
Fuel Supply
PGE has short-term agreements with various suppliers to purchase gas during the winter peak demand period. PGE also utilizes spot-market purchases of gas when necessary.
PGE owns 90% of a pipeline which directly connects the Beaver Combustion Turbine Plant (Beaver) to an interstate gas pipeline operating between British Columbia and New Mexico. Beginning in June 1993, PGE had access to 30,000 million British thermal units (MMBtu/day) of capacity on the pipeline, increasing to 76,000 MMBtu/day in November 1995. Also in 1993, PGE signed an agreement with Pacific Gas Transmission to provide 41,000 MMBtu/day of capacity, starting in November 1995, on its natural gas pipeline.
National Energy Policy Act of 1992
The Federal Energy Regulatory Commission (FERC) can now order wholesale transmission access (wholesale wheeling) of electric power. Wholesale wheeling allows independent power producers and utilities to market excess power to other utilities over wide geographic areas. PGE's ownership of 950 megawatts of transmission rights on the Pacific Northwest Intertie provides access to power and wholesale customers beyond
PGE's service territory.
Nonutility
Bonneville Pacific Litigation - Portland General Corporation (Portland General), Portland General Holdings, Inc. (Holdings), and certain affiliated individuals have been named in a class action suit by investors in Bonneville Pacific Corporation (Bonneville Pacific) and in a suit filed by the
bankruptcy trustee for Bonneville Pacific. The class action suit alleges various violations of securities law, fraud and misrepresentation. The suit by the bankruptcy trustee for Bonneville Pacific alleges federal and Utah securities violations, common law fraud, breach of fiduciary duty, tortious interference, negligence, negligent misrepresentation and other actionable wrongs.
Holdings has filed a complaint seeking approximately $228 million in damages against Deloitte & Touche and certain parties associated with Bonneville Pacific alleging that it relied on fraudulent and negligent statements and omissions when it acquired a 46% interest in and made loans to Bonneville Pacific.
A detailed report released in June 1992, by a U.S. Bankruptcy examiner outlined a number of questionable transactions that resulted in gross exaggeration of Bonneville Pacific's assets prior to Holdings' investment. This report includes the examiner's opinion that there was significant mismanagement and very likely fraud at Bonneville Pacific. These findings support management's belief that a favorable outcome on these matters can be achieved.
For background information and further details, see Note 14, Legal Matters, in Notes to Financial Statements.
Results of Operations
1993 Compared to 1992
Portland General reported 1993 earnings of $89 million, $1.88 per share, compared to $90 million, $1.93 per share, in 1992. In 1992, upon approval from the PUC, PGE applied capital treatment to $18 million of Trojan steam generator repair costs which were incurred in 1991. As a result, $11 million, after tax, was restored to 1992 earnings. Excluding this event, 1992 earnings would have been $79 million compared to $89 million in 1993. Regulatory action, continued customer growth and cost reductions contributed to the favorable 1993 results.
In August 1993, the PUC authorized PGE to defer, for later collection, 50% of the incremental Trojan replacement power costs incurred from July 1, 1993, through March 31, 1994. This authorization, coupled with the 80% deferral in place from December 4, 1992, to March 31, 1993, (see the Power Cost Recovery discussion in the Outlook section above) allowed the Company to record, in 1993, $67 million of revenues related to the future recovery of replacement power costs.
Retail load growth of 2.6% and cooler weather during the early months of 1993 positively affected revenue by increasing sales of kilowatt-hours 5%. Wholesale revenue declined $30 million due to the lack of low-cost power for resale. The recording of replacement power revenues and retail sales growth, partially offset by the decline in wholesale revenues, yielded an operating revenue increase of $64 million.
Operating costs (excluding variable power, depreciation, decommissioning and amortization) declined 14% due to a $53 million decline in nuclear expenses. In May 1993, the NRC issued PGE a possession only license amendment for Trojan. This license amendment reduced or eliminated certain operating requirements that were unnecessary for a shut down and defueled reactor which allowed PGE to reduce personnel. Nuclear expenses for 1993 reflect the amortization of Trojan
miscellaneous closure and transition costs (which were accrued and capitalized at December 31, 1992). These costs are amortized as payments are made. During 1993 the Company amortized $43 million to nuclear operating expenses.
The $53 million nuclear savings partially offset the $90 million increase in variable power costs. The average variable power cost increased from 15 mills per kilowatt-hour in 1992 to 19 mills per kilowatt-hour (10 mills = 1 cent) in 1993. Trojan generated 16% of the Company's 1992 power needs at an average fuel cost of 4 mills per kilowatt-hour. This generation was primarily replaced by power purchases at an average price of 24 mills per kilowatt-hour.
Good plant performance helped control variable power costs. PGE's Beaver plant operated well in 1993, generating 13% more power than in 1992. Company- owned hydro production rose 21%. Additional maintenance outage time caused the Colstrip Units 3 and 4 Coal Plant (Colstrip) generation to decline which slightly reduced the Company's 1993 thermal generation from the 1992 level (excluding Trojan), however the total average fuel cost increased from 9 mills per kilowatt-hour to 10 mills per kilowatt-hour driving 1993 fuel expense up $5 million.
Depreciation, decommissioning and amortization increased $24 million in 1993. The 1992 amount includes a credit of $18 million associated with the capitalization of 1991 Trojan steam generator repair costs discussed above. The remaining increase reflects depreciation charges for new plant placed in service.
Other income increased slightly reflecting accrued interest on deferred charges and declining interest costs, partially offset by an increase in charitable contributions of approximately $4 million.
1992 Compared to 1991
Financial results for 1992 were much improved over 1991. Portland General's earnings of $90 million, or $1.93 per share, reflected improved operations at the utility's generating facilities, continued customer growth and cost control. In 1991, Portland General experienced a loss of $50 million, or $1.06 per share, which included losses from independent power of $74 million and additional real estate reserves of $29 million. Excluding the effects of losses from nonutility interests, 1991 earnings would have been $53 million.
Trojan operated for six months in 1992 compared with two months in 1991, generating more than twice the power. This reduced the need for power purchases on the secondary market. Operating and maintenance costs for Trojan declined 30% in 1992. The 1991 operating and maintenance costs included $18 million for repairs that were capitalized in 1992 (see the discussion of 1993 compared to 1992 above).
The Company's non-nuclear generating facilities performed well in 1992. Boardman operated at an 85% capacity factor generating 31% more power than in 1991. Other thermal generation increased 30%, while Company-owned hydro power production declined 9% due to poor water conditions. Higher internal generation raised fuel expense 34%, but significantly reduced the need for incremental power purchases. 34% fewer megawatt-hours were purchased; however, the average price per megawatt-hour purchased increased 26% due to poor hydro conditions experienced in the region. The poor hydro conditions also limited PGE's ability to make nonfirm resales. Consequently, 1992 wholesale revenue declined 17%.
Even though unseasonably warm weather reduced demand, 1992 retail revenues rose slightly due to the addition of 11,000 retail customers and $18 million of accrued revenues associated with the recovery of Trojan replacement power costs. Accrued revenues of $12 million were recorded in 1991 representing the 1991 portion of 90% of the replacement power costs incurred from November 1, 1991 to March 6, 1992. The PUC authorized a temporary price increase to collect these revenues. The 1992 accrued revenues of $18 million represented $10 million of the 90% deferral and $8 million of the 80% deferral (see the Power Cost Recovery discussion in the Outlook section above). Total 1992 operating revenues declined slightly due to the drop in wholesale revenue.
Corporate cost containment also contributed to the earnings growth. Operating expenses (excluding variable power, depreciation, decommissioning and amortization) declined 10% due to cost cutting measures. A manpower reduction program was implemented in 1991 that eliminated 300 positions. The severance costs associated with the program were reflected in 1991 results. Interest expense declined 10% as the Company took advantage of lower interest rates.
Financial Condition
1993 Compared to 1992
During 1993 PGE invested approximately $126 million in electric utility plant. Plant investments included $29 million in the Coyote Springs Generation Project (Coyote Springs). This project will be a 220 megawatt cogeneration facility constructed near Boardman as part of the Trojan replacement resource portfolio. Coyote Springs is expected to be completed in the fall of 1995. Also during 1993, PGE completed construction of a third intertie to California which gave the Company an additional 150 megawatts of scheduling capability. The intertie project has increased PGE's capacity for buying and selling wholesale energy. In addition to utility plant, the Company invested $18 million in energy efficiency assets including new construction, lighting and appliances. The PUC has authorized a return on PGE's investment in energy efficiency projects.
The Company's non-cash revenues increased in 1993 due to the recording of $67 million of revenues associated with the future recovery of Trojan replacement power costs (see the Power Cost Recovery discussion in the Financial and Operating Outlook section).
Deferred charges increased over $200 million primarily due to the recording of $228 million of deferred tax liabilities and related regulatory assets representing future collections from customers. Under the liability method specified by SFAS No. 109, the deferred tax assets and liabilities are determined based on the temporary differences between the financial statement bases and tax bases of assets and liabilities as measured by the enacted tax rates for the years in which the taxes are expected to be paid. Management believes it is probable that the regulatory asset will be fully recovered in customer rates.
Changes in liabilities primarily reflect the adoption of SFAS No. 109, the revision of the decommissioning estimate to $409 million, and financing activities.
Common stock equity of Portland General increased $46 million reflecting earnings of $89 million, dividends declared of $57 million, and common stock issuances. Portland General's return on average shareholders' equity was 11.6% in 1993.
Cash Flow
Portland General Corporation Portland General requires cash to pay dividends to its common stockholders, to provide funds to its subsidiaries, to meet debt service obligations and for day to day operations. Sources of cash are dividends from PGE, its principal subsidiary, asset sales and leasing rentals, short- and intermediate-term borrowings, and the sale of its common stock.
Portland General received $73 million in dividends from PGE and $10 million in proceeds from the issuance of shares of common stock under its Dividend Reinvestment and Optional Cash Payment Plan.
In October 1993, Portland General filed a Registration Statement with the Securities and Exchange Commission (SEC) to issue up to 5,000,000 additional shares of its $3.75 par value common stock. The net proceeds from the sale of common stock will be used to purchase additional shares of PGE common stock. In February 1994, Portland General filed a Prospectus Supplement covering the sale of up to 2,300,000 of these shares.
Portland General Electric Company
Cash Provided by Operations is the primary source of cash used for day to day operating needs of PGE and funding of construction activities. PGE also obtains cash from external borrowings, as needed.
A significant portion of cash from 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. Cash provided by operations increased slightly in 1993 reflecting lower income tax payments. The 1992 cash flow from current operations declined slightly from the 1991 level.
Increased replacement power costs have affected current cash flows. A significant portion of such costs have been offset by cost savings driven by personnel reductions at Trojan.
Future cash requirements may be affected by the ultimate outcome of the IRS audit of PGE's 1985 WNP-3 abandonment loss deduction. The IRS has completed its audit of Portland General's tax returns for the years 1985 to 1987 and has issued a statutory notice of tax deficiency, which PGE is contesting. See Notes 5 and 5A, Income Taxes, in Notes to Financial Statements for further information.
PGE has been named a "potentially responsible party" (PRP) of PCB contaminants at various environmental cleanup sites. The total cost of cleanup is estimated at $27 million, of which the Company's share is approximately $3 million. Should the eventual outcome of these uncertainties result in additional cash requirements, PGE expects internally generated cash flows or external borrowings to be sufficient to fund such obligations. PGE has made an assessment of the other involved PRP's and is satisfied that they can meet their share of the obligation.
Investing activities are primarily for investment in facilities for generation, transmission and distribution of electric energy and for energy efficiency improvements. In 1993, PGE's capital expenditures of $144 million were 20% new generating resources, 7% existing generation plants, 43% transmission and distribution, 13% energy efficiency, and 17% general plant and other. 1994 expected capital expenditures of $265 million include $115 million for new generating resources, $20 million for existing generating plants, $75 million for transmission and distribution, $25 million for energy efficiency and $30 million of other expenditures. The PUC has authorized a return on PGE's investment in energy efficiency projects, which will help alleviate the need for additional energy resources in the future.
PGE continues to fund an external trust for the future costs of Trojan decommissioning. Funding began in March 1991. Currently PGE funds $11 million each year. As of December 31, 1993, $46 million had been funded and invested primarily in investment grade tax-exempt bonds with a current market value of $49 million.
PGE's future capital expenditure program is expected to include investment of $400 million to $450 million to add up to 600 megawatts of gas-fired combustion turbines and cogeneration projects to PGE's resource base over the next five years. In addition, PGE expects to continue investing in energy efficiency programs.
PGE's cash provided by operations, after dividends, is expected to meet approximately 50% of PGE's estimated 1994 investing activities compared to 90% in 1993 and 85% in 1992.
Financing activities to fund the remaining capital requirements are accomplished through intermediate-term and long-term debt and equity issuances. Access to capital markets is necessary to implement the asset growth strategy discussed above. PGE intends to maintain approximately the same capitalization ratios while funding this asset expansion.
The maturities of intermediate and long- term debt are chosen to match expected asset lives and maintain a balanced maturity schedule. Short-term debt, which includes commercial paper and lines of credit, is used for day-to-day operations.
Interest rates continued to decline during 1993. As a result, PGE refunded higher coupon debt. PGE issued $150 million of 7 3/4% First Mortgage Bonds in April 1993, and $27 million of 5.65 % Medium
Term Notes in May 1993. Proceeds from these issuances redeemed the 9 5/8% Series First Mortgage Bonds and 10% Debentures. Additionally, in August 1993 PGE issued $75 million of Medium Term Notes consisting of $35 million of five year notes at 5.69% and $40 million of ten year notes at 6.47%. Proceeds from this issuance were used to redeem the 8% and both 8 3/4% Series First Mortgage Bonds.
The issuance of additional preferred stock and First Mortgage Bonds 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, 1993, PGE could issue $475 million of preferred stock and $370 million of additional First Mortgage Bonds.
Appendix
(Electronic Filing Only)
Omitted graphic material:
Page 8 Retail Price v. Inflation graph comparing PGE retail price (price per KWh) to Portland CPI Retail Price CPI 1984 4.84 102.8 1985 5.12 106.7 1986 5 108.2 1987 4.93 110.9 1988 4.77 114.7 1989 4.69 120.3 1990 4.57 127.4 1991 4.69 134 1992 4.78 140 1993 4.86 143.6
Page 12 Loads v. Firm Resources graph: (average MW) Loads Firm Resources 1989 1862 2079 1990 1973 2078 1991 2018 2071 1992 2138 2225 1993 2195 2022 1994 2268 2051 1995 2316 2055 1996 2368 2049 1997 2432 2223 1998 2479 2223
Page 12 1993 Actual Power Sources pie chart:
PGE Hydro: 12% (2,355,000 MWh) Coal: 21% (4,111,000 MWh) Secondary Purchases: 28% (5,305,000 MWh) Firm Purchases: 30% (5,888,000 MWh) Combustion Turbines: 9% (1,714,000 MWh)
Page 12 1994 Forecasted Power Sources pie chart:
PGE Hydro: 12% (2,347,000 MWh) Secondary Purchases: 20% (3,980,000 MWh) Coal: 21% (4,272,000 MWh) Firm Purchases: 37% (7,231,000 MWh) Combustion Turbines: 10% (1,874,000 MWh)
Page 28 Residential Customers graph:
(Thousands) 1983 454950 1984 454732 1985 461076 1986 470136 1987 476481 1988 484293 1989 496165 1990 512913 1991 526699 1992 536111 1993 545410
Page 29 Operating Revenue and Net Income (Loss) graph:
($ Millions)
Operating Revenue Net Income 1989 797 -27 1990 852 100 1991 890 -50 1992 884 90 1993 947 89
Page 29 PGE Electricity Sales graph:
(Billions of KWh)
1989 Residential 6.1 Commercial 5.2 Industrial 3.5 Wholesale 3.0
1990 Residential 6.4 Commercial 5.5 Industrial 3.6 Wholesale 4.3
1991 Residential 6.5 Commercial 5.6 Industrial 3.6 Wholesale 3.9
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
Page 30 Operating Expenses graph:
($ Millions)
1989 Operating Expenses 295 Variable Power 179 Depreciation 91
Operating Expenses 302 Variable Power 200 Depreciation 90
Operating Expenses 361 Variable Power 226 Depreciation 112
Operating Expenses 327 Variable Power 222 Depreciation 99
Operating Expenses 283 Variable Power 311 Depreciation 122
Page 30 Net Variable Power Costs graph: Net variable power is defined as variable power less wholesale revenues.
(Mills/KWh)
Net Variable Power Retail Revenues 1989 5 46 1990 5 46 1991 6 48 1992 7 49 1993 13 52
Page 32 Utility Capital Expenditures graph:
($ Millions)
1989 119 1990 109 1991 148 1992 154 1993 144
Page 33 Capitalization
($ Millions)
1989 Long-term Debt 817 												 Common Equity 762 Preferred Stock 153
1990 Long-term Debt 763 Common Equity 771 Preferred Stock 152
1991 Long-term Debt 913 Common Equity 679 Preferred Stock 150
1992 Long-term Debt 874 Common Equity 724 Preferred Stock 152
1993 Long-term Debt 803 Common Equity 744 Preferred Stock 140
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 & Co. is Portland General's independent public accountant. As a part of its annual audit, internal accounting controls are selected for review 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 & Co. Management has also endeavored to ensure that all representations to Arthur Andersen & Co. were valid and appropriate.
Joseph M. Hirko Vice President Finance, Chief Financial Officer, Chief Accounting Officer and Treasurer
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Portland General Corporation:
We have audited the accompanying consolidated balance sheets and statements of capitalization of Portland General Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1993. 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.
As more fully discussed in Note 6 to the consolidated financial
statements, the realization of assets related to the abandoned Trojan Nuclear Plant in the amount of $722 million is dependent upon the ratemaking treatment as determined by the Public Utility Commission of Oregon.
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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As more fully discussed in Note 5 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes.
Portland, Oregon, January 25, 1994 (except with respect to the matter discussed in Note 16, as to which the date is February 23, 1994) ARTHUR ANDERSEN & CO.
Item 8.
Item 8. Financial Statements and Supplementary Data
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
Portland General Corporation and Subsidiaries Notes to Financial Statements
Note 1
Summary of Significant Accounting Policies
Consolidation Principles
The consolidated financial statements include the accounts of Portland General Corporation (Portland General or the Company) and all of its majority-owned subsidiaries. Significant intercompany balances and transactions have been eliminated.
Basis of Accounting
Portland General and its subsidiaries conform to generally accepted accounting principles. In addition, Portland General Electric Company's (PGE) policies are in accordance with the accounting requirements and the ratemaking practices of regulatory authorities having jurisdiction.
Revenues
PGE accrues estimated unbilled revenues for services provided 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 Bonneville Power Administration (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. Excluding the Trojan Nuclear Plant (Trojan), depreciation expense as a percent of the related average depreciable plant in service was approximately 3.9% in 1993, 3.8% in 1992 and 3.9% in 1991.
The cost of renewal and replacement of property units is charged to plant, and repairs and maintenance are charged to expense as incurred. The cost of utility property units retired, other than land, is charged to accumulated depreciation.
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 3.52%, 4.72% and 8.05% for the years 1993, 1992 and 1991, 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.
Income tax provisions are adjusted, when appropriate, for potential tax adjustments. Deferred income taxes are provided for temporary differences between financial and income tax reporting. See Notes 5 and 5A, Income Taxes, for more details.
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.
Nuclear Fuel
Amortization of the cost of nuclear fuel was based on the quantity of heat produced for the generation of electric energy.
Investment in Leases
Columbia Willamette Leasing (CWL), a subsidiary of Portland General Holdings, Inc. (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, 1993 and 1992, are as follows (thousands of dollars):
1993 1992
Lease contracts receivable $ 600,710 $ 645,746 Nonrecourse debt service (481,988) (524,661) Net contracts receivable 118,722 121,085
Estimated residual value 88,047 88,085 Less - Unearned income (41,395) (43,436) Investment in leveraged leases 165,374 165,734
Less - Deferred ITC (9,756) (10,037) Investment in leases, net $ 155,618 $ 155,697
Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or less are classified as cash equivalents.
WNP-3 Settlement Exchange Agreement
The Washington Public Power Supply System Unit 3 (WNP-3) Settlement Exchange Agreement, which has been excluded from PGE's rate base, is carried at present value and amortized on a constant return basis.
Regulatory Assets
PGE defers, or accrues revenue for, certain costs which otherwise would be charged to expense, if it is probable that future collections will permit recovery of such costs. These costs are reflected as deferred charges or accrued revenues in the financial statements and are amortized over the period in which revenues are collected. Trojan plant and decommissioning costs are currently covered in customer rates. Of the remaining regulatory assets, approximately 78% have been treated by the Oregon Public Utility Commission (PUC) as allowable cost of service items in PGE's most recent rate processes. The remaining amounts are subject to regulatory confirmation in PGE's future ratemaking proceedings.
Reclassifications
Certain amounts in prior years have been reclassified for comparative purposes.
Note 2
Real Estate - Discontinued Operations
Portland General is divesting its real estate operations, which consist primarily of Columbia Willamette Development Company (CWDC). In early 1993, CWDC withdrew from the Cornerstone Columbia Development Company (Cornerstone), a partnership with Weyerhauser Real Estate Company. As a distribution and complete liquidation of CWDC's interest in Cornerstone, CWDC received all of Cornerstone's interest in a joint venture.
In 1991, Portland General reviewed the adequacy of its real estate loss reserve and determined that an additional reserve was warranted. A loss of $29 million (net of related income tax benefits of $17 million) was recorded in the fourth quarter of 1991 to recognize lower market values and additional holding costs.
At December 31, 1993 and 1992, the net assets of real estate operations were composed of the following (thousands of dollars):
1993 1992
Assets Real estate development $18,900 $22,132 Other assets 21,234 27,248
Total assets 40,134 49,380
Liabilities 1,632 2,181 Reserve for discontinuance - net 7,124 13,221
Net assets $31,378 $33,978
Management believes that it has adequately provided for accounting losses to be incurred during the disposal of real estate assets. Prior estimates will be continually monitored during the liquidation period.
Note 3
Loss from Independent Power
In late 1991 Holdings, a wholly owned subsidiary of Portland General, recorded losses totaling $74 million, net of tax benefits of $16 million, related to the write-off of Holdings' equity investment in Bonneville Pacific Corporation (Bonneville Pacific) and a provision for uncollectible loans, project development and other costs.
Holdings owns 9.8 million shares, or 46%, of Bonneville Pacific's common stock. The write-off followed a review of the Bonneville Pacific investment, which raised various concerns including the carrying values of certain of its assets, the lack of progress by Bonneville Pacific to complete agreed- upon project selldowns and
Bonneville Pacific's poor financial performance. In December 1991, Bonneville Pacific voluntarily filed for protection under Chapter 11 of the Bankruptcy Code. Holdings also has $28 million of secured and unsecured loans outstanding to Bonneville Pacific and its subsidiaries. Holdings recorded a reserve in December 1991 against the outstanding loans. Holdings intends to pursue recovery of these loans but cannot predict what amount, if any, may be recovered. See Note 14, Legal Matters, for litigation related to Bonneville Pacific.
Note 4
Employee Benefits
Pension Plan
Portland General has a non-contributory 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 and preferred stocks, corporate bonds and US government and agency issues.
Portland General determines net periodic pension expense according to the principles of SFAS No. 87, Employers' Accounting for Pensions.
The following table sets forth the Plan's funded status and amounts recognized in Portland General's financial statements (thousands of dollars):
1993 1992
Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $151,334 and $133,870 $166,301 $145,670 Effect of projected future compensation levels 32,608 34,531 Projected benefit obligation (PBO) 198,909 180,201 Plan assets at fair value 262,412 226,413 Plan assets in excess of PBO 63,503 46,212 Unrecognized net experience gain (60,445) (42,324) Unrecognized prior service costs 14,147 16,677 Unrecognized net transition asset being recognized over 18 years (21,533) (23,490) Pension - prepaid cost (liability) $ (4,328) $(2,925)
1992 1991
Assumptions: Discount rate used to calculate PBO 7.25% 8.00%
8.00% Rate of increase in future compensation levels 5.25 6.00
6.25 Long-term rate of return on assets 8.50 8.50
8.50
Net pension expense for 1993, 1992 and 1991 included the following components (thousands of dollars):
1993 1992
Service cost $ 6,151 $ 6,082 $ 5,627 Interest cost on PBO 14,241 13,792 13,641 Actual return on plan assets (48,231) (18,272) (45,693) Net amortization and deferral 29,839 1,496 30,029 Net periodic pension expense $ 2,000 $ 3,098 $ 3,604
Other Post-Retirement Benefit Plans
Portland General accrues for health, medical and life insurance costs during the employees' service years, per 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 postretirement health and life insurance benefits at December 31, 1993 was $31 million, for which there were $31 million of assets held in trust. The projected benefit obligation for postretirement health and life insurance benefits at December 31, 1992 was $29 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 $16 million and $12 million at December 31, 1993 and 1992, respectively.
Deferred Compensation
Portland General provides certain management employees with benefits under an unfunded Management Deferred Compensation Plan (MDCP). Obligations for the MDCP are $18 million and $14 million at December 31, 1993 and 1992, respectively.
Trojan Retention Plan
In October 1992, Portland General implemented a defined contribution plan to retain Trojan employees during a phaseout of plant operations. Trojan ceased commercial operation in early 1993; participation in the retention plan was terminated on May 31, 1993 and all benefits under the plan were paid.
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 of 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 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. In 1993, total contributions to the ESOP of $5 million combined with dividends on unallocated shares of $2 million were used to pay debt service and interest on PGE's loan. Shares of common stock used to match contributions by employees of Portland General and its subsidiaries are purchased on the open market.
Note 5
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 1991 losses from independent power or discontinued real estate operations (thousands of dollars):
1993 1992
Income Tax Expense: Currently payable $ 2,989 $ 44,057
$ 22,520 Deferred income taxes Accelerated depreciation 15,477 20,049
26,258 WNP-3 amortization (1,099) (2,190) (2,570) AMAX coal contract (1,238) (1,227) (1,050) Trojan operating costs 17,332 7,402
4,080 Energy efficiency programs 7,327 3,246
2,859 Replacement power costs 26,543 (246) 5,084 Repurchase debt 4,847 1,019
(850) USDOE nuclear fuel assessment 6,108 -
- Excess deferred taxes (3,494) (1,888) (1,557) Interim rate relief - 6,573
1,036 Lease income (18,151) (15,453) (14,892) Nonrecourse debt interest 12,578 11,621
12,156 Other 6,659 (1,258) (3,469) Investment tax credit adjustments (4,356) (6,981) (4,589) $ 71,522 $ 64,724
$ 45,016
Provision Allocated to: Operations $ 67,520 $ 67,235
$ 44,005 Other income and deductions 4,002 (2,511) 1,011 $ 71,522 $ 64,724
$ 45,016
Effective Tax Rate Computation: Computed tax based on statutory $ 56,224 $ 52,478
$ 33,477 federal income tax rates applied to income before income taxes
Increases (Decreases) resulting from: Accelerated depreciation 10,748 9,462
7,763 State and local taxes - net 3,288 10,117
5,766 Investment tax credits (4,356) (6,981) (4,589) Adjustments to income tax reserves - (3,284) (393) Excess deferred taxes (3,419) (1,816) (1,483) USDOE nuclear fuel assessment 5,075 - - - Preferred dividend requirement 3,935 4,296 4,390 Other 27 452 85 $ 71,522 $ 64,724 $ 45,016
Effective tax rate 44.5% 41.9%
45.7%
Effective January 1, 1993, Portland General adopted SFAS No. 109, "Accounting for Income Taxes". Prior to SFAS No. 109, Portland General accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. Prior period financial statements have not been restated. As of December 31, 1993 and 1992, the significant components of the Company's deferred income tax assets and liabilities were as follows (thousands of dollars):
1993 1992 Deferred Tax Assets Plant-in-service $ 83,602 $ 18,608 Regulatory reserve 47,718 46,804 Other 75,404 40,796 206,724 106,208
Deferred Tax Liabilities Plant-in-service (497,476) (201,596) WNP-3 exchange contract (70,542) (71,099) Replacement power costs (29,574) (4,838) Leasing (147,101) (140,980) Other (94,924) (53,129) (839,617) (471,642)
Less current deferred taxes 842 - Less valuation allowance (28,197) - Total $(660,248) $(365,434)
As a result of implementing SFAS No. 109, Portland General has recorded deferred tax assets and liabilities for all temporary differences between the financial statement bases and tax bases of assets and liabilities.
Portland General has certain state pollution control tax credit carryforwards and the benefits of capital loss carryforwards that presently cannot be offset with future taxable income or capital gains and accordingly has recorded a valuation allowance totalling $28.2 million at December 31, 1993 to fully reserve against these assets.
Federal alternative minimum tax credit carryforwards, which have no expiration date, are $15.7 million at December 31, 1993.
The Omnibus Budget Reconciliation Act of 1993 resulted in a federal tax rate increase from 34% to 35% effective January 1, 1993. The tax rate increase resulted in additional income tax expense for the Company of $4.9 million.
The IRS completed its examination of Portland General's tax returns for the years 1985 to 1987 and has issued a statutory notice of tax deficiency, which Portland General is contesting. As part of this audit, the IRS has proposed to disallow PGE's 1985 WNP-3 abandonment loss deduction on the premise that it is a taxable exchange. PGE disagrees with this position and will take appropriate action to defend its deduction. Management believes that it has appropriately provided for probable tax adjustments and is of the opinion that the ultimate disposition of this matter will not have a material adverse impact on the financial condition of Portland General.
Note 6
Trojan Nuclear Plant
Shutdown - PGE is the 67.5% owner of Trojan. In early 1993, PGE ceased commercial operation of Trojan. PGE made the decision to shut down Trojan as part of its least cost planning process, a biennial process whereby PGE evaluates a mix of energy options that yield an adequate and reliable supply of electricity at the least cost to the utility and to its customers. On June 3, 1993 the PUC acknowledged PGE's Least Cost Plan (LCP).
Decommissioning Estimate - The 1993 nuclear decommissioning estimate of $409 million represents a site-specific decommissioning cost estimate performed for Trojan by an experienced decommissioning engineering firm. This cost estimate assumes that the majority of decommissioning activities will occur between 1998 and 2002, after construction of a temporary dry spent fuel storage facility. The final decommissioning activities will occur in 2018 after PGE completes shipment of spent fuel to a United States Department of Energy (USDOE) facility.
The decommissioning cost estimate includes the cost of decommissioning planning, removal and burial of irradiated equipment and facilities as required by the Nuclear Regulatory Commission (NRC); building demolition and nonradiological site remediation; and fuel management costs including licensing, surveillance and $75 million of transition costs. Transition costs are the operating costs associated with closing Trojan, operating and maintaining the spent fuel pool and securing the plant until dismantlement can begin. Except for transition costs, which will continue to be amortized as incurred PGE will fund the decommissioning costs through contributions to the Trojan decommissioning trust.
The 1992 decommissioning cost estimate of $411 million was based upon a study performed on a nuclear plant similar to Trojan and included the cost of dismantlement activities performed during the years 1996 through 2002, monitoring of stored spent fuel through 2018 and $130 million of miscellaneous closure and transition costs ($43 million was amortized to nuclear operating expenses during 1993).
The 1992 estimate and the 1993 site- specific estimate are reflected in the financial statements in nominal dollars (actual dollars expected to be spent in each year). The difference between the 1992 and the 1993 cost estimates, reflected in nominal dollars, is due to the application of a higher inflation factor, the timing of decommissioning activities and certain changes in assumptions, such as decommissioning the temporary dry spent fuel storage facility and shipping highly activated reactor components to the USDOE repository in 2018, which are included in the 1993 estimate. Both the 1992 cost estimate and the 1993 site-specific cost estimate reflected in 1993 (current) dollars are $289 million.
Assumptions used to develop the site- specific cost estimate represent the best information PGE has currently. However, the Company is continuing its analysis of various options which could change the timing and scope of dismantling activities. Presently, PGE is planning to accelerate the timing of large component removal which could reduce overall decommissioning costs. PGE plans to submit a detailed decommissioning work plan to the NRC in mid-1994. PGE expects any future changes in estimated decommissioning costs to be incorporated in future revenues to be collected from customers.
PGE is recording an annual operating provision of $11 million for decommissioning. This provision is being collected from customers and deposited in an external trust fund. Earnings on the trust fund assets reduce the amount of decommissioning costs to be collected from customers. Trojan abandonment - decommissioning of $356 million (reflected in the deferred charges section of the Company's balance sheet) represents remaining decommissioning costs expected to be collected from customers.
Trojan decommissioning trust assets are invested primarily in investment grade tax-exempt bonds. At December 31, 1993 the trust reflects the following activity (thousands of dollars):
Beginning Balance 1/01/93 $32,945
1993 Activity Contributions 11,220 Earnings 4,696
Ending Balance 12/31/93 $48,861
Investment Recovery - PGE filed a general rate case on November 8, 1993 which addresses recovery of Trojan plant costs, including decommissioning. In late February 1993, the PUC granted PGE accounting authorization to continue using previously approved depreciation and decommissioning rates and lives for its Trojan investment.
As stated earlier, PGE made the decision to permanently cease commercial operation of Trojan as part of its least cost planning process. Management determined that continued operation of Trojan was not cost effective. Least cost analysis assumed that recovery of the Trojan plant investment, including future decommissioning costs, would be granted by the PUC. Regarding the authority of the PUC to grant recovery, the Oregon Department of Justice (Attorney General) issued an opinion that the PUC may allow rate recovery of total plant costs, including operating expenses, taxes, decommissioning costs, return of capital invested in the plant and return on the undepreciated investment. While the Attorney General's opinion does not guarantee recovery of costs associated with the shutdown, it does clarify that under current law the PUC has authority to allow recovery of such costs in rates.
PGE asked the PUC to resolve certain legal and policy questions regarding the statutory framework for future ratemaking proceedings related to the recovery of the Trojan investment and decommissioning costs. On August 9, 1993, the PUC issued a declaratory ruling agreeing with the Attorney General's opinion discussed above. The ruling also stated that the PUC will favorably consider allowing PGE to recover in rates some or all of its return on and return of its undepreciated investment in Trojan, including decommissioning costs, if PGE meets certain conditions. PGE believes that its general rate filing provides evidence that satisfies the conditions established by the PUC.
Management believes that the PUC will grant future revenues to cover all, or substantially all, of Trojan plant costs with an appropriate return. However, future recovery of the Trojan plant investment and future decommissioning costs requires PUC approval in a public regulatory process. Although the PUC has allowed PGE to continue, on an interim basis, collection of these costs in the same manner as prescribed in its last general rate proceeding, the PUC has yet to address recovery of costs related to a prematurely retired plant when the decision to close the plant was based upon a least cost planning process. Due to uncertainties inherent in a public process, management cannot predict, with certainty, whether all, or substantially all, of the Trojan plant investment and future decommissioning costs will be recovered. Management believes the ultimate outcome of this public regulatory process will not have a material adverse effect on the financial condition, liquidity or capital resources of Portland General. However, it may have a material impact on the results of operations for a future reporting period.
Portland General's independent accountants are satisfied that management's assessment regarding the ultimate outcome of the regulatory process is reasonable. Due to the inherent uncertainties in the regulatory process discussed above, the magnitude of the amounts involved and the possible impact on the results of operations for a future reporting period, the independent accountants have added a paragraph to their audit report to give emphasis to this matter.
Nuclear Fuel Disposal and Clean up of Federal Plants - PGE has a contract with the USDOE for permanent disposal of spent nuclear fuel in USDOE facilities. These disposal services are now estimated to commence no earlier than 2010. PGE paid the USDOE .1 cent per net kilowatt-hour sold at Trojan for these future disposal services. On-site storage capacity is able to accommodate fuel until the federal facilities are available.
The Energy Policy Act of 1992 provided for the creation of a Decontamination and Decommissioning Fund (DDF) to provide for the clean up of the USDOE gas diffusion plants. The DDF is to be funded by domestic nuclear utilities and the Federal Government. The legislation provided that each utility pays based on the ratio of the amount of enrichment services the utility purchased and the total amount of enrichment services purchased by all domestic utilities prior to the enactment of the legislation. Trojan's estimated usage was 1.03%. Based on this estimate, PGE's portion of the funding requirement is approximately $15.6 million. Amounts are funded over 15 years beginning with the USDOE's fiscal year 1993. PGE made its first of the 15 annual payments on September 30, 1993 for $1.04 million.
Nuclear Insurance - The Price-Anderson Amendment of 1988 limits public liability claims that could arise from a nuclear incident to a maximum of $9.4 billion per incident. PGE has purchased the maximum primary insurance coverage currently available of $200 million. The
remaining $9.2 billion is covered by secondary financial protection required by the NRC. This secondary coverage provides for loss sharing among all owners of nuclear reactor licenses.
In the event of an incident at any nuclear plant in which the amount of the loss exceeds $200 million, PGE could be assessed retrospective premiums of up to $53.5 million per incident, limited to a maximum of $7 million per incident in any one year under the secondary financial protection coverage.
PGE's share of property damage and decontamination coverage is provided for losses at Trojan up to $337 million primary and $378 million excess. The $378 million excess coverage is provided subject to a potential maximum retrospective premium adjustment of $0.8 million per policy year. The NRC requires that, in case of an incident, insurance proceeds must first be dedicated to stabilizing and decontaminating the reactor. This could reduce the amount of proceeds available to repair, replace or restore the property or otherwise available to the trustee for application under PGE's First Mortgage Bond Indenture. Insurance coverage is provided primarily through insurance companies owned by utilities with nuclear facilities.
Note 7
*See the discussion of stock compensation plans below and Note 4, Employee Benefits for a discussion of the ESOP.
Common Stock
As of December 31, 1993, Portland General had reserved 367,000 authorized but unissued common shares for issuance under its dividend reinvestment plan. In addition, new shares of common stock are issued under an employee stock purchase plan. Cumulative Preferred Stock of Subsidiary 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.
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.
The 8.10% Series preferred stock has an annual sinking fund requirement which requires the redemption of 100,000 shares at $100 per share beginning in 1994. At its option, PGE may redeem, through the sinking fund, an additional 100,000 shares each year. This Series is redeemable at the option of PGE at $103 per share to April 14, 1994 and at reduced amounts thereafter.
Common Dividend Restriction of Subsidiary PGE is restricted from paying dividends or making other distributions to Portland General, without prior PUC 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, 1993, PGE's common stock equity capital was 44% of its total capitalization.
Stock Compensation Plans Portland General has a plan under which 2.3 million shares of Portland General common stock are available for stock- based incentives. Upon termination, expiration or lapse of certain types of awards, any shares remaining subject to the award are again available for grant under the plan. As of December 31, 1993, 856,800 stock options were outstanding. Of the outstanding options, 20,000 are exercisable: 10,000 at a price of $15.75 per share; 2,500 at $17.375 per share; and 7,500 at $14.75 per share. The remaining 836,800 options are exercisable beginning in 1994 through 1998 at prices ranging from $14 to $22.25 per share. In addition, 25,000 options granted under a separate award were exercised in 1993.
On December 6, 1993 Portland General issued 64,000 restricted common shares for officers of Portland General and PGE.
Note 8
Short-Term Borrowings
Portland General meets its liquidity needs through the issuance of commercial paper and borrowings from commercial banks. At December 31, 1993, Portland General had total committed lines of credit of $240 million. Portland General has a $40 million committed facility expiring in July 1994. PGE has committed facilities of $120 million expiring in July 1996 and $80 million expiring in July 1994. These lines of credit have annual fees ranging from 0.15% to 0.25% 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, 1993, there were no outstanding borrowings under the committed facilities.
Portland General has a commercial paper facility of $40 million in addition to PGE's $200 million facility. The amount of commercial paper outstanding cannot exceed each company's unused committed lines of credit.
Commercial paper and lines of credit borrowings are at rates reflecting current market conditions and, generally, are substantially below the prime commercial rate.
Short-term borrowings and related interest rates were as follows (thousands of dollars):
1993 1992 1991 As of year end:
Aggregate short-term debt outstanding Bank loans - $ 10,002 $ 16,000 Commercial paper $159,414 130,676 76,473
Weighted average interest rate Bank loans - 4.4% 6.8% Commercial paper 3.5% 4.1 5.5
Unused committed lines of credit $240,000 $180,000 $175,000
For the year ended:
Average daily amounts of short-term debt outstanding Bank loans $ 10,949 $ 7,671 $ 56,579 Commercial paper 123,032 89,077 30,539 Weighted daily average interest rate Bank loans 3.6% 5.0% 7.2% Commercial paper 3.5 4.2 6.5 Maximum amount outstanding during the year $171,208 $144,056 $108,231
Interest rates exclude the effect of commitment fees, facility fees and other financing fees.
Note 9
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.
The following principal amounts of long-term debt become due for redemption through sinking funds and maturities (thousands of dollars):
1994 1995 1996 1997
Sinking Funds $ 1,313 $ 1,138 $ 988 $ 688 $ 688 Maturities 41,289 71,356 57,528 56,085
64,745
The sinking funds include $988,000 a year for 1994 through 1996 and $688,000 for 1997 and 1998, which, in accordance with the terms of the Indenture, PGE may satisfy by pledging available property additions equal to 166-2/3% of the sinking fund requirements.
Note 10
Commitments
New Generating Resources
During 1993 PGE entered into a $133 million agreement with a contractor for construction of the Coyote Springs cogeneration facility. Under the terms of the agreement, PGE is committed to making progress payments of approximately $91 million in 1994, and $16 million in 1995. At December 31, 1993, progress payments of approximately $26 million have been made.
Natural Gas Transmission Agreements
In January 1993, PGE signed two long- term agreements for transmission of natural gas from domestic and Canadian sources to PGE's existing and proposed natural gas-fired generating facilities. One agreement provides PGE firm pipeline capacity beginning June, 1993 and increased pipeline capacity in November 1995. Beginning in late 1995, the second agreement will give PGE capacity on a second interstate gas pipeline. Under the terms of these two agreements, PGE is committed to paying capacity charges of approximately $3 million during 1994, $4 million in 1995, $11 million annually through 2010 and $3 million annually until 2015. Under these agreements PGE has the right to assign unused capacity to other parties. In addition, PGE will make a capital contribution for pipeline construction of between $3 million and $7 million in 1995.
Railroad Service Agreement
In October 1993, PGE entered into a railroad service agreement and will make capital contributions toward upgrading a line used to deliver coal from Wyoming to the Boardman Coal Plant (Boardman). PGE is required to contribute $8 million over the 6-year contract life.
Purchase Commitments
Other purchase commitments outstanding (principally construction at PGE) totaled approximately $14 million at December 31, 1993. 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. Selected information is summarized as follows (thousands of dollars):
Rocky Priest
Portland Reach Rapids Wanapum Wells Hydro
Revenue bonds outstanding at December 31, 1993 $189,752 $141,245 $189,395 $199,920 $ 40,230
PGE's current share of output, capacity, and cost Percentage of output 12.0% 13.9% 18.7% 21.9% 100% Net capability in megawatts 154 125 170 184 36
Annual cost, including debt service
1993 $4,000 $3,800 $5,400 $5,500 $4,800 1992 3,900 3,100 4,400 4,800 4,400 1991 3,800 3,400 4,000 4,300 3,800
Contract expiration date 2011 2005 2009 2018 2017
PGE's share of debt service costs, excluding interest, will be approximately $6 million for each of the years 1994 through 1996, $7 million for 1997 and $5 million for 1998. The minimum payments through the remainder of the contracts are estimated to total $104 million.
PGE has entered into long-term contracts to purchase power from three other utilities in the region. These contracts will require fixed payments of up to $25 million in 1994 and $32 million in 1995 and 1996. After that date, capacity charges will be up to $25 million annually until the second contract terminates in 2001. The third contract will continue until 2016 with capacity charges of $19 million annually.
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 in 1993, $20 million in 1992 and $21 million in 1991. PGE has capitalized its combustion turbine leases. However, these leases are considered operating leases for ratemaking purposes.
As of December 31, 1993, the 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
1994 $ 3,016 $ 18,568 $ 21,584 1995 3,016 19,711 22,727 1996 3,016 20,261 23,277 1997 3,016 19,794 22,810 1998 3,016 18,992 22,008 Remainder 1,388 186,575 187,963 Total 16,468 $283,901 $300,369 Imputed (2,775) Interest Present Value of Minimum Future Net Lease Payments $13,693
Included in the future minimum operating lease payments schedule above is approximately $140 million for PGE's headquarters complex.
Note 11
WNP-3 Settlement Exchange Agreement
PGE is selling energy received under a WNP-3 Settlement Exchange Agreement (WSA) to the Western Area Power Administration (WAPA) for 25 years, which began October 1990. Revenues from the WAPA sales contract are expected to be sufficient to support the carrying value of PGE's investment. 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 megawatts for approximately 30 years from BPA under the WSA. In exchange PGE will make available to BPA energy from its combustion turbines or from other available resources at an agreed-to price.
Note 12
Jointly-Owned Plant
At December 31, 1993, 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 $359,555 $152,981 Colstrip 3&4 Colstrip, MT Coal 1,440 20.0 444,817 157,576 Centralia Centralia, WA Coal 1,310 2.5 9,301 5,143
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 13
Regulatory Matters
Public Utility Commission of Oregon
PGE had sought judicial review of three rate matters related to a 1987 general rate case. In 1989, PGE reserved $89 million for an unfavorable outcome of these matters. In July 1990, PGE reached an out-of-court settlement with the PUC on two of the three rate matter issues being litigated. As a result of the settlement, $16 million was restored to income in 1990. The settlement resolved the dispute with the PUC regarding treatment of accelerated amortization of certain ITC and 1986- 1987 interim relief. As a settlement of the interim relief issue, PGE refunded approximately $17 million to customers.
In 1991, the Utility Reform Project (URP) petitioned the PUC to reconsider the order approving the settlement. The Oregon legislature subsequently passed a law clarifying the PUC's authority to approve the settlement. As a result, the PUC issued an order implementing the settlement. URP has filed an appeal in Multnomah County Circuit Court to overturn the PUC's order implementing settlement.
In addition, CUB filed a complaint in 1991 in Marion County Circuit Court seeking to modify, vacate, set aside or reverse the PUC's order implementing settlement. In September 1992, the Marion County Circuit Court judge issued a decision upholding the PUC orders approving the settlement. CUB appealed the decision. In December 1993 the Oregon Court of Appeals affirmed without opinion the Circuit Court decision upholding the PUC order.
The settlement, however, did not resolve the Boardman/Intertie gain issue, which the parties continue to litigate. PGE's position is that 28% of the gain should be allocated to customers. The 1987 rate order allocated 77% of the gain to customers over a 27-year period. PGE has fully reserved this amount, which is being amortized over a 27-year period in accordance with the 1987 rate order. The unamortized gain, $120 million at December 31, 1993, is shown as "Regulatory reserves" on the balance sheet.
In PGE's general rate filing, PGE proposes to accelerate the amortization of the Boardman gain to customers from 27 years to three years, starting in January 1995, as part of a comprehensive settlement of the outstanding litigation on this issue.
While the ultimate disposition of these matters may have an impact on the results of operations for a future reporting period, management believes, based on discussion of the underlying facts and circumstances with legal counsel, these matters will not have a material adverse effect on the financial condition of Portland General.
Note 14
Legal Matters
WNP Cost Sharing
PGE and three other investor-owned utilities (IOUs) are involved in litigation surrounding the proper allocation of shared costs between Washington Public Power Supply System (Supply System) Units 1 and 3 and Units 4 and 5. A court ruling issued in May 1989 stated that Bond Resolution No. 890, adopted by the Supply System, controlled disbursement of proceeds from bonds issued for the construction of Unit 5, including the method for allocation of shared costs. It is the IOUs' contention that at the time the project commenced there was agreement among the parties as to the allocation of shared costs and that this agreement and the Bond Resolution are consistent such that the allocation under the agreement is not prohibited by the Bond Resolution.
In October 1990, the U.S. District Court ruled that the methodology for the allocation of shared costs required the application of principles akin to those espoused by Chemical Bank. In February 1992, the Court of Appeals reversed the U.S. District Court's decision and ruled that shared costs between Units 3 and 5 should be allocated in proportion to benefits under the equitable method supported by PGE and the other IOUs. A trial remains necessary to assure that the allocations are properly performed.
Bonneville Pacific Class Action Suit and Lawsuit
A consolidated case of all previously filed class actions has been filed in U.S. District Court for the District of Utah purportedly on behalf of purchasers of common shares and convertible subordinated debentures of Bonneville Pacific Corporation in the period from August 18, 1989 until January 22, 1992 alleging violations of federal and Utah state securities laws, common law fraud and negligent misrepresentation. The defendants are specific Bonneville Pacific insiders, Portland General, Portland General Holdings, Inc., certain Portland General individuals, Deloitte & Touche and three underwriters of a Bonneville Pacific offering of subordinated debentures. The amount of damages alleged is not specified.
In addition, the bankruptcy trustee for Bonneville Pacific has filed an amended complaint against Portland General, Holdings, and certain affiliated individuals in U.S. District Court for the District of Utah alleging common law fraud, breach of fiduciary duty, tortious interference, negligence, negligent misrepresentation and other actionable wrongs. The original suit was filed by Bonneville Pacific prior to the appointment of the bankruptcy trustee. The amount of damages sought is not specified in the complaint.
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.
Summary
While the ultimate disposition of these matters may have an impact on the results of operations for a future reporting period, management believes, based on discussion of the underlying facts and circumstances with legal counsel, that these matters will not have a material adverse effect on the financial condition of Portland General.
Other Bonneville Pacific Related Litigation
Holdings filed complaints seeking approximately $228 million in damages in the Third Judicial District Court for Salt Lake County (in Utah) against Deloitte & Touche and certain other parties associated with Bonneville Pacific alleging that it relied on fraudulent and negligent statements and omissions by Deloitte & Touche and the other defendants when it acquired a 46% interest in and made loans to Bonneville Pacific starting in September 1990.
Note 15
Fair Value of 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):
Note 16
Subsequent Event
In February 1994, Portland General issued 2.3 million shares of common stock. Proceeds to Portland General were $41 million. These proceeds were used to purchase 2.3 million additional shares of PGE common stock. PGE, in turn, will use the funds to repay all or a portion of its short-term borrowings or for its construction program.
QUARTERLY COMPARISON FOR 1993 AND 1992 (Unaudited)
Portland General Corporation
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Part III
Item 10
Item 10 - 13. Information Regarding Directors and Executive Officers of the Registrant
Portland General Corporation
Information for items 10-13 are incorporated by reference to Portland General's definitive proxy statement to be filed on or about March 29, 1994. Executive officers of Portland General are listed on page 23 of this report.
Portland General Electric Company
Information regarding item 10 (Executive Compensation) is incorporated by reference to Portland General's definitive proxy statement to be filed on or about March 29, 1994 with the exception of Mr. Cross' compensation for the year 1991 when he was an executive officer at Portland General Electric. The information for Mr. Cross is as follows:
Annual Compensation Long-Term Compensation Awards/Options
Year Salary ($) Bonus ($) (#) 1991 $150,000 $ 5,0251 15,000
1Mr. Cross received a bonus in 1991 due to his mid-year starting date the prior year; this bonus was attributable to both 1990 and 1991.
Information for items 11-13 are incorporated by reference to Portland General's definitive proxy statement to be filed on or about March 29, 1994. Executive officers of Portland General Electric are listed on page 23 of this report.
Part IV
Item 14.
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
Exhibits See Exhibit Index on Page 69 of this report.
(b) Report on Form 8-K
PGC PGE November 8, 1993 - Item 5. Other Events: X X A request was filed by PGE to increase electric prices.
February 15, 1994 - Item 5. Other Events: X X Portland General and PGE 1993 financial information.
Schedule V - Property, Plant and Equipment (Thousands of Dollars)
Portland General Corporation
Substantially the same as PGE's Schedule V below.
Portland General Electric Company
Schedule X - Supplementary Income Statement Information (Thousands of Dollars)
Portland General Corporation
Substantially the same as PGE's Schedule X below.
PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
(3) * 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 X year ended December 31, 1991, Exhibit (3)].
(4) *Portland General Electric Company Indenture of Mortgage and Deed of Trust dated July 1, 1945; Ninth Supplemental Indenture dated June 1, 1960; Tenth Supplemental Indenture dated November 1, 1961; Eleventh Supplemental Indenture dated February 1, 1963; Twelfth Supplemental Indenture dated June 1, 1963; Thirteenth Supplemental Indenture dated April 1, 1964; Fourteenth Supplemental Indenture dated March 1, 1965 (Form 8, Amendment No. 1, dated June 14, 1965). X X
* Fifteenth Supplemental Indenture, dated June 1, 1966; Sixteenth Supplemental Indenture, dated October 1, 1967; Eighteenth Supplemental Indenture, dated November 1, 1970; Nineteenth Supplemental Indenture, dated November 1, 1971; Twentieth Supplemental Indenture, dated November 1, 1972; Twenty-First Supplemental Indenture, dated April 1, 1973; Twenty-Second Supplemental Indenture, dated October 1, 1973; Twenty-Seventh Supplemental Indenture, dated April 1, 1976; 69PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
Twenty-Ninth Supplemental Indenture, dated June 1, 1977 (Registration No. 2-61199, Exhibit 2.d-1). X X
* Thirtieth Supplemental Indenture, dated October 1, 1978; Thirty-First Supplemental Indenture, dated November 1, 1978 (Registration No. 2-63516, Exhibit 2.d-3). X X
* Thirty-Eighth Supplemental Indenture dated June 1, 1985 [Form 10-Q for the quarter ended June 30, 1985, Exhibit (4)]. X X
* Thirty-Ninth Supplemental Indenture, dated March 1, 1986 [Form 10-K for the fiscal year ended December 31, 1985, Exhibit (4)]. X X
* Fortieth Supplemental Indenture, dated October 1, 1990 [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (4)]. X X
* Forty-First Supplemental Indenture dated December 31, 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
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) *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 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 70PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
* Participation Agreement, dated December 30, 1985 [Form 10-K for the fiscal year ended December 31, 1985, Exhibit (10)]. X X
* Lease Agreement, dated December 30, 1985 [Form 10-K 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
71PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
*Portland General Corporation Outside Directors' Deferred Compensation Plan, 1990 Restatement dated November 1, 1990 [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (10)]. X X
* Portland General Corporation Retirement Plan for Outside Directors, 1990 Restatement dated July 10, 1990 [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (10)]. X X
* Portland General Electric Company Outside Directors' Life Insurance Benefit Plan 1988 Restatement [Form 10-K for the fiscal year ended December 31, 1988, Exhibit (10)]. X X
* Portland General Electric Company Outside Directors Life Insurance Benefit Plan, Amendment No. 1 dated October 3, 1989 [Form 10-K for the fiscal year ended December 31, 1989, Exhibit (10)]. X X
* Portland General Corporation Outside Directors Life Insurance Benefit Plan, Amendment No. 2 dated December 3, 1989 [Form 10-K for the fiscal year ended December 31, 1989, Exhibit (10)]. X X
* Portland General Corporation Outside Directors' Stock Compensation Plan, Amended and Restated December 6, 1989 [Form 10-K for the fiscal year ended December 31, X 1991, Exhibit (10)].
* Special Board Assignment for Robert W. Roth, dated May 1, 1992. [Form 10-K for the fiscal year ended December 31, 1992, Exhibit (10)] X X
(24) Portland General Corporation Consent of Independent Public Accountants (filed herewith). X
Portland General Electric Company Consent of Independent Public Accountants (filed herewith). X
(25) Portland General Corporation Power of Attorney (filed herewith). X
Portland General Electric Company Power of Attorney (filed herewith). X
(28) Form 11-K relating to Employee Stock Purchase Plan of Portland General Corporation (filed herewith). X
72PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
Executive Compensation Plans and Arrangements
(10) * Portland General Corporation Management Deferred Compensation Plan, 1990 Restatement dated November 1, 1990 [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (10)]. X X
* Portland General Corporation Management Deferred Compensation Plan, Amendment No. 1 dated December 16, 1991 [Form 10-K for the fiscal year ended December 31, X X 1991, Exhibit (10)].
*Portland General Electric Company Senior Officers' Life Insurance Benefit Plan 1988 Restatement [Form 10-K for the fiscal year ended December 31, 1988, Exhibit (10)]. X X
* Portland General Electric Company Senior Officers' Life Insurance Benefit Plan, Amendment No. 1 dated October 3, 1989 [Form 10-K for the fiscal year ended December 31, 1989, Exhibit (10)]. X X
* Portland General Corporation Senior Officers Life Insurance Benefit Plan, Amendment No. 2 dated December 3, 1989 [Form 10-K for the fiscal year ended December 31, 1989, 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
* 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
* Portland General Electric Company Annual Incentive Master 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 1990 Long-term Incentive Master Plan [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (10)]. X X
* Portland General Corporation Supplemental Executive Retirement Plan, 1990 Restatement dated July 10, 1990 [Form 10-K for the fiscal year ended December 31, 1990, Exhibit (10)]. X X 73PORTLAND GENERAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Number Exhibit PGC PGE
(10) * Portland General Corporation Supplemental Executive Cont.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, dated October 11, 1989 [Form 10-K for the fiscal year ended December 31, 1989, Exhibit (10)]. X X
* Employment Contract for James E. Cross, dated April 17, 1990. [Form 10-K for the fiscal year ended December 31, 1992, Exhibit (10)]. X
* Salary Continuation Agreement for James E. Cross, dated December 21, 1992. [Form 10-K for the fiscal year ended December 31, 1992, Exhibit (10)]. X
* Enhanced Benefit Under Supplemental Executive Retirement Plan for James E. Cross, dated August 4, 1992. [Form 10-K for the fiscal year ended December 31, 1992, Exhibit (10)]. X
Portland General Corporation Amended and Restated 1990 Long-Term Incentive Master Plan, amended July 1993 (filed herewith). X
Portland General Corporation 1990 Long-Term Incentive Master Plan, Amendment No. 1 dated February 8, 1994 (filed herewith). X
* Incorporated by reference as indicated.
APPENDIX
PORTLAND GENERAL ELECTRIC COMPANY
Page
PART II
Item 8. Financial Statements and Notes ...... 77
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 & Co. is PGE's independent public accountant. As a part of its annual audit, internal accounting controls are selected for review 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 & Co. Management has also endeavored to ensure that all representations to Arthur Andersen & Co. were valid and appropriate.
Joseph M. Hirko Vice President Finance, Chief Financial Officer, Chief Accounting Officer and Treasurer
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 and statements of capitalization of Portland General Electric
Company and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1993.
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.
As more fully discussed in Note 6 to the consolidated financial statements, the realization of assets related to the abandoned Trojan Nuclear Plant in the amount of $722 million is dependent upon the ratemaking treatment as determined by the Public Utility Commission of Oregon.
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, 1993 and 1992, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As more fully discussed in Note 5A to the consolidated financial statements, effective January 1, 1993, the Company changed its
method of accounting for income taxes.
Portland, Oregon, January 25, 1994 (except with respect to the matter discussed in Note 16, as to which the date is February 23, 1994) ARTHUR ANDERSEN & CO.
Item 8. Financial Statements and Supplementary Data
Portland General Electric Company and Subsidiaries Consolidated Statements of Income
Portland General Electric Company and Subsidiaries Consolidated Statements of Retained Earnings
Portland General Electric Company and Subsidiaries Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated balance sheets.
Portland General Electric Company and Subsidiaries Consolidated Statements of Capitalization
The accompanying notes are an integral part of these consolidated statements.
Portland General Electric Company and Subsidiaries Consolidated Statements of Cash Flow
The accompanying notes are an integral part of these consolidated statements.
PAGE> 80
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 Portland General's financial information on the following page numbers.
Note 5A
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 Electric Company's (PGE) effective tax rate. (thousands of dollars)
Effective January 1, 1993, PGE adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Prior to SFAS No. 109, PGE accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. Prior period financial statements have not been restated. As of December 31, 1993 and 1992, the significant components of PGE's deferred income tax assets and liabilities were as follows:
As a result of implementing SFAS No. 109, PGE has recorded deferred tax assets and liabilities for all temporary differences between the financial statement bases and tax bases of assets and liabilities.
The Omnibus Budget Reconciliation Act of 1993 resulted in a federal tax rate increase from 34% to 35% effective January 1, 1993. The tax rate increase resulted in additional income tax expense for PGE of $3.6 million.
The IRS completed its examination of Portland General Corporation's (Portland General) tax returns for the years 1985 to 1987 and has issued a statutory notice of tax deficiency which Portland General is contesting. As part of this audit, the IRS has proposed to disallow PGE's 1985 Washington Public Power Supply System Unit 3 (WNP-3) abandonment loss deduction on the premise that it is a taxable exchange. PGE disagrees with this position and will take appropriate action to defend its deduction. Management believes that it has appropriately provided for probable tax adjustments and is of the opinion that the ultimate disposition of this matter will not have a material adverse impact on the financial condition of PGE.
Note 7A
Common Stock
Common Stock
Portland General is the sole shareholder of PGE common stock. PGE is restricted, without prior Oregon Public Utility Commission (PUC) 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, 1993, PGE's common stock equity capital was 44% of its total capitalization.
Note 8A
Short-Term Borrowings
PGE meets liquidity needs through the issuance of commercial paper and borrowings from commercial banks. At December 31, 1993, PGE had a committed facilities of $120 million expiring in July 1996 and an $80 million expiring in July 1994. These lines of credit have commitment fees and/or facility fees ranging from 0.15 to 0.20 of one percent and do not require compensating cash balances. The facilities are used primarily as back-up for both commercial paper and borrowings from commercial banks under uncommitted lines of credit. At December 31, 1993, 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 commercial paper outstanding. Most of PGE's short-term borrowings are through commercial paper.
Commercial paper and lines of credit borrowing are at rates reflecting current market conditions and generally are substantially below the prime commercial rate.
Short-term borrowings and related interest rates were as follows (thousands of dollars):
Interest rates exclude the effect of commitment fees, facility fees, and other financing fees. Note 9A
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.
The following principal amounts of long-term debt become due for redemption through sinking funds and maturities (thousands of dollars):
The sinking funds include $988,000 a year for 1994 through 1996 and $688,000 for 1997 and 1998, which, in accordance with the terms of the Indenture, PGE may satisfy by pledging available property additions equal to 166-2/3% of the sinking fund requirements.
Note 15A
Fair Value of 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 PGE for debt of similar remaining maturities.
The estimated fair values of financial instruments are as follows (thousands of dollars):