POR

Business Context and Reporting Period

Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: PGE provides electric service to approximately 791,000 retail customers in Oregon. The company operates hydroelectric and thermal generation facilities, including the Boardman Coal Plant and the Trojan Nuclear Plant (closed). A significant corporate event occurred on April 3, 2006, when PGE issued 62.5 million shares of new common stock to Enron's creditors, ceasing to be a subsidiary of Enron and becoming a publicly traded entity on the NYSE (Ticker: POR).

Key Financial Metrics

Note: Cash flow and balance sheet figures for the six-month period are presented as the most recent available data points in the filing.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 5.4% in Q2 2006 and 4.0% in the first half of 2006 compared to the prior year. This was driven by a 6.7% increase in retail energy sales (Q2) due to customer growth and warmer weather, as well as higher wholesale revenues.
• Profitability Decline (YTD): While Q2 net income improved ($27M vs. $16M), YTD net income dropped significantly to $21M from $54M in the prior year. The decline was primarily caused by reduced margins on energy sales due to high replacement power costs from the Boardman Coal Plant outage and unrealized losses on derivative contracts.
• Power Costs: Purchased power and fuel expenses increased 37% YTD ($102M increase). Approximately $52M of this increase was attributed to incremental costs to replace generation from the Boardman plant, which was offline for repairs for most of the first half of 2006.
• Hydro Generation: Favorable regional hydro conditions resulted in a 44% increase in hydro generation compared to the first half of 2005, partially offsetting the loss of thermal generation.
• Derivative Losses: The company recorded $25M in unrealized net losses on derivative activities in the first half of 2006, compared to $12M in unrealized net gains in the same period in 2005.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

• Boardman Plant: The Boardman Coal Plant returned to full operation in early July 2006 after extended repairs. PGE has filed an application with the OPUC to defer approximately $46M in excess power costs incurred during the outage for future ratemaking recovery.
• Rate Case: PGE filed a general rate case in March 2006 proposing an 8.9% rate increase for 2007. The OPUC staff's initial proposal suggests a 1.9% increase. A final order is expected in January 2007.
• Capital Projects: The 400 MW Port Westward natural gas plant is on schedule for completion in Q1 2007. PGE is also pursuing development rights for the Biglow Canyon Wind Farm.
• Dividends: A cash dividend of $14M was declared in May 2006. Future dividends are subject to OPUC approval and restrictions tied to the company's common equity capital percentage.

Material Risks and Contingencies

• Oregon Senate Bill 408 (SB 408): New state law requires utilities to match income taxes collected from ratepayers with taxes paid to the government. PGE estimates potential refunds to customers for 2006 could range from $18M to $66M. A $9M pre-tax reserve was recorded in the first half of 2006 based on the low end of this range.
• Trojan Nuclear Plant Litigation: Ongoing legal challenges regarding the recovery of investment and return on the closed Trojan plant. Class action suits seek damages of up to $260M. Management believes this will not materially impact financial condition but could impact future operations.
• California Wholesale Market Refunds: PGE faces potential refund liabilities related to wholesale sales in California (2000-2001). A $40M reserve has been established. The company is pursuing cost recovery studies to offset these liabilities.
• Environmental Liabilities: PGE is a Potentially Responsible Party (PRP) for the Portland Harbor and Harbor Oil Superfund sites. Management believes the impact will not be material, but costs are uncertain.
• Regulatory and Legal: The City of Portland has challenged the OPUC order approving PGE's stock issuance and filed complaints regarding tax filings. PGE is vigorously defending these actions.

Investor Verification Checklist

• SB 408 Impact: Verify the final OPUC rules regarding Oregon Senate Bill 408 and the ultimate refund obligation, which could range from $18M to $66M.
• Boardman Cost Recovery: Monitor the OPUC's decision on PGE's application to defer $46M in excess power costs related to the Boardman plant outage.
• General Rate Case: Track the outcome of the 2007 general rate case, specifically the approved rate increase and return on equity, as the staff's initial proposal ($30M increase) is significantly lower than PGE's request ($143M increase).
• California Refunds: Review the status of FERC proceedings and Ninth Circuit Court appeals regarding California wholesale market refunds and the potential for cost offsets.
• Trojan Litigation: Follow the status of the Oregon Supreme Court decision on the class action certification regarding Trojan investment recovery.
• Derivative Exposure: Assess the reversal of the $25M unrealized derivative losses recorded in the first half of 2006 as contracts settle later in the year.