POR

Business Context and Reporting Period

Company: Portland General Electric Company (PGE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: PGE is a single, integrated electric utility serving approximately 743,000 retail customers in Oregon. It generates, purchases, transmits, distributes, and sells electricity. As of the reporting date, PGE is a wholly-owned subsidiary of Enron Corp., which filed for Chapter 11 bankruptcy on December 2, 2001. PGE is not included in the bankruptcy filing but faces significant uncertainty regarding its parent company's status, potential sale, and related liabilities.

Key Financial Metrics

Note: 2001 Net Income included a $48 million after-tax provision for uncollectible accounts receivable from Enron affiliates.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 23% to $1,855 million in 2002 compared to $2,420 million in 2001. This was primarily driven by a 70% drop in wholesale (non-trading) revenues due to significantly lower market prices for electricity and natural gas.
• Retail Growth: Despite a 1.4% decline in retail energy sales volume due to Oregon's economic downturn, retail revenues increased 35% to $1,468 million, driven by a general rate increase effective October 1, 2001.
• Profitability Improvement: Net income more than doubled to $66 million from $34 million in 2001. The 2001 figure was depressed by a $48 million provision for uncollectible Enron receivables. 2002 results benefited from reduced losses on energy trading activities and lower purchased power costs.
• Cost Reductions: Purchased power and fuel costs decreased 33% ($577 million) due to lower wholesale prices and reduced thermal generation. Average variable power costs were 60% of the prior year's level.
• Cash Flow: Cash provided by operating activities turned positive at $298 million, a significant improvement from a $67 million use of cash in 2001, largely due to the release of $312 million in cash collateral deposits from wholesale customers.

Guidance, Outlook, Risks, and Contingencies

Enron Bankruptcy and Controlled Group Liability

PGE faces potential exposure to liabilities arising from Enron's bankruptcy, including:

• Merger Receivable: PGE is owed approximately $81 million by Enron. A full reserve has been established due to uncertainty of collection.
• Pension Plans: While PGE's pension plan is over-funded on an accumulated benefit obligation basis, there is a risk of "controlled group liability" if the underfunded Enron pension plan is terminated. PGE management believes any lien by the Pension Benefit Guaranty Corporation (PBGC) would be subordinate to PGE's existing mortgage liens.
• Income Taxes: PGE rejoined Enron's consolidated tax group in December 2002. While Enron has substantial Net Operating Losses (NOLs), PGE could be liable for post-petition interest or penalties if the IRS audit results in additional liabilities.

Regulatory and Legal Risks

• FERC Investigations: PGE is under investigation by the Federal Energy Regulatory Commission (FERC) regarding potential market manipulation and affiliate trading rules in the California and Pacific Northwest markets (2000-2001). PGE faces potential revocation of market-based rate authority and refund obligations estimated between $20 million and $30 million for California sales.
• Antitrust Litigation: PGE is named in cross-complaints in California wholesale electricity antitrust cases. No specific monetary amount is claimed, but the cases are in abeyance pending rulings on the master complaint.
• Trojan Nuclear Plant: Two class-action lawsuits filed in January 2003 seek $260 million in damages related to the recovery of investment in the closed Trojan plant. PGE intends to vigorously defend these suits.
• Public Ownership Initiatives: The City of Portland and Multnomah County are exploring the formation of a People's Utility District (PUD) which could condemn PGE's distribution assets.

Outlook

PGE forecasts minimal retail energy sales growth in 2003 due to the slow Oregon economy. The company anticipates capital expenditures of approximately $180 million in 2003. Early forecasts indicate hydro conditions in 2003 will be significantly below normal, potentially requiring higher-cost replacement power. PGE has filed an application to defer these hydro replacement costs.

Investor Verification Checklist

• Enron Receivables: Verify the status of the $81 million merger receivable and the likelihood of recovery in Enron's bankruptcy proceedings.
• FERC Investigation Outcome: Monitor the FERC investigation into 2000-2001 trading activities for potential refunds or loss of market-based rate authority.
• Hydro Conditions: Assess the impact of below-normal hydro forecasts on 2003 power costs and the approval status of the cost deferral application.
• Legal Proceedings: Track the progress of the Trojan nuclear plant class-action lawsuits and the California antitrust cross-complaints.
• Debt Ratings: Monitor credit rating agency actions (Moody's, S&P, Fitch) as downgrades could trigger collateral calls and increase borrowing costs.
• PUHCA Exemption: Confirm the status of Enron's application for exemption from the Public Utility Holding Company Act, as denial could subject PGE to additional SEC regulations.