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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1996, for Portland General Corporation (PGC), an electric utility holding company, and its principal operating subsidiary, Portland General Electric Company (PGE). PGE accounts for substantially all of PGC's assets, revenues, and net income. The filing highlights a proposed tax-free, stock-for-stock merger with Enron Corp., announced on July 20, 1996, pending shareholder and regulatory approvals.

Key Financial Metrics

Wholesale Revenues: Increased 89% in Q2 1996 compared to Q2 1995, now comprising nearly 14% of total operating revenues.

Variable Power Costs: Remained flat in Q2 1996 ($46.3 million) despite a 36% increase in total energy sales, driven by abundant low-cost hydro power.

Material Changes vs. Prior Period

• Earnings Growth: YTD 1996 net income ($83.0 million) significantly exceeds YTD 1995 ($30.4 million). The 1995 figure included a one-time $37 million after-tax charge related to the regulatory disallowance of 13% of the Trojan nuclear plant investment. Excluding this charge, 1995 earnings would have been $67 million.
• Revenue Drivers: Operating revenues rose 6% in Q2 and 11% YTD. Growth was driven by a 291% increase in wholesale sales volume (YTD) and a 2.2% increase in retail energy sales (YTD), offsetting a 4% decline in industrial sales due to cutbacks in paper and metal manufacturing.
• Cost Efficiency: Average variable power costs dropped from 16.0 mills/kWh in YTD 1995 to 11.7 mills/kWh in YTD 1996, saving approximately $25 million due to favorable market conditions and hydro generation.
• Capital Structure: PGE redeemed $20 million of preferred stock in April 1996. Interest charges increased slightly due to higher short-term debt levels, though preferred dividend requirements decreased by nearly $2 million following refinancing.

Guidance, Outlook, and Risks

Proposed Merger with Enron

On July 20, 1996, PGC entered a merger agreement with Enron Corp. Shareholders will receive one share of Enron stock for each PGC share. The transaction is subject to shareholder approval (planned for Fall 1996) and regulatory approvals from the Oregon Public Utility Commission (OPUC) and FERC. The agreement includes termination rights based on Enron's stock price (above $47.25 or below $36.25).

Regulatory and Rate Matters

PGE submitted a rate plan to the OPUC proposing a 3.5% reduction in residential rates and approximately $50 million in annual rate reductions, contingent on merger approval. The plan also seeks to accelerate the recovery of the Trojan nuclear plant investment.

Legal and Operational Risks

• Trojan Investment Recovery: An April 1996 circuit court ruling contradicted a prior decision, finding the OPUC could not authorize PGE to collect a return on its undepreciated Trojan investment. Both PGE and the OPUC have appealed this ruling to the Oregon Court of Appeals. Management believes the recovery will be upheld.
• Bonneville Pacific Litigation: Ongoing legal action alleging breach of fiduciary duty and other claims. The court has dismissed several major claims (RICO, fraud), reducing potential damages, though the case remains pending.
• Competition: FERC Order 888 and state restructuring efforts are increasing competition in wholesale and retail markets, expected to lower prices and reduce margins over time.

Investor Verification Checklist

• Verify the status of the Enron merger regulatory approvals (OPUC and FERC) and shareholder vote outcomes scheduled for Fall 1996.
• Monitor the Trojan nuclear plant investment recovery appeal at the Oregon Court of Appeals, as a negative ruling could impact rate base and future earnings.
• Assess the impact of FERC Order 888 and Oregon's restructuring workshop on long-term retail and wholesale pricing power.
• Review the Bonneville Pacific lawsuit for any updates on the revised damage study or settlement negotiations.
• Confirm the execution of the proposed rate plan and the timing of the $50 million annual rate reduction for customers.