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Business Context and Reporting Period

Company: Portland General Electric Company (PGE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Ownership Status: Wholly owned subsidiary of Enron Corp. (all 42,758,877 shares of common stock owned by Enron). PGE is not included in Enron's bankruptcy proceedings, though its stock is part of the bankruptcy estate. Enron intends to issue new PGE stock to creditors in April 2006, at which point PGE will cease to be an Enron subsidiary.

Key Financial Metrics

Liquidity & Capitalization:
- Long-term Obligations: $884 million (June 30, 2005) vs. $892 million (Dec 31, 2004).
- Common Equity Ratio: 59.4% (June 30, 2005).
- Credit Facility: Entered into a new $400 million five-year unsecured revolving credit facility on May 27, 2005. Utilization was approximately $24 million in letters of credit as of June 30, 2005.
- Dividends: No dividends declared in Q1 or Q2 2005. A $150 million cash dividend was declared and paid to Enron on July 19, 2005.

Material Changes vs. Prior Period

• Revenue: Operating revenues for the six months ended June 30, 2005, decreased by $23 million (3.2%) compared to the prior year. This was driven by a 2% decrease in retail revenues due to lower energy sales and a 7% decrease in wholesale revenues due to reduced market activity, partially offset by higher average prices.
• Net Income: Net income for the six months remained flat at $54 million. For the quarter, net income decreased $6 million to $16 million, primarily due to higher administrative and general expenses (including claim settlements and employee benefits) offset by improved margins on energy sales.
• Expenses: Purchased power and fuel expenses decreased $38 million (12%) for the six months, driven by increased low-cost coal generation (Boardman plant) and higher unrealized gains from derivative instruments. Administrative and other expenses increased $15 million for the six months due to claim settlements and benefit costs.
• Trading Activities: PGE discontinued non-retail trading activities in early 2005. Consequently, trading volumes dropped significantly (e.g., electricity trading sales fell from 5,562 thousand MWh in the first half of 2004 to 574 thousand MWh in 2005).

Outlook, Risks, and Contingencies

Management Commentary and Outlook

• Power Supply: Regional hydro conditions remain below normal ("moderate drought"). PGE expects to offset this with thermal generation and wholesale purchases. Preliminary estimates indicate a 3% to 4% average retail price increase for 2006.
• Capital Projects: Construction of the 350 MWa Port Westward natural gas plant is on target for mid-2007 completion. A 27 MWa wind project is expected by year-end 2005.
• Ownership Transition: Following the termination of a sale to Oregon Electric, Enron plans to distribute PGE stock to creditors in April 2006. PGE intends to list new stock on a national exchange.

Significant Risks and Contingencies

• Enron Bankruptcy Exposure: While PGE is not in bankruptcy, it faces potential liabilities as a member of the Enron controlled group regarding pension plans (PBGC claims) and income taxes. Management believes these will not have a material adverse impact on financial condition but could impact future operations. No reserves have been established for these potential liabilities.
• California Wholesale Refunds: PGE faces potential refund liabilities to the California ISO and PX for wholesale sales between 2000-2001. PGE has established a $40 million reserve against $63 million in receivables. Potential liability is estimated between $40 million and $50 million. Litigation and FERC proceedings are ongoing.
• Trojan Nuclear Plant Litigation: Ongoing class action lawsuits and regulatory challenges regarding the recovery of investment and return on the closed Trojan Nuclear Plant. Plaintiffs seek damages totaling $260 million. PGE believes the outcome will not materially impact financial condition but may impact future results. No reserves established.
• Environmental Matters: PGE is a Potentially Responsible Party (PRP) for the Portland Harbor and Harbor Oil Superfund sites. Management believes liability will not be material, but costs cannot be estimated.
• Regulatory Risks: Pending OPUC decisions on Hydro Generation Adjustment tariffs and new Oregon legislation regarding income tax treatment in rates.

Investor Verification Checklist

• Ownership Transition: Verify the status of regulatory approvals (OPUC, FERC, NRC, SEC) required for Enron to distribute PGE stock to creditors in April 2006.
• California Refunds: Monitor the status of FERC proceedings and Ninth Circuit Court appeals regarding the $40-$50 million potential refund liability and the $63 million receivable offset.
• Trojan Litigation: Track the Oregon Supreme Court oral arguments scheduled for September 2005 regarding class certification and the return on investment issue.
• Enron Pension Liability: Confirm the outcome of the proposed settlement between Enron and the PBGC regarding pension plan termination and potential controlled group liability.
• Hydro Conditions: Assess the impact of continued below-normal hydro conditions on 2005 and 2006 power costs and the status of the Hydro Generation Adjustment tariff.