POR 20140331 10Q
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014

or

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to ____________________

Commission File Number: 001-5532-99

PORTLAND GENERAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)

Oregon
     93-0256820          
(State or other jurisdiction of
incorporation or organization)
     (I.R.S. Employer          
     Identification No.)          
121 SW Salmon Street
Portland, Oregon 97204
(503) 464-8000
(Address of principal executive offices, including zip code,
and Registrant’s telephone number, including area code) 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes x [ ] No
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  
Large accelerated filer [x]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [x] No
 
Number of shares of common stock outstanding as of April 24, 2014 is 78,182,356 shares.
 


Table of Contents


PORTLAND GENERAL ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

TABLE OF CONTENTS

 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 


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DEFINITIONS

The following abbreviations and acronyms are used throughout this document:

Abbreviation or Acronym
 
Definition
AUT
 
Annual Power Cost Update Tariff
Biglow Canyon
 
Biglow Canyon wind farm
Carty
 
Carty Generating Station natural gas-fired generating plant
Colstrip
 
Colstrip Units 3 and 4 coal-fired generating plant
CWIP
 
Construction work-in-progress
EFSA
 
Equity forward sale agreement
EPA
 
United States Environmental Protection Agency
ESS
 
Electricity Service Supplier
FERC
 
Federal Energy Regulatory Commission
FMBs
 
First Mortgage Bonds
IRP
 
Integrated Resource Plan
kV
 
Kilovolt = one thousand volts of electricity
Moody’s
 
Moody’s Investors Service
MW
 
Megawatts
MWh
 
Megawatt hours
NVPC
 
Net Variable Power Costs
OPUC
 
Public Utility Commission of Oregon
PCAM
 
Power Cost Adjustment Mechanism
PW2
 
Port Westward Unit 2 natural gas-fired generating plant
S&P
 
Standard and Poor’s Ratings Services
SEC
 
United States Securities and Exchange Commission
Tucannon River
 
Tucannon River wind farm
Trojan
 
Trojan nuclear power plant


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PART I FINANCIAL INFORMATION

Item 1.
Financial Statements.
 
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(Dollars in millions, except per share amounts)
(Unaudited)

 
Three Months Ended March 31,
 
2014
 
2013
Revenues, net
$
493

 
$
473

Operating expenses:
 
 
 
Purchased power and fuel
184

 
192

Production and distribution
54

 
51

Administrative and other
54

 
54

Depreciation and amortization
75

 
62

Taxes other than income taxes
28

 
27

Total operating expenses
395

 
386

Income from operations
98

 
87

Interest expense
25

 
25

Other income (expense):
 
 
 
Allowance for equity funds used during construction
6

 
2

Miscellaneous income (expense), net
(1
)
 
1

Other income, net
5

 
3

Income before income tax expense
78

 
65

Income tax expense
20

 
17

Net income and Comprehensive income
58

 
48

Less: net loss attributable to noncontrolling interests

 
(1
)
Net income and Comprehensive income attributable to Portland General Electric Company
$
58

 
$
49

 
 
 
 
Weighted-average shares outstanding (in thousands):
 
 
 
Basic
78,992

 
75,608

Diluted
80,156

 
75,699

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.74

 
$
0.65

Diluted
$
0.73

 
$
0.65

 
 
 
 
Dividends declared per common share
$
0.275

 
$
0.270

 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 


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PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)

 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
64

 
$
107

Accounts receivable, net
158

 
146

Unbilled revenues
77

 
104

Inventories
64

 
65

Margin deposits
17

 
9

Regulatory assets—current
55

 
66

Other current assets
114

 
94

Total current assets
549

 
591

Electric utility plant, net
5,009

 
4,880

Regulatory assets—noncurrent
448

 
464

Nuclear decommissioning trust
83

 
82

Non-qualified benefit plan trust
33

 
35

Other noncurrent assets
47

 
49

Total assets
$
6,169

 
$
6,101

 
 
 
 
See accompanying notes to condensed consolidated financial statements.



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PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(Dollars in millions)
(Unaudited)

 
March 31,
2014
 
December 31,
2013
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
147

 
$
173

Liabilities from price risk management activities—current
52

 
49

Current portion of long-term debt
70

 

Accrued expenses and other current liabilities
182

 
171

Total current liabilities
451

 
393

Long-term debt, net of current portion
1,846

 
1,916

Regulatory liabilities—noncurrent
899

 
865

Deferred income taxes
605

 
586

Unfunded status of pension and postretirement plans
157

 
154

Non-qualified benefit plan liabilities
102

 
101

Asset retirement obligations
101

 
100

Liabilities from price risk management activities—noncurrent
126

 
141

Other noncurrent liabilities
25

 
25

Total liabilities
4,312

 
4,281

Commitments and contingencies (see notes)

 

Equity:
 
 
 
Portland General Electric Company shareholders’ equity:
 
 
 
Preferred stock, no par value, 30,000,000 shares authorized; none issued and outstanding as of March 31, 2014 and December 31, 2013

 

Common stock, no par value, 160,000,000 shares authorized; 78,182,056 and 78,085,559 shares issued and outstanding as of
March 31, 2014 and December 31, 2013, respectively
912

 
911

Accumulated other comprehensive loss
(5
)
 
(5
)
Retained earnings
949

 
913

Total Portland General Electric Company shareholders’ equity
1,856

 
1,819

Noncontrolling interests’ equity
1

 
1

Total equity
1,857

 
1,820

Total liabilities and equity
$
6,169

 
$
6,101

 
See accompanying notes to condensed consolidated financial statements.



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PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
58

 
$
48

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
75

 
62

Decrease in net liabilities from price risk management activities
(19
)
 
(37
)
Regulatory deferrals—price risk management activities
19

 
37

Deferred income taxes
15

 
13

Pension and other postretirement benefits
8

 
10

Allowance for equity funds used during construction
(6
)
 
(2
)
Regulatory deferral of settled derivative instruments
5

 
5

Decoupling mechanism deferrals, net of amortization
(4
)
 
(5
)
Other non-cash income and expenses, net
7

 
8

Changes in working capital:
 
 
 
Decrease in accounts receivable and unbilled revenues
14

 
29

(Increase) decrease in margin deposits, net
(8
)
 
13

Decrease in accounts payable and accrued liabilities
(6
)
 
(4
)
Other working capital items, net
(13
)
 
(12
)
Cash received to be returned to customers pursuant to the Residential Exchange Program
15

 
2

Other, net
(2
)
 
(2
)
Net cash provided by operating activities
158

 
165

Cash flows from investing activities:
 
 
 
Capital expenditures
(185
)
 
(108
)
Sales of nuclear decommissioning trust securities
6

 
8

Purchases of nuclear decommissioning trust securities
(6
)
 
(9
)
Proceeds from sale of property
4

 

Other, net
2

 
2

Net cash used in investing activities
(179
)
 
(107
)
 
 
 
 
See accompanying notes to condensed consolidated financial statements.



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PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In millions)
(Unaudited)

 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from financing activities:
 
 
 
Maturities of commercial paper, net
$

 
$
(17
)
Dividends paid
(22
)
 
(20
)
Net cash used in financing activities
(22
)
 
(37
)
(Decrease) increase in cash and cash equivalents
(43
)
 
21

Cash and cash equivalents, beginning of period
107

 
12

Cash and cash equivalents, end of period
$
64

 
$
33

 
 
 
 
Supplemental cash flow information is as follows:
 
 
 
Cash paid for interest, net of amounts capitalized
$
10

 
$
13

Non-cash investing and financing activities:
 
 
 
Accrued dividends payable
22

 
20

Accrued capital additions
69

 
11

Preliminary engineering costs transferred to Construction work-in-progress from Other noncurrent assets

 
4

 
See accompanying notes to condensed consolidated financial statements.




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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1: BASIS OF PRESENTATION

Nature of Business

Portland General Electric Company (PGE or the Company) is a single, vertically integrated electric utility engaged in the generation, transmission, distribution, and retail sale of electricity in the state of Oregon. The Company also participates in the wholesale market by purchasing and selling electricity and natural gas in an effort to obtain reasonably-priced power for its retail customers. PGE operates as a single segment, with revenues and costs related to its business activities maintained and analyzed on a total electric operations basis. PGE’s corporate headquarters are located in Portland, Oregon and its approximately 4,000 square mile, state-approved service area allocation is located entirely within the state of Oregon, encompassing 52 incorporated cities, of which Portland and Salem are the largest. As of March 31, 2014, PGE served 838,283 retail customers with a service area population of approximately 1.7 million, comprising approximately 44% of the state’s population.

Condensed Consolidated Financial Statements

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such regulations, although PGE believes that the disclosures provided are adequate to make the interim information presented not misleading.

To conform with the 2014 presentation, PGE has separately presented Cash received to be returned to customers pursuant to the Residential Exchange Program of $2 million from Other, net and collapsed Power cost deferrals, net of amortization of $2 million with Other non-cash income and expenses, net in the operating activities section of the condensed consolidated statement of cash flows for the three months ended March 31, 2013.

The financial information included herein for the three months ended March 31, 2014 and 2013 is unaudited; however, such information reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the condensed consolidated financial position, condensed consolidated results of income and comprehensive income, and condensed consolidated cash flows of the Company for these interim periods. Certain costs are estimated for the full year and allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period; accordingly, such costs may not be reflective of amounts to be recognized for a full year. Due to seasonal fluctuations in electricity sales, as well as the price of wholesale energy and natural gas, interim financial results do not necessarily represent those to be expected for the year. The financial information as of December 31, 2013 is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013, included in Item 8 of PGE’s Annual Report on Form 10-K, filed with the SEC on February 14, 2014, and should be read in conjunction with such condensed consolidated financial statements.

Comprehensive Income

PGE had no material components of other comprehensive income to report for the three months ended March 31, 2014 and 2013.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of gain or loss contingencies, as of the date of the financial statements and the reported amounts of revenues and expenses

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

during the reporting period. Actual results experienced by the Company could differ materially from those estimates.

NOTE 2: BALANCE SHEET COMPONENTS

Accounts Receivable, Net

Accounts receivable is net of an allowance for uncollectible accounts of $7 million and $6 million as of March 31, 2014 and December 31, 2013, respectively.

The activity in the allowance for uncollectible accounts is as follows (in millions):
 
Three Months Ended March 31,
 
2014
 
2013
Balance as of beginning of period
$
6

 
$
5

Provision, net
2

 
2

Amounts written off, less recoveries
(1
)
 
(1
)
Balance as of end of period
$
7

 
$
6


Inventories

PGE inventories, which are recorded at average cost, consist primarily of materials and supplies for use in operations, maintenance, and capital activities and fuel for use in generating plants. Fuel inventories include natural gas, coal, and oil. The Company assesses the realizability of inventory for purposes of determining that inventory is recorded at the lower of average cost or market.

Other Current Assets

Other current assets consist of the following (in millions):
 
March 31,
2014
 
December 31, 2013
Prepaid expenses
$
53

 
$
38

Current deferred income tax asset
43

 
42

Assets from price risk management activities
18

 
13

Other

 
1

Other current assets
$
114

 
$
94



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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Electric Utility Plant, Net

Electric utility plant, net consists of the following (in millions):
 
March 31,
2014
 
December 31,
2013
Electric utility plant
$
7,144

 
$
7,095

Construction work-in-progress
633

 
508

Total cost
7,777

 
7,603

Less: accumulated depreciation and amortization
(2,768
)
 
(2,723
)
Electric utility plant, net
$
5,009

 
$
4,880


Accumulated depreciation and amortization in the table above includes accumulated amortization related to intangible assets of $176 million and $170 million as of March 31, 2014 and December 31, 2013, respectively. Amortization expense related to intangible assets was $6 million and $5 million for the three months ended March 31, 2014 and 2013, respectively.

Regulatory Assets and Liabilities

Regulatory assets and liabilities consist of the following (in millions):
 
March 31, 2014
 
December 31, 2013
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Regulatory assets:
 
 
 
 
 
 
 
Price risk management
$
34

 
$
123

 
$
36

 
$
140

Pension and other postretirement plans

 
189

 

 
194

Deferred income taxes

 
78

 

 
76

Deferred broker settlements
8

 

 
12

 
1

Debt reacquisition costs

 
16

 

 
17

Deferred capital projects
11

 
19

 
16

 
18

Other
2

 
23

 
2

 
18

Total regulatory assets
$
55

 
$
448

 
$
66

 
$
464

Regulatory liabilities:
 
 
 
 
 
 
 
Asset retirement removal costs
$

 
$
762

 
$

 
$
747

Trojan decommissioning activities

 
42

 

 
41

Asset retirement obligations

 
39

 

 
39

Other
2

 
56

 
1

 
38

Total regulatory liabilities
$
2

* 
$
899

 
$
1

* 
$
865


*
Included in Accrued expenses and other current liabilities in the condensed consolidated balance sheets.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in millions):
 
March 31,
2014
 
December 31, 2013
Accrued employee compensation and benefits
$
38

 
$
46

Accrued interest payable
36

 
23

Accrued taxes payable
28

 
21

Accrued dividends payable
22

 
22

Regulatory liabilities—current
2

 
1

Other
56

 
58

Total accrued expenses and other current liabilities
$
182

 
$
171


Credit Facilities

PGE has the following unsecured revolving credit facilities as of March 31, 2014:

A $400 million syndicated credit facility, which is scheduled to terminate in November 2018; and

A $300 million syndicated credit facility, which is scheduled to terminate in December 2017.

Pursuant to the terms of the agreements, both revolving credit facilities may be used for general corporate purposes and as backup for commercial paper borrowings, and also permit the issuance of standby letters of credit. PGE may borrow for one, two, three, or six months at a fixed interest rate established at the time of the borrowing, or at a variable interest rate for any period up to the then remaining term of the applicable credit facility. Both revolving credit facilities contain provisions for two, one-year extensions that are subject to approval by the banks, require annual fees based on PGEs unsecured credit ratings, and contain customary covenants and default provisions, including a requirement that limits consolidated indebtedness, as defined in the agreements, to 65% of total capitalization. As of March 31, 2014, PGE was in compliance with this covenant with a 50.8% debt to total capital ratio.

PGE has a commercial paper program under which it may issue commercial paper for terms of up to 270 days, limited to the unused amount of credit under the credit facilities.

Pursuant to an order issued by the Federal Energy Regulatory Commission (FERC), the Company is authorized to issue short-term debt up to $900 million through February 6, 2016. The authorization provides that if utility assets financed by unsecured debt are divested, then a proportionate share of the unsecured debt must also be divested.

PGE classifies borrowings under the revolving credit facilities and outstanding commercial paper as Short-term debt on the condensed consolidated balance sheets. As of March 31, 2014, PGE had no borrowings outstanding under the revolving credit facilities, no commercial paper outstanding, and $15 million of letters of credit issued. As of March 31, 2014, the aggregate available capacity under the credit facilities was $685 million.

In addition, the Company has two, one-year $30 million letter of credit facilities, which are scheduled to terminate in September and October 2014. As of March 31, 2014, PGE had issued $45 million of letters of credit under these facilities, with an aggregate available capacity of $15 million.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Pension and Other Postretirement Benefits

Components of net periodic benefit cost are as follows (in millions):
 
Three Months Ended March 31,
 
Defined Benefit
Pension Plan
 
Other Postretirement
Benefits
 
2014
 
2013
 
2014
 
2013
Service cost
$
4

 
$
4

 
$

 
$
1

Interest cost
9

 
8

 
1

 
1

Expected return on plan assets
(10
)
 
(10
)
 

 

Amortization of net actuarial loss
4

 
6

 

 

Net periodic benefit cost
$
7

 
$
8

 
$
1

 
$
2


NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS

PGE determines the fair value of financial instruments, both assets and liabilities recognized and not recognized in the Company’s condensed consolidated balance sheets, for which it is practicable to estimate fair value as of March 31, 2014 and December 31, 2013, and then classifies these financial assets and liabilities based on a fair value hierarchy. The fair value hierarchy is used to prioritize the inputs to the valuation techniques used to measure fair value. These three levels and application to the Company are discussed below.

Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2
Pricing inputs include those that are directly or indirectly observable in the marketplace as of the reporting date.

Level 3
Pricing inputs include significant inputs that are unobservable for the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

PGE recognizes transfers between levels in the fair value hierarchy as of the end of the reporting period for all its financial instruments. Changes to market liquidity conditions, the availability of observable inputs, or changes in the economic structure of a security marketplace may require transfer of the securities between levels. There were no significant transfers between levels during the three months ended March 31, 2014 and 2013, except those transfers from Level 3 to Level 2 presented in this note.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

The Company’s financial assets and liabilities whose values were recognized at fair value are as follows by level within the fair value hierarchy (in millions):
 
As of March 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
Money market funds
$

 
$
59

 
$

 
$
59

Debt securities:
 
 
 
 
 
 
 
Domestic government
8

 
6

 

 
14

Corporate credit

 
10

 

 
10

Non-qualified benefit plan trust: (2)
 
 
 
 
 
 
 
Equity Securities:
 
 
 
 
 
 
 
Domestic
5

 
2

 

 
7

Debt securities—domestic government
1

 

 

 
1

Assets from price risk management activities: (1) (3)
 
 
 
 
 
 
 
Electricity

 
4

 

 
4

Natural gas

 
16

 
1

 
17

 
$
14

 
$
97

 
$
1

 
$
112

Liabilities—Liabilities from price risk management
activities:(1) (3)
 
 
 
 
 
 
 
Electricity
$

 
$
20

 
$
115

 
$
135

Natural gas

 
26

 
17

 
43

 
$

 
$
46

 
$
132

 
$
178

 
(1)
Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in Regulatory assets or Regulatory liabilities as appropriate.
(2)
Excludes insurance policies of $25 million, which are recorded at cash surrender value.
(3)
For further information, see Note 4, Price Risk Management.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

 
As of December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
Money market funds
$

 
$
59

 
$

 
$
59

Debt securities:
 
 
 
 
 
 
 
Domestic government
6

 
8

 

 
14

Corporate credit

 
9

 

 
9

Non-qualified benefit plan trust: (2)
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Domestic
4

 
3

 

 
7

International
1

 

 

 
1

Debt securities—domestic government
1

 

 

 
1

Assets from price risk management activities: (1) (3)
 
 
 
 
 
 
 
Electricity

 
9

 
1

 
10

Natural gas

 
4

 

 
4

 
$
12

 
$
92

 
$
1

 
$
105

Liabilities — Liabilities from price risk management activities: (1) (3)
 
 
 
 
 
 
 
Electricity
$

 
$
10

 
$
117

 
$
127

Natural gas

 
40

 
23

 
63

 
$

 
$
50

 
$
140

 
$
190

 
(1)
Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in Regulatory assets or Regulatory liabilities as appropriate.
(2)
Excludes insurance policies of $26 million, which are recorded at cash surrender value.
(3)
For further information, see Note 4, Price Risk Management.

Trust assets held in the Nuclear decommissioning and Non-qualified benefit plan trusts are recorded at fair value in PGE’s condensed consolidated balance sheets and invested in securities that are exposed to interest rate, credit and market volatility risks. These assets are classified within Level 1, 2 or 3 based on the following factors:
 
Money market funds—PGE invests in money market funds that seek to maintain a stable net asset value. These funds invest in high-quality, short-term, diversified money market instruments, short-term treasury bills, federal agency securities, certificates of deposits, and commercial paper. Money market funds are classified as Level 2 in the fair value hierarchy as the securities are traded in active markets of similar securities but are not directly valued using quoted market prices.
 
Debt securities—PGE invests in highly-liquid United States treasury securities to support the investment objectives of the trusts. These domestic government securities are classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date.
 
Assets classified as Level 2 in the fair value hierarchy include domestic government debt securities, such as municipal debt, and corporate credit securities. Prices are determined by evaluating pricing data such as broker quotes for similar securities and adjusted for observable differences. Significant inputs used in valuation models generally include benchmark yield and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation as applicable.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Equity securities—Equity mutual fund and common stock securities are primarily classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date. Principal markets for equity prices include published exchanges such as NASDAQ and the New York Stock Exchange. Certain mutual fund assets included in commingled trusts or separately managed accounts are classified as Level 2 in the fair value hierarchy as pricing inputs are directly or indirectly observable in the marketplace.

Assets and liabilities from price risk management activities are recorded at fair value in PGE’s condensed consolidated balance sheets and consist of derivative instruments entered into by the Company to manage its exposure to commodity price risk and foreign currency exchange rate risk, and reduce volatility in net power costs for the Company’s retail customers. For additional information regarding these assets and liabilities, see Note 4, Price Risk Management.
 
For those assets and liabilities from price risk management activities classified as Level 2, fair value is derived using present value formulas that utilize inputs such as forward commodity prices and interest rates. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category consist of forwards, futures and swaps.

Assets and liabilities from price risk management activities classified as Level 3 consist of instruments for which fair value is derived using one or more significant inputs that are not observable for the entire term of the instrument. These instruments consist of longer term forwards, futures and swaps.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Quantitative information regarding the significant, unobservable inputs used in the measurement of Level 3 assets and liabilities from price risk management activities is presented below:
 
 
 
 
 
 
 
 
Significant
 
Price per Unit
 
 
Fair Value
 
Valuation
 
Unobservable
 
 
 
 
 
Weighted
Commodity Contracts
 
Assets
 
Liabilities
 
Technique
 
Input
 
Low
 
High
 
Average
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of March 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forward
 
$

 
$
102

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
4.50

 
$
81.20

 
$
36.81

Natural gas financial swaps
 
1

 
17

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
3.32

 
5.38

 
3.87

Electricity financial futures
 

 
13

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
9.50

 
46.62

 
33.07

 
 
$
1

 
$
132

 
 
 
 
 
 
 
 
 
 
As of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forward
 
$

 
$
103

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
9.63

 
$
77.95

 
$
40.18

Natural gas financial swaps
 

 
23

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
3.16

 
4.49

 
3.71

Electricity financial futures
 
1

 
14

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
9.63

 
46.07

 
33.01

 
 
$
1

 
$
140

 
 
 
 
 
 
 
 
 
 

The significant unobservable inputs used in the Company’s fair value measurement of price risk management assets and liabilities are long-term forward prices for commodity derivatives. For shorter term contracts, the Company employs the mid-point of the market’s bid-ask spread and these inputs are derived using observed transactions in active markets, as well as historical experience as a participant in those markets. These price inputs are validated against independent market data aggregated from multiple sources. For certain long term contracts, observable, liquid market transactions are not available for the duration of the delivery period. In such instances, the Company uses internally developed price curves, which derive longer term prices and utilize observable data when available. When not available, regression techniques are used to estimate unobservable future prices. In addition, changes in the fair value measurement of price risk management assets and liabilities are analyzed and reviewed on a monthly basis by the Company. This process includes analytical review of changes in commodity prices as well as procedures to analyze and identify the reasons for the changes over specific reporting periods.

The Company’s Level 3 assets and liabilities from price risk management activities are sensitive to market price changes in the respective underlying commodities. The significance of the impact is dependent upon the magnitude of the price change and the Company’s position as either the buyer or seller of the contract. Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:
Significant Unobservable Input
 
Position
 
Change to Input
 
Impact on Fair Value Measurement
Market price
 
Buy
 
Increase (decrease)
 
Gain (loss)
Market price
 
Sell
 
Increase (decrease)
 
Loss (gain)
 
 
 
 
 
 
 

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)


Changes in the fair value of net liabilities from price risk management activities (net of assets from price risk management activities) classified as Level 3 in the fair value hierarchy were as follows (in millions):
 
Three Months Ended March 31,
 
2014
 
2013
Balance as of the beginning of the period
$
139

 
$
16

Net realized and unrealized (gains) losses*
(11
)
 
5

Purchases

 
24

Transfers out of Level 3 to Level 2
3

 

Balance as of the end of the period
$
131

 
$
45

 
* Contains nominal amounts of realized losses. Both realized and unrealized (gains) losses are recorded in Purchased power and fuel expense in the condensed consolidated statements of income of which the unrealized portion is fully offset by the effects of regulatory accounting until settlement of the underlying transactions.

Transfers into Level 3 occur when significant inputs used to value the Company’s derivative instruments become less observable, such as a delivery location becoming significantly less liquid. During the three months ended March 31, 2014 and 2013, there were no transfers into Level 3 from Level 2. Transfers out of Level 3 occur when the significant inputs become more observable, such as when the time between the valuation date and the delivery term of a transaction becomes shorter. PGE records transfers in and transfers out of Level 3 at the end of the reporting period for all of its financial instruments. Transfers from Level 2 to Level 1 for the Company’s price risk management assets and liabilities do not occur as quoted prices are not available for identical instruments. As such, the Company’s assets and liabilities from price risk management activities mature and settle as Level 2 fair value measurements.

Long-term debt is recorded at amortized cost in PGE’s condensed consolidated balance sheets. The fair value of long-term debt is classified as a Level 2 fair value measurement and 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. As of March 31, 2014, the estimated aggregate fair value of PGE’s long-term debt was $2,186 million, compared to its $1,916 million carrying amount. As of December 31, 2013, the estimated aggregate fair value of PGE’s long-term debt was $2,074 million, compared to its $1,916 million carrying amount.

NOTE 4: PRICE RISK MANAGEMENT

PGE participates in the wholesale marketplace in order to balance its supply of power, which consists of its own generation combined with wholesale market transactions, to meet the needs of its retail customers, manage risk, and administer its existing long-term wholesale contracts. Such activities include fuel and power purchases and sales resulting from economic dispatch decisions for Company-owned generation. As a result, PGE is exposed to commodity price risk and foreign currency exchange rate risk, from which changes in prices and/or rates may affect the Company’s financial position, results of operations, or cash flows.

PGE utilizes derivative instruments to manage its exposure to commodity price risk and foreign currency exchange rate risk in order to reduce volatility in net power costs for its retail customers. These derivative instruments may include forwards, futures, swaps, and option contracts for electricity, natural gas, oil, and foreign currency, which are recorded at fair value on the condensed consolidated balance sheets, with changes in fair value recorded in the condensed consolidated statements of income. In accordance with the ratemaking and cost recovery processes authorized by the OPUC, PGE recognizes a regulatory asset or liability to defer the gains and losses from derivative instruments until settlement of the associated derivative instrument. PGE may designate certain derivative instruments as cash flow hedges or may use derivative instruments as economic hedges. The Company does not engage in trading activities for non-retail purposes.

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)


PGE’s Assets and Liabilities from price risk management activities consist of the following (in millions):
 
March 31,
2014
 
December 31,
2013
 
Current assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
4

 
$
9

 
Natural gas
14

 
4

 
Total current derivative assets
18

(1) 
13

(1) 
Noncurrent assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity

 
1

 
Natural gas
3

 

 
Total noncurrent derivative assets
3

(2) 
1

(2) 
Total derivative assets not designated as hedging instruments
$
21

 
$
14

 
Total derivative assets
$
21

 
$
14

 
Current liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
33

 
$
20

 
Natural gas
19

 
29

 
Total current derivative liabilities
52

 
49

 
Noncurrent liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
102

 
107

 
Natural gas
24

 
34

 
Total noncurrent derivative liabilities
126

 
141

 
Total derivative liabilities not designated as hedging instruments
$
178

 
$
190

 
Total derivative liabilities
$
178

 
$
190

 
(1)
Included in Other current assets on the condensed consolidated balance sheets.
(2)
Included in Other noncurrent assets on the condensed consolidated balance sheets.

PGE’s net volumes related to its Assets and Liabilities from price risk management activities resulting from its derivative transactions, which are expected to deliver or settle through 2035, were as follows (in millions):
 
March 31, 2014
 
December 31, 2013
Commodity contracts:
 
 
 
 
 
Electricity
22

MWh
 
14

MWh
Natural gas
104

Decatherms
 
106

Decatherms
Foreign currency
$
2

Canadian
 
$
7

Canadian

PGE has elected to report gross on the condensed consolidated balance sheets the positive and negative exposures resulting from derivative instruments pursuant to agreements that meet the definition of a master netting arrangement. In the case of default on, or termination of, any contract under the master netting arrangements, these agreements provide for the net settlement of all related contractual obligations with a counterparty through a single payment. These types of transactions may include non-derivative instruments, derivatives qualifying for scope

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

exceptions, receivables and payables arising from settled positions, and other forms of non-cash collateral, such as letters of credit, which are excluded from the offsetting table presented below.

Information related to Price risk management liabilities subject to master netting agreements is as follows (in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in
 
 
 
 
Gross
 
Gross
 
Net
 
Condensed Consolidated
 
 
 
 
Amounts
 
Amounts
 
Amounts
 
Balance Sheets
 
 
 
 
Recognized
 
Offset
 
Presented
 
Derivatives
 
Cash Collateral(1)
 
Net Amount
As of March 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Electricity(2)
 
$
90

 
$

 
$
90

 
$
(90
)
 
$

 
$

Natural gas(2)
 
1

 

 
1

 
(1
)
 

 

 
 
$
91

 
$

 
$
91

 
$
(91
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Electricity(2)
 
$
91

 
$

 
$
91

 
$
(91
)
 
$

 
$

Natural gas(2)
 
1

 

 
1

 
(1
)
 

 

 
 
$
92

 
$

 
$
92

 
$
(92
)
 
$

 
$


(1)
As of March 31, 2014, the Company had no collateral posted. As of December 31, 2013, PGE had posted collateral in the amount of $7 million, which consisted entirely of letters of credit.
(2)
Included in Liabilities from price risk management activities—current and Liabilities from price risk management activities—noncurrent.

Net realized and unrealized (gains) losses on derivative transactions not designated as hedging instruments are recorded in Purchased power and fuel in the condensed consolidated statements of income and were as follows (in millions):
 
Three Months Ended March 31,
 
2014
 
2013
Commodity contracts:
 
 
 
Electricity
$
9

 
$
8

Natural Gas
(36
)
 
(8
)

Net unrealized and certain net realized (gains) losses presented in the table above are offset within the condensed consolidated statements of income by the effects of regulatory accounting. Of the net (gains) losses recognized in Net income for the three months ended March 31, 2014 and 2013, net losses of $12 million and $3 million, respectively, have been offset.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Assuming no changes in market prices and interest rates, the following table indicates the year in which the net unrealized loss recorded as of March 31, 2014 related to PGE’s derivative activities would become realized as a result of the settlement of the underlying derivative instrument (in millions):
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
$
28

 
$
23

 
$
13

 
$
5

 
$
5

 
$
57

 
$
131

Natural gas
7

 
3

 
10

 
6

 

 

 
26

Net unrealized loss
$
35

 
$
26

 
$
23

 
$
11

 
$
5

 
$
57

 
$
157


PGE’s secured and unsecured debt is currently rated at investment grade by Moody’s Investors Service (Moody’s) and Standard and Poor’s Ratings Services (S&P). Should Moody’s and/or S&P reduce their rating on PGE’s unsecured debt to below investment grade, the Company could be subject to requests by certain wholesale counterparties to post additional performance assurance collateral, in the form of cash or letters of credit, based on total portfolio positions with each of those counterparties. Certain other counterparties would have the right to terminate their agreements with the Company.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position as of March 31, 2014 was $166 million, for which PGE has posted $7 million in collateral, consisting entirely of letters of credit. If the credit-risk-related contingent features underlying these agreements were triggered at March 31, 2014, the cash requirement to either post as collateral or settle the instruments immediately would have been $151 million. As of March 31, 2014, PGE has posted an additional $17 million in cash collateral, which is classified as Margin deposits on the Company’s condensed consolidated balance sheet, for derivative instruments with no credit-risk related contingent features.

Counterparties representing 10% or more of Assets and Liabilities from price risk management activities were as follows:
 
March 31,
2014
 
December 31,
2013
Assets from price risk management activities:
 
 
 
Counterparty A
20
%
 
5
%
Counterparty B
18

 
53

Counterparty C
15

 
6

Counterparty D
10

 
5

 
63
%
 
69
%
Liabilities from price risk management activities:
 
 
 
Counterparty E
46
%
 
43
%
Counterparty F
12

 
11

 
58
%
 
54
%

See Note 3, Fair Value of Financial Instruments, for additional information concerning the determination of fair value for the Company’s Assets and Liabilities from price risk management activities.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

NOTE 5: EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Potential common shares consist of: i) employee stock purchase plan shares; ii) unvested time-based and performance-based restricted stock units, along with associated dividend equivalent rights; and iii) shares issuable pursuant to an equity forward sale agreement (EFSA). See Note 6, Equity, for additional information on the EFSA and its impact on earnings per share. Unvested performance-based restricted stock units and associated dividend equivalent rights are included in dilutive potential common shares only after the performance criteria have been met. For the three months ended March 31, 2014 and 2013, unvested performance-based restricted stock units and associated dividend equivalent rights of approximately 363,000 and 431,000, respectively, were excluded from the dilutive calculation because the performance goals had not been met.

Net income attributable to PGE common shareholders is the same for both the basic and diluted earnings per share computations. The reconciliations of the denominators of the basic and diluted earnings per share computations are as follows (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Weighted-average common shares outstanding—basic
78,992

 
75,608

Dilutive effect of potential common shares
1,164

 
91

Weighted-average common shares outstanding—diluted
80,156

 
75,699


NOTE 6: EQUITY

The activity in equity during the three months ended March 31, 2014 and 2013 is as follows (dollars in millions):
 
Portland General Electric Company
Shareholders’ Equity
 
 
 
 
Common Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
 
Noncontrolling
Interests’
Equity
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balances as of December 31, 2013
78,085,559

 
$
911

 
$
(5
)
 
$
913

 
 
$
1

Issuances of shares pursuant to equity-based plans
96,497

 

 

 

 
 

Stock-based compensation

 
1

 

 

 
 

Dividends declared

 

 

 
(22
)
 
 

Net income

 

 

 
58

 
 

Balances as of March 31, 2014
78,182,056

 
$
912

 
$
(5
)
 
$
949

 
 
$
1

 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2012
75,556,272

 
$
841

 
$
(6
)
 
$
893

 
 
$
2

Issuances of shares pursuant to equity-based plans
120,909

 

 

 

 
 

Dividends declared

 

 

 
(20
)
 
 

Net income (loss)

 

 

 
49

 
 
(1
)
Balances as of March 31, 2013
75,677,181

 
$
841

 
$
(6
)
 
$
922

 
 
$
1



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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

In connection with a public offering of shares of its common stock in 2013, PGE entered into an EFSA. Pursuant to the terms of the EFSA, a forward counterparty borrowed 11,100,000 shares of PGE’s common stock from third parties in the open market and sold the shares to a group of underwriters for $29.50 per share, less an underwriting discount equal to $0.96 per share. The underwriters then sold the shares in a public offering. PGE receives proceeds from the sale of common stock when the EFSA is physically settled (described below), and at that time PGE records the proceeds in equity.

Under the terms of the EFSA, PGE may elect to settle the equity forward transactions by means of: i) physical; ii) cash; or iii) net share settlement, in whole or in part, at any time on or prior to June 11, 2015, except in specified circumstances or events that would require physical settlement. To the extent that the transactions are physically settled, PGE is required to issue and deliver shares of PGE common stock to the forward counterparty at the then applicable forward sale price. The forward sale price was initially determined to be $29.50 per share at the time the EFSA was entered into, and the amount of cash to be received by PGE upon physical settlement of the EFSA is subject to certain adjustments in accordance with the terms of the EFSA.

The use of the EFSA substantially eliminates future equity market price risk by fixing the common stock offering sales price under the then existing market conditions, while mitigating immediate share dilution resulting from the offering by postponing the actual issuance of common stock until such funds are needed in accordance with the Company’s capital requirements. The EFSA had no initial fair value since it was entered into at the then market price of the common stock. PGE concluded that the EFSA was an equity instrument and that it does not qualify as a derivative because the EFSA was indexed to the Company’s stock. PGE anticipates settling the EFSA through physical settlement on or before June 11, 2015.

At March 31, 2014, the Company could have physically settled the EFSA by delivering 10,400,000 shares to the forward counterparty in exchange for cash of $284 million. In addition, at March 31, 2014, the Company could have elected to make a cash settlement by paying approximately $52 million, or a net share settlement by delivering approximately 1,603,711 shares of common stock. To the extent that PGE makes a cash or net share settlement, the Company would receive no additional proceeds from the public offering.

Prior to settlement, the potentially issuable shares pursuant to the EFSA are reflected in PGE’s diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of PGE’s common stock used in calculating diluted earnings per share for a reporting period are increased by the number of shares, if any, that would be issued upon physical settlement of the EFSA less the number of shares that could be purchased by PGE in the market with the proceeds received from issuance (based on the average market price during that reporting period).

NOTE 7: CONTINGENCIES

PGE is subject to legal, regulatory, and environmental proceedings, investigations, and claims that arise from time to time in the ordinary course of its business. Contingencies are evaluated using the best information available at the time the consolidated financial statements are prepared. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company may seek regulatory recovery of certain costs that are incurred in connection with such matters, although there can be no assurance that such recovery would be granted.

Loss contingencies are accrued, and disclosed if material, when it is probable that an asset has been impaired or a liability incurred as of the financial statement date and the amount of the loss can be reasonably estimated. If a reasonable estimate of probable loss cannot be determined, a range of loss may be established, in which case the minimum amount in the range is accrued, unless some other amount within the range appears to be a better estimate.

A loss contingency will also be disclosed when it is reasonably possible that an asset has been impaired or a liability incurred if the estimate or range of potential loss is material. If a probable or reasonably possible loss cannot be

23

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

reasonably estimated, then the Company: i) discloses an estimate of such loss or the range of such loss, if the Company is able to determine such an estimate; or ii) discloses that an estimate cannot be made.

If an asset has been impaired or a liability incurred after the financial statement date, but prior to the issuance of the financial statements, the loss contingency is disclosed, if material, and the amount of any estimated loss is recorded in the subsequent reporting period.

The Company evaluates, on a quarterly basis, developments in such matters that could affect the amount of any accrual, as well as the likelihood of developments that would make a loss contingency both probable and reasonably estimable. The assessment as to whether a loss is probable or reasonably possible, and as to whether such loss or a range of such loss is estimable, often involves a series of complex judgments about future events. Management is often unable to estimate a reasonably possible loss, or a range of loss, particularly in cases in which: i) the damages sought are indeterminate or the basis for the damages claimed is not clear; ii) the proceedings are in the early stages; iii) discovery is not complete; iv) the matters involve novel or unsettled legal theories; v) there are significant facts in dispute; vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or vii) there is a wide range of potential outcomes. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution, including any possible loss, fine, penalty, or business impact.  

Trojan Investment Recovery

Regulatory Proceedings. In 1993, PGE closed the Trojan nuclear power plant (Trojan) and sought full recovery of, and a rate of return on, its Trojan costs in a general rate case filing with the OPUC. In 1995, the OPUC issued a general rate order that granted the Company recovery of, and a rate of return on, 87% of its remaining investment in Trojan.

Numerous challenges and appeals were subsequently filed in various state courts on the issue of the OPUC’s authority under Oregon law to grant recovery of, and a return on, the Trojan investment. In 1998, the Oregon Court of Appeals upheld the OPUC’s order authorizing PGE’s recovery of the Trojan investment, but held that the OPUC did not have the authority to allow the Company to recover a return on the Trojan investment and remanded the case to the OPUC for reconsideration.

In 2000, PGE entered into agreements to settle the litigation related to recovery of, and return on, its investment in Trojan. The settlement, which was approved by the OPUC, allowed PGE to remove from its balance sheet the remaining investment in Trojan as of September 30, 2000, along with several largely offsetting regulatory liabilities. After offsetting the investment in Trojan with these liabilities, the remaining Trojan regulatory asset balance of approximately $5 million (after tax) was expensed. As a result of the settlement, PGE’s investment in Trojan was no longer included in prices charged to customers, either through a return of or a return on that investment. The Utility Reform Project (URP) did not participate in the settlement and filed a complaint with the OPUC challenging the settlement agreements. In 2002, the OPUC issued an order (2002 Order) denying all of the URP’s challenges. In 2007, following several appeals by various parties, the Oregon Court of Appeals issued an opinion that remanded the 2002 Order to the OPUC for reconsideration.

The OPUC then issued an order in 2008 (2008 Order) that required PGE to provide refunds, including interest from September 30, 2000, to customers who received service from the Company during the period from October 1, 2000 to September 30, 2001. The Company recorded a charge of $33.1 million in 2008 related to the refund and accrued additional interest expense on the liability until refunds to customers were completed in the first quarter of 2010. The URP and the plaintiffs in the class actions described below separately appealed the 2008 Order to the Oregon Court of Appeals. On February 6, 2013, the Oregon Court of Appeals issued an opinion that upheld the 2008 Order. On May 31, 2013, the Court of Appeals denied the appellants’ request for reconsideration of the decision. On October 18, 2013, the Oregon Supreme Court granted plaintiffs’ petition seeking review of the February 6, 2013

24

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Oregon Court of Appeals decision. Oral argument occurred in March 2014 and the parties now await a Court decision.

Class Actions. In two separate legal proceedings, lawsuits were filed in Marion County Circuit Court against PGE in 2003 on behalf of two classes of electric service customers. The class action lawsuits seek damages totaling $260 million, plus interest, as a result of the Company’s inclusion, in prices charged to customers, of a return on its investment in Trojan.

In 2006, the Oregon Supreme Court issued a ruling ordering the abatement of the class action proceedings until the OPUC responded to the 2002 Order (described above). The Oregon Supreme Court concluded that the OPUC has primary jurisdiction to determine what, if any, remedy can be offered to PGE customers, through price reductions or refunds, for any amount of return on the Trojan investment that the Company collected in prices.

The Oregon Supreme Court further stated that if the OPUC determined that it can provide a remedy to PGE’s customers, then the class action proceedings may become moot in whole or in part. The Oregon Supreme Court added that, if the OPUC determined that it cannot provide a remedy, the court system may have a role to play. The Oregon Supreme Court also ruled that the plaintiffs retain the right to return to the Marion County Circuit Court for disposition of whatever issues remain unresolved from the remanded OPUC proceedings. The Marion County Circuit Court subsequently abated the class actions in response to the ruling of the Oregon Supreme Court.

As noted above, on February 6, 2013, the Oregon Court of Appeals upheld the 2008 Order. Because the Oregon Supreme Court has granted the plaintiffs’ petition seeking review of that decision, and the class actions described above remain pending, management believes that it is reasonably possible that the regulatory proceedings and class actions could result in a loss to the Company in excess of the amounts previously recorded and discussed above. Because these matters involve unsettled legal theories and have a broad range of potential outcomes, sufficient information is currently not available to determine PGE’s potential liability, if any, or to estimate a range of potential loss.

Pacific Northwest Refund Proceeding

In 2001, the FERC called for a hearing to explore whether there may have been unjust and unreasonable charges for spot market sales of electricity in the Pacific Northwest from December 25, 2000 through June 20, 2001 (Pacific Northwest Refund proceeding). During that period, PGE both sold and purchased electricity in the Pacific Northwest. In 2003, the FERC issued an order terminating the proceeding and denying the claims for refunds. Upon appeal of the decision to the U.S. Ninth Circuit Court of Appeals (Ninth Circuit) the Court remanded the case to the FERC to, among other things, address market manipulation evidence in detail and account for the evidence in any future orders regarding the award or denial of refunds in the proceedings.
 
In October 2011, the FERC issued an Order on Remand, establishing an evidentiary hearing to determine whether any seller had engaged in unlawful market activity in the Pacific Northwest spot markets during the December 25, 2000 through June 20, 2001 period by violating specific contracts or tariffs, and, if so, whether a direct connection existed between the alleged unlawful conduct and the rate charged under the applicable contract. The FERC held that the Mobile-Sierra public interest standard governs challenges to the bilateral contracts at issue in this proceeding, and the strong presumption under Mobile-Sierra that the rates charged under each contract are just and reasonable would have to be specifically overcome before a refund could be ordered. The FERC directed the presiding judge, if necessary, to determine a refund methodology and to calculate refunds, but held that a market-wide remedy was not appropriate, given the bilateral contract nature of the Pacific Northwest spot markets.

In December 2012, the FERC issued an order clarifying that the Mobile-Sierra presumption could be overcome either by: i) a showing that a respondent had violated a contract or tariff and that the violation had a direct

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

connection to the rate charged under the applicable contract; or ii) a showing that the contract rate at issue imposed an excessive burden or seriously harmed the public interest.

On April 5, 2013, the FERC granted rehearing of its Order on Remand on the issue of the appropriate refund period, holding that parties could pursue refunds for transactions between January 1, 2000 and December 24, 2000 under Section 309 of the Federal Power Act by showing violations of a filed tariff or rate schedule or of a statutory requirement. Refund claimants have filed petitions for appeal of the Order on Remand and the Order on Rehearing with the Ninth Circuit.

In its October 2011 Order on Remand, the FERC ordered settlement discussions to be convened before a FERC settlement judge. Pursuant to the settlement proceedings, the Company received notice of two claims and reached agreements to settle both claims for an immaterial amount. The FERC approved both settlements during 2012.

Additionally, the settlement between PGE and certain other parties in the California refund case in Docket No. EL00-95, et seq., approved by the FERC in May 2007, resolved all claims between PGE and the California parties named in the settlement, including the California Energy Resource Scheduling division of the California Department of Water Resources (CERS), as to transactions in the Pacific Northwest during the settlement period, January 1, 2000 through June 20, 2001, but did not settle potential claims from other market participants relating to transactions in the Pacific Northwest.

The above-referenced settlements resulted in a release for the Company as a named respondent in the first phase of the remand proceedings, which are limited to initial and direct claims for refunds, but there remains a possibility that additional claims related to this matter could be asserted against the Company in a subsequent phase of the proceeding if refunds are ordered against some or all of the current respondents.

During the first phase of the remand hearing, now completed, two sets of refund proponents, the City of Seattle, Washington (Seattle) and various California parties on behalf of CERS, presented cases alleging that multiple respondents had engaged in unlawful activities and caused severe financial harm that justified the imposition of refunds. After conclusion of the hearing, the presiding Administrative Law Judge issued an Initial Decision on March 28, 2014 finding: i) that Seattle did not carry its Mobile-Sierra burden with respect to its refund claims against any of its respondent sellers; and ii) that the California representatives of CERS did not carry their Mobile-Sierra burden with respect to one of CERS’ respondents, but did find evidence of unlawful activity in the implementation of multiple transactions and bad faith in the formation of as many as 119 contracts by the last remaining CERS respondent. The Administrative Law Judge scheduled a second phase of the hearing to commence after a final FERC decision on the Initial Decision. In the second phase, the last respondent will have an opportunity to produce additional evidence as to why its transactions should be considered legitimate and why refunds should not be ordered. If the FERC requires one or more respondents to make refunds, it is possible that such respondent(s) will attempt to recover similar refunds from their suppliers, including the Company.

Management believes that this matter could result in a loss to the Company in future proceedings. However, management cannot predict whether the FERC will order refunds from any of the current respondents, which contracts would be subject to refunds, the basis on which refunds would be ordered, or how such refunds, if any, would be calculated. Further, management cannot predict whether any current respondents, if ordered to make refunds, will pursue additional refund claims against their suppliers, and, if so, what the basis or amounts of such potential refund claims against the Company would be. Due to these uncertainties, sufficient information is currently not available to determine PGE’s liability, if any, or to estimate a range of reasonably possible loss.

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

EPA Investigation of Portland Harbor

A 1997 investigation by the United States Environmental Protection Agency (EPA) of a segment of the Willamette River known as Portland Harbor revealed significant contamination of river sediments. The EPA subsequently included Portland Harbor on the National Priority List pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) as a federal Superfund site and listed 69 Potentially Responsible Parties (PRPs). PGE was included among the PRPs as it has historically owned or operated property near the river. In January 2008, the EPA requested information from various parties, including PGE, concerning additional properties in or near the original segment of the river under investigation as well as several miles beyond. Subsequently, the EPA has listed additional PRPs, which now number over one hundred.

The Portland Harbor site is currently undergoing a remedial investigation (RI) and feasibility study (FS) pursuant to an Administrative Order on Consent (AOC) between the EPA and several PRPs known as the Lower Willamette Group (LWG), which does not include PGE.

In March 2012, the LWG submitted a draft FS to the EPA for review and approval. The draft FS, along with the RI, provide the framework for the EPA to determine a clean-up remedy for Portland Harbor that will be documented in a Record of Decision, which the EPA is expected to issue in 2015 or 2016.

The draft FS evaluates several alternative clean-up approaches. These approaches would take from two to 28 years with costs ranging from $169 million to $1.8 billion, depending on the selected remedial action levels and the choice of remedy. The draft FS does not address responsibility for the costs of clean-up, allocate such costs among PRPs, or define precise boundaries for the clean-up. Responsibility for funding and implementing the EPAs selected clean-up will be determined after the issuance of the Record of Decision.

Management believes that it is reasonably possible that this matter could result in a loss to the Company. However, due to the uncertainties discussed above, sufficient information is currently not available to determine PGE’s liability for the cost of any required investigation or remediation of the Portland Harbor site or to estimate a range of potential loss.

DEQ Investigation of Downtown Reach

The Oregon Department of Environmental Quality (DEQ) has executed a memorandum of understanding with the EPA to administer and enforce clean-up activities for portions of the Willamette River that are upriver from the Portland Harbor Superfund site (the Downtown Reach). In January 2010, the DEQ issued an order requiring PGE to perform an investigation of certain portions of the Downtown Reach. PGE completed this investigation in December 2011 and entered into a consent order with the DEQ in July 2012 to conduct a feasibility study of alternatives for remedial action for the portions of the Downtown Reach that were included within the scope of PGE’s investigation. The draft feasibility study report, which describes possible remediation alternatives that range in estimated cost from $3 million to $8 million, was submitted to the DEQ in late February 2014. Using the Company’s best estimate of the probable cost for the remediation effort from the set of alternatives provided in the draft feasibility study report, PGE has a $3 million reserve for this matter as of March 31, 2014.
Based on the available evidence of previous rate recovery of incurred environmental remediation costs for PGE, as well as for other utilities operating within the same jurisdiction, the Company has concluded that the estimated cost of $3 million to remediate the Downtown Reach is probable of recovery. As a result, the Company also has a regulatory asset of $3 million for future recovery in prices as of March 31, 2014. The Company included recovery of the regulatory asset in its 2015 General Rate Case filed with the OPUC in February 2014.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Alleged Violation of Environmental Regulations at Colstrip

On July 30, 2012, PGE received a Notice of Intent to Sue (Notice) for violations of the Clean Air Act (CAA) at Colstrip Steam Electric Station (CSES) from counsel on behalf of the Sierra Club and the Montana Environmental Information Center (MEIC). The Notice was also addressed to the other CSES co-owners, including PPL Montana, LLC, the operator of CSES. PGE has a 20% ownership interest in Units 3 and 4 of CSES. The Notice alleges certain violations of the CAA, including New Source Review, Title V, and opacity requirements, and states that the Sierra Club and MEIC will: i) request a United States District Court to impose injunctive relief and civil penalties; ii) require a beneficial environmental project in the areas affected by the alleged air pollution; and iii) seek reimbursement of Sierra Club’s and MEIC’s costs of litigation and attorney’s fees.

The Sierra Club and MEIC asserted that the CSES owners violated the Title V air quality operating permit during portions of 2008 and 2009 and that the owners have violated the CAA by failing to timely submit a complete air quality operating permit application to the Montana Department of Environmental Quality (MDEQ). The Sierra Club and MEIC also asserted violations of opacity provisions of the CAA.

On March 6, 2013, the Sierra Club and MEIC sued the CSES co-owners, including PGE, for these and additional alleged violations of various environmental related regulations. The plaintiffs are seeking relief that includes an injunction preventing the co-owners from operating CSES except in accordance with the CAA, the Montana State Implementation Plan, and the plant’s federally enforceable air quality permits. In addition, plaintiffs are seeking civil penalties against the co-owners including $32,500 per day for each violation occurring through January 12, 2009, and $37,500 per day for each violation occurring thereafter. On May 3, 2013, the defendants filed a motion to dismiss 36 of the 39 claims in the suit. On September 27, 2013, the plaintiffs filed an amended complaint that deleted the Title V and opacity claims, added claims associated with two 2011 projects, and expanded the scope of certain claims to encompass approximately 40 additional projects. This matter is scheduled for trial in March 2015. On March 1, 2014, the plaintiffs filed another Notice of Intent to Sue, which would amend the original suit by adding twelve projects to the case.

Management believes that it is reasonably possible that this matter could result in a loss to the Company. However, due to the uncertainties concerning this matter, PGE cannot predict the outcome or determine whether it would have a material impact on the Company.

Challenge to AOC Related to Colstrip Wastewater Facilities

In August 2012, the operator of CSES entered into an AOC with the MDEQ, which established a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at CSES. Within five years, under this AOC, the operator of CSES is required to provide financial assurance to MDEQ for the costs associated with closure of the waste water treatment facilities. This will establish an obligation for asset retirement, but the operator of CSES is unable at this time to estimate these costs, which will require both public and agency review.

In September 2012, Earthjustice filed an affidavit pursuant to Montana’s Major Facility Siting Act (MFSA) that sought review of the AOC by Montana’s Board of Environmental Review (BER), on behalf of environmental groups Sierra Club, the MEIC, and the National Wildlife Federation. In September 2012, the operator of CSES filed an election with the BER to have this proceeding conducted in Montana state district court as contemplated by the MFSA. In October 2012, Earthjustice, on behalf of Sierra Club, the MEIC and the National Wildlife Federation, filed with the Montana state district court a petition for a writ of mandamus and a complaint for declaratory relief alleging that the AOC fails to require the necessary actions under the MFSA and the Montana Water Quality Act with respect to groundwater seepage from the wastewater facilities at CSES. On May 31, 2013, the district court judge granted the defendants’ motion to dismiss the petition for the writ of mandamus.

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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)


Management believes that it is reasonably possible that this matter could result in a loss to the Company. However, due to the uncertainties concerning this matter, PGE cannot predict the outcome or determine whether it would have a material impact on the Company.

Oregon Tax Court Ruling

On September 17, 2012, the Oregon Tax Court issued a ruling contrary to an Oregon Department of Revenue (DOR) interpretation and a current Oregon administrative rule, regarding the treatment of wholesale electricity sales. The underlying issue is whether electricity should be treated as tangible or intangible property for state income tax apportionment purposes. The DOR has appealed the ruling of the Oregon Tax Court to the Oregon Supreme Court. It is uncertain whether the ruling will be upheld.

If the ruling is upheld, PGE estimates that its income tax liability could increase by as much as $7 million due to an increase in the tax rate at which deferred tax liabilities would be recognized in future years. For open tax years per Oregon statute, 2008 through 2012, the Company entered into a closing agreement with the DOR during the third quarter 2013 under which the DOR agreed to the tax apportionment methodology utilized on the tax returns relating to those years.

Management believes that it is reasonably possible that this matter could result in a loss to the Company. However, due to the uncertainties concerning this matter, PGE cannot predict the outcome of this matter.

Other Matters

PGE is subject to other regulatory, environmental, and legal proceedings, investigations, and claims that arise from time to time in the ordinary course of business, which may result in judgments against the Company. Although management currently believes that resolution of such matters, individually and in the aggregate, will not have a material impact on its financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties, and management’s view of these matters may change in the future.

NOTE 8: GUARANTEES

PGE enters into financial agreements and power and natural gas purchase and sale agreements that include indemnification provisions relating to certain claims or liabilities that may arise relating to the transactions contemplated by these agreements. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. PGE periodically evaluates the likelihood of incurring costs under such indemnities based on the Company’s historical experience and the evaluation of the specific indemnities. As of March 31, 2014, management believes the likelihood is remote that PGE would be required to perform under such indemnification provisions or otherwise incur any significant losses with respect to such indemnities. The Company has not recorded any liability on the condensed consolidated balance sheets with respect to these indemnities.

NOTE 9: VARIABLE INTEREST ENTITIES

PGE has determined that it is the primary beneficiary of two variable interest entities (VIEs) and, therefore, consolidates the VIEs within the Company’s condensed consolidated financial statements as of March 31, 2014. Both arrangements were formed for the sole purpose of designing, developing, constructing, owning, maintaining, operating, and financing photovoltaic solar power facilities located on real property owned by third parties, and selling the energy generated by the facilities. PGE is the Managing Member in each of the Limited Liability Companies (LLCs), holding less than 1% equity interest in each entity, and a financial institution is the Investor Member, holding more than 99% equity interest in each entity. PGE has determined that its interests in these VIEs contain the obligation to absorb the variability of the entities that could potentially be significant to the VIEs, and the Company has the power to direct the activities that most significantly affect the entities’ economic performance.


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PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)

Determining whether PGE is the primary beneficiary of a VIE is complex, subjective, and requires the use of judgments and assumptions. Significant judgments and assumptions made by PGE in determining it is the primary beneficiary of these LLCs include the following: i) PGE has the expertise to own and operate electric generating facilities and is authorized to operate the LLCs pursuant to the operating agreements, and, therefore, PGE has control over the most significant activities of the LLCs; ii) PGE expects to own 100% of the LLCs shortly after five years have elapsed from when the facility was placed in service, at which time the facilities will have approximately 75% of their estimated useful life remaining; and iii) based on projections prepared in accordance with the operating agreements, PGE expects to absorb a majority of any expected losses of the LLCs.

Included in PGE’s condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 are LLC net assets of $5 million, consisting primarily of Electric utility plant, net, with $1 million of Cash and cash equivalents. These assets can only be used to settle the obligations of the consolidated VIEs.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Forward-Looking Statements

The information in this report includes statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements that relate to expectations, beliefs, plans, assumptions and objectives concerning future results of operations, business prospects, future loads, the outcome of litigation and regulatory proceedings, future capital expenditures, market conditions, future events or performance and other matters. Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will likely result,” “will continue,” “should,” or similar expressions are intended to identify such forward-looking statements.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed. PGE’s expectations, beliefs and projections are expressed in good faith and are believed by PGE to have a reasonable basis including, but not limited to, management’s examination of historical operating trends and data contained in records and other data available from third parties, but there can be no assurance that PGE’s expectations, beliefs or projections will be achieved or accomplished.

In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes for PGE to differ materially from those discussed in forward-looking statements include:

governmental policies and regulatory audits, investigations and actions, including those of the FERC and OPUC with respect to allowed rates of return, financings, electricity pricing and price structures, acquisition and disposal of facilities and other assets, construction and operation of plant facilities, transmission of electricity, recovery of power costs and capital investments, and current or prospective wholesale and retail competition;

economic conditions that result in decreased demand for electricity, reduced revenue from sales of excess energy during periods of low wholesale market prices, impaired financial stability of vendors and service providers and elevated levels of uncollectible customer accounts;

the outcome of legal and regulatory proceedings and issues including, but not limited to, the matters described in Note 7, Contingencies, in the Notes to the Condensed Consolidated Financial Statements;

unseasonable or extreme weather and other natural phenomena, which could affect customers’ demand for power and PGE’s ability and cost to procure adequate power and fuel supplies to serve its customers, and

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could increase the Company’s costs to maintain its generating facilities and transmission and distribution systems;

operational factors affecting PGE’s power generating facilities, including forced outages, hydro and wind conditions, and disruption of fuel supply, which may cause the Company to incur repair costs, as well as increased power costs for replacement power;

the failure to complete capital projects on schedule and within budget or the abandonment of capital projects, which could result in the Company’s inability to recover project costs;

volatility in wholesale power and natural gas prices, which could require PGE to issue additional letters of credit or post additional cash as collateral with counterparties pursuant to existing power and natural gas purchase agreements;

capital market conditions, including access to capital, interest rate volatility, reductions in demand for investment-grade commercial paper, as well as changes in PGE’s credit ratings, which could have an impact on the Company’s cost of capital and its ability to access the capital markets to support requirements for working capital, construction of capital projects, and the repayments of maturing debt;

future laws, regulations, and proceedings that could increase the Company’s costs or affect the operations of the Company’s thermal generating plants by imposing requirements for additional emissions controls or significant emissions fees or taxes, particularly with respect to coal-fired generating facilities, in order to mitigate carbon dioxide, mercury and other gas emissions;

changes in wholesale prices for fuels, including natural gas, coal and oil, and the impact of such changes on the Company’s power costs;

changes in the availability and price of wholesale power;

changes in residential, commercial, and industrial customer growth, and in demographic patterns, in PGE’s service territory;

the effectiveness of PGE’s risk management policies and procedures;

declines in the fair value of securities held for the defined benefit pension plans and other benefit plans, which could result in increased funding requirements for such plans;

changes in, and compliance with, environmental and endangered species laws and policies;

the effects of climate change, including changes in the environment that may affect energy costs or consumption, increase the Company’s costs, or adversely affect its operations;

new federal, state, and local laws that could have adverse effects on operating results;

cyber security attacks, data security breaches, or other malicious acts that cause damage to the Company’s generation and transmission facilities or information technology systems, or result in the release of confidential customer and proprietary information;

employee workforce factors, including a significant number of employees approaching retirement, potential strikes, work stoppages, and transitions in senior management;

political, economic, and financial market conditions;

natural disasters and other risks, such as earthquake, flood, drought, lightning, wind, and fire;

financial or regulatory accounting principles or policies imposed by governing bodies; and

acts of war or terrorism.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, PGE undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors

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emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide an understanding of the business environment, results of operations, and financial condition of PGE. MD&A should be read in conjunction with the Company’s condensed consolidated financial statements contained in this report, as well as the consolidated financial statements and disclosures in its Annual Report on Form 10-K for the year ended December 31, 2013, and other periodic and current reports filed with the SEC.

Capital Requirements and Financing—Pursuant to PGE’s latest acknowledged IRP and the result of the Company’s request for proposal processes completed in 2013, PGE is in the process of constructing three new generation resources as follows:

Port Westward Unit 2 (PW2)—Construction commenced in May 2013 on PW2, which is a 220 MW natural gas-fired plant located adjacent to the Port Westward and Beaver natural gas-fired generating plants near Clatskanie, Oregon. This project is currently on budget at an estimated total cost of $300 million, excluding AFDC, and is expected to be online in the first quarter of 2015. The Company has requested in its 2015 General Rate Case that cost recovery for the project begin at the point at which the plant is placed into service;

Tucannon River wind farm (Tucannon River)—Construction commenced in September 2013 on Tucannon River, which is a wind farm located in southeastern Washington with a nameplate capacity of 267 MW, consisting of 116 turbines each with a generating capacity of 2.3 MW. This project is currently on budget at an estimated total cost of $500 million, excluding AFDC, and is expected to be online between December 2014 and March 31, 2015. The Company had requested recovery of costs related to the project in its 2015 General Rate Case to begin when the plant is placed into service, which at the time was expected to be in the first half of 2015. However, in March 2014, PGE submitted a renewable adjustment clause mechanism (RAC) filing to the OPUC to allow for deferral and recovery of costs to begin earlier if the project should come online earlier than contemplated in the 2015 General Rate Case; and

Carty Generating Station (Carty)—Construction commenced in January 2014 on Carty, which is a 440 MW natural gas-fired power plant located in Eastern Oregon, adjacent to Boardman. This project is currently on budget at an estimated total cost of $450 million, excluding AFDC, and is expected to be online in 2016.
The Company expects to file for recovery of costs related to this project in a future general rate case.

In total, the Company’s capital expenditures in 2014 are expected to approximate $1 billion, which includes an estimated $640 million related to the three new generation resources under construction discussed above. For additional information on these three new generation resources, see “Capital Requirements” in the Liquidity and Capital Resources section of this Item 2.

PGE expects to fund such estimated capital requirements with a combination of cash from operations, which is expected to range from $540 million to $560 million, and proceeds from long-term loans and issuances of debt securities ranging from $550 million to $600 million. For additional information, see “Liquidity” and “Debt and Equity Financings” in the Liquidity and Capital Resources section of this Item 2.

General Rate Case—On January 1, 2014, new customer prices went into effect pursuant to the OPUC order issued on PGE’s 2014 General Rate Case. The OPUC authorized a $61 million increase in annual revenues, representing an approximate 4% overall increase in customer prices. The increase includes improvements to existing power plants and wind forecasting, new Clackamas River fish-sorting facilities, a disaster-preparedness center, technology investments, employee benefit costs and compliance with new federal regulations. In addition, the order approves a

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capital structure of 50% debt and 50% equity, a return on equity of 9.75%, a cost of capital of 7.65%, and an average rate base of approximately $3.1 billion.

On February 13, 2014, PGE filed with the OPUC a 2015 General Rate Case, which is based on a 2015 test year. PGE requested an $81 million net increase in annual revenues, representing an approximate 4.6% overall increase in customer prices. The net increase in annual revenues consists of the following (in millions):
New generating plants:
 
Port Westward Unit 2
$
51

Tucannon River wind farm
47

Base business cost increase
12

Less: customer credits*
(29
)
Annual revenue net increase
$
81

 
* Includes approximately $17 million for the return of $50 million over three years, 2015 through 2017, for the settlement of a legal matter concerning costs associated with the operation of the Independent Spent Fuel Storage Installation (ISFSI) at Trojan. Also includes credits related to the return of ISFSI tax credits to customers and additional Bonneville Power Administration (BPA) Regional Power Act refund to residential customers.

PGE is proposing a capital structure of 50% debt and 50% equity, a return on equity of 10%, a cost of capital of 7.78%, and an average rate base of approximately $3.9 billion.

Regulatory review of the 2015 General Rate Case will continue throughout 2014, with a final order expected to be issued by the OPUC by mid-December 2014. New customer prices are expected to become effective in 2015, with the first price increase effective January 1 and two additional price increases effective as two new generating plants become operational. PW2 is expected to be placed in service in the first quarter of 2015 and Tucannon River is expected to be placed in service between December 2014 and March 31, 2015.

Operating Activities—PGE is a vertically integrated electric utility engaged in the generation, transmission, distribution, and retail sale of electricity, as well as the wholesale purchase and sale of electricity and natural gas. The Company generates revenues and cash flows primarily from the sale and distribution of electricity to customers in its service territory.

The impact of seasonal weather conditions on demand for electricity can cause the Company’s revenues and income from operations to fluctuate from period to period. PGE is a winter-peaking utility that typically experiences its highest retail energy sales during the winter heating season, although a slightly lower peak occurs in the summer that generally results from air conditioning demand. Price changes and customer usage patterns, which can be affected by the economy, also have an effect on revenues while the availability and price of purchased power and fuel can affect income from operations.

Customers and Demand—Retail energy deliveries for the first quarter of 2014 decreased 1.7% from the first quarter of 2013, which was primarily driven by a decline in residential energy deliveries, despite comparable weather conditions, and a decline in industrial energy deliveries largely due to decreased demand from a paper production customer. Energy efficiency and conservation efforts by retail customers continue to influence total energy deliveries, although the financial impacts to the Company of such efforts are partially mitigated by the decoupling mechanism. The decline was partially offset by the effects of a 1% increase in the average number of total retail customers served.


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The following table indicates the average number of retail customers, and corresponding energy deliveries, by customer class, for the periods indicated and includes customers purchasing their energy from Electricity Service Suppliers (ESSs):
 
Three Months Ended March 31,
 
 
 
2014
 
2013
 
% Increase
/(Decrease)in Energy
Deliveries
 
Average
Number of
Customers
 
Retail Energy
Deliveries*
 
Average
Number of
Customers
 
Retail Energy
Deliveries*
 
Residential
733,719

 
2,174

 
726,451

 
2,229

 
(2.5
)%
Commercial
103,684

 
1,781

 
102,765

 
1,787

 
(0.3
)
Industrial
262

 
1,001

 
272

 
1,024

 
(2.2
)
Total
837,665

 
4,956

 
829,488

 
5,040

 
(1.7
)
 
 
 
 
 
 
 
 
 
 
 *
In thousands of MWh.

Power Operations—To meet the energy needs of its retail customers, the Company utilizes a combination of its own generating resources and wholesale market transactions. Based on numerous factors, including plant availability, customer demand, river flows, wind conditions, and current wholesale prices, PGE makes economic dispatch decisions continuously in an effort to obtain reasonably-priced power for its retail customers. In addition, PGE’s thermal generating plants require varying levels of annual maintenance, during which the respective plant is unavailable to provide power. As a result, the amount of power generated and purchased in the wholesale market to meet the Company’s retail load requirement can vary from period to period. During the first quarters of 2014 and 2013, availability of the plants PGE operates approximated 95% and 97%, respectively, with the availability of Colstrip Units 3 and 4, in which the Company has a 20% ownership interest but does not operate, approximating 82% and 97%, respectively. Colstrip Unit 4 was off-line most of the month of January 2014 due to repairs to the generator. As a result, PGE incurred approximately $2 million of incremental replacement power costs in the first quarter of 2014 related to this plant outage.

During the first quarter of 2014, the Company’s generating plants provided approximately 59% of its retail load requirement, compared with 62% in the first quarter of 2013. The decrease in the proportion of power generated to meet the Company’s retail load requirement was largely the result of the difference in the economic dispatch decisions made throughout the respective periods, as well as the outage of Colstrip Unit 4 in January 2014.

Energy received from PGE-owned hydroelectric plants and under contracts from mid-Columbia hydroelectric projects increased 4% in the first quarter of 2014 compared with the first quarter of 2013. These resources provided approximately 18% of the Company’s retail load requirement for the first quarters of 2014 and 2013. Through March, energy received from these sources approximated projections included in the Company’s Annual Power Cost Update Tariff (AUT) during 2014, compared with falling short of such projection by 3% during 2013. Any excess in hydro generation from that projected in the AUT generally displaces power from higher cost sources, while any shortfall is generally replaced with power from higher cost sources. Energy from hydro resources is expected to approximate projections included in the AUT for 2014.

Energy expected to be received from PGE-owned wind generating resources (Biglow Canyon) is projected annually in the AUT. Any excess in wind generation from that projected in the AUT generally displaces power from higher cost sources, while any shortfall is generally replaced with power from higher cost sources. Energy received from Biglow Canyon fell short of that projected in PGE’s AUT by 11% in the first quarters of 2014 and 2013, and provided approximately 4% of the Company’s retail load requirement for the first quarter of 2014, compared with 5% for the first quarter of 2013.

Pursuant to the Company’s power cost adjustment mechanism (PCAM), customer prices can be adjusted to reflect a portion of the difference between each year’s forecasted net variable power cost (NVPC) included in customer

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prices (baseline NVPC) and actual NVPC for the year. NVPC consists of the cost of power purchased and fuel used to generate electricity to meet PGE’s retail load requirements, as well as the cost of settled electric and natural gas financial contracts (all classified as Purchased power and fuel expense in the Company’s condensed consolidated statements of income) and is net of wholesale revenues, which are classified as Revenues, net in the condensed consolidated statements of income. To the extent actual NVPC, subject to certain adjustments, is above or below the deadband, the PCAM provides for 90% of the variance to be collected from or refunded to customers, respectively, subject to a regulated earnings test. Pursuant to the regulated earnings test, a refund will occur only to the extent that it results in PGE’s actual regulated return on equity (ROE) for that year being no less than 1% above the Company’s latest authorized ROE, while a collection will occur only to the extent that it results in PGE’s actual regulated ROE for that year being no greater than 1% below the Company’s authorized ROE. Any estimated refund to customers pursuant to the PCAM is recorded as a reduction in Revenues in the Company’s condensed consolidated statements of income, while any estimated collection from customers is recorded as a reduction in Purchased power and fuel expense. The deadband range is from $15 million below to $30 million above baseline NVPC.

For the first quarter of 2014, actual NVPC was approximately $3 million below baseline NVPC. Based on forecast data, NVPC for the year ending December 31, 2014 is currently estimated to be below baseline NVPC, but within the deadband range; accordingly, no estimated collection from or refund to customers is expected for 2014.

For the first quarter of 2013, actual NVPC was approximately $1 million below baseline NVPC. For the full year 2013, actual NVPC was $11 million above baseline NVPC, which is within the established deadband range. Accordingly, no estimated collection from customers was recorded for 2013.

Legal, Regulatory, and Environmental Matters—PGE is a party to certain proceedings, the ultimate outcome of which may have a material impact on the results of operations and cash flows in future reporting periods. Such proceedings include, but are not limited to, the following matters:

Challenges to recovery of the Company’s investment in its closed Trojan plant;

Claims for refunds related to wholesale energy sales during 2000 - 2001 in the Pacific Northwest Refund Proceeding; and

An investigation of environmental matters regarding Portland Harbor.

For additional information regarding the above and other matters, see Note 7, Contingencies, in the Notes to Condensed Consolidated Financial Statements.

The following discussion highlights certain regulatory items that have impacted the Company’s revenues, results of operations, or cash flows for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 or have affected retail customer prices, as authorized by the OPUC. In some cases, the Company has deferred the related expenses or benefits as regulatory assets or liabilities, respectively, for later amortization and inclusion in customer prices, pending OPUC review and authorization.

Power Costs—Pursuant to the AUT process, PGE files annually an estimate of power costs for the following year. As part of its 2014 General Rate Case, PGE included a projected $17 million reduction in power costs in its request for an overall increase in revenues. The power cost portion of the request was moved to a separate docket at the OPUC and was approved and included in the overall $61 million annual revenue increase authorized by the OPUC in the Company’s 2014 General Rate Case with new prices beginning January 1, 2014.
    
In October 2013, the OPUC issued an order approving the results of the PCAM for 2012, which, based on a regulated earnings test, did not produce a refund to (or collection from) customers. Consequently, no cash flow impact will occur in 2014 as a result of the PCAM.

Renewable Resource Costs—Pursuant to its RAC, PGE can recover in customer prices prudently incurred costs of renewable resources that are expected to be placed in service in the current year. The Company may submit a filing to the OPUC by April 1st each year, with prices expected to become effective January 1st of the following year. As part of the RAC, the OPUC has authorized the deferral of eligible costs not yet included in customer prices until the January 1st effective date.

In March 2014, PGE submitted to the OPUC a renewable adjustment clause filing requesting deferral and recovery of the net revenue requirement of Tucannon River in the event that the facility were to come online prior to the inclusion of the project in base rates as proposed in the 2015 General Rate Case. The Company had previously reported that the facility was expected to be in service in the first half of 2015. Based on progress of the project, the Company has revised the estimated timeline for completion of the facility and believes that the project will be in service between December 2014 and March 31, 2015.

PGE did not submit a RAC filing to the OPUC in 2013 as it did not place renewable resources into service during 2013.

Decoupling—The decoupling mechanism, which the OPUC has authorized through 2016, is intended to provide for recovery of margin lost as a result of a reduction in electricity sales attributable to energy efficiency and conservation efforts by residential and certain commercial customers. The mechanism provides for collection from (or refund to) customers if weather adjusted use per customer is less (or more) than that projected in the Company’s most recent approved general rate case.

Pursuant to the Company’s 2014 General Rate Case, the OPUC approved a change in the refund or collection period such that it will begin January 1, rather than June 1. As such, collection of the estimated $5 million recorded during 2013, which resulted from variances between actual weather adjusted use per customer and that projected in the 2011 General Rate Case, subject to OPUC approval, would occur over a one year period beginning January 1, 2015.

For the three months ended March 31, 2014, the Company has recorded an estimated collection of $4 million. Any resulting collection from customers for the 2014 year would begin January 1, 2016.

Capital deferral—In the 2011 General Rate Case, the OPUC authorized the Company to defer the costs associated with four capital projects that were not completed at the time the 2011 General Rate Case was approved. A regulatory asset of $16 million was recorded in 2012, for potential recovery in customer prices, subject to an earnings test, with an offsetting credit to Depreciation and amortization expense. The OPUC authorized recovery of the deferred costs over a one year period, with a resulting tariff effective January 1, 2014. During 2013, the Company deferred an additional $18 million of costs associated with these projects and plans to file for recovery of these deferred costs, subject to an earnings test, in July 2014 with new customer prices expected to be effective in January 2015.

Boardman Operating Life Adjustment—As part of the 2014 General Rate Case, the incremental depreciation expense that resulted from the shortened Boardman life was included in base customer prices, while recovery of the decommissioning costs continue under this separate tariff. The OPUC is currently considering the request for recovery of additional decommissioning costs that resulted from the acquisition of the additional 15% interest in Boardman on December 31, 2013. The tariff also provides for annual updates to decommissioning revenue requirements with revised prices to take effect each January 1.

Integrated Resource Plan (IRP)—PGE’s IRP outlines how the Company will meet future customer demand and describes PGE’s future energy supply strategy, assessing both new and existing technologies, market conditions, and regulatory requirements.

On March 27, 2014, PGE filed a new IRP (2013 IRP) with the OPUC, which outlines the Company’s expectations for resource needs and resource portfolio performance over the next 20 years, and includes an “Action Plan,” which covers PGE’s proposed actions over the next two to four years (through 2017). Over this time period, the Company projects energy requirements and energy available through its generation resources and long-term power purchase agreements to be in approximate balance.

The Action Plan of the 2013 IRP includes the following, among other components, between 2014 and 2017:

Seek renewal, or partial renewal, of expiring power purchase agreements for energy generated from hydroelectric projects, if available and cost-effective for our customers;

Acquire a total of 124 MWa of energy efficiency through continuation of Energy Trust of Oregon programs;

To help manage peak load conditions and other supply contingencies, acquire 48 MW of demand response and PGE dispatchable standby generation from our customers;

In preparation for the next IRP, perform various research and studies related to load forecast and energy efficiency projections, distributed photovoltaic solar application within PGE’s service territory, the viability of large-scale biomass operations, fuel supply, wind integration needs, and operational flexibility requirements; and

Retain and acquire transmission service through BPA’s Open Access Transmission Tariff to interconnect new and existing resources in eastern Oregon to PGE’s service territory.

The 2013 IRP also incorporates the three new resources that are currently under construction, which are expected to be in service between December 2014 and 2016. For additional information on these capital projects see “Capital Requirements” in the Liquidity and Capital Resources section in this Item 2.

OPUC review of the 2013 IRP will continue throughout 2014, with an acknowledgement from the OPUC not expected before September 2014.

Critical Accounting Policies

PGE’s critical accounting policies are outlined in Item 7 of the Company’s Annual Report on Form 10‑K for the year ended December 31, 2013, filed with the SEC on February 14, 2014.


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Results of Operations

The following table contains condensed consolidated statements of income information for the periods presented (dollars in millions):
 
Three Months Ended March 31,
 
2014
 
2013
Revenues, net
$
493

 
100
 %
 
$
473

 
100
 %
Purchased power and fuel
184

 
37

 
192

 
41

Gross margin
309

 
63

 
281

 
59

Other operating expenses:
 
 
 
 
 
 
 
Production and distribution
54

 
11

 
51

 
11

Administrative and other
54

 
11

 
54

 
11

Depreciation and amortization
75

 
15

 
62

 
13

Taxes other than income taxes
28

 
6

 
27

 
6

Total other operating expenses
211

 
43

 
194

 
41

Income from operations
98

 
20

 
87

 
18

Interest expense*
25

 
5

 
25

 
5

Other income (expense):
 
 
 
 
 
 
 
Allowance for equity funds used during construction
6

 
1

 
2

 

Miscellaneous income (expense), net
(1
)
 

 
1

 

Other income, net
5

 
1

 
3

 

Income before income tax expense
78

 
16

 
65

 
13

Income tax expense
20

 
4

 
17

 
3

Net income
58

 
12

 
48