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
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues, net
|
$
|
449
|
|
|
$
|
428
|
|
|
$
|
979
|
|
|
$
|
915
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Purchased power and fuel
|
118
|
|
|
126
|
|
|
259
|
|
|
275
|
|
Generation, transmission and distribution
|
81
|
|
|
64
|
|
|
162
|
|
|
130
|
|
Administrative and other
|
65
|
|
|
61
|
|
|
133
|
|
|
122
|
|
Depreciation and amortization
|
86
|
|
|
83
|
|
|
170
|
|
|
165
|
|
Taxes other than income taxes
|
31
|
|
|
30
|
|
|
64
|
|
|
60
|
|
Total operating expenses
|
381
|
|
|
364
|
|
|
788
|
|
|
752
|
|
Income from operations
|
68
|
|
|
64
|
|
|
191
|
|
|
163
|
|
Interest expense, net
|
30
|
|
|
27
|
|
|
60
|
|
|
54
|
|
Other income:
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction
|
3
|
|
|
8
|
|
|
5
|
|
|
15
|
|
Miscellaneous income, net
|
1
|
|
|
1
|
|
|
2
|
|
|
—
|
|
Other income, net
|
4
|
|
|
9
|
|
|
7
|
|
|
15
|
|
Income before income tax expense
|
42
|
|
|
46
|
|
|
138
|
|
|
124
|
|
Income tax expense
|
10
|
|
|
9
|
|
|
33
|
|
|
26
|
|
Net income
|
$
|
32
|
|
|
$
|
37
|
|
|
$
|
105
|
|
|
$
|
98
|
|
Other comprehensive income
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Comprehensive income
|
$
|
33
|
|
|
$
|
37
|
|
|
$
|
105
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding—basic and diluted (in thousands)
|
89,063
|
|
|
88,902
|
|
|
89,033
|
|
|
88,867
|
|
|
|
|
|
|
|
|
|
Earnings per share—basic and diluted
|
$
|
0.36
|
|
|
$
|
0.42
|
|
|
$
|
1.18
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
$
|
0.66
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
33
|
|
|
$
|
6
|
|
Accounts receivable, net
|
139
|
|
|
155
|
|
Unbilled revenues
|
68
|
|
|
107
|
|
Inventories
|
82
|
|
|
82
|
|
Regulatory assets—current
|
47
|
|
|
36
|
|
Other current assets
|
43
|
|
|
77
|
|
Total current assets
|
412
|
|
|
463
|
|
Electric utility plant, net
|
6,573
|
|
|
6,434
|
|
Regulatory assets—noncurrent
|
536
|
|
|
498
|
|
Nuclear decommissioning trust
|
41
|
|
|
41
|
|
Non-qualified benefit plan trust
|
36
|
|
|
34
|
|
Other noncurrent assets
|
55
|
|
|
57
|
|
Total assets
|
$
|
7,653
|
|
|
$
|
7,527
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(Dollars in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
90
|
|
|
$
|
129
|
|
Liabilities from price risk management activities—current
|
46
|
|
|
44
|
|
Current portion of long-term debt
|
150
|
|
|
150
|
|
Accrued expenses and other current liabilities
|
226
|
|
|
254
|
|
Total current liabilities
|
512
|
|
|
577
|
|
Long-term debt, net of current portion
|
2,200
|
|
|
2,200
|
|
Regulatory liabilities—noncurrent
|
989
|
|
|
958
|
|
Deferred income taxes
|
685
|
|
|
669
|
|
Unfunded status of pension and postretirement plans
|
286
|
|
|
281
|
|
Liabilities from price risk management activities—noncurrent
|
158
|
|
|
125
|
|
Asset retirement obligations
|
165
|
|
|
161
|
|
Non-qualified benefit plan liabilities
|
106
|
|
|
105
|
|
Other noncurrent liabilities
|
160
|
|
|
107
|
|
Total liabilities
|
5,261
|
|
|
5,183
|
|
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 June 30, 2017 and December 31, 2016
|
—
|
|
|
—
|
|
Common stock, no par value, 160,000,000 shares authorized; 89,062,560 and 88,946,704 shares issued and outstanding as of
June 30, 2017 and December 31, 2016, respectively
|
1,203
|
|
|
1,201
|
|
Accumulated other comprehensive loss
|
(7
|
)
|
|
(7
|
)
|
Retained earnings
|
1,196
|
|
|
1,150
|
|
Total equity
|
2,392
|
|
|
2,344
|
|
Total liabilities and equity
|
$
|
7,653
|
|
|
$
|
7,527
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
105
|
|
|
$
|
98
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
170
|
|
|
165
|
|
Deferred income taxes
|
20
|
|
|
20
|
|
Pension and other postretirement benefits
|
13
|
|
|
14
|
|
Allowance for equity funds used during construction
|
(5
|
)
|
|
(15
|
)
|
Decoupling mechanism deferrals, net of amortization
|
(15
|
)
|
|
(3
|
)
|
Other non-cash income and expenses, net
|
16
|
|
|
12
|
|
Changes in working capital:
|
|
|
|
Decrease in accounts receivable and unbilled revenues
|
55
|
|
|
59
|
|
Increase in inventories
|
—
|
|
|
(4
|
)
|
Decrease in margin deposits, net
|
7
|
|
|
18
|
|
Decrease in accounts payable and accrued liabilities
|
(29
|
)
|
|
(13
|
)
|
Other working capital items, net
|
11
|
|
|
6
|
|
Other, net
|
(15
|
)
|
|
(19
|
)
|
Net cash provided by operating activities
|
333
|
|
|
338
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(245
|
)
|
|
(319
|
)
|
Sales of Nuclear decommissioning trust securities
|
11
|
|
|
11
|
|
Purchases of Nuclear decommissioning trust securities
|
(9
|
)
|
|
(11
|
)
|
Other, net
|
(2
|
)
|
|
—
|
|
Net cash used in investing activities
|
(245
|
)
|
|
(319
|
)
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
|
|
|
|
PORTLAND GENERAL ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Cash flows from financing activities:
|
|
|
|
Proceeds from issuance of long-term debt
|
—
|
|
|
265
|
|
Payments on long-term debt
|
—
|
|
|
(133
|
)
|
Change in short-term debt
|
—
|
|
|
(6
|
)
|
Dividends paid
|
(57
|
)
|
|
(53
|
)
|
Other
|
(4
|
)
|
|
(3
|
)
|
Net cash (used in) provided by financing activities
|
(61
|
)
|
|
70
|
|
Increase in cash and cash equivalents
|
27
|
|
|
89
|
|
Cash and cash equivalents, beginning of period
|
6
|
|
|
4
|
|
Cash and cash equivalents, end of period
|
$
|
33
|
|
|
$
|
93
|
|
|
|
|
|
Supplemental cash flow information is as follows:
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
$
|
55
|
|
|
$
|
49
|
|
Cash paid for income taxes
|
13
|
|
|
7
|
|
Non-cash investing and financing activities:
|
|
|
|
Assets obtained under capital lease
|
55
|
|
|
57
|
|
|
See accompanying notes to condensed consolidated financial statements.
|
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, purchase, 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. The Company’s corporate headquarters is located in Portland, Oregon and its approximately
4,000
square mile, state-approved service area allocation, located entirely within the State of Oregon, encompasses
51
incorporated cities, of which Portland and Salem are the largest. As of June 30, 2017, PGE served approximately
872,000
retail customers with a service area population of approximately
1.9 million
, comprising approximately
46%
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 2017 presentation,
PGE has reclassified Decoupling mechanism deferrals, net of amortization of
$(3) million
from Other non-cash income and expenses, net within the operating activities section and reclassified both Payments on capital leases of
$2 million
and Debt issuance costs of
$1 million
to Other within the financing activities section of the condensed consolidated statement of cash flows for the six months ended June 30, 2016.
The financial information included herein for the three and six months ended
June 30, 2017
and
2016
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 income and comprehensive income, and condensed consolidated cash flows of the Company for these interim periods. The financial information as of
December 31, 2016
is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended
December 31, 2016
, included in Item 8 of PGE’s Annual Report on Form 10-K, filed with the SEC on
February 17, 2017
, which should be read in conjunction with such condensed consolidated financial statements.
Comprehensive Income
PGE recorded a net
$1 million
gain in other comprehensive income for the three month period ended
June 30, 2017
due to the combination of changes in compensation retirement benefit liability and amortization, net of taxes of an immaterial amount, and other miscellaneous adjustments. For the six month period ended June 30, 2017,
no
material change has occurred in other comprehensive income. The Company had
no
material components of other comprehensive income to report for the three and six month periods ended
June 30, 2016
.
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
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
loss contingencies, as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results experienced by the Company could differ materially from those estimates.
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.
Recent Accounting Pronouncements
Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), creates a new Topic 606 and supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 provides a five-step analysis of transactions to determine when and how revenue is recognized that consists of: i) identify the contract with the customer; ii) identify the performance obligations in the contract; iii) determine the transaction price; iv) allocate the transaction price to the performance obligations; and v) recognize revenue when or as each performance obligation is satisfied. Companies can transition to the requirements of this ASU either retrospectively (full retrospective method) or as a cumulative-effect adjustment as of the effective date (modified retrospective method), which is January 1, 2018 for calendar year-end public entities. The Company is evaluating which transition method it will elect. The Company does not anticipate any material changes to its revenue policy for tariff-based revenues, which comprises a majority of PGE’s retail revenues, as performance obligations are expected to be satisfied in a similar recognition pattern. PGE continues to evaluate the impacts the new guidance may have on its consolidated financial position, consolidated results of operations, and consolidated cash flows, particularly related to recognizing revenue for certain contracts where collectibility may be in question, certain matters of presentation of alternative revenue programs (such as decoupling), wholesale, and other operating revenue contracts.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
which supersedes the current lease accounting requirements for lessees and lessors within
Topic 840, Leases.
Pursuant to the new standard, lessees will be required to recognize all leases, including operating leases, on the balance sheet and record corresponding right-of-use assets and lease liabilities. Accounting for lessors is substantially unchanged from current accounting principles. Lessees will be required to classify leases as either finance leases or operating leases. Initial balance sheet measurement is similar for both types of leases; however, expense recognition and amortization of right-of-use assets will differ. Operating leases will reflect lease expense on a straight-line basis, while finance leases will result in the separate presentation of interest expense on the lease liability (as calculated using the effective interest method) and amortization expense of the right-of-use asset. Quantitative and qualitative disclosures will also be required surrounding significant judgments made by management. The provisions of this pronouncement are effective for calendar year-end, public entities on January 1, 2019 and must be applied on a modified retrospective basis as of the beginning of the earliest comparative period presented. The new standard also provides reporting entities the option to elect a package of practical expedients for existing leases that commenced before the effective date. Early adoption is permitted. The Company is in the process of evaluating the impact to its consolidated financial position, consolidated results of operations, and consolidated cash flows of the adoption of ASU 2016-02.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU 2017-07). Pursuant to this ASU, only the service cost component of net periodic pension and postretirement benefit costs will be eligible for capitalization and should be applied on a prospective basis upon implementation. Also, the non-service
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
components are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations and should be applied on a retrospective basis upon implementation. For calendar year-end public entities, the update will be effective for annual periods beginning January 1, 2018. The Company does not plan to early adopt. The Company is in the process of evaluating the impact the guidance may have on its consolidated financial position and consolidated results of operations.
NOTE 2: BALANCE SHEET COMPONENTS
Inventories
PGE’s inventories, which are recorded at average cost, consist primarily of materials and supplies for use in operations, maintenance, and capital activities, as well as fuel, which includes natural gas, coal, and oil for use in the Company’s generating plants. Periodically, the Company assesses inventory for purposes of determining that inventory is recorded at the lower of average cost or net realizable value.
Other Current Assets
Other current assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
Prepaid expenses
|
$
|
34
|
|
|
$
|
48
|
|
Margin deposits
|
1
|
|
|
8
|
|
Assets from price risk management activities
|
5
|
|
|
18
|
|
Other
|
3
|
|
|
3
|
|
Other current assets
|
$
|
43
|
|
|
$
|
77
|
|
Electric Utility Plant, Net
Electric utility plant, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Electric utility plant
|
$
|
9,674
|
|
|
$
|
9,534
|
|
Construction work-in-progress
|
346
|
|
|
213
|
|
Total cost
|
10,020
|
|
|
9,747
|
|
Less: accumulated depreciation and amortization
|
(3,447
|
)
|
|
(3,313
|
)
|
Electric utility plant, net
|
$
|
6,573
|
|
|
$
|
6,434
|
|
Accumulated depreciation and amortization in the table above includes accumulated amortization related to intangible assets of
$277 million
and
$257 million
as of
June 30, 2017
and
December 31, 2016
, respectively. Amortization expense related to intangible assets was
$12 million
and
$10 million
for the
three months
ended
June 30, 2017
and
2016
, respectively, and
$23 million
and
$22 million
for the
six months ended June 30, 2017
and 2016, respectively. The Company’s intangible assets primarily consist of computer software development and hydro licensing costs.
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Regulatory Assets and Liabilities
Regulatory assets and liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Regulatory assets:
|
|
|
|
|
|
|
|
Price risk management
|
$
|
41
|
|
|
$
|
156
|
|
|
$
|
26
|
|
|
$
|
120
|
|
Pension and other postretirement plans
|
—
|
|
|
229
|
|
|
—
|
|
|
235
|
|
Deferred income taxes
|
—
|
|
|
82
|
|
|
—
|
|
|
86
|
|
Debt issuance costs
|
—
|
|
|
20
|
|
|
—
|
|
|
22
|
|
Other
|
6
|
|
|
49
|
|
|
10
|
|
|
35
|
|
Total regulatory assets
|
$
|
47
|
|
|
$
|
536
|
|
|
$
|
36
|
|
|
$
|
498
|
|
Regulatory liabilities:
|
|
|
|
|
|
|
|
Asset retirement removal costs
|
$
|
—
|
|
|
$
|
910
|
|
|
$
|
—
|
|
|
$
|
887
|
|
Trojan decommissioning activities
|
8
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Asset retirement obligations
|
—
|
|
|
51
|
|
|
—
|
|
|
49
|
|
Other
|
26
|
|
|
28
|
|
|
33
|
|
|
22
|
|
Total regulatory liabilities
|
$
|
34
|
|
*
|
$
|
989
|
|
|
$
|
51
|
|
*
|
$
|
958
|
|
* Included in Accrued expenses and other current liabilities in the condensed consolidated balance sheets.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
Regulatory liabilities—current
|
$
|
34
|
|
|
$
|
51
|
|
Accrued employee compensation and benefits
|
52
|
|
|
52
|
|
Accrued interest payable
|
25
|
|
|
25
|
|
Accrued dividends payable
|
31
|
|
|
30
|
|
Accrued taxes payable
|
25
|
|
|
25
|
|
Other
|
59
|
|
|
71
|
|
Total accrued expenses and other current liabilities
|
$
|
226
|
|
|
$
|
254
|
|
Credit Facilities
As of
June 30, 2017
, PGE had a
$500 million
revolving credit facility scheduled to expire in
November 2020
.
Pursuant to the terms of the agreement, the revolving credit facility may be used for general corporate purposes, as backup for commercial paper borrowings, and to 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. During the first quarter of 2017, PGE exercised one of the two one-year extensions available under the terms of the credit facility. Such action resulted in an updated expiration date of November 2020. The facility also contains a provision that requires annual fees based on PGE
’
s unsecured credit ratings, and contains customary covenants and default provisions, including a
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
requirement that limits consolidated indebtedness, as defined in the agreement, to
65%
of total capitalization. As of
June 30, 2017
, PGE was in compliance with this covenant with a
51.0%
debt-to-total capital ratio.
The Company 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 revolving credit facility.
PGE classifies any borrowings under the revolving credit facility and outstanding commercial paper as Short-term debt on the condensed consolidated balance sheets.
Under the revolving credit facility, as of
June 30, 2017
, since PGE had
no
borrowings outstanding, and
no
commercial paper or letters of credit issued, the aggregate unused available credit capacity under the revolving credit facility was
$500 million
.
In addition, PGE has four letter of credit facilities under which the Company can request letters of credit for original terms not to exceed one year. These facilities provide a total capacity of
$220 million
. The issuance of such letters of credit is subject to the approval of the issuing institution. Under these facilities, letters of credit for a total of
$56 million
were outstanding as of
June 30, 2017
. Letters of credit issued are not reflected on the Company’s condensed consolidated balance sheets.
Pursuant to an order issued by the Federal Energy Regulatory Commission (FERC), the Company is authorized to issue short-term debt in an aggregate amount of up to
$900 million
through
February 6, 2018
.
Long-term Debt
During the
six months ended June 30, 2017
, PGE did not
enter into any First Mortgage Bond (FMB) long-term debt transactions.
In May 2016, PGE entered into an unsecured credit agreement with certain financial institutions, under which the Company had the opportunity to obtain three separate term loans in an aggregate principal amount of up to
$200 million
by October 31, 2016. Under the agreement, PGE obtained the following term loans:
|
|
•
|
$50 million
on May 4, 2016;
|
|
|
•
|
$75 million
on June 15, 2016; and
|
|
|
•
|
$25 million
on October 31, 2016.
|
The term loan interest rates are set at the beginning of the interest period for periods of one, three, or six months, as selected by PGE, and are based on the London Interbank Offered Rate plus 63 basis points, and was
1.8%
as of
June 30, 2017
, with no other fees.
The credit agreement expires November 30,
2017
, at which time any amounts outstanding under the term loans become due and payable. Upon the occurrence of certain events of default, the Company’s obligations under the credit agreement may be accelerated. Such events of default include payment defaults to lenders under the credit agreement, covenant defaults and other customary defaults for financings of this type.
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Defined Benefit Pension Plan Costs
Components of net periodic benefit cost under the defined benefit pension plan are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Interest cost
|
9
|
|
|
8
|
|
|
17
|
|
|
16
|
|
Expected return on plan assets
|
(10
|
)
|
|
(10
|
)
|
|
(20
|
)
|
|
(20
|
)
|
Amortization of net actuarial loss
|
3
|
|
|
4
|
|
|
6
|
|
|
8
|
|
Net periodic benefit cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
12
|
|
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
June 30, 2017
and
December 31, 2016
, and then classifies these financial assets and liabilities based on a fair value hierarchy that is applied to prioritize the inputs to the valuation techniques used to measure fair value. The three levels of the fair value hierarchy 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 measurement date.
|
|
|
Level 2
|
Pricing inputs include those that are directly or indirectly observable in the marketplace as of the measurement 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. Assets measured at fair value using net asset value (NAV) as a practical expedient are not categorized in the fair value hierarchy; instead these assets are listed in the totals of the fair value hierarchy to permit the reconciliation to amounts presented in the financial statements.
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
and
six
month periods ended
June 30, 2017
and
2016
, except those presented in this note.
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 June 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
(2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Nuclear decommissioning trust:
(1)
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Domestic government
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Corporate credit
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Money market funds measured at NAV
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
Non-qualified benefit plan trust:
(3)
|
|
|
|
|
|
|
|
|
|
Money market funds
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Equity securities—domestic
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Debt securities—domestic government
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Collective trust—domestic equity measured at NAV
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Assets from price risk management activities:
(1) (4)
|
|
|
|
|
|
|
|
|
|
Electricity
|
—
|
|
|
3
|
|
|
2
|
|
|
—
|
|
|
5
|
|
Natural gas
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
$
|
11
|
|
|
$
|
21
|
|
|
$
|
2
|
|
|
$
|
23
|
|
|
$
|
57
|
|
Liabilities from price risk management
activities:
(1) (4)
|
|
|
|
|
|
|
|
|
|
Electricity
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
144
|
|
|
$
|
—
|
|
|
$
|
146
|
|
Natural gas
|
—
|
|
|
47
|
|
|
11
|
|
|
—
|
|
|
58
|
|
|
$
|
—
|
|
|
$
|
49
|
|
|
$
|
155
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
|
(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)
|
Assets are measured at NAV as a practical expedient and not subject to hierarchy level classification disclosure.
|
|
|
(3)
|
Excludes insurance policies of
$27 million
, which are recorded at cash surrender value.
|
|
|
(4)
|
For further information, see Note 4, Price Risk Management.
|
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
(2)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Nuclear decommissioning trust:
(1)
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
Domestic government
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Corporate credit
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Money market funds measured at NAV
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
Non-qualified benefit plan trust:
(3)
|
|
|
|
|
|
|
|
|
|
Money market funds
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Equity securities—domestic
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Debt securities—domestic government
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Collective trust—domestic equity measured at NAV
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Assets from price risk management activities:
(1) (4)
|
|
|
|
|
|
|
|
|
|
Electricity
|
—
|
|
|
6
|
|
|
1
|
|
|
—
|
|
|
7
|
|
Natural gas
|
—
|
|
|
15
|
|
|
1
|
|
|
—
|
|
|
16
|
|
|
$
|
8
|
|
|
$
|
39
|
|
|
$
|
2
|
|
|
$
|
23
|
|
|
$
|
72
|
|
Liabilities from price risk management
activities:
(1) (4)
|
|
|
|
|
|
|
|
|
|
Electricity
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
118
|
|
Natural gas
|
—
|
|
|
42
|
|
|
9
|
|
|
—
|
|
|
51
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
169
|
|
|
|
(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)
|
Assets are measured at NAV as a practical expedient and not subject to hierarchy level classification disclosure.
|
|
|
(3)
|
Excludes insurance policies of
$26 million
, which are recorded at cash surrender value.
|
|
|
(4)
|
For further information, see Note 4, Price Risk Management.
|
Trust assets
held in the Nuclear decommissioning and Non-qualified benefit plan (NQ 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:
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 measurement 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 yields and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable.
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Equity securities
—Equity mutual fund and common stock 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 measurement date. Principal markets for equity prices include published exchanges such as NASDAQ and the New York Stock Exchange.
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. The Company believes the redemption value of these funds is likely to be the fair value, which is represented by the net asset value. Redemption is permitted daily without written notice.
Common and collective trust funds
—PGE invests in common and collective trust funds that invest in equity securities. The Company believes the redemption value of these funds is likely to be the fair value, which is represented by the net asset value as a practical expedient. A majority of the funds provide for daily liquidity with appropriate written notice. One fund allows for withdrawal from all accounts as of the last day on each calendar month, with at least 10 days’ prior written notice, and provides for a 95% payment to be made within 30 days, and the balance to be paid after the annual fund audit is complete. Common and collective trusts are not classified in the fair value hierarchy as they are valued at NAV as a practical expedient.
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 variable power costs (NVPC) 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 include commodity 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 commodity forwards, futures, and swaps.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant Unobservable Input
|
|
Price per Unit
|
Commodity Contracts
|
|
Assets
|
|
Liabilities
|
|
|
|
Low
|
|
High
|
|
Weighted Average
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity physical forwards
|
|
$
|
—
|
|
|
$
|
143
|
|
|
Discounted cash flow
|
|
Electricity forward price (per MWh)
|
|
$
|
12.25
|
|
|
$
|
35.56
|
|
|
$
|
27.90
|
|
Natural gas financial swaps
|
|
—
|
|
|
11
|
|
|
Discounted cash flow
|
|
Natural gas forward price (per Decatherm)
|
|
1.70
|
|
|
3.15
|
|
|
2.14
|
|
Electricity financial futures
|
|
2
|
|
|
1
|
|
|
Discounted cash flow
|
|
Electricity forward price (per MWh)
|
|
15.83
|
|
|
29.94
|
|
|
24.37
|
|
|
|
$
|
2
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity physical forwards
|
|
$
|
—
|
|
|
$
|
112
|
|
|
Discounted cash flow
|
|
Electricity forward price (per MWh)
|
|
$
|
14.25
|
|
|
$
|
54.73
|
|
|
$
|
38.18
|
|
Natural gas financial swaps
|
|
1
|
|
|
9
|
|
|
Discounted cash flow
|
|
Natural gas forward price (per Decatherm)
|
|
1.85
|
|
|
4.92
|
|
|
2.64
|
|
Electricity financial futures
|
|
1
|
|
|
—
|
|
|
Discounted cash flow
|
|
Electricity forward price (per MWh)
|
|
8.57
|
|
|
33.60
|
|
|
25.10
|
|
|
|
$
|
2
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
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, PGE employs the mid-point of the bid-ask spread of the market 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 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 quarterly basis by the Company.
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 PGE’s position as either the buyer or seller under 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)
|
|
|
|
|
|
|
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance as of the beginning of the period
|
144
|
|
|
131
|
|
|
$
|
119
|
|
|
$
|
119
|
|
Net realized and unrealized losses
*
|
9
|
|
|
28
|
|
|
35
|
|
|
40
|
|
Transfers out of Level 3 to Level 2
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Balance as of the end of the period
|
$
|
153
|
|
|
$
|
158
|
|
|
$
|
153
|
|
|
$
|
158
|
|
* Both realized and unrealized losses, of which the unrealized portion is fully offset by the effects of regulatory accounting until settlement of the underlying transactions, are recorded in Purchased power and fuel expense in the condensed consolidated statements of income.
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
and
six
months ended
June 30, 2017
and
2016
, there were
no
minal 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 derivative 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 the Company’s FMBs and Pollution Control Revenue Bonds 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. The fair value of PGE’s unsecured term bank loans was classified as a Level 3 fair value measurement and was estimated based on the terms of the loans and the Company’s creditworthiness. The significant unobservable inputs to the Level 3 fair value measurement included the interest rate and the length of the loan. The estimated fair value of the Company’s unsecured term bank loans approximated their carrying value.
As of
June 30, 2017
, the carrying amount of PGE’s long-term debt was
$2,350 million
, net of
$11 million
of unamortized debt expense, and its estimated aggregate fair value was
$2,748 million
, consisting of
$2,598 million
and
$150 million
classified as Level 2 and Level 3, respectively, in the fair value hierarchy.
As of
December 31, 2016
, the carrying amount of PGE’s long-term debt was
$2,350 million
, net of
$11 million
of unamortized debt expense, and its estimated aggregate fair value was
$2,693 million
, consisting of
$2,543 million
and
$150 million
classified as Level 2 and Level 3, respectively, in the fair value hierarchy.
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 purchases and sales of both power and fuel resulting from economic dispatch decisions for Company-owned generation resources. As a result of this ongoing business activity, PGE is exposed to commodity price risk and foreign currency exchange rate risk, from
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
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 rate risk in order to reduce volatility in NVPC for its retail customers. Such derivative instruments may include forward, futures, swaps, and option contracts, which are recorded at fair value on the condensed consolidated balance sheets, for electricity, natural gas, oil, and foreign currency, 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 Public Utility Commission of Oregon (OPUC), the Company 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.
PGE’s Assets and Liabilities from price risk management activities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Current assets:
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
Electricity
|
$
|
3
|
|
|
$
|
6
|
|
|
Natural gas
|
2
|
|
|
12
|
|
|
Total current derivative assets
|
5
|
|
(1)
|
18
|
|
(1)
|
Noncurrent assets:
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
Electricity
|
2
|
|
|
1
|
|
|
Natural gas
|
—
|
|
|
4
|
|
|
Total noncurrent derivative assets
|
2
|
|
(2)
|
5
|
|
(2)
|
Total derivative assets not designated as hedging instruments
|
$
|
7
|
|
|
$
|
23
|
|
|
Total derivative assets
|
$
|
7
|
|
|
$
|
23
|
|
|
Current liabilities:
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
Electricity
|
$
|
10
|
|
|
$
|
12
|
|
|
Natural gas
|
36
|
|
|
32
|
|
|
Total current derivative liabilities
|
46
|
|
|
44
|
|
|
Noncurrent liabilities:
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
Electricity
|
136
|
|
|
106
|
|
|
Natural gas
|
22
|
|
|
19
|
|
|
Total noncurrent derivative liabilities
|
158
|
|
|
125
|
|
|
Total derivative liabilities not designated as hedging instruments
|
$
|
204
|
|
|
$
|
169
|
|
|
Total derivative liabilities
|
$
|
204
|
|
|
$
|
169
|
|
|
|
|
(1)
|
Included in Other current assets on the condensed consolidated balance sheets.
|
|
|
(2)
|
Included in Other noncurrent assets on the condensed consolidated balance sheets.
|
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
PGE’s net purchase 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):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Commodity contracts:
|
|
|
|
|
|
Electricity
|
5
|
|
MWh
|
|
8
|
|
MWh
|
Natural gas
|
118
|
|
Decatherms
|
|
107
|
|
Decatherms
|
Foreign currency
|
$
|
28
|
|
Canadian
|
|
$
|
22
|
|
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 given counterparty through a single payment. These types of transactions may include non-derivative instruments, derivatives qualifying for scope exceptions, receivables and payables arising from settled positions, and other forms of non-cash collateral, such as letters of credit. As of June 30, 2017 and December 31, 2016, gross amounts included as Price risk management liabilities subject to master netting agreements were
$147 million
and
$115 million
, respectively, for which PGE posted collateral of
$11 million
as of June 30, 2017 and December 31, 2016, which consisted entirely of letters of credit. As of June 30, 2017, of the gross amounts recognized,
$144 million
was for electricity and
$3 million
was for natural gas compared to
$112 million
for electricity and
$3 million
for natural gas recognized as of December 31, 2016.
Net realized and unrealized losses (gains) on derivative transactions not designated as hedging instruments are classified in Purchased power and fuel in the condensed consolidated statements of income and were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Commodity contracts:
|
|
|
|
|
|
|
|
Electricity
|
$
|
16
|
|
|
$
|
27
|
|
|
$
|
49
|
|
|
$
|
52
|
|
Natural Gas
|
7
|
|
|
(41
|
)
|
|
41
|
|
|
(24
|
)
|
Foreign currency exchange
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Net unrealized and certain net realized losses (gains) presented in the table above are offset within the condensed consolidated statements of income by the effects of regulatory accounting. Of the net losses (gains) recognized in Net income for the three month periods ended
June 30, 2017
and
2016
, net losses of
$4 million
and net gains of
$18 million
have been offset, respectively. Net losses of
$65 million
and
$16 million
have been offset for the six month periods ended June 30, 2017 and 2016, respectively.
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
June 30, 2017
related to PGE’s derivative activities would become realized as a result of the settlement of the underlying derivative instrument (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Commodity contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
108
|
|
|
$
|
141
|
|
Natural gas
|
24
|
|
|
20
|
|
|
9
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Net unrealized loss
|
$
|
27
|
|
|
$
|
26
|
|
|
$
|
17
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
108
|
|
|
$
|
197
|
|
PGE’s secured and unsecured debt is currently rated at investment grade by Moody’s Investors Service (Moody’s) and S&P Global Ratings (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 derivative instruments with credit-risk-related contingent features that were in a liability position as of
June 30, 2017
was
$202 million
, for which PGE has posted
$14 million
in collateral, consisting entirely of letters of credit. If the credit-risk-related contingent features underlying these agreements were triggered at
June 30, 2017
, the cash requirement to either post as collateral or settle the instruments immediately would have been
$200 million
. Cash collateral for derivative instruments is classified as Margin deposits included in Other current assets on the Company’s condensed consolidated balance sheet.
Counterparties representing 10% or more of Assets and Liabilities from price risk management activities were as follows:
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Assets from price risk management activities:
|
|
|
|
Counterparty A
|
52
|
%
|
|
22
|
%
|
Counterparty B
|
6
|
|
|
17
|
|
Counterparty C
|
6
|
|
|
12
|
|
|
64
|
%
|
|
51
|
%
|
Liabilities from price risk management activities:
|
|
|
|
Counterparty D
|
70
|
%
|
|
66
|
%
|
|
70
|
%
|
|
66
|
%
|
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.
NOTE 5: EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share are 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; and ii) contingently issuable time-based and performance-based restricted stock units, along with associated dividend equivalent rights.
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
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 and six month periods ended
June 30, 2017
, unvested performance-based restricted stock units and related dividend equivalent rights in the total amount of
273 thousand
were excluded from the dilutive calculation because the performance goals had not been met, with
305 thousand
excluded for the three and six month periods ended
June 30, 2016
.
Net income is the same for both the basic and diluted earnings per share computations. The denominators of the basic and diluted earnings per share computations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average common shares outstanding—basic and diluted
|
89,063
|
|
|
88,902
|
|
|
89,033
|
|
|
88,867
|
|
NOTE 6: EQUITY
The activity in equity during the
six
months ended
June 30, 2017
and
2016
is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
|
Balances as of December 31, 2016
|
88,946,704
|
|
|
$
|
1,201
|
|
|
$
|
(7
|
)
|
|
$
|
1,150
|
|
|
$
|
2,344
|
|
Issuances of shares pursuant to equity-based plans
|
115,856
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Stock-based compensation
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(59
|
)
|
|
(59
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
105
|
|
|
105
|
|
Balances as of June 30, 2017
|
89,062,560
|
|
|
$
|
1,203
|
|
|
$
|
(7
|
)
|
|
$
|
1,196
|
|
|
$
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2015
|
88,792,751
|
|
|
$
|
1,196
|
|
|
$
|
(8
|
)
|
|
$
|
1,070
|
|
|
$
|
2,258
|
|
Issuances of shares pursuant to equity-based plans
|
128,005
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Stock-based compensation
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
(55
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
98
|
|
Balances as of June 30, 2016
|
88,920,756
|
|
|
$
|
1,198
|
|
|
$
|
(8
|
)
|
|
$
|
1,113
|
|
|
$
|
2,303
|
|
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 condensed 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.
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
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 determined, 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 and the reasons.
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) significant facts are in dispute; vi) a large number of parties are represented (including circumstances in which it is uncertain how liability, if any, will be shared among multiple defendants); or vii) a wide range of potential outcomes exist. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution, including any possible loss, fine, penalty, or business impact.
Carty
Background—
The Company is involved in several litigation proceedings that involve claims concerning the Company’s termination of the construction agreement relating to the Carty natural gas-fired generating plant (Carty) located in Eastern Oregon, and the payment obligations of two sureties who provided a performance bond in connection with such agreement. The Company is seeking recovery of incremental construction costs and other damages pursuant to breach of contract claims against the contractor and claims against the sureties pursuant to the performance bond. There are currently lawsuits pending in U.S. District Court for the District of Oregon (U.S. District Court), as well as an arbitration proceeding before the International Chamber of Commerce International Court of Arbitration (ICC). In the most recent procedural development, on July 10, 2017, the Ninth Circuit Court of Appeals (Ninth Circuit) held that the ICC had jurisdiction to determine what parties and what claims could be presented in the ICC arbitration. PGE has filed a petition requesting en banc rehearing with the Ninth Circuit.
Arbitration Proceeding—
In 2013, the Company entered into an agreement (Construction Agreement) with its engineering, procurement and construction contractor - Abeinsa EPC LLC, Abener Construction Services, LLC, Teyma Construction USA, LLC, and Abeinsa Abener Teyma General Partnership, an affiliate of Abengoa S.A. (collectively, the “Contractor”) - for the construction of Carty. Liberty Mutual Insurance Company and Zurich American Insurance Company (hereinafter referred to collectively as the “Sureties”) provided a performance bond of
$145.6 million
(Performance Bond) under the Construction Agreement.
On December 18, 2015, the Company declared the Contractor in default under the Construction Agreement and terminated the Construction Agreement. Following termination of the Construction Agreement, PGE, in
PORTLAND GENERAL ELECTRIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
consultation with the Sureties, brought on new contractors and construction resumed during the week of December 21, 2015.
In January 2016, the Company received notice from the ICC that Abengoa S.A. had submitted a request for arbitration. In the request, Abengoa S.A. alleged that the Company’s termination of the Construction Agreement was wrongful and in breach of the agreement terms and did not give rise to any liability of Abengoa S.A. under the terms of a guaranty in favor of PGE and pursuant to which Abengoa S.A. agreed to guaranty certain obligations of the Contractor under the Construction Agreement.
PGE disagreed with the assertions in the request for arbitration and in February 2016 filed a complaint and motion for preliminary injunction in the U.S. District Court seeking to have the arbitration claim dismissed on the grounds that the Company had not made a demand under the Abengoa S.A. guaranty, and therefore the matter was not ripe for arbitration. In addition, the Contractor has been joined as a party to the arbitration and is seeking damages of approximately
$117 million
based on a claim that PGE wrongfully terminated the Construction Agreement. The Contractor is also seeking estimated damages of
$44 million
based on a claim that PGE failed to disclose to the Contractor, in connection with the Contractor’s bid submitted pursuant to the Company’s request for proposals, certain information regarding union labor productivity rates in eastern Oregon, and that this alleged failure caused the Contractor to submit a bid with a contract price that was lower than the contract price that would have been submitted had Contractor known such information. PGE disagrees with both of these claims. A hearing on the jurisdictional issues before the ICC is scheduled for late October 2017.
Bankruptcy Proceedings
- On March 28, 2016, Abengoa S.A. and several of its foreign affiliates filed petitions for recognition under Chapter 15 of the U.S. Bankruptcy Code requesting interim relief, including an injunction precluding the prosecution of any proceedings against the Chapter 15 debtors. On March 29, 2016, a number of Abengoa S.A.’s U.S. subsidiaries, including the four entities that collectively comprise the Contractor, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. As a result, on April 5, 2016, the U.S. District Court issued an order stating that the Company’s U.S. District Court action against Abengoa S.A., as further described below, was stayed. In early October 2016, the bankruptcy court in the Chapter 11 proceeding granted the Company’s motion for relief from stay with respect to the four entities that collectively comprise the Contractor, which allowed the Company to bring claims against such entities in the U.S. District Court.
U.S. District Court Proceedings against Sureties -
On March 9, 2016, the Sureties delivered a letter to the Company denying liability in whole under the Performance Bond. The Company disagreed with the Sureties’ assertions and, on March 23, 2016, filed a breach of contract action against the Sureties in the U.S. District Court. The Company’s complaint disputed the Sureties’ assertion that the Company wrongfully terminated the Construction Agreement and asserts that the Sureties are responsible for the payment of all damages sustained by PGE as a result of the Sureties’ breach of contract, including damages in excess of the
$145.6 million
stated amount of the Performance Bond. Such damages include additional costs incurred by PGE to complete Carty.
On April 15, 2016, the Sureties filed a motion to stay this U.S. District Court proceeding, alleging that PGE’s claims should be addressed in the arbitration proceeding initiated by Abengoa S.A. and referenced above because PGE’s claims are intertwined with the issues involved in such arbitration and all parties necessary to resolve PGE’s claims are parties to the arbitration. PGE opposed the motion and filed a motion to prevent the Sureties from pursuing, in the ICC arbitration proceeding, claims relating to the Performance Bond. On July 27, 2016, the court denied the Sureties’ motion to stay and granted PGE’s motion for a preliminary injunction. The Sureties appealed the rulings to the Ninth Circuit. On July 10, 2017, the Ninth Circuit overturned the federal district court ruling and held that the ICC Arbitration panel has jurisdiction to determine what parties can be joined, and what claims can be presented, in the ICC Arbitration. On July 24, 2017, PGE filed a petition requesting en banc rehearing with the Ninth Circuit.
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U.S. District Court Proceedings against Contractor -
On October 21, 2016, PGE filed a complaint in the U.S. District Court against Abeinsa for failure to satisfy its obligations under the Construction Agreement. PGE seeks damages from Abeinsa in excess of
$200 million
for: i) costs incurred to complete construction of Carty, settle claims with unpaid contractors and vendors and remove liens; and ii) damages in excess of the construction costs, including a project management fee, liquidated damages under the Construction Agreement, legal fees and costs, damages due to delay of the project, warranty costs, and interest. On March 21, 2017, the U.S. District Court entered an order staying the case. Unless the July 10, 2017 Ninth Circuit decision referenced in the preceding paragraph is reversed upon rehearing, the ICC Arbitration panel will determine whether these claims must be presented in the ICC Arbitration.
Recovery of Excess Capital Costs—
Following termination of the Construction Agreement, PGE brought on new contractors and resumed construction. Carty was placed into service on July 29, 2016 and the Company began collecting its revenue requirement in customer prices on August 1, 2016, as authorized by the OPUC, based on the approved cost of
$514 million
. Actual costs for Carty have exceeded the amount approved for inclusion in customer prices by the OPUC and as of June 30, 2017, PGE has capitalized
$635 million
for Carty, classified as Electric utility plant. The incremental costs resulted from various matters relating to the resumption of construction activities following the termination of the Construction Agreement, including, among other things, determining the remaining scope of construction, preparing work plans for contractors, identifying new contractors, negotiating contracts, and procuring additional materials. Costs also increased as a result of PGE’s discovery through the construction process of latent defects in work performed by the former Contractor and the corresponding labor and materials required to correct the work.
Other items contributing to the increase include costs relating to the removal of certain liens filed on the property for goods and services provided under contracts with the former Contractor, and costs to repair equipment damage that resulted from poor storage and maintenance on the part of the former Contractor. Actual costs for Carty recorded as Electric utility plant do not reflect any offsetting amounts that may be received from the Sureties pursuant to the Performance Bond. The amounts recorded also exclude approximately
$7 million
of lien claims filed for goods and services provided under contracts with the former Contractor that remain in dispute. The Company believes these liens are invalid and is contesting the claims in the courts.
In the event the total project costs incurred by PGE, net of offsetting amounts that may be received from the Sureties, Abengoa S.A., or the Contractor, ultimately exceed the
$514 million
amount approved by the OPUC for inclusion in customer prices, the Company intends to seek approval to recover any excess amounts in customer prices in a subsequent regulatory proceeding after exhausting all remedies against the aforementioned parties. However, there is no assurance that such recovery would be allowed by the OPUC. In accordance with GAAP and the Company’s accounting policies, any such excess costs may be charged to expense at the time disallowance of recovery becomes probable and a reasonable estimate of the amount of such disallowance can be made. As of the date of this report, the Company has concluded that the likelihood that a portion of the cost of Carty will be disallowed for recovery in customer prices is less than probable. Accordingly, no loss has been recorded to date related to the project.
As actual project costs for Carty have exceeded
$514 million
, the Company is incurring a higher cost than what is reflected in the current authorized revenue requirement amount, primarily due to higher depreciation and interest expense. On July 29, 2016, the Company requested from the OPUC a regulatory deferral for the recovery of the revenue requirement associated with the incremental capital costs for Carty starting from its in service date to the date that such amounts are approved in a subsequent General Rate Case (GRC) proceeding. The Company has requested that the OPUC delay its review of this deferral request until all legal actions, including PGE’s actions against the Sureties, have been resolved. Until such time, the effects of this higher cost are recognized in the Company’s results of operations, as a deferral for such amounts would not be considered probable of recovery at
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this time, in accordance with GAAP. Any amounts approved by the OPUC for recovery under the deferral filing will be recognized in earnings in the period of such approval, however there is no assurance that such recovery would be granted by the OPUC. The Company believes that costs incurred to date and capitalized in Electric utility plant, net, in the condensed consolidated balance sheet, were prudently incurred. There has been no settlement discussions with regulators related to such costs.
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 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 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
100
.
The Portland Harbor site remedial investigation (RI) has been completed pursuant to an Administrative Order on Consent between the EPA and several PRPs known as the Lower Willamette Group (LWG), which does not include PGE. The LWG has funded the RI and feasibility study (FS) and has stated that it had incurred
$115 million
in investigation-related costs. The Company anticipates that such costs will ultimately be allocated to PRPs as a part of the allocation process for remediation costs of the EPA’s preferred remedy.
The EPA has finalized the FS, along with the RI, and these documents provided the framework for the EPA to determine a clean-up remedy for Portland Harbor that was documented in a Record of Decision (ROD) issued on January 6, 2017. The ROD outlines the EPA’s selected remediation alternative to clean-up for Portland Harbor which has an estimated total cost of
$1.7 billion
, comprised of
$1.2 billion
related to remediation construction costs and
$0.5 billion
related to long-term operation and maintenance costs, for a combined discounted present value of
$1.05 billion
. As stated within the ROD, such cost ranges were estimated with accuracy between -30% and +50% of actual costs. Remediation construction costs are estimated to be incurred over a 13 year period, with long-term operation and maintenance costs estimated to be incurred over a 30 year period from the start of construction. The EPA acknowledges the estimated costs are based on data that is now outdated and that a period of pre-remedial design sampling is necessary to gather updated baseline data to better refine the remedial design and estimated cost. The EPA has prepared a Draft Sampling Plan to encourage PRPs to enter into an Administrative Order on Consent with the agency and begin the sampling process before the end of 2017. PGE is in the process of determining whether it will participate in such a process.
PGE is participating in a voluntary process to determine an appropriate allocation of costs amongst the PRPs. Significant uncertainties remain surrounding facts and circumstances that are integral to the determination of such an allocation percentage, including a final allocation methodology and data with regard to property specific activities and history of ownership of sites within Portland Harbor. Based on the above facts and remaining uncertainties, PGE cannot reasonably estimate its potential liability or determine an allocation percentage that represents PGE’s portion of the liability to clean-up Portland Harbor.
Where damage to natural resources has occurred as a result of releases of hazardous substances, federal and state natural resource trustees may seek to recover for damages at such sites, which are referred to as natural resource damages. As it relates to the Portland Harbor, PGE has been participating in the Portland Harbor Natural Resource Damages assessment (NRDA) process. The EPA does not manage NRDA activities, but provides claims information and coordination support to the Natural Resource Damages (NRD) trustees. Damage assessment activities are
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typically conducted by a Trustee Council made up of the trustee entities for the site. The Portland Harbor NRD trustees are the National Oceanic and Atmospheric Administration, the U.S. Fish and Wildlife Service, the State of Oregon, and certain tribal entities.
The NRD trustees may seek to negotiate legal settlements or take other legal actions against the parties responsible for the damages. Funds from such settlements must be used to restore damaged resources and may also compensate the trustees for costs incurred in assessing the damages. The NRD trustees are in the process of negotiating NRDA liability with several PRPs, including PGE. PGE believes that the Company’s portion of NRDA liabilities related to Portland Harbor will not have a material impact on its results of operations, financial position, or cash flows.
As discussed above, significant uncertainties still remain concerning the precise boundaries for clean-up, the assignment of responsibility for clean-up costs, the final selection of a proposed remedy by the EPA, and the method of allocation of costs amongst PRPs. It is probable that PGE will share in a portion of these costs. However, the Company does not currently have sufficient information to reasonably estimate the amount, or range, of its potential costs for investigation or remediation of the Portland Harbor site, although such costs could be material. The Company plans to seek recovery of any costs resulting from the Portland Harbor proceeding through claims under insurance policies and regulatory recovery in customer prices.
In July 2016, the Company filed a deferral application with the OPUC seeking the deferral of the future environmental remediation costs, as well as, seeking authorization to establish a regulatory cost recovery mechanism for such environmental costs. The Company reached an agreement with OPUC Staff and other parties regarding the details of the recovery mechanism, which the OPUC approved in the first quarter of 2017. The mechanism will allow the Company to defer and recover incurred environmental expenditures through a combination of third-party proceeds, such as insurance recoveries, and through customer prices, as necessary. The mechanism establishes annual prudency reviews of environmental expenditures and is subject to an annual earnings test.
Trojan Investment Recovery Class Actions
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 2007, following several appeals by various parties, the Oregon Court of Appeals issued an opinion that remanded the matter to the OPUC for reconsideration.
In 2003, in two separate legal proceedings, lawsuits were filed in Marion County Circuit Court (Circuit Court) against PGE 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 August 2006, the Oregon Supreme Court (OSC) issued a ruling ordering the abatement of the class action proceedings. The OSC concluded that the OPUC had primary jurisdiction to determine what, if any, remedy could 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.
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The OSC further stated that if the OPUC determined that it could provide a remedy to PGE’s customers, then the class action proceedings may become moot in whole or in part. The OSC added that, if the OPUC determined that it could not provide a remedy, the court system may have a role to play. The OSC also ruled that the plaintiffs retained the right to return to the Circuit Court for disposition of whatever issues remained unresolved from the remanded OPUC proceedings. In October 2006, the Circuit Court abated the class actions in response to the ruling of the OSC.
In 2008, the OPUC issued an order (2008 Order) that required PGE to provide refunds of
$33 million
, including interest, which refunds were completed in 2010. Following appeals, the 2008 Order was upheld by the Oregon Court of Appeals in February 2013 and by the OSC in October 2014.
In June 2015, based on a motion filed by PGE, the Circuit Court lifted the abatement and in July 2015, the Circuit Court heard oral argument on the Company’s motion for Summary Judgment. Following oral argument on PGE’s motion for summary judgment, the plaintiffs moved to amend the complaints. On February 22, 2016, the Circuit Court denied the plaintiff’s motion to amend the complaint and on March 16, 2016, the Circuit Court entered a general judgment that granted the Company’s motion for summary judgment and dismissed all claims by the plaintiffs. On April 14, 2016, the plaintiffs appealed the Circuit Court dismissal to the Court of Appeals for the State of Oregon.
PGE believes that the October 2, 2014 OSC decision and the recent Circuit Court decisions have reduced the risk of a loss to the Company in excess of the amounts previously recorded and discussed above. However, because the class actions remain subject to a decision in the appeal, management believes that it is reasonably possible that such a loss in excess of amounts previously recorded could result. As these matters involve unsettled legal theories and have a broad range of potential outcomes, sufficient information is currently not available to determine the amount of any such loss.
Deschutes River Alliance Clean Water Act Claims
On August 12, 2016, the Deschutes River Alliance (DRA) filed a lawsuit against the Company in the U.S. District Court of the District of Oregon. DRA’s claims seek injunctive and declaratory relief against PGE under the Clean Water Act (CWA) related to alleged past and continuing violations of the CWA. Specifically, DRA claims PGE has violated certain conditions contained in PGE’s Water Quality Certification for the Pelton/Round Butte Hydroelectric Project (Project) related to dissolved oxygen, temperature, and measures of acidity or alkalinity of the water. DRA alleges the violations are related to PGE’s operation of the Selective Water Withdrawal (SWW) facility at the Project. The SWW, located above Round Butte Dam, is, among other things, designed to blend water from the surface of the reservoir with water near the bottom of the reservoir and was constructed and placed into service in 2010 as part of the FERC license requirements for the purpose of restoration and enhancement of native salmon and steelhead fisheries above the Project. DRA has alleged that PGE’s operation of the SWW has caused the above-referenced violations of the CWA, which in turn have degraded the Deschutes River’s fish and wildlife habitat below the Project and harmed the economic and personal interests of DRA’s members and supporters.
On September 30, 2016, PGE filed a motion to dismiss, which asserted that the CWA does not allow citizen suits of this nature, and that FERC has jurisdiction over all licensing issues, including the alleged CWA violations. On March 27, 2017, the court denied PGE’s motion to dismiss. On April 6, 2017, PGE filed a motion with the District Court for certification to file an interlocutory appeal with the Ninth Circuit and for a stay of the District Court proceeding. On April 7, 2017, the court granted an unopposed motion filed by the Confederated Tribes of Warm Springs (the Tribes) to appear in the case as Amicus Curiae (friend of the court). The Tribes share ownership of the Project with PGE, but have not been named as a defendant. The parties agreed to defer decision on the motion for stay pending a ruling by the District Court on PGE’s request to file the interlocutory appeal. The District Court granted PGE’s request on May 19, 2017, but the Ninth Circuit has not yet ruled on whether it will hear the appeal.
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Subsequently, the parties have begun settlement discussions, and have agreed to a 90-day stay of the District Court proceeding.
The Company cannot predict the outcome of this matter, but believes that it has strong defenses to DRA’s claims and intends to defend against them. Because i) this matter involves novel issues of law and ii) the mechanism and costs for achieving the relief sought in DRA’s claims have not yet been determined, the Company cannot, at this time, determine the likelihood of whether the outcome of this matter will result in a material loss.
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 that 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
June 30, 2017
, 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.