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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 June 30, 2015

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 July 22, 2015 is 88,765,889 shares.
 



PORTLAND GENERAL ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 30, 2015

TABLE OF CONTENTS



2


DEFINITIONS

The following abbreviations and acronyms are used throughout this document:

Abbreviation or Acronym
 
Definition
AFDC
 
Allowance for funds used during construction
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
MWa
 
Average megawatts
MWh
 
Megawatt hours
NVPC
 
Net Variable Power Costs
OPUC
 
Public Utility Commission of Oregon
PCAM
 
Power Cost Adjustment Mechanism
PW1
 
Port Westward Unit 1 natural gas-fired generating plant
PW2
 
Port Westward Unit 2 natural gas-fired flexible capacity 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


3


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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues, net
$
450

 
$
423

 
$
923

 
$
916

Operating expenses:
 
 
 
 
 
 
 
Purchased power and fuel
148

 
142

 
309

 
326

Generation, transmission and distribution
66

 
67

 
128

 
121

Administrative and other
60

 
56

 
120

 
110

Depreciation and amortization
76

 
73

 
151

 
148

Taxes other than income taxes
28

 
27

 
58

 
55

Total operating expenses
378

 
365

 
766

 
760

Income from operations
72

 
58

 
157

 
156

Interest expense, net
28

 
23

 
58

 
48

Other income:
 
 
 
 
 
 
 
Allowance for equity funds used during construction
5

 
9

 
9

 
15

Miscellaneous income, net
1

 
1

 
2

 

Other income, net
6

 
10

 
11

 
15

Income before income tax expense
50

 
45

 
110

 
123

Income tax expense
15

 
10

 
25

 
30

Net income and Comprehensive income
$
35

 
$
35

 
$
85

 
$
93

 
 
 
 
 
 
 
 
Weighted-average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
80,745

 
78,183

 
79,515

 
78,154

Diluted
80,745

 
80,051

 
79,515

 
79,742

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.44

 
$
1.07

 
$
1.19

Diluted
$
0.44

 
$
0.43

 
$
1.07

 
$
1.16

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.300

 
$
0.280

 
$
0.580

 
$
0.555

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


4



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




 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
122

 
$
127

Accounts receivable, net
122

 
149

Unbilled revenues
87

 
93

Inventories
101

 
82

Regulatory assets—current
117

 
133

Other current assets
97

 
115

Total current assets
646

 
699

Electric utility plant, net
5,874

 
5,679

Regulatory assets—noncurrent
552

 
494

Nuclear decommissioning trust
40

 
90

Non-qualified benefit plan trust
35

 
32

Other noncurrent assets
51

 
48

Total assets
$
7,198

 
$
7,042

 
 
 
 
See accompanying notes to condensed consolidated financial statements.





5



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



 
June 30,
2015
 
December 31,
2014
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
125

 
$
156

Liabilities from price risk management activities—current
101

 
106

Current portion of long-term debt
55

 
375

Accrued expenses and other current liabilities
228

 
236

Total current liabilities
509

 
873

Long-term debt, net of current portion
2,204

 
2,126

Regulatory liabilities—noncurrent
923

 
906

Deferred income taxes
648

 
625

Unfunded status of pension and postretirement plans
243

 
237

Liabilities from price risk management activities—noncurrent
187

 
122

Asset retirement obligations
135

 
116

Non-qualified benefit plan liabilities
105

 
105

Other noncurrent liabilities
23

 
21

Total liabilities
4,977

 
5,131

Commitments and contingencies (see notes)

 

Equity:
 
 
 
Preferred stock, no par value, 30,000,000 shares authorized; none issued and outstanding as of June 30, 2015 and December 31, 2014

 

Common stock, no par value, 160,000,000 shares authorized; 88,765,629 and 78,228,339 shares issued and outstanding as of
June 30, 2015 and December 31, 2014, respectively
1,191

 
918

Accumulated other comprehensive loss
(7
)
 
(7
)
Retained earnings
1,037

 
1,000

Total equity
2,221

 
1,911

Total liabilities and equity
$
7,198

 
$
7,042

 
See accompanying notes to condensed consolidated financial statements.



6


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


 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
85

 
$
93

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
151

 
148

Increase (decrease) in net liabilities from price risk management activities
63

 
(84
)
Regulatory deferrals—price risk management activities
(63
)
 
84

Deferred income taxes
22

 
20

Pension and other postretirement benefits
19

 
17

Allowance for equity funds used during construction
(9
)
 
(15
)
Regulatory deferral of settled derivative instruments
2

 
6

Other non-cash income and expenses, net
11

 
9

Changes in working capital:
 
 
 
Decrease in accounts receivable and unbilled revenues
32

 
55

Increase in inventories
(19
)
 
(20
)
(Increase) decrease in margin deposits, net
(17
)
 
7

Decrease in accounts payable and accrued liabilities
(22
)
 
(29
)
Other working capital items, net
7

 
6

Cash received to be returned to customers pursuant to the Residential Exchange Program

 
14

Other, net
(14
)
 
(9
)
Net cash provided by operating activities
248

 
302

Cash flows from investing activities:
 
 
 
Capital expenditures
(313
)
 
(501
)
Distribution from Nuclear decommissioning trust
50

 

Sales tax refund received related to Tucannon River Wind Farm
23

 

Sales of Nuclear decommissioning trust securities
7

 
9

Purchases of Nuclear decommissioning trust securities
(7
)
 
(10
)
Proceeds from sale of property

 
4

Other, net
2

 
4

Net cash used in investing activities
(238
)
 
(494
)
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs
$
271

 
$

Proceeds from issuance of long-term debt
145

 
225

Payments on long-term debt
(387
)
 

Dividends paid
(44
)
 
(43
)
Net cash (used in) provided by financing activities
(15
)
 
182

Decrease in cash and cash equivalents
(5
)
 
(10
)
Cash and cash equivalents, beginning of period
127

 
107

Cash and cash equivalents, end of period
$
122

 
$
97

 
 
 
 
Supplemental cash flow information is as follows:
 
 
 
Cash paid for interest, net of amounts capitalized
$
56

 
$
45

Cash paid for income taxes
1

 
11

Non-cash investing and financing activities:
 
 
 
Accrued capital additions
58

 
105

Accrued dividends payable
27

 
23

 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 

7


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










8

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 June 30, 2015, PGE served 848,600 retail customers with a service area population of approximately 1.8 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 2015 presentation, PGE has separately presented Increase in inventories of $20 million from Other working capital items, net and collapsed Decoupling mechanism deferrals, net of amortization of $3 million into Other non-cash income and expenses, net in the operating activities section of the condensed consolidated statement of cash flows for the six months ended June 30, 2014.

The financial information included herein for the three and six month periods ended June 30, 2015 and 2014 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 statements 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, 2014 is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in Item 8 of PGE’s Annual Report on Form 10-K, filed with the SEC on February 13, 2015, which 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 and six month periods ended June 30, 2015 and 2014.

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

9

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.

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 or as a cumulative-effect adjustment as of the date of adoption, which was originally January 1, 2017 for the Company. In June 2015, the Financial Accounting Standards Board (FASB) voted to defer the effective date by one year, with early adoption permitted as of the original effective date. The final ASU reflecting these changes is expected to be issued later this year. 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 2014-09.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The provisions of ASU 2015-03 are effective for fiscal years beginning after December 15, 2015, or January 1, 2016 for PGE, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The provisions should be applied on a retrospective basis. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle, which includes: i) the nature of and reason for the change in accounting principle; ii) the transition method; iii) a description of the prior-period information that has been retrospectively adjusted; and iv) the effect of the change on the financial statement line items. The adoption of the provisions of ASU 2015-03 is not expected to have a material impact on PGE’s consolidated financial position, consolidated results of operation, or consolidated cash flows.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820), Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07), which removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Instead, such disclosures are restricted only to investments that the entity has decided to measure using the practical expedient. This standard is effective for interim and annual periods beginning after December 15, 2015. PGE will adopt the amendments contained in ASU 2015-07 on January 1, 2016, which is not expected to have an impact on the Company’s consolidated financial position, consolidated results of operations, or consolidated cash flows.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory (ASU 2015-11), which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, or January 1, 2017 for PGE, and interim periods within those fiscal years. Early adoption is

10

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

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 2015-11.

NOTE 2: BALANCE SHEET COMPONENTS

Accounts Receivable, Net

Accounts receivable is net of an allowance for uncollectible accounts of $6 million as of June 30, 2015 and December 31, 2014.

The activity in the allowance for uncollectible accounts is as follows (in millions):
 
Six Months Ended June 30,
 
2015
 
2014
Balance as of beginning of period
$
6

 
$
6

Provision, net
3

 
4

Amounts written off, less recoveries
(3
)
 
(3
)
Balance as of end of period
$
6

 
$
7


Inventories

PGE’s 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. Periodically, the Company assesses the realizability of inventory for purposes of determining that inventory is recorded at the lower of average cost or market. During the six months ended June 30, 2015, the Company’s inventory balance increased largely as a result of contractual deliveries of coal exceeding usage due to plant maintenance and economic dispatch decisions.

Other Current Assets

Other current assets consist of the following (in millions):
 
June 30,
2015
 
December 31, 2014
Prepaid expenses
$
32

 
$
39

Current deferred income tax asset
33

 
33

Margin deposits
28

 
11

Accrued sales tax refund related to Tucannon River Wind Farm

 
23

Assets from price risk management activities
3

 
6

Other
1

 
3

Other current assets
$
97

 
$
115



11

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):
 
June 30,
2015
 
December 31,
2014
Electric utility plant
$
8,301

 
$
8,161

Construction work-in-progress
557

 
417

Total cost
8,858

 
8,578

Less: accumulated depreciation and amortization
(2,984
)
 
(2,899
)
Electric utility plant, net
$
5,874

 
$
5,679


Accumulated depreciation and amortization in the table above includes accumulated amortization related to intangible assets of $209 million and $191 million as of June 30, 2015 and December 31, 2014, respectively. Amortization expense related to intangible assets was $9 million and $6 million for the three months ended June 30, 2015 and 2014, respectively, and $18 million and $12 million for the six months ended June 30, 2015 and 2014, respectively. The Company’s intangible assets primarily consist of computer software development and hydro licensing costs.

Regulatory Assets and Liabilities

Regulatory assets and liabilities consist of the following (in millions):
 
June 30, 2015
 
December 31, 2014
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Regulatory assets:
 
 
 
 
 
 
 
Price risk management
$
98

 
$
186

 
$
100

 
$
121

Pension and other postretirement plans

 
237

 

 
247

Deferred income taxes

 
87

 

 
86

Debt issuance costs

 
17

 

 
15

Deferred capital projects
10

 

 
19

 

Other
9

 
25

 
14

 
25

Total regulatory assets
$
117

 
$
552

 
$
133

 
$
494

Regulatory liabilities:
 
 
 
 
 
 
 
Asset retirement removal costs
$

 
$
824

 
$

 
$
804

Trojan decommissioning activities
21

 
24

 
23

 
34

Asset retirement obligations

 
42

 

 
39

Other
32

 
33

 
37

 
29

Total regulatory liabilities
$
53

* 
$
923

 
$
60

* 
$
906


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


12

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):
 
June 30,
2015
 
December 31, 2014
Regulatory liabilities—current
$
53

 
$
60

Accrued employee compensation and benefits
43

 
51

Accrued interest payable
25

 
26

Accrued dividends payable
27

 
23

Accrued taxes payable
21

 
22

Other
59

 
54

Total accrued expenses and other current liabilities
$
228

 
$
236


Asset Retirement Obligations

Asset retirement obligations (AROs) consist of the following (in millions):
 
June 30,
2015
 
December 31, 2014
Trojan decommissioning activities
$
43

 
$
41

Utility plant
81

 
64

Non-utility property
11

 
11

Asset retirement obligations
$
135

 
$
116


Utility plant represents AROs that have been recognized for the Company’s thermal and wind generation sites and distribution and transmission assets where disposal is governed by environmental regulation.

The United States Environmental Protection Agency (EPA) published a final rule, effective October 19, 2015, that regulates Coal Combustion Residuals (CCRs) under the Resource Conservation and Recovery Act, Subtitle D. The new rule imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements, and closure and post-closure care requirements on CCR impoundments and landfills that are located on active power plants and not closed. The rule’s requirements for covered CCR impoundments and landfills include commencement or completion of closure activities generally between three and ten years from certain triggering events.

Based on a preliminary evaluation, the Company believes the rule will not have a material effect on operations at Boardman, which produce dry CCRs. Disposal of the dry CCRs occurs at an on-site landfill that is currently permitted and regulated by the State of Oregon under requirements similar to the new CCR rule.

Colstrip utilizes wet scrubbers and a number of settlement ponds that will require upgrading or closure to meet the new regulatory requirements. The operator of Colstrip has provided an initial cost estimate related to the impacts of the new CCR rule. As a result, during the second quarter of 2015, the Company recorded an increase to the existing Colstrip AROs in the amount of $15 million, with a corresponding increase in the cost basis of the plant, included in Electric utility plant, net on the consolidated balance sheet. PGE plans to seek recovery in customer prices of the incremental costs associated with the new rule.


13

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

Credit Facilities

During the first quarter of 2015, PGE determined that a $500 million aggregate revolving credit facility capacity would be sufficient to meet its liquidity needs and accordingly, in March 2015, reduced its aggregate revolving credit capacity from $700 million to $500 million. As of June 30, 2015, PGE has a $500 million revolving credit facility, which is scheduled to expire in November 2019.

Pursuant to the terms of the agreement, the revolving credit facility 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 credit facility. The revolving credit facility contains provisions for two, one-year extensions subject to approval by the banks, requires annual fees based on PGEs unsecured credit ratings, and contains customary covenants and default provisions, including a requirement that limits consolidated indebtedness, as defined in the agreement, to 65% of total capitalization. As of June 30, 2015, PGE was in compliance with this covenant with a 50.4% debt-to-total capital ratio.

PGE classifies any borrowings under the revolving credit facility and outstanding commercial paper as Short-term debt on the condensed consolidated balance sheets. As of June 30, 2015, PGE had no borrowings or commercial paper outstanding, $38 million of letters of credit issued, and an aggregate available capacity under the credit facility of $462 million.

In addition, PGE has two $30 million letter of credit facilities, under which the Company can request letters of credit for original terms not to exceed one year. The issuance of such letters of credit is subject to the approval of the issuing institution. As of June 30, 2015, $59 million of letters of credit had been issued under these facilities.

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.

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.

Long-term Debt

During the six months ended June 30, 2015, PGE had the following long-term debt transactions:

In June, repaid $200 million of long-term bank loans;

In May, issued $70 million of 3.50% Series First Mortgage Bonds (FMBs) due 2035 and repaid $67 million of 6.80% Series FMBs, due January 2016;

In February, repaid $50 million of long-term bank loans; and

In January, issued $75 million of 3.55% Series FMBs due 2030 and repaid $70 million of 3.46% Series FMBs.

On July 10, 2015, the Company repaid the remaining outstanding balance of long-term bank loans in the amount of $55 million.


14

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):
 
Defined Benefit
Pension Plan
 
Other Postretirement
Benefits
 
Non-Qualified
Benefit Plans
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Three Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
5

 
$
3

 
$
1

 
$
1

 
$

 
$

Interest cost
8

 
8

 
1

 
1

 
1

 
1

Expected return on plan assets
(10
)
 
(10
)
 
(1
)
 
(1
)
 

 

Amortization of prior service cost

 

 

 
1

 

 

Amortization of net actuarial loss
5

 
5

 

 

 

 

Net periodic benefit cost
$
8

 
$
6

 
$
1

 
$
2

 
$
1

 
$
1

Six Months Ended June 30:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
9

 
$
7

 
$
2

 
$
1

 
$

 
$

Interest cost
16

 
17

 
2

 
2

 
1

 
1

Expected return on plan assets
(20
)
 
(20
)
 
(1
)
 
(1
)
 

 

Amortization of prior service cost

 

 

 
1

 

 

Amortization of net actuarial loss
10

 
9

 

 

 

 

Net periodic benefit cost
$
15

 
$
13

 
$
3

 
$
3

 
$
1

 
$
1


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, 2015 and December 31, 2014, 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 and six month periods ended June 30, 2015 and 2014, except those transfers from Level 3 to Level 2 presented in this note.


15

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, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
Money market funds
$

 
$
16

 
$

 
$
16

Debt securities:
 
 
 
 
 
 
 
Domestic government
4

 
9

 

 
13

Corporate credit

 
11

 

 
11

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

 
3

 
1

 
4

Natural gas

 

 

 

 
$
10

 
$
41

 
$
1

 
$
52

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

 
$
20

 
$
132

 
$
152

Natural gas

 
99

 
37

 
136

 
$

 
$
119

 
$
169

 
$
288

 
(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 $27 million, which are recorded at cash surrender value.
(3)
For further information, see Note 4, Price Risk Management.


16

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

 
As of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
Money market funds
$

 
$
65

 
$

 
$
65

Debt securities:
 
 
 
 
 
 
 
Domestic government
7

 
7

 

 
14

Corporate credit

 
11

 

 
11

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

 
1

 

 
5

International
1

 

 

 
1

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

 
4

 
1

 
5

Natural gas

 
2

 

 
2

 
$
12

 
$
90

 
$
1

 
$
103

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

 
$
32

 
$
80

 
$
112

Natural gas

 
95

 
21

 
116

 
$

 
$
127

 
$
101

 
$
228

 
(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.


17

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 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.


18

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:
 
 
 
 
 
 
Valuation Technique
 
Significant Unobservable Input
 
Price per Unit
 
 
Fair Value
 
 
 
 
 
 
 
Weighted Average
Commodity Contracts
 
Assets
 
Liabilities
 
 
 
Low
 
High
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forward
 
$

 
$
131

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
12.97

 
$
66.27

 
$
31.43

Natural gas financial swaps
 

 
37

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
2.40

 
4.33

 
2.90

Electricity financial futures
 
1

 
1

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
21.35

 
37.90

 
30.56

 
 
$
1

 
$
169

 
 
 
 
 
 
 
 
 
 
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forward
 
$

 
$
77

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
11.97

 
$
122.72

 
$
37.43

Natural gas financial swaps
 

 
21

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
2.88

 
4.86

 
3.41

Electricity financial futures
 
1

 
3

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
11.97

 
39.26

 
27.88

 
 
$
1

 
$
101

 
 
 
 
 
 
 
 
 
 

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)
 
 
 
 
 
 
 

19

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,
 
2015

2014
 
2015
 
2014
Balance as of the beginning of the period
$
148

 
$
131

 
$
100

 
$
139

Net realized and unrealized losses (gains)*
20

 
(44
)
 
70

 
(55
)
Transfers out of Level 3 to Level 2

 
2

 
(2
)
 
5

Balance as of the end of the period
$
168

 
$
89

 
$
168

 
$
89

 

*
Contains nominal amounts of realized losses. Both realized and unrealized losses (gains) 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 and six months ended June 30, 2015 and 2014, 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 the Company’s FMBs and Pollution Control 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 is classified as Level 3 and is estimated based on the terms of the loans and the Company’s creditworthiness. These significant unobservable inputs to the Level 3 fair value measurement include the interest rate and the length of the loan. The estimated fair value of the Company’s unsecured term bank loans approximates their carrying value.

As of June 30, 2015, the carrying amount of PGE’s long-term debt was $2,259 million and its estimated aggregate fair value was $2,568 million, consisting of $2,513 million and $55 million classified as Level 2 and Level 3, respectively, in the fair value hierarchy. As of December 31, 2014, the carrying amount of PGE’s long-term debt was $2,501 million and its estimated aggregate fair value was $2,901 million, consisting of $2,596 million and $305 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 and manage risk. 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.


20

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

PGE utilizes derivative instruments to manage its exposure to commodity price risk and foreign currency exchange rate risk in order to reduce volatility in NVPC 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.

PGE’s Assets and Liabilities from price risk management activities consist of the following (in millions):
 
June 30,
2015
 
December 31,
2014
 
Current assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
3

 
$
4

 
Natural gas

 
2

 
Total current derivative assets
3

(1) 
6

(1) 
Noncurrent assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
1

 
1

 
Total noncurrent derivative assets
1

(2) 
1

(2) 
Total derivative assets not designated as hedging instruments
$
4

 
$
7

 
Total derivative assets
$
4

 
$
7

 
Current liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
38

 
$
54

 
Natural gas
63

 
52

 
Total current derivative liabilities
101

 
106

 
Noncurrent liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
114

 
58

 
Natural gas
73

 
64

 
Total noncurrent derivative liabilities
187

 
122

 
Total derivative liabilities not designated as hedging instruments
$
288

 
$
228

 
Total derivative liabilities
$
288

 
$
228

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


21

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

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):
 
June 30, 2015
 
December 31, 2014
Commodity contracts:
 
 
 
 
 
Electricity
12

MWh
 
16

MWh
Natural gas
129

Decatherms
 
127

Decatherms
Foreign currency
$
7

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 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 Amounts Recognized
 
Gross Amounts Offset
 
Net Amounts Presented
 
Condensed Consolidated
 
 
 
 
 
 
Balance Sheets
 
Net Amount
 
 
 
 
Derivatives
 
Cash Collateral(1)
 
As of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
Electricity(2)
$
117

 
$

 
$
117

 
$
(117
)
 
$

 
$

Natural gas(2)
13

 

 
13

 
(13
)
 

 

 
$
130

 
$

 
$
130

 
$
(130
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
Electricity(2)
$
55

 
$

 
$
55

 
$
(55
)
 
$

 
$

Natural gas(2)
17

 

 
17

 
(17
)
 

 

 
$
72

 
$

 
$
72

 
$
(72
)
 
$

 
$


(1)
As of June 30, 2015 and December 31, 2014, PGE had posted collateral in the amount of $13 million and $11 million, respectively, 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.


22

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

Net realized and unrealized losses (gains) 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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Commodity contracts:
 
 
 
 
 
 
 
Electricity
$
29

 
$
(38
)
 
$
70

 
$
(29
)
Natural Gas

 
(6
)
 
44

 
(42
)

Net unrealized and certain net realized losses (gains) presented in the preceding table 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, 2015 and 2014, net losses of $33 million and $52 million, respectively, have been offset. Net losses of $116 million and $64 million have been offset for the six month periods ended June 30, 2015 and 2014, respectively.

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, 2015 related to PGE’s derivative activities would become realized as a result of the settlement of the underlying derivative instrument (in millions):
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
$
22

 
$
19

 
$
7

 
$
6

 
$
6

 
$
88

 
$
148

Natural gas
37

 
61

 
31

 
6

 
1

 

 
136

Net unrealized loss
$
59

 
$
80

 
$
38

 
$
12

 
$
7

 
$
88

 
$
284


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 derivative instruments with credit-risk-related contingent features that were in a liability position as of June 30, 2015 was $274 million, for which PGE has posted $56 million in collateral, consisting of $44 million in letters of credit and $12 million in cash. If the credit-risk-related contingent features underlying these agreements were triggered at June 30, 2015, the cash requirement to either post as collateral or settle the instruments immediately would have been $261 million. As of June 30, 2015, PGE had posted a nominal amount of cash collateral for derivative instruments with no credit-risk related contingent features. Cash collateral for derivative instruments is classified as Margin deposits included in Other current assets on the Company’s condensed consolidated balance sheet.


23

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

Counterparties representing 10% or more of Assets and Liabilities from price risk management activities were as follows:
 
June 30,
2015
 
December 31,
2014
Assets from price risk management activities:
 
 
 
Counterparty A
66
%
 
63
%
Counterparty B
3

 
14

 
69
%
 
77
%
Liabilities from price risk management activities:
 
 
 
Counterparty C
40
%
 
22
%
Counterparty D
5

 
12

 
45
%
 
34
%

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 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 related 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 and six month periods ended June 30, 2015, unvested performance-based restricted stock units and related dividend equivalent rights of approximately 306,000 were excluded from the dilutive calculation because the performance goals had not been met, with 365,000 excluded for the three and six month periods ended June 30, 2014.

Net income attributable to 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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Weighted-average common shares
outstanding—basic
80,745

 
78,183

 
79,515

 
78,154

Dilutive effect of potential common shares

 
1,868

 

 
1,588

Weighted-average common shares
outstanding—diluted
80,745

 
80,051

 
79,515

 
79,742



24

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

NOTE 6: EQUITY

The activity in equity during the six months ended June 30, 2015 and 2014 is as follows (dollars in millions):
 
Common Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Total
Balances as of December 31, 2014
78,228,339

 
$
918

 
$
(7
)
 
$
1,000

 
$
1,911

Issuance of common stock, net of issuance costs of $12
10,400,000

 
271

 

 

 
271

Issuances of shares pursuant to equity-based plans
137,290

 
1

 

 

 
1

Stock-based compensation

 
1

 

 

 
1

Dividends declared

 

 

 
(48
)
 
(48
)
Net income

 

 

 
85

 
85

Balances as of June 30, 2015
88,765,629

 
$
1,191

 
$
(7
)
 
$
1,037

 
$
2,221

 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2013
78,085,559

 
$
911

 
$
(5
)
 
$
913

 
$
1,819

Issuances of shares pursuant to equity-based plans
116,682

 

 

 

 

Stock-based compensation

 
3

 

 

 
3

Dividends declared

 

 

 
(44
)
 
(44
)
Net income

 

 

 
93

 
93

Balances as of June 30, 2014
78,202,241

 
$
914

 
$
(5
)
 
$
962

 
$
1,871


During the second quarter of 2015, PGE physically settled in full the EFSA, with the issuance of 10,400,000 shares of common stock in exchange for net proceeds of $271 million. Prior to settlement, the potentially issuable shares pursuant to the EFSA were 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

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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 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) 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 are 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 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 2008, the OPUC issued an order (2008 Order) that required PGE to provide refunds of $33 million, including interest, which were completed in 2010. Following appeals, the 2008 Order was upheld by the Oregon Court of Appeals in February 2013 and by the Oregon Supreme Court in October 2014.

In 2003, in two separate legal proceedings, lawsuits were filed in Marion County 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 issued a ruling ordering the abatement of the class action proceedings. The Oregon Supreme Court 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.

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. In October 2006, the Marion County Circuit Court abated the class actions in response to the ruling of the Oregon Supreme Court.

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


In June 2015, based on a motion filed by PGE, the Marion County Circuit Court lifted the abatement and set oral argument on the Company’s motion for Summary Judgment to occur on July 27, 2015.

PGE believes that the October 2, 2014 Oregon Supreme Court decision has 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 pending, management believes that it is reasonably possible that such a loss to the Company 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.

Pacific Northwest Refund Proceeding

In response to the Western energy crisis of 2000-2001, the FERC initiated, beginning in 2001, a series of adjudicatory and investigative proceedings to determine whether refunds are warranted for bilateral sales of electricity in the Pacific Northwest wholesale spot market during the period December 25, 2000 through June 20, 2001. In an order issued in 2003, the FERC denied refunds. Various parties appealed the order to the Ninth Circuit Court of Appeals and, on appeal, the Court remanded the issue of refunds to the FERC for further consideration.

On remand, in 2011 and thereafter, the FERC issued several procedural orders that established an evidentiary hearing, defined the scope of the hearing, expanded the refund period to include January 1, 2000 through December 24, 2000 for certain types of claims, and described the burden of proof that must be met to justify abrogation of the contracts at issue and the imposition of refunds. Those orders included a finding by the FERC 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 either by: i) a showing that a respondent had violated a contract or tariff and that the violation had a direct 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. The FERC also held that a market-wide remedy was not appropriate, given the bilateral contract nature of the Pacific Northwest spot markets. Refund proponents have filed petitions for appeal of these procedural orders with the Ninth Circuit. Those appeals remain pending.

In response to the evidence and arguments presented during the hearing, in May 2015, the FERC issued an order upholding the decision of an Administrative Law Judge that the refund proponents had failed to meet the Mobile-Sierra burden with respect to all but one respondent. That order is subject to requests for rehearing.

The Company has settled all of the direct claims asserted against it in the proceedings for an immaterial amount. The settlements and associated FERC orders have not fully eliminated the potential for so-called “ripple claims,” which have been described by the FERC as “sequential claims against a succession of sellers in a chain of purchases that are triggered if the last wholesale purchaser in the chain is entitled to a refund.” However, the FERC has acknowledged that the potential for such ripple claims is “speculative” and the Company believes that ripple claims made against it, if any, are unlikely to be successful under the FERC orders currently in effect. Accordingly, unless those FERC orders are overturned or modified, the Company does not believe that it will incur any material loss in connection with this matter.

Management cannot predict the outcome of the various pending appeals and remands concerning this matter. If, on rehearing, appeal, or subsequent remand, the Ninth Circuit or the FERC were to reverse previous FERC rulings and find that the Mobile-Sierra standard is not applicable or that a market-wide remedy is appropriate, it is possible that additional refund claims could be asserted against the Company. However, management cannot predict, under such circumstances, 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

27

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

ordered to make refunds, would 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.

EPA Investigation of Portland Harbor

In 1997, an investigation by the 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 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 continues to undergo 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 2012, the LWG submitted a draft FS to the EPA for review and approval. The draft FS, which is being rewritten by the EPA, along with the RI, will 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 not expected to issue before 2017.

The draft FS evaluates several alternative clean-up approaches, which 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 2010, the DEQ issued an order requiring PGE to perform an investigation of certain portions of the Downtown Reach. PGE completed this investigation in 2011 and entered into a consent order with the DEQ in 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.

Following the DEQ’s evaluation of a draft feasibility study, PGE submitted a final feasibility study report to the DEQ in September 2014, which described possible remediation alternatives that ranged in estimated cost from $3 million to $8 million. Based on the estimated cost of the alternative recommended by the Company in the feasibility study report, PGE recorded a $3 million reserve for this matter in 2014 and established a regulatory asset of $3 million for future recovery in prices. In April 2015, the DEQ issued its Record of Decision in which it selected the remedy recommended in the feasibility study report.

28

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


The final order issued by the OPUC in the 2015 General Rate Case (GRC) included revenues to offset the amortization of the regulatory asset over a two year period that began January 1, 2015. As of June 30, 2015, the Company has a regulatory asset of $2 million remaining for future recovery of costs related to the Downtown Reach. The 2016 GRC filing provides for the possibility of revising the recovery if costs vary from what was estimated.

Alleged Violation of Environmental Regulations at Colstrip

In July 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 alleged certain violations of the CAA, including New Source Review, Title V, and opacity requirements, and stated that the Sierra Club and MEIC would: 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.

In May 2013, the defendants filed a motion to dismiss 36 of 39 claims alleged in the complaint. In September 2013, the plaintiffs filed a motion for partial summary judgment regarding the appropriate method of calculating emission increases. Also in September 2013, the plaintiffs filed an amended complaint that withdrew 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. In July 2014, the court denied both the defendants’ motion to dismiss and the plaintiffs’ motion for partial summary judgment.

On August 27, 2014, the plaintiffs filed a second amended complaint to which the defendants’ response was filed on September 26, 2014. The second amended complaint continues to seek injunctive relief, declaratory relief, and civil penalties for alleged violations of the federal Clean Air Act. The plaintiffs state in the second amended complaint that it was filed, in part, to comply with the court’s ruling on the defendants’ motion to dismiss and plaintiffs’ motion for partial summary judgment. Discovery in this matter is ongoing with trial now scheduled for November 2015.

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.


29

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

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 June 30, 2015, 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.

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 the Company to have a reasonable basis including, but not limited to, management’s examination of historical operating trends and data contained either in internal records or 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 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 disruptions of fuel supply, which may cause the Company to incur repair costs, as well as increase power costs for replacement power;

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


30


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 power and natural gas purchase agreements;

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

capital market conditions, including availability of capital, volatility of interest rates, reductions in demand for investment-grade commercial paper, as well as changes in PGE’s credit ratings, any of 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 of operating its thermal generating plants, or affect the operations of such 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, and compliance with, environmental laws and policies, including those related to threatened and endangered species, fish, and wildlife;

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;

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;

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 potential strikes, work stoppages, transitions in senior management, and the number of employees approaching retirement;

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

political and economic conditions;

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

changes in 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 emerge from time to time and it is not possible for management to predict all such factors or 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, 2014, and other periodic and current reports filed with the SEC.

Capital Requirements and Financing—Carty Generating Station (Carty) is a 440 MW natural gas-fired baseload resource under construction, which is 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 the second quarter of 2016. As of June 30, 2015, $385 million, including $27 million of AFDC, is included in construction work-in-process for Carty. The Company filed for recovery of costs related to this project in the 2016 GRC.

In total, the Company’s 2015 capital expenditures are expected to approximate $598 million, which includes an estimated $165 million related to Carty. For additional information regarding estimated capital expenditures, see “Capital Requirements” in the Liquidity and Capital Resources section of this Item 2.

PGE expects to fund 2015 estimated capital expenditures and repayments of long-term debt with a combination of cash from operations, which is expected to range from $455 million to $495 million, and proceeds from the issuances of equity and debt securities. For additional information, see “Liquidity” and “Debt and Equity Financings” in the Liquidity and Capital Resources section of this Item 2.

General Rate Cases—On January 1, 2015, new customer prices went into effect pursuant to the OPUC order issued on PGE’s 2015 General Rate Case (2015 GRC), which was based on a 2015 test year and included forecasted retail energy deliveries assuming average weather conditions. The OPUC authorized a $15 million increase in annual revenues, representing an approximate 1% overall increase in customer prices. The increase included recovery of costs related to the Port Westward Unit 2 natural gas-fired flexible capacity generating plant (PW2) and Tucannon River Wind Farm (Tucannon River). In addition, the order approved a capital structure of 50% debt and 50% equity, a return on equity of 9.68%, a cost of capital of 7.56%, and an average rate base of approximately $3.8 billion.

Pursuant to the 2015 GRC order, a forecast of capital expenditures for PW2 of $323 million and Tucannon River of $525 million was used to set customers prices. However, to the extent that total actual capital expenditures are less than that used to set customer prices, the 2015 revenue requirement impact of any shortfall will be deferred for future refund to customers. In the event that total actual capital expenditures exceed those used to set customer prices, there is no deferral of such incremental capital costs. The Company expects to defer approximately $2 million in 2015 for the revenue requirement to be refunded to customers for the two generation resources, as forecast capital exp