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Portland General Electric Co 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Document

 
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 September 30, 2016

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 October 17, 2016 is 88,926,854 shares.
 



PORTLAND GENERAL ELECTRIC COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2016

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
Boardman
 
Boardman coal-fired generating plant
Carty
 
Carty natural gas-fired generating plant
Colstrip
 
Colstrip Units 3 and 4 coal-fired generating plant
CWIP
 
Construction work-in-progress
EPA
 
United States Environmental Protection Agency
ESS
 
Electricity Service Supplier
FERC
 
Federal Energy Regulatory Commission
FMBs
 
First Mortgage Bonds
GAAP
 
Accounting principles generally accepted in the United States of America
GRC
 
General Rate Case
IRP
 
Integrated Resource Plan
Moody’s
 
Moody’s Investors Service
MW
 
Megawatts
MWa
 
Average megawatts
MWh
 
Megawatt hours
NVPC
 
Net Variable Power Costs
OCEP
 
Oregon Clean Electricity and Coal Transition Plan
OPUC
 
Public Utility Commission of Oregon
PCAM
 
Power Cost Adjustment Mechanism
RPS
 
Renewable Portfolio Standard
S&P
 
S&P Global Ratings
SEC
 
United States Securities and Exchange Commission
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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues, net
$
484

 
$
476

 
$
1,399

 
$
1,399

Operating expenses:
 
 
 
 
 
 
 
Purchased power and fuel
180

 
181

 
455

 
490

Generation, transmission and distribution
69

 
64

 
199

 
192

Administrative and other
63

 
59

 
185

 
179

Depreciation and amortization
79

 
76

 
244

 
227

Taxes other than income taxes
29

 
28

 
89

 
86

Total operating expenses
420

 
408

 
1,172

 
1,174

Income from operations
64

 
68

 
227

 
225

Interest expense, net
28

 
28

 
82

 
86

Other income:
 
 
 
 
 
 
 
Allowance for equity funds used during construction
4

 
6

 
19

 
15

Miscellaneous income (expense), net

 
(2
)
 

 

Other income, net
4

 
4

 
19

 
15

Income before income tax expense
40

 
44

 
164

 
154

Income tax expense
6

 
8

 
32

 
33

Net income and Comprehensive income
$
34

 
$
36

 
$
132

 
$
121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding—basic and diluted (in thousands)
88,921

 
88,766

 
88,885

 
82,633

 
 
 
 
 
 
 
 
Earnings per share—basic and diluted
$
0.38

 
$
0.40

 
$
1.49

 
$
1.47

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.32

 
$
0.30

 
$
0.94

 
$
0.88

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

4


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




 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
88

 
$
4

Accounts receivable, net
140

 
158

Unbilled revenues
60

 
95

Inventories
82

 
83

Regulatory assets—current
65

 
129

Other current assets
41

 
88

Total current assets
476

 
557

Electric utility plant, net
6,340

 
6,012

Regulatory assets—noncurrent
515

 
524

Nuclear decommissioning trust
41

 
40

Non-qualified benefit plan trust
34

 
33

Other noncurrent assets
49

 
44

Total assets
$
7,455

 
$
7,210

 
 
 
 
See accompanying notes to condensed consolidated financial statements.





5


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



 
September 30,
2016
 
December 31,
2015
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
112

 
$
98

Liabilities from price risk management activities—current
66

 
130

Short-term debt

 
6

Current portion of long-term debt

 
133

Accrued expenses and other current liabilities
270

 
259

Total current liabilities
448

 
626

Long-term debt, net of current portion
2,325

 
2,060

Regulatory liabilities—noncurrent
958

 
928

Deferred income taxes
644

 
632

Unfunded status of pension and postretirement plans
267

 
259

Liabilities from price risk management activities—noncurrent
163

 
161

Asset retirement obligations
156

 
151

Non-qualified benefit plan liabilities
105

 
106

Other noncurrent liabilities
79

 
29

Total liabilities
5,145

 
4,952

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 September 30, 2016 and December 31, 2015

 

Common stock, no par value, 160,000,000 shares authorized; 88,926,626 and 88,792,751 shares issued and outstanding as of
September 30, 2016 and December 31, 2015, respectively
1,199

 
1,196

Accumulated other comprehensive loss
(7
)
 
(8
)
Retained earnings
1,118

 
1,070

Total equity
2,310

 
2,258

Total liabilities and equity
$
7,455

 
$
7,210

 
See accompanying notes to condensed consolidated financial statements.



6


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

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
132

 
$
121

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
244

 
227

(Decrease) increase in net liabilities from price risk management activities
(59
)
 
71

Regulatory deferrals—price risk management activities
59

 
(71
)
Deferred income taxes
18

 
31

Pension and other postretirement benefits
21

 
25

Allowance for equity funds used during construction
(19
)
 
(15
)
Other non-cash income and expenses, net
8

 
29

Changes in working capital:
 
 
 
Decrease in accounts receivable and unbilled revenues
53

 
37

Decrease (increase) in inventories
1

 
(12
)
Decrease (increase) in margin deposits, net
25

 
(9
)
Increase in accounts payable and accrued liabilities
31

 
13

Other working capital items, net
12

 
15

Other, net
(29
)
 
(23
)
Net cash provided by operating activities
497

 
439

Cash flows from investing activities:
 
 
 
Capital expenditures
(454
)
 
(452
)
Distribution from Nuclear decommissioning trust

 
50

Sales tax refund received related to Tucannon River Wind Farm

 
23

Sales of Nuclear decommissioning trust securities
17

 
11

Purchases of Nuclear decommissioning trust securities
(16
)
 
(10
)
Other, net
(1
)
 
1

Net cash used in investing activities
(454
)
 
(377
)
 
 
 
 
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)


 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs
$

 
$
271

Proceeds from issuance of long-term debt
265

 
145

Payments on long-term debt
(133
)
 
(442
)
Change in short-term debt
(6
)
 

Dividends paid
(82
)
 
(70
)
Other
(3
)
 
(1
)
Net cash provided by (used in) financing activities
41

 
(97
)
Increase (Decrease) in cash and cash equivalents
84

 
(35
)
Cash and cash equivalents, beginning of period
4

 
127

Cash and cash equivalents, end of period
$
88

 
$
92

 
 
 
 
Supplemental cash flow information is as follows:
 
 
 
Cash paid for interest, net of amounts capitalized
$
61

 
$
67

Cash paid for income taxes
12

 
3

Non-cash investing and financing activities:
 
 
 
Assets obtained under capital lease
57

 

 
See accompanying notes to condensed consolidated financial statements.


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. 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 September 30, 2016, PGE served approximately 863,000 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 2016 presentation, PGE has reclassified Cash paid pursuant to the Residential Exchange Program of $3 million to Other, net and Decoupling mechanism deferrals, net of amortization of $10 million to Other non-cash income and expenses, net within the operating activities section of the condensed consolidated statement of cash flows for the nine months ended September 30, 2015.

The financial information included herein for the three and nine months ended September 30, 2016 and 2015 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, 2015 is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in Item 8 of PGE’s Annual Report on Form 10-K, filed with the SEC on February 12, 2016, 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 month periods ended September 30, 2016 and 2015. Other comprehensive loss due to the change in compensation retirement benefits liability and amortization, net of taxes was $1 million and none for the nine month periods ended September 30, 2016 and 2015.

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.

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 or as a cumulative-effect adjustment as of the date of adoption, which was originally January 1, 2017 for the Company. In August 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2014-14) that defers the effective date by one year, although it permits early adoption as of the original effective date. The Company plans to adopt this ASU on January 1, 2018 and is in the process of evaluating its planned transition method and the impact to its consolidated financial position, consolidated results of operations, and consolidated cash flows of the adoption of ASU 2014-09.

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 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is designed to simplify the presentation and accounting for certain income tax effects, employer tax withholding requirements, forfeiture assumptions, and statement of cash flows presentation related to share-based payment awards. Under this standard, all excess tax benefits and tax deficiencies should be recognized within the income statement, and excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. The update also allows reporting entities to make a policy election regarding its accounting for forfeitures either by estimating the number

10


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

of awards that are expected to vest or account for forfeitures when they occur. Within the statement of cash flows, this update will now require tax windfalls to be classified along with other income tax cash flows as an operating activity, and cash payments made on behalf of employees when directly withholding shares for tax-withholding purposes should be classified as a financing activity. Most of the provisions of this update require transition on a modified retrospective basis by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. For calendar year-end public entities, the update will be effective for annual periods beginning January 1, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact to its consolidated financial position, consolidated results of operations, and consolidated cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), with the intention to reduce diversity in practice, as well as simplify elements of classification within the statement of cash flows for certain transactions. The new ASU prescribes specific clarification guidance for the following eight classes of transactions: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance (COLI) policies, distributions received from equity method investments, beneficial interest in securitization transactions, and separately identifiable cash flows and application of the predominance principal. For calendar year-end public entities, the update will be effective for annual periods beginning January 1, 2018 and requires application using a retrospective transition method. Early adoption is permitted. The Company is in the process of evaluating the impacts of adoption of ASU 2016-15 to the presentation of consolidated cash flows.

Recently Adopted Accounting Pronouncements

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 Company has retrospectively adopted the provisions of ASU 2015-03 as of January 1, 2016, which was the original effective date for calendar year-end, public entities. As a result, unamortized debt expense of $11 million at September 30, 2016 and December 31, 2015, respectively, have been reclassified from Other noncurrent assets to a deduction of Long-term debt, net of current portion on the condensed consolidated balance sheets. Adoption of this guidance had no impact on the Company’s consolidated results of operations or consolidated cash flows. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation of Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update) (ASU 2015-15)which clarifies that the SEC staff would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement” given the lack of guidance on this topic in ASU 2015-03. Therefore, as allowed under this update, the Company records debt issuance costs associated with its line-of-credit arrangements as an asset within Other current assets, and amortizes the costs over the term of the agreement.

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 as a 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 as a practical expedient. Instead, such disclosures are restricted only to investments that the entity has decided to measure using the practical expedient. The Company has retrospectively adopted the provisions of this update as of January 1, 2016, which was the original effective date for calendar year-end, public entities. As a result, certain

11


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

investments have been retrospectively reclassified within the Company’s fair value disclosures of its Nuclear decommissioning trust and Non-qualified benefit plan trust. See Note 3, Fair Value of Financial Instruments for more information. The Company also anticipates that adoption of this standard will require certain benefit plan assets to be reclassified in disclosures made in the Company’s Annual Report on Form 10-K. The adoption of this guidance had no impact on the Company’s consolidated financial position, consolidated results of operations, or consolidated cash flows.

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 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.

Other Current Assets

Other current assets consist of the following (in millions):
 
September 30,
2016
 
December 31, 2015
Prepaid expenses
$
28

 
$
43

Margin deposits
8

 
33

Assets from price risk management activities
5

 
10

Other

 
2

Other current assets
$
41

 
$
88


Electric Utility Plant, Net

Electric utility plant, net consists of the following (in millions):
 
September 30,
2016
 
December 31,
2015
Electric utility plant
$
9,415

 
$
8,560

Construction work-in-progress
194

 
545

Total cost
9,609

 
9,105

Less: accumulated depreciation and amortization
(3,269
)
 
(3,093
)
Electric utility plant, net
$
6,340

 
$
6,012


Accumulated depreciation and amortization in the table above includes accumulated amortization related to intangible assets of $260 million and $227 million as of September 30, 2016 and December 31, 2015, respectively. Amortization expense related to intangible assets was $11 million and $10 million for the three months ended September 30, 2016 and 2015, respectively, and $33 million and $28 million for the nine months ended September 30, 2016 and 2015, respectively. The Company’s intangible assets primarily consist of computer software development and hydro licensing costs.


12


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

Carty Placed In Service—On July 29, 2016, the Company placed Carty into service, a 440 MW baseload natural gas-fired generating plant in Eastern Oregon, located adjacent to the Boardman coal-fired generating plant (Boardman). As of September 30, 2016, PGE had $615 million in plant in service related to Carty as compared to $424 million, as of December 31, 2015 included in Construction work-in-progress (CWIP) for the project. The final order issued by the OPUC on November 3, 2015 in connection with the Company’s 2016 General Rate Case (GRC), authorized the inclusion in customer prices of capital costs for Carty of up to $514 million, as well as Carty’s operating costs, at such time that the plant is placed in service, provided that occurred by July 31, 2016. As Carty was placed in service on July 29, 2016, the Company has been authorized to include in customer prices, effective August 1, 2016, the revenue requirement necessary to allow for recovery of capital costs of up to $514 million, as well as Carty’s operating costs. See Note 7, Contingencies, for further information regarding Carty.

Capital Lease—PGE has entered into agreements to purchase natural gas transportation capacity to serve Carty via a 24-mile natural gas pipeline, Carty Lateral, that was constructed to serve the Carty facility. The Company has entered into a 30-year agreement to purchase the entire capacity of Carty Lateral, which is approximately 175,000 decatherms per day. At the end of the initial contract term, the Company has the option to renew the agreement in continuous three-year increments with at least 24-months prior written notice. For accounting purposes, this transportation capacity agreement is treated as a capital lease.

As of September 30, 2016, a capital lease asset of $57 million was reflected within Electric utility plant, and accumulated amortization of such assets of $2 million reflected within Accumulated depreciation and amortization in the table above. The present value of the future minimum lease payments due under the agreement included $3 million within Accrued expenses and other current liabilities and $52 million in Other noncurrent liabilities on the condensed consolidated balance sheets. For ratemaking purposes capital leases are treated as operating leases; therefore, in accordance with the accounting rules for regulated operations, the amortization of the leased asset is based on the rental payments recovered from customers. Also for ratemaking purposes, such rental payments were capitalized to the Carty project prior to its in service date of July 29, 2016 and, as a result, amortization of the leased asset of $2 million and interest expense of $3 million was capitalized to CWIP. Beginning August 1, 2016, amortization of the leased asset of $1 million and interest expense of $1 million has been recorded to Purchased power and fuel expense in the condensed consolidated statements of income through September 30, 2016.

For the remainder of 2016, PGE expects $2 million in minimum lease payments, with $1 million of imputed interest and present value of net minimum lease payments of $1 million. As of September 30, 2016, PGE’s estimated future minimum lease payments, for the following five years and thereafter, net of administrative costs such as property taxes, insurance and maintenance are as follows (in millions):
 
Payments Due
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Total minimum lease payments
$
7

 
$
6

 
$
6

 
$
6

 
$
6

 
$
78

 
$
109

Less imputed interest
 
 
 
 
 
 
 
 
 
 
 
 
55

Present value of net minimum lease payments
 
 
 
 
 
 
 
 
 
 
 
 
$
54



13


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):
 
September 30, 2016
 
December 31, 2015
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Regulatory assets:
 
 
 
 
 
 
 
Price risk management
$
61

 
$
161

 
$
120

 
$
161

Pension and other postretirement plans

 
228

 

 
239

Deferred income taxes

 
80

 

 
86

Debt issuance costs

 
23

 

 
16

Other
4

 
23

 
9

 
22

Total regulatory assets
$
65

 
$
515

 
$
129

 
$
524

Regulatory liabilities:
 
 
 
 
 
 
 
Asset retirement removal costs
$

 
$
872

 
$

 
$
837

Trojan decommissioning activities
24

 
4

 
17

 
15

Asset retirement obligations

 
48

 

 
45

Other
25

 
34

 
38

 
31

Total regulatory liabilities
$
49

* 
$
958

 
$
55

* 
$
928


*
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):
 
September 30,
2016
 
December 31, 2015
Regulatory liabilities—current
$
49

 
$
55

Accrued employee compensation and benefits
45

 
51

Accrued interest payable
40

 
25

Accrued dividends payable
29

 
28

Accrued taxes payable
43

 
25

Other
64

 
75

Total accrued expenses and other current liabilities
$
270

 
$
259


Credit Facilities

As of September 30, 2016, PGE had a $500 million revolving credit facility scheduled to expire in November 2019.

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. 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

14


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 September 30, 2016, 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 September 30, 2016, PGE had no borrowings, commercial paper, or letters of credit issued. As of September 30, 2016, the aggregate unused available credit capacity under the revolving credit facility was $500 million.

In addition, PGE has four letter of credit facilities that provide a total of $160 million capacity 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. Under these four facilities, $73 million of letters of credit were outstanding as of September 30, 2016. 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

In May 2016, PGE entered into an unsecured credit agreement with certain financial institutions, under which the Company may obtain three separate term loans in an aggregate principal amount of up to $200 million by October 31, 2016. PGE has obtained the following two term loans:

$50 million on May 4, 2016; and

$75 million on June 15, 2016.

The Company has given notice to the financial institutions that it intends to obtain the third term loan in the amount of $25 million on October 31, 2016. The term loan interest rates are set at the beginning of the interest period for periods of 1-month, 3-months or 6-months, as selected by PGE and are based on the London Interbank Offered Rate (LIBOR) plus 63 basis points, approximately 1.2% as of September 30, 2016, 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.

During the nine months ended September 30, 2016, PGE had the following First Mortgage Bonds (FMBs) long-term debt transactions, all of which occurred in early January 2016:

Issued $140 million of 2.51% Series FMBs due in 2021;

Repaid $75 million of 5.80% Series FMBs, due in 2018; and

Repaid $58 million of 3.81% Series FMBs, due in 2017.


15


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

Due to the anticipated repayment of the $133 million in early January 2016, this amount of long-term debt was classified as current on the Company’s condensed consolidated balance sheets as of December 31, 2015.

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
4

 
$
4

 
$
12

 
$
13

Interest cost
9

 
8

 
25

 
24

Expected return on plan assets
(10
)
 
(10
)
 
(30
)
 
(30
)
Amortization of net actuarial loss
3

 
5

 
11

 
15

Net periodic benefit cost
$
6

 
$
7

 
$
18

 
$
22



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 September 30, 2016 and December 31, 2015, 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. Pursuant to the adoption of ASU 2015-07, Fair Value Measurement (Topic 820), Disclosures for Investments in Certain Entities that Calculate Net Asset Value per share (or Its Equivalent), as disclosed in Note 1, Basis of Presentation, assets measured at fair value using net asset value (NAV) as a practical expedient are not categorized in the fair value hierarchy. These assets are listed in the totals of the fair value hierarchy to permit the reconciliation to amounts presented in the financial statements, and prior period amounts have been retrospectively reclassified to conform to current presentation.

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 nine month periods ended September 30, 2016 and 2015, except those transfers from Level 3 to Level 2 presented in this note.


16


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 September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Other(2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
Domestic government
$
2

 
$
10

 
$

 
$

 
$
12

Corporate credit

 
9

 

 

 
9

Money market funds measured at NAV(2)

 

 

 
20

 
20

Non-qualified benefit plan trust: (3)
 
 
 
 
 
 
 
 
 
Equity securities—domestic
4

 

 

 

 
4

Debt securities—domestic government
1

 

 

 

 
1

Money market funds measured at NAV(2)

 

 

 
1

 
1

Collective trust—domestic equity measured at NAV(2)

 

 

 
2

 
2

Assets from price risk management activities: (1) (4)
 
 
 
 
 
 
 
 
 
Electricity

 
2

 

 

 
2

Natural gas

 
5

 

 

 
5

 
$
7

 
$
26

 
$

 
$
23

 
$
56

Liabilities from price risk management
activities: (1) (4)
 
 
 
 
 
 
 
 
 
Electricity
$

 
$
4

 
$
139

 
$

 
$
143

Natural gas

 
65

 
21

 

 
86

 
$

 
$
69

 
$
160

 
$

 
$
229

 
(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.


17


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

 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Other(2)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Nuclear decommissioning trust: (1)
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
Domestic government
$
6

 
$
8

 
$

 
$

 
$
14

Corporate credit

 
8

 

 

 
8

Money market funds measured at NAV(2)

 

 

 
18

 
18

Non-qualified benefit plan trust: (3)
 
 
 
 
 
 
 
 
 
Equity securities—domestic
3

 

 

 

 
3

Debt securities—domestic government
1

 

 

 

 
1

Money market funds measured at NAV(2)

 

 

 
1

 
1

Collective trust—domestic equity measured at NAV(2)

 

 

 
2

 
2

Assets from price risk management activities: (1) (4)
 
 
 
 
 
 
 
 
 
Electricity

 
7

 

 

 
7

Natural gas

 
3

 

 

 
3

 
$
10

 
$
26

 
$

 
$
21

 
$
57

Liabilities from price risk management
activities: (1) (4)
 
 
 
 
 
 
 
 
 
Electricity
$

 
$
28

 
$
105

 
$

 
$
133

Natural gas

 
144

 
14

 

 
158

 
$

 
$
172

 
$
119

 
$

 
$
291

 
(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, and have been retrospectively reclassified pursuant to the implementation of ASU 2015-07. For further information see Note 1, Basis of Presentation.
(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 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.


18


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 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. Money market funds are not classified in the fair value hierarchy since they are valued at NAV as a practical expedient. 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 invests 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 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 and swaps.


19


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 September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forwards
 
$

 
$
139

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
15.58

 
$
41.79

 
$
29.50

Natural gas financial swaps
 

 
21

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
1.84

 
3.23

 
2.26

Electricity financial futures
 

 

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
19.29

 
33.75

 
26.78

 
 
$

 
$
160

 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity physical forwards
 
$

 
$
105

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
$
8.50

 
$
84.47

 
$
30.69

Natural gas financial swaps
 

 
14

 
Discounted cash flow
 
Natural gas forward price (per Decatherm)
 
2.06

 
3.70

 
2.54

Electricity financial futures
 

 

 
Discounted cash flow
 
Electricity forward price (per MWh)
 
9.98

 
27.36

 
19.26

 
 
$

 
$
119

 
 
 
 
 
 
 
 
 
 

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 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 monthly 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 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)
 
 
 
 
 
 
 


20


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
September 30,
 
Nine Months Ended
September 30,
 
2016

2015
 
2016
 
2015
Balance as of the beginning of the period
$
158

 
$
168

 
$
119

 
$
100

Net realized and unrealized losses*

 
15

 
40

 
85

Transfers out of Level 3 to Level 2
2

 
(14
)
 
1

 
(16
)
Balance as of the end of the period
$
160

 
$
169

 
$
160

 
$
169

 

*
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 nine months ended September 30, 2016 and 2015, there were nominal 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 Level 3 in the fair value hierarchy 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 September 30, 2016, the carrying amount of PGE’s long-term debt was $2,325 million, net of $11 million of unamortized debt expense, and its estimated aggregate fair value was $2,885 million, classified as Level 2 in the fair value hierarchy. As of December 31, 2015, the carrying amount of PGE’s long-term debt was $2,193 million, net of $11 million of unamortized debt expense, and its estimated aggregate fair value was $2,455 million, classified as Level 2 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 purchases and sales of both power and fuel 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.


21


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, 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), 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):
 
September 30,
2016
 
December 31,
2015
 
Current assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
2

 
$
7

 
Natural gas
3

 
3

 
Total current derivative assets
5

(1) 
10

(1) 
Noncurrent assets:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity

 

 
Natural gas
2

 

 
Total noncurrent derivative assets
2

(2) 

(2) 
Total derivative assets not designated as hedging instruments
$
7

 
$
10

 
Total derivative assets
$
7

 
$
10

 
Current liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
$
11

 
$
36

 
Natural gas
55

 
94

 
Total current derivative liabilities
66

 
130

 
Noncurrent liabilities:
 
 
 
 
Commodity contracts:
 
 
 
 
Electricity
132

 
97

 
Natural gas
31

 
64

 
Total noncurrent derivative liabilities
163

 
161

 
Total derivative liabilities not designated as hedging instruments
$
229

 
$
291

 
Total derivative liabilities
$
229

 
$
291

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


22


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):
 
September 30, 2016
 
December 31, 2015
Commodity contracts:
 
 
 
 
 
Electricity
8

MWh
 
12

MWh
Natural gas
123

Decatherms
 
124

Decatherms
Foreign currency
$
21

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 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 September 30, 2016 and December 31, 2015, gross amounts included as Price risk management liabilities subject to master netting agreements were $143 million and $111 million, respectively, for which PGE posted collateral of $15 million as of September 30, 2016, which consisted of $14 million of letters of credit and $1 million of cash, and $14 million as of December 31, 2015, which consisted entirely of letters of credit. As of September 30, 2016, of the gross amounts recognized, $139 million was for electricity and $4 million was for natural gas compared to $104 million for electricity and $7 million for natural gas recognized as of December 31, 2015.

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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Commodity contracts:
 
 
 
 
 
 
 
Electricity
$
8

 
$
7

 
$
60

 
$
77

Natural Gas
10

 
35

 
(14
)
 
79

Foreign currency exchange

 

 
(1
)
 


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 September 30, 2016 and 2015, net losses of $20 million and net losses of $34 million have been offset, respectively. Net losses of $36 million and $150 million have been offset for the nine month periods ended September 30, 2016 and 2015, respectively.


23


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 September 30, 2016 related to PGE’s derivative activities would become realized as a result of the settlement of the underlying derivative instrument (in millions):
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
$
3

 
$
6

 
$
8

 
$
8

 
$
7

 
$
109

 
$
141

Natural gas
20

 
41

 
13

 
5

 
2

 

 
81

Net unrealized loss
$
23

 
$
47

 
$
21

 
$
13

 
$
9

 
$
109

 
$
222


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 September 30, 2016 was $227 million, for which PGE has posted $36 million in collateral, consisting of $31 million in letters of credit and $5 million in cash. If the credit-risk-related contingent features underlying these agreements were triggered at September 30, 2016, the cash requirement to either post as collateral or settle the instruments immediately would have been $219 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:
 
September 30,
2016
 
December 31,
2015
Assets from price risk management activities:
 
 
 
Counterparty A
34
%
 
5
%
Counterparty B
12

 
8

Counterparty C
10

 
8

Counterparty D
7

 
10
%
Counterparty E
2

 
59
%
 
65
%
 
90
%
Liabilities from price risk management activities:
 
 
 
Counterparty F
61
%
 
36
%
Counterparty C
8

 
10

Counterparty B
7

 
10

 
76
%
 
56
%

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.


24


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

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) unvested employee stock purchase plan shares; and ii) contingently issuable time-based and performance-based restricted stock units, along with associated dividend equivalent rights. 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 nine month periods ended September 30, 2016, 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 308,000 excluded for the three and nine month periods ended September 30, 2015.

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
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Weighted-average common shares outstanding—basic and diluted
88,921

 
88,766

 
88,885

 
82,633



25


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

NOTE 6: EQUITY

The activity in equity during the nine months ended September 30, 2016 and 2015 is as follows (dollars in millions):
 
Common Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
Total
Balances as of December 31, 2015
88,792,751

 
$
1,196

 
$
(8
)
 
$
1,070

 
$
2,258

Issuances of shares pursuant to equity-based plans
133,875

 
1

 

 

 
1

Stock-based compensation

 
2

 

 

 
2

Dividends declared

 

 

 
(84
)
 
(84
)
Other comprehensive income

 

 
1

 

 
1

Net income

 

 

 
132

 
132

Balances as of September 30, 2016
88,926,626

 
$
1,199

 
$
(7
)
 
$
1,118

 
$
2,310

 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2014
78,228,339

 
$
918

 
$
(7
)
 
$
1,000

 
$
1,911

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

 
271

 

 

 
271

Issuances of shares pursuant to equity-based plans
143,833

 
1

 

 

 
1

Stock-based compensation

 
3

 

 

 
3

Dividends declared

 

 

 
(75
)
 
(75
)
Net income

 

 

 
121

 
121

Balances as of September 30, 2015
88,772,172

 
$
1,193

 
$
(7
)
 
$
1,046

 
$
2,232


During 2015, PGE physically settled in full an equity forward sale agreement, with the issuance of 10,400,000 shares of common stock in exchange for net proceeds of $271 million.

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.

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 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.

26


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


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,