PORTLAND GENERAL ELECTRIC CO /OR/ - Quarter Report: 2007 September (Form 10-Q)

The interim financial statements have been prepared by Portland General Electric Company (PGE or the Company) and, in the opinion of management, reflect all adjustments which are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Such statements, which are unaudited, are presented in accordance with the interim reporting requirements of the Securities and Exchange Commission (SEC), which do not include all the disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. Certain information and footnote disclosures made in the last annual report on Form 10-K have been condensed or omitted for the interim statements. 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 costs, interim financial results do not necessarily represent those to be expected for the year. It is management's opinion that, when the interim statements are read in conjunction with the Company's 2006 Annual Report on Form 10-K filed with the SEC, the disclosures are adequate to make the information presented not misleading.

Reclassifications - Certain amounts in the financial statements have been reclassified for comparative purposes. Specifically, "Allowance for equity funds used during construction," previously classified within "Other Income (Deductions) - Miscellaneous" on the Condensed Consolidated Statements of Income, is now reported separately. In addition, "Allowance for equity funds used during construction" and "Senate Bill 408 deferrals," previously classified within "Other non-cash income and expenses (net)" on the Condensed Consolidated Statements of Cash Flows, are now reported separately. These reclassifications had no material effect on PGE's previously reported consolidated financial position, results of operations, or cash flows.

Defined Benefit Pension Plan - PGE sponsors a non-contributory defined benefit pension plan, the assets of which are held in a trust. Pension plan calculations include several assumptions which are reviewed annually and updated as appropriate.

Non-Qualified Benefit Plans - The amounts included under Non-Qualified Benefit Plans in the accompanying table primarily represent obligations for a Supplemental Executive Retirement Plan (SERP). The SERP was closed to new participants in 1997. Investments in a non-qualified benefit plan trust, consisting of trust owned life insurance policies and marketable securities, are intended to be the primary source for financing these plans.

Other Benefits - PGE also participates in non-contributory post-retirement health and life insurance plans ("Other Benefits" in the table below). Employees are covered under a Defined Dollar Medical Benefit Plan which limits PGE's obligation by establishing a maximum benefit per employee. Contributions made to a voluntary employees' beneficiary association trust are used to fund these plans. Costs of these plans, based upon an actuarial study, are included in prices charged to customers. Post-retirement benefit plan calculations include several assumptions which are reviewed annually and updated as appropriate. In addition, PGE has established Health Retirement Accounts (HRAs) for its employees under which the Company makes contributions to trust accounts to provide for claims by retirees for qualified medical costs.

The measurement date for these plans is December 31. PGE does not expect to make contributions to the pension plan, SERP, or post-retirement health and life insurance plans during 2007; contributions to the HRAs are not expected to be material.

The following table reflects the components of net periodic benefit cost for the periods indicated (in millions):

PGE utilizes derivative instruments, including electricity forward, swap, and option contracts and natural gas forward, swap, option, and futures contracts in its retail (non-trading) electric utility activities to manage its exposure to commodity price risk and to minimize net power costs for service to its retail customers. Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended), derivative instruments are recorded on the Balance Sheet as an asset or liability measured at estimated fair value, with changes in fair value recognized currently in earnings, unless specific hedge accounting criteria are met.

Changes in the fair value of retail (non-trading) derivative instruments prior to settlement that do not qualify for either the normal purchase and normal sale exception or for hedge accounting are recorded on a net basis in Purchased Power and Fuel expense. For derivative instruments that are physically settled, sales are recorded in Operating Revenues, with purchases, natural gas swaps and futures recorded in Purchased Power and Fuel expense. PGE records the non-physical settlement of non-trading electricity derivative activities on a net basis in Purchased Power and Fuel expense, in accordance with Emerging Issues Task Force Issue No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and "Not Held for Trading Purposes."

Special accounting for qualifying hedges allows gains and losses on a derivative instrument to be recorded in Other Comprehensive Income (OCI) until they can offset the related results on the hedged item in the Income Statement. The derivative instruments entered into to manage the Company's future non-trading retail resource requirements are subject to regulation; accordingly, the unrealized gains and losses are deferred pursuant to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.

PGE participates in the wholesale marketplace in order to balance its supply of power to meet the needs of its retail customers, manage risk, and satisfy the requirements of its current long-term wholesale contracts. Such activities include power purchases and sales resulting from economic dispatch decisions for its own generation, which allows PGE to secure reasonably priced power for its customers. Most of PGE's non-trading wholesale sales have been to utilities and power marketers and have been predominantly short-term. In this process, PGE may net purchases and sales with the same counterparty rather than simultaneously receiving and delivering physical power. These net transactions are also referred to as "book outs." Only the net amount of those purchases or sales required to fulfill retail and wholesale obligations are physically settled.

Prior to December 2006, PGE recorded a regulatory asset or regulatory liability under SFAS No. 71 to offset unrealized gains and losses on certain non-trading contracts recorded prior to settlement to the extent that such contracts were included in the Company's Resource Valuation Mechanism (RVM). Upon settlement, the regulatory asset or regulatory liability was reversed. In its January 2007 general rate order, the Public Utility Commission of Oregon (OPUC) approved a new Annual Power Cost Update Tariff, which replaced the RVM, and a new Power Cost Adjustment Mechanism (PCAM) by which PGE can adjust future prices to reflect the difference between each year's forecasted and actual net variable power costs (NVPC) on a settlement basis. As a result, a regulatory asset or regulatory liability is now recorded to offset changes in fair value of derivative instruments.

The following table reflects unrealized gains and losses recorded in earnings for the periods indicated (in millions):

The following table reflects derivative activities from cash flow hedges recorded in OCI (before taxes) for the periods indicated (in millions):

Hedge ineffectiveness from cash flow hedges was not material in the first nine months of 2007 and 2006. As of September 30, 2007, the maximum length of time over which PGE is hedging its exposure to such transactions is approximately 48 months. The Company estimates that of the $5 million of net unrealized losses in OCI at September 30, 2007, $7 million in net unrealized losses will be reclassified into earnings within the next twelve months (fully offset by SFAS No. 71 regulatory assets) and $2 million in net unrealized gains will be reclassified over the remaining 36 months (fully offset by SFAS No. 71 regulatory liabilities).

Trojan Investment Recovery - In 1993, PGE closed the Trojan Nuclear Plant as part of the Company's least cost planning process. PGE sought full recovery of, and a rate of return on, its Trojan plant costs, including decommissioning, in a general rate case filing with the OPUC. In 1995, the OPUC issued a general rate order which granted the Company recovery of, and a rate of return on, 87% of its remaining investment in Trojan plant costs, and full recovery of its estimated decommissioning costs through 2011.

Numerous challenges, appeals and reviews were subsequently filed in the Marion County Circuit Court, the Oregon Court of Appeals, and the Oregon Supreme Court on the issue of the OPUC's authority under Oregon law to grant recovery of, and a return on, the Trojan investment. The primary plaintiffs in the litigation were the Citizens' Utility Board (CUB) and the Utility Reform Project (URP). The Oregon Court of Appeals issued an opinion in 1998, stating that the OPUC does not have the authority to allow PGE to recover a return on the Trojan investment, but upholding the OPUC's authorization of PGE's recovery of the Trojan investment and ordering remand of the case to the OPUC. PGE, the OPUC, and URP each requested the Oregon Supreme Court to conduct a review of the Court of Appeals decision. On November 19, 2002, the Oregon Supreme Court dismissed the petitions for review. As a result, the 1998 Oregon Court of Appeals opinion stands and the case has been remanded to the OPUC (1998 Remand).

In 2000, while the petitions for review of the 1998 Oregon Court of Appeals decision were pending at the Oregon Supreme Court, PGE, CUB, and the staff of the OPUC entered into agreements to settle the litigation related to PGE's recovery of, and return on, its investment in the Trojan plant. The URP did not participate in the settlement. The settlement, which was approved by the OPUC in September 2000, allowed PGE to remove from its balance sheet the remaining before-tax investment in Trojan of approximately $180 million at September 30, 2000, along with several largely offsetting regulatory liabilities. The largest of such amounts consisted of before-tax credits of approximately $79 million in customer benefits related to the previous settlement of power contracts with two other utilities and the approximately $80 million remaining credit due customers under terms of the 1997 merger of the Company's parent corporation at the time (Portland General Corporation) with Enron Corp. The settlement also allowed PGE recovery of approximately $47 million in income tax benefits related to the Trojan investment which had been flowed through to customers in prior years; such amount was substantially recovered from PGE customers by the end of 2006. After offsetting the investment in Trojan with these credits and prior tax benefits, the remaining Trojan regulatory asset balance of approximately $5 million (after tax) was expensed. As a result of the settlement, PGE's investment in Trojan is no longer included in prices charged to customers, either through a return of or a return on that investment. Authorized collection of Trojan decommissioning costs is unaffected by the settlement agreements or the OPUC orders.

URP filed a complaint with the OPUC challenging the settlement agreements and the OPUC's September 2000 order. In March 2002, the OPUC issued an order (2002 Order) denying all of URP's challenges, and approving the accounting and ratemaking elements of the 2000 settlement. URP appealed the 2002 Order to the Marion County Circuit Court. On November 7, 2003, the Marion County Circuit Court issued an opinion remanding the case to the OPUC for action to reduce prices or order refunds (2003 Remand). The opinion does not specify the amount or timeframe of any reductions or refunds. PGE and the OPUC have appealed the 2003 Remand to the Oregon Court of Appeals. On October 10, 2007, the Oregon Court of Appeals issued an opinion that vacated the 2003 Remand and remanded the 2002 Order to the OPUC for reconsideration.

Prior to the October 10, 2007 opinion of the Court of Appeals, the OPUC combined the 1998 Remand and the 2003 Remand into one proceeding and has been considering the matter in two phases. The first phase involves a determination of what prices would have been if, in 1995, the OPUC had interpreted the law to prohibit a return on the Trojan investment. The second phase involves a determination of whether the OPUC has authority to engage in retroactive ratemaking.

In Order No. 07-157 (the Order), entered on April 19, 2007, the OPUC denied the motion PGE filed in November 2006 to consolidate phases and re-open the record. In addition, the Order abated the first phase of the proceeding pending a decision by the Oregon Court of Appeals on the 2003 Remand, and ordered that the second phase of the remand proceeding be immediately commenced to investigate the OPUC's authority to engage in retroactive ratemaking. The Order further stated that parties not now participating in the joint remand proceedings will be allowed to intervene and participate in the second phase. Oral argument was held on August 9, 2007.

In a separate legal proceeding, two class action suits were filed in Marion County Circuit Court against PGE on January 17, 2003 on behalf of two classes of electric service customers. One case seeks to represent current PGE customers that were customers during the period from April 1, 1995 to October 1, 2000 (Current Class) and the other case seeks to represent PGE customers that were customers during the period from April 1, 1995 to October 1, 2000, but who are no longer customers (Former Class, together with the Current Class, the Class Action Plaintiffs). The suits seek damages of $190 million for the Current Class and $70 million for the Former Class, as a result of the inclusion of a return on investment of Trojan in the prices PGE charges its customers. On December 14, 2004, the Judge granted the Class Action Plaintiffs' motion for Class Certification and Partial Summary Judgment and denied PGE's motion for Summary Judgment. On March 3, 2005 and March 29, 2005, PGE filed two Petitions for an Alternative Writ of Mandamus with the Oregon Supreme Court, asking the Court to take jurisdiction and command the trial Judge to dismiss the complaints or to show cause why they should not be dismissed, and seeking to overturn the Class Certification. On August 31, 2006, the Oregon Supreme Court issued a ruling on PGE's Petitions for Alternative Writ of Mandamus, abating the class action proceedings until the OPUC responds to the 2003 Remand (described above). The Oregon Supreme Court concluded that the OPUC has primary jurisdiction to determine what, if any, remedy it can offer to PGE customers, through price reductions or refunds, for any amount of return on the Trojan investment PGE collected in prices for the period from April 1995 through October 2000. The Supreme Court further stated that if the OPUC determines that it can provide a remedy to PGE's customers, then the class action proceedings may become moot in whole or in part, but if the OPUC determines that it cannot provide a remedy, and that decision becomes final, the court system may have a role to play. The 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. On October 5, 2006, the Marion County Circuit Court issued an Order of Abatement in response to the ruling of the Oregon Supreme Court, abating the class actions, but inviting motions to lift the abatement after one year. On October 17, 2007, the plaintiffs filed a motion to lift the abatement. PGE's response is due on November 5, 2007.

On February 14, 2005, PGE received a Notice of Potential Class Action Lawsuit for Damages and Demand to Rectify Damages from counsel representing Frank Gearhart, David Kafoury and Kafoury Brothers, LLC (Potential Plaintiffs), stating that Potential Plaintiffs intend to bring a class action lawsuit against the Company. Potential Plaintiffs allege that for the period from October 1, 2000 to the present, PGE's electricity prices have included unlawful charges for a return on investment in Trojan in an amount in excess of $100 million. Under Oregon law, there is no requirement as to the time the lawsuit must be filed following the 30-day notice period. No action has been filed to date.

Management cannot predict the ultimate outcome of the above matters. However, it believes these matters will not have a material adverse impact on the financial condition of the Company, but may have a material impact on the results of operations and cash flows for a future reporting period. No reserves have been established by PGE for any amounts related to this issue.

Port Westward Generating Plant - In January 2007, the OPUC issued an order approving a 2.8% price increase related to cost recovery of PGE's Port Westward Generating Plant (Port Westward), a 400 MW natural gas-fired facility located in Clatskanie, Oregon, to be effective when the plant was placed in service. In the order, the OPUC also established a process for re-examining the price increase if the plant's in service date was on or after May 2, 2007. The OPUC staff and intervenors were permitted, within 15 days of the in service date of the plant, to request a re-examination of the costs of Port Westward reflected in PGE's prices. On June 11, 2007, Port Westward was placed into service at a total cost of approximately $280 million (including allowance for funds used during construction), and the new prices went into effect on June 15, 2007. CUB had requested a re-examination of the new prices. On October 22, 2007, the OPUC issued an order denying the request for re-examination and allowing the prices to go into effect on a permanent basis.

Colstrip Royalty Claim - Western Energy Company (WECO) supplies coal from the Rosebud Mine in Montana under a Coal Supply Agreement and a Transportation Agreement with owners of Colstrip Units 3 and 4 (Colstrip), in which PGE has a 20% ownership interest. In 2002 and 2003, WECO received two orders from the Office of Minerals Revenue Management of the U.S. Department of the Interior which asserted underpayment of royalties and taxes by WECO related to transportation of coal from the mine to Colstrip during the period October 1991 through December 2001. WECO subsequently appealed the two orders to the Minerals Management Service (MMS) of the U.S. Department of the Interior. On March 28, 2005, the appeal by WECO was substantially denied. On April 28, 2005, WECO appealed the decision of the MMS to the Interior Board of Land Appeals of the U.S. Department of the Interior. In late September 2006, WECO received an additional order from the Office of Minerals Revenue Management to report and pay additional royalties for the period January 2002 through December 2004. On September 12, 2007, the Interior Board of Land Appeals issued a decision affirming the March 28, 2005 MMS decision.

In May 2005, WECO received a "Preliminary Assessment Notice" from the Montana Department of Revenue, asserting claims similar to those of the Office of Minerals Revenue Management.

WECO has indicated to the owners of Colstrip that, if WECO is unsuccessful in the above appeal process, it will seek reimbursement of any royalty payments by passing these costs on to the owners. The owners of Colstrip advised WECO that their position would be that these claims are not allowable costs under either the Coal Supply Agreement or the Transportation Agreement.

Management cannot predict the ultimate outcome of the above matters or estimate any potential loss. Based on information currently known to the Company's management, PGE does not expect that this issue will have a material adverse effect on its financial condition, results of operations or cash flows. If WECO is able to pass any of these costs on to the owners, the Company would likely seek recovery through the ratemaking process.

Refunds on Wholesale Market Transactions in the Pacific Northwest - On July 25, 2001, the Federal Energy Regulatory Commission (FERC) called for a preliminary evidentiary hearing to explore whether there may have been unjust and unreasonable charges for spot market sales of electricity in the Pacific Northwest from December 25, 2000 through June 20, 2001. During that period, PGE both sold and purchased electricity in the Pacific Northwest. In September 2001, upon completion of hearings, the appointed administrative law judge issued a recommended order that the claims for refunds be dismissed. In December 2002, the FERC re-opened the case to allow parties to conduct further discovery. In June 2003, the FERC issued an order terminating the proceeding and denying the claims for refunds. In November 2003 and February 2004, the FERC denied all requests for rehearing of its June 2003 decision. Parties appealed various aspects of these FERC orders to the U.S. Ninth Circuit Court of Appeals (Ninth Circuit).

On August 24, 2007, the Ninth Circuit issued its decision on appeal, concluding that the FERC failed to adequately explain how it considered or examined new evidence showing intentional market manipulation in California and its potential ties to the Pacific Northwest and that the FERC should not have excluded from the Pacific Northwest refund proceeding purchases of energy made by the California Energy Resources Scheduling (CERS) division in the Pacific Northwest spot market. The Ninth Circuit remanded the case to the FERC (i) to address the new market manipulation evidence in detail and account for it in any future orders regarding the award or denial of refunds in the proceedings, (ii) to include sales to CERS in its analysis, and (iii) to further consider its refund decision in light of related, intervening opinions of the court. The Ninth Circuit offered no opinion on the FERC's findings based on the record established by the administrative law judge and declined to reach the merits of the FERC's ultimate decision to deny refunds. On September 18, 2007, the Ninth Circuit deferred the deadline for parties to file for rehearing until November 16, 2007.

The settlement between PGE and certain other parties in the California refund case in Docket No. EL00-95, et seq., approved by the FERC on May 17, 2007, resolves all claims as between PGE and the California parties named in the settlement as to transactions in the Pacific Northwest during the settlement period, January 1, 2000 through June 21, 2001, but does not settle potential claims from other market participants relating to transactions in the Pacific Northwest.

Management cannot predict the ultimate outcome of the above matter related to wholesale transactions in the Pacific Northwest. However, it believes that the outcome will not have a material adverse impact on the financial condition of the Company, but may have a material impact on the results of operations and cash flows for future reporting periods.

Complaint and Application for Deferral - Income Taxes - On October 5, 2005, the URP and Ken Lewis (together, the Complainants) filed a Complaint and an Application for Deferred Accounting with the OPUC alleging that, since the September 2, 2005 effective date of Oregon Senate Bill 408 (SB 408), PGE's rates were not just and reasonable and were in violation of SB 408 because they contained approximately $92.6 million in annual charges for state and federal income taxes that are not being paid to any governmental entity. The Complaint and Application for Deferred Accounting requested that the OPUC order the creation of a deferred account for all amounts charged to customers since September 2, 2005 for state and federal income taxes, less amounts actually paid by or on behalf of PGE to the federal and state governments for income taxes. PGE contends that no adjustment for taxes may be made prior to the January 1, 2006 effective date of the automatic adjustment clause included in SB 408. For further information, see Note 5, Utility Rate Treatment of Income Taxes.

On August 14, 2007, the OPUC issued an order granting the Application for Deferred Accounting for the period from October 5, 2005 through December 31, 2005 (Deferral Period). The OPUC's order also dismissed the Complaint, without prejudice, on grounds that it is superfluous to the Complainants' request for deferred accounting. The order requires that PGE calculate the amounts applicable to the Deferral Period, along with calculations of PGE's earnings and the effect of the deferral on the Company's return on equity. PGE is to submit these calculations to the OPUC by December 1, 2007. The order also provides that the OPUC will review PGE's earnings at the time it considers amortization of the deferral. PGE understands that the OPUC will consider the potential impact of the deferral on its earnings over a relevant twelve-month period, which will include the Deferral Period. After consideration of these matters, the OPUC will determine whether a rate adjustment is required. The OPUC decision is expected prior to June 1, 2008. On October 15, 2007, PGE filed a petition for judicial review with the Oregon Court of Appeals, seeking review of the OPUC's August 14, 2007 order.

Management cannot predict the ultimate outcome of this matter. However, based on information currently known to management, it believes this matter will not have a material adverse effect on PGE's financial condition, results of operations or cash flows.

Harborton - Since 1973, PGE has operated the Harborton Substation on land owned by the Company located near the Willamette River. A 1997 investigation by the Environmental Protection Agency (EPA) of a 5.5 mile segment of the river, known as the Portland Harbor, revealed significant contamination of sediments within the harbor. The EPA subsequently included the Portland Harbor on the federal National Priority List pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act (Superfund).

In December 2000, PGE received from the EPA a "Notice of Potential Liability" regarding the Harborton Substation facility. The notice listed sixty-eight other companies that the EPA believes may be Potentially Responsible Parties (PRPs) with respect to the Portland Harbor Superfund Site.

In February 2002, PGE provided a report on its remedial investigation of the Harborton Substation site to the Oregon Department of Environmental Quality (DEQ). The report concluded that there is no likely present or past source or pathway for release of hazardous substances to surface water or sediments in the Portland Harbor Superfund Site at or from the site and that the site does not present a high priority threat to present and future public health, safety, welfare, or the environment. The DEQ submitted the report to the EPA and, in a May 18, 2004 letter, the EPA notified the DEQ that, based on the summary information from the DEQ and the stage of the process, the EPA, as of that time, agreed that the Harborton Substation site does not appear to be a current source of contamination to the river.

In a December 6, 2005 letter, the DEQ notified PGE that the site is not likely a current source of contamination to the river and that the site is a low priority for further action. On October 17, 2007, the EPA notified PGE of a meeting to be held on November 7, 2007 regarding the convening of the process for allocation of costs for investigation and remediation activities. Management believes that the Company's contribution to the sediment contamination, if any, from the Harborton Substation site would qualify it as a de minimis PRP.

Sufficient information is currently not available to determine the total cost of any required investigation or remediation of the Portland Harbor or the liability of PRPs, including PGE. Management cannot predict the ultimate outcome of this matter. However, it believes this matter will not have a material adverse impact on the Company's financial condition, results of operations or cash flows.

Harbor Oil - Harbor Oil, Inc. (Harbor Oil), located in north Portland, was utilized by PGE to process used oil from the Company's power plants and electrical distribution system from at least 1990 until 2003. Harbor Oil is also utilized by other entities for the processing of used oil and other lubricants.

In 1974 and 1979, major oil spills occurred at the Harbor Oil site that impacted an approximate two acre area. Elevated levels of contaminants, including metals, pesticides, and polychlorinated biphenyls (PCBs), have been detected at the site. On September 29, 2003, Harbor Oil was included on the federal National Priority List as a federal Superfund site.

PGE received a Special Notice Letter for Remedial Investigation/Feasibility Study (RI/FS) from the EPA, dated June 27, 2005, in which the Company was named as one of fourteen PRPs with respect to the Harbor Oil site. The letter started a period for the PRPs to participate in negotiations with the EPA to reach a settlement to conduct or finance an RI/FS of the Harbor Oil site. On May 31, 2007, an Administrative Order on Compliance was signed by the EPA and six other parties, including PGE, to implement an RI/FS at the Harbor Oil site.

Sufficient information is currently not available to determine the total cost of investigation and remediation of the Harbor Oil site or the liability of the PRPs, including PGE. Management cannot predict the ultimate outcome of this matter. However, it believes this matter will not have a material adverse impact on the Company's financial condition, results of operations or cash flows.

An Oregon law, commonly referred to as SB 408, attempts to more closely match income tax amounts forecasted to be collected in revenues with the amount of income taxes paid to governmental entities by investor-owned utilities or their consolidated group. The law requires that utilities file a report with the OPUC each year regarding the amount of taxes paid by the utility or its consolidated group (with certain adjustments), as well as the amount of taxes authorized to be collected in rates, as defined by the statute. This report is to be filed by October 15th of the year following the reporting year.

If the OPUC determines that the difference between the two amounts is greater than $100,000, the utility is required to establish an "automatic adjustment clause" to adjust rates. The first adjustment under the automatic adjustment clause applies to taxes paid to units of government and collected from customers on or after January 1, 2006.

The rules adopted by the OPUC to implement SB 408 include the use of fixed reference points for margins and effective tax rates from a ratemaking proceeding. The rules also include a methodology to determine the amounts properly attributed to the utility from a consolidated tax payment using a formula to determine the ratio of the utility's payroll, property and sales to the consolidated group's amounts for the same items. This ratio is then multiplied by the amount of total taxes paid by the consolidated group to determine the utility's attributed portion. The OPUC also determined that, beginning January 1, 2006, interest will accrue on the differences between income taxes collected and income taxes paid to governmental entities, using a mid-year convention.

In accordance with the statute, PGE filed a report with the OPUC on October 15, 2007 for the 2006 tax year, reflecting the amount of taxes paid by the Company as well as the amount of taxes authorized to be collected in rates, as defined by the statute. As of September 30, 2007, PGE has recorded a refund to customers of approximately $44 million for the 2006 tax year, including $4 million of accrued interest. This amount also includes a $1 million third quarter 2007 true up to reduce the estimated refund for 2006. The regulatory liability includes $17 million paid to Enron Corp. for net current taxes payable for the first quarter of 2006 when PGE was included in its former parent's consolidated group for filing consolidated federal and state income tax returns. Under the OPUC rules, refunds to customers for the 2006 tax year will begin June 1, 2008.

For the year 2007, PGE estimates a collection from customers of approximately $14 million. Based on a percentage of estimated annual revenues collected in the first nine months of the year, PGE has recorded credits to income and a regulatory asset of approximately $10 million, including $0.4 million of accrued interest through September 30, 2007. Any collections from, or refunds to, customers for the 2007 tax year will be reported in the Company's October 15, 2008 filing with the OPUC.

In May 2007, PGE shareholders approved the Portland General Electric Company 2007 Employee Stock Purchase Plan (ESPP). A total of 625,000 shares have been registered for future issuance pursuant to the ESPP. The ESPP permits all eligible Company employees to purchase shares of PGE common stock through regular payroll deductions, which are limited to 10% of base pay. Each year, employees may purchase up to a maximum of $25,000 worth of stock (based on fair market value on the purchase date) or 1,500 shares, whichever is less. Each year during the term of the ESPP there will be two six-month offering periods, during which eligible employees will have the right to purchase shares of PGE common stock at a price per share equal to 95% of the fair market value of the stock on the purchase date. The offering periods will run from January 1 through June 30 and from July 1 through December 31, with shares purchased at the end of each offering period. The first offering period began on July 1, 2007.

The following table indicates common stock dividends declared through September 30, 2007:

In 2006, PGE adopted the Portland General Electric Company 2006 Stock Incentive Plan (the Plan). Under the Plan, PGE may grant a variety of equity based awards, including restricted stock units with time-based vesting conditions (Restricted Stock Units) and performance-based vesting conditions (Performance Stock Units) to non-employee directors, officers and certain key employees. A total of 4,687,500 shares of common stock were registered for future issuance under the Plan.

The Restricted Stock Units granted to PGE officers vest over a three-year period in equal installments on each anniversary of the grant date. The Restricted Stock Units granted to key employees vest at the end of the three-year period following the grant date. Under both officer and key employee grants, applicable service requirements must be met in order for the Restricted Stock Units to vest.

Performance Stock Units granted to both officers and key employees vest if performance goals related to overall customer satisfaction, electric service power quality and reliability, generating plant availability, and net income (compared to budget) are met at the end of a three-year performance period. Vesting of Performance Stock Units will be calculated by multiplying the number of units granted by a performance percentage determined by the Compensation and Human Resources Committee of PGE's Board of Directors. The performance percentage will be calculated based on whether and to what extent the performance goals have been met. In accordance with the Plan, however, in determining results relative to these goals, the committee may disregard or offset the effect of extraordinary, unusual or non-recurring items. Based on the attainment of the performance goals, the awards can range from zero to 150% of the grant.

Outstanding Restricted and Performance Stock Units provide for the payment of one Dividend Equivalent Right (DER) for each stock unit. A DER entitles the grantee to receive an amount equal to dividends paid on a share of PGE's common stock. The Performance Stock Unit DERs vest on the same schedule as the Performance Stock Units and are settled in shares of PGE common stock valued at the closing stock price on the vesting date. The Restricted Stock Unit DERs vest on the same schedule as the Restricted Stock Units and are settled in shares of PGE common stock valued at the closing stock price on the dividend payment date.

Restricted Stock Units granted to non-employee directors vest over a one-year period in equal installments on the last day of each calendar quarter and are settled exclusively in shares of the Company's common stock, provided that the director remains a member of the Board of Directors. The non-employee director grants also provide for the quarterly payment of DERs on the outstanding Restricted Stock Units. The DERs are settled in cash on the date that the related dividends are paid to holders of PGE's common stock. The cash from the settlement of the DERs may also be deferred under the terms of the Portland General Electric Company 2006 Outside Directors' Deferred Compensation Plan.

Restricted Stock Unit activity for the first nine months of 2007 is summarized in the following table:

Performance Stock Unit activity for the first nine months of 2007 is summarized in the following table:

The weighted average fair value is measured based on the closing price of PGE common stock on the date of grant. A total of 4,408,372 shares remain available for future grants. The Plan had no material impact on cash flow for the nine months ended September 30, 2007.

For the nine months ended September 30, 2007, PGE recorded $2.0 million of stock-based compensation expense (included in Administrative and other expense in the Condensed Consolidated Statements of Income), with a corresponding credit to common stock equity. No equity compensation costs were capitalized. Based upon the attainment of performance goals that would allow the vesting of 100% and 115% of awarded Performance Stock Units for 2007 and 2006 grants, respectively, and utilizing an estimated forfeiture rate of 3%, unrecognized compensation expense related to unvested Stock Units was $4.5 million at September 30, 2007, of which $0.6 million, $2.6 million, and $1.3 million is expected to be expensed in 2007, 2008, and 2009, respectively.

PGE expects to grant Restricted Stock Units to non-employee directors as part of their annual compensation arrangement. It is also anticipated that Restricted Stock Unit or Performance Stock Unit grants will be made to PGE officers and key employees in future years, resulting in "overlapping" vesting periods and an increase in recorded compensation expense and common stock equity.

The following table presents the computation of basic and diluted earnings per common share for the periods indicated:

To meet short-term cash requirements, PGE has established a program under which it may from time to time issue commercial paper for terms of up to 270 days. The commercial paper program is supported by the Company's $400 million five-year unsecured revolving credit facility, which has been extended for one additional year, to July 13, 2012. The amount available under the program is limited to the unused line of credit under the facility. In addition to borrowings, the credit facility also allows PGE to issue standby letters of credit. At September 30, 2007, PGE had $14 million of outstanding letters of credit backed by the facility, with $386 million of remaining borrowing capacity available, compared to $313 million at December 31, 2006. The facility contains customary covenants and default provisions, including a requirement that limits consolidated indebtedness, as defined in the facility, to 65% of total capitalization. At September 30, 2007, PGE was in compliance with these covenants.

Although the commercial paper program subjects the Company to fluctuations in interest rates, reflecting current market conditions, individual instruments carried a fixed rate during their respective terms.

Short-term borrowings and related interest rates were as follows (dollars in millions):

PGE has authorization from the FERC to issue short-term debt, in an amount not to exceed $400 million outstanding at any one time, over the two-year period through February 7, 2008. The Company intends to seek extension of the FERC authorization during the fourth quarter of 2007. In addition, PGE filed a shelf registration statement with the SEC in June 2007 for the purpose of issuing common stock and first mortgage bonds from time to time as determined in light of market conditions and other factors, the proceeds from which will be used to fund planned capital and other expenditures.

On September 19, 2007, PGE received $130 million from the sale of 5.81% First Mortgage Bonds, which mature on October 1, 2037, to certain institutional buyers in the private placement market, pursuant to an agreement entered into in April 2007. Proceeds from the sale of the bonds will be used for general corporate purposes, which may include capital expenditures and/or the repayment of existing debt.

PGE enters into finance and power 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. The Company has not recorded any liability on the Condensed Consolidated Balance Sheets with respect to these indemnifications. Based on PGE's historical experience and the evaluation of the specific indemnities, management believes the likelihood that PGE would be required to perform or otherwise incur any significant losses is remote.

PGE adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement requirements related to accounting for income taxes. It requires that a tax position meet a "more-likely-than-not" threshold before the benefit of an uncertain tax position can be recognized in the financial statements. FIN 48 requires recognition in the financial statements of the largest amount of benefit that has a greater than 50% probability of being realized and sustained on audit by the appropriate taxing authorities, based solely on its technical merits. Based on such assessment, PGE has not recorded any liability for uncertain tax positions.

PGE files income tax returns in the U.S federal jurisdiction, the states of Oregon and Montana, and certain local jurisdictions. The Company is not currently under examination by federal, state or local tax authorities. Open tax years include 2004 and subsequent years for federal tax purposes and 2003 and subsequent years for state and local tax purposes.

SFAS No. 157, Fair Value Measurements, was issued in September 2006 and is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 provides enhanced guidance for the use of fair value to measure assets and liabilities. It also requires expanded disclosure regarding the extent to which fair value is used for such measurements, information used to measure fair value, and the effect of fair value measurements on earnings. Provisions of SFAS No. 157 apply whenever other accounting standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. PGE is evaluating the application of SFAS No. 157 with respect to its assets and liabilities.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115, was issued in February 2007 and is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 provides entities the option to report most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. PGE is evaluating the application of SFAS No. 159 with respect to its financial assets and liabilities.

FASB Staff Position No. 39-1 (FSP FIN 39-1), Amendment of FASB Interpretation No. 39 (FIN 39), was issued in April 2007 and is effective for fiscal years beginning after November 15, 2007. FSP FIN 39-1 modifies FIN 39, Offsetting of Amounts Related to Certain Contracts, and permits reporting entities to offset the receivable or payable recognized upon payment or receipt of cash collateral against fair value amounts recognized for derivative instruments that have been offset under a master netting arrangement. FSP FIN 39-1 requires financial statement disclosure of a reporting entity's accounting policy (to offset or not offset) as well as amounts recognized for the right to reclaim cash collateral, or the obligation to return cash collateral, that have been offset against net derivative positions. PGE is evaluating the application of FSP FIN 39-1 with respect to its assets and liabilities.

Information Regarding 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 relate to expectations, beliefs, plans, objectives for future operations, assumptions, business prospects, 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," "should," "estimates," "expects," "intends," "plans," "predicts," "projects," "will likely result," "will continue," or similar expressions identify forward-looking statements.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed. PGE's expectations, beliefs and projections are expressed in good faith and are believed by PGE to have a reasonable basis including, without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, but there can be no assurance that PGE's expectations, beliefs or projections will be achieved or accomplished.

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

• governmental policies and regulatory audits, investigations, and actions, including those of the FERC and OPUC with respect to allowed rates of return, financings, electricity pricing and price structures, acquisition and disposal of assets and facilities, operation and construction of plant facilities, transmission of electricity, recovery of NVPC and other capital investments, and current or prospective wholesale and retail competition;
• the outcome of legal and regulatory proceedings and issues, including the Trojan Investment Recovery and the Pacific Northwest Refunds proceedings, described in Note 4, Contingencies, in the Notes to Condensed Consolidated Financial Statements;
• unseasonable weather and other natural phenomena, which, in addition to affecting PGE's customers' demand for power, could have a potentially serious impact on PGE's ability and cost to procure adequate supplies of fuel or purchased power to serve its customers;
• operational factors affecting PGE's power generation facilities including outages, unplanned forced outages, hydro conditions, wind conditions, and disruption of fuel supply;
• wholesale energy prices (including the effect of FERC price controls) and their impact on the availability and price of wholesale power in the western United States;
• residential, commercial, and industrial growth and demographic patterns in PGE's service territory;
• future laws, regulations, and proceedings that could result in requirements for additional pollution control equipment or significant emissions fees or taxes, particularly with respect to coal-fired generation facilities, to mitigate carbon dioxide and other gas emissions, including regional haze and mercury emissions, affecting the future operations of the Company's thermal generating plants;
• capital market conditions, including interest rate fluctuations, and changes in PGE's credit ratings, which could have an impact on the cost of capital and the ability of PGE to access the capital markets to support requirements for working capital, construction costs, and the repayment of maturing debt;
• the effectiveness of PGE's risk management policies and procedures and the creditworthiness of customers and counterparties;
• the failure to complete major generating plants on schedule and within budget;
• the effects of Oregon law related to utility rate treatment of income taxes (SB 408), which may result in earnings volatility and adverse effects on results of operations;
• changes in, and compliance with, environmental and endangered species laws and policies;
• the effects of global warming or climate change, including changes in the environment that may affect energy costs or consumption and changes in laws or regulations related to greenhouse gas emissions that may increase the Company's costs or affect its operations;
• new federal, state, and local laws that could have adverse effects on operating results;
• employee workforce factors, including strikes, work stoppages, and the loss of key executives;
• general political, economic, and financial market conditions;
• the outcome of efforts to relicense the Company's hydroelectric projects, as required by the FERC;
• natural disasters and other natural risks, such as earthquake, flood, drought, lightning, wind, and fire;
• acts of war or terrorism; and
• financial or regulatory accounting principles or policies imposed by governing bodies.

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, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

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. The MD&A should be read in conjunction with the Company's condensed consolidated financial statements contained in this report, its Annual Report on Form 10-K for the year ended December 31, 2006, and other periodic and current reports filed with the Securities and Exchange Commission.

PGE is a vertically integrated electric utility engaged in the generation, purchase, transmission, distribution, and retail sale of electricity in the State of Oregon, as well as the wholesale sale of electricity and natural gas in the western United States and Canada. PGE generates revenues and cash flows primarily from the sale and distribution of electricity to customers in its service territory.

The Company's revenues and operating income are subject to fluctuations during the year due to the impacts of seasonal weather conditions on demand for electricity, price changes, and customer usage patterns. PGE is a winter peaking utility typically experiencing its highest retail energy sales in response to the winter heating season, with a slightly lower peak in the summer which generally results from the demand for air conditioning.

PGE utilizes its own generating resources, along with wholesale market purchases, to meet the energy needs of its customers. In June 2007, the Company added the 400 MW capacity Port Westward plant to its generating portfolio, reducing PGE's dependence on the wholesale energy market. The Company has a generation excellence program that focuses on cost effective and reliable plant operations.

Factors that can affect the availability and price of purchased power and fuel include weather conditions in the Northwest and Southwest, the performance of major generating facilities in both regions, regional hydro conditions, and prices of natural gas and coal used to fuel thermal generating plants. Market prices of natural gas can also be affected by destructive storms and extreme weather in other regions of the United States.

PGE periodically evaluates the need to align its general rate structure to sufficiently cover its operating costs and provide a reasonable rate of return. Preliminary indications are that the Company may file a general rate case in early 2008, based on a 2009 test year, with new prices to be effective beginning in January 2009.

Oregon's economy continued to expand in the first nine months of 2007, as the state's non-farm employment (seasonally adjusted) grew 1.4% and reached a new record level in August. The state's 5.2% seasonally adjusted unemployment rate in 2007 is below last year's 5.4% average rate. The ongoing strength of Oregon's economy has contributed to customer growth that is expected to require continued investment in generation, transmission and distribution facilities to meet increased energy requirements of PGE's customers. As of September 30, 2007, the Company served approximately 804,000 retail customers. Load growth forecasts provided to the OPUC in October indicate an overall 3%, weather adjusted, increase in energy deliveries in 2008. Higher commercial demand and increased deliveries to industrial customers, including new pharmaceutical and solar panel manufacturers, are expected to more than offset a slowdown in the housing market and lower residential use due to conservation and energy efficiency efforts.

The Company's 2007 Integrated Resource Plan (IRP) describes the Company's strategy to meet the long-term electric energy needs of its customers, with emphasis on supply reliability and price stability. The plan includes additional renewable resources, energy efficiency, demand-side resources, power purchase agreements of varying terms, and the acquisition of additional peaking capacity. Implementing the IRP will provide opportunities to grow the Company through investments that benefit customers by securing future power supplies at the lowest possible cost and risk. New Renewable Energy Standards adopted by the 2007 Oregon legislature require that PGE and other large electricity providers serve at least 25% of their retail load within the state from renewable resources by the year 2025. The Company continues with construction of new wind generation facilities at the Biglow Canyon Wind Farm (Biglow Canyon), which is expected to have a total installed capacity of 400 to 450 MW. The project is to be completed in three phases with Phase I expected to be completed by the end of 2007. Phases II and III are expected to be completed by the end of 2009 and 2010, respectively.

PGE is currently engaged in two major efforts that it expects will benefit customers. First, the Company has a customer focus initiative that seeks to meet customer expectations for service and reliability. Second, during the third quarter of 2007, the Company signed contracts with vendors for the purchase and installation of an Advanced Metering Infrastructure (AMI) system. Subject to Board of Directors and regulatory approvals, PGE will deploy AMI for residential and commercial customers between 2008 and 2010, achieving operational savings through increased efficiencies along with providing new services for customers. Customer benefits would include the ability to curtail usage during peak periods, remote interaction with smart appliances, and access to usage patterns.

The Company issued $130 million of First Mortgage Bonds in the third quarter of 2007, and expects to issue an additional $75 million of First Mortgage Bonds in the fourth quarter of 2007, to help provide sufficient liquidity. PGE expects increased capital expenditures for Phases II and III of Biglow Canyon, hydro relicensing, and the AMI project during the next few years. The Company's ability to execute its capital investment plan will depend on continued strength in the economy and access to capital markets.

PGE is a party in several legal and regulatory proceedings that could have a material impact on the results of operations and cash flows of future reporting periods, including:

• challenges, appeals and reviews on the issue of the OPUC's authority to grant recovery of, and a return on, the Company's remaining investment in its closed Trojan plant, which the OPUC granted in a 1995 general rate order;
• claims for refunds related to wholesale energy sales in the Pacific Northwest during 2000 - 2001;
• an OPUC order granting an Application for Deferred Accounting to defer the difference between amounts charged to customers for state and federal income taxes and amounts actually paid to these governmental entities for the period from October 5, 2005 through December 31, 2005. The OPUC will consider whether rates were just and reasonable or were in violation of the provisions of SB 408, as alleged by the complainants.

For further information regarding these and other items, see Note 4, Contingencies, in the Notes to Condensed Consolidated Financial Statements.

PGE is subject to state and federal environmental laws and regulations that govern air quality standards, including emissions from thermal power plants. The Company's operations may also be affected by the federal regional haze rules, which establish goals to protect visibility and remedy existing impairments resulting from man-made pollution. While PGE anticipates that it will be able to comply with these restrictions and those imposed under the Clean Air Mercury Rule, such rules may require added costs to purchase and install additional emission control equipment. In addition, increasing local, national and international concerns regarding global warming and climate change may result in future laws or regulations that require additional pollution control equipment or significant emissions fees or taxes. For further information regarding estimated future capital expenditures related to emission control laws and regulations, see "Capital Requirements" in "Liquidity and Capital Resources" in this Item 2.

In May 2007, the Bonneville Power Administration suspended Residential Exchange Program payments to investor-owned utilities, including PGE, as a result of a decision by the U.S. Ninth Circuit Court of Appeals. The removal of exchange program credits from PGE customers' bills has resulted in an approximate 14% average price increase for the Company's residential and small farm customers. PGE is participating with other investor-owned utilities to pursue available options - judicial, regulatory, and legislative - to restore their customers' federal power benefits.

For a discussion of new accounting standards that have been issued but not yet adopted by the Company, see Note 12, New Accounting Standards, in the Notes to Condensed Consolidated Financial Statements.

The following review of PGE's results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Due to seasonal fluctuations in electricity sales, as well as the price of wholesale energy and natural gas costs, quarterly operating earnings are not necessarily indicative of results to be expected for calendar year 2007.

PGE's net income in the third quarter of 2007 was $20 million, or $0.32 per diluted share, compared to $10 million, or $0.16 per diluted share, in the third quarter of 2006. The improved results were primarily attributable to the approximate $18 million after tax impact of SB 408, with an estimated amount to be collected from customers recorded in the third quarter of 2007 compared to a refund to customers recorded in the same period of 2006. Higher power costs and administrative and general expenses during the third quarter partially offset the impact of SB 408.

The following table summarizes Operating Revenues and Energy Sold and Delivered for the third quarter of 2007 and 2006: