ML20245J916

Pacificorp Annual Rept 1988

ML20245J916
Person / Time
Site:	Trojan File:Portland General Electric icon.png
Issue date:	12/31/1988
From:	Frisbee D, Gleason A PACIFICORP (FORMERLY PACIFIC POWER & LIGHT)
To:
Shared Package
ML20245J905	List: ML20245J902 ML20245J908 ML20245J916 ML20245J919
References
NUDOCS 8907030215
Download: ML20245J916 (68)

Text

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yy v. l 'P A C I..F I' C _o R P. y 4 bQ n h - ['ik DW Finemaled HiginIlglets 1988 .{pu>( p[.

• MILLIONS of DOLLAR 5 FOR THE YEAR Four-Year h5 1988 1987 ang (s

t.~ OPERATING RESULTS Revenues. $ 3,519 $ 3,277 7% 6% { income from Operations 1,046 1,031 1 2 y4 {bg Net Income. 447 411 9 6 Earnings Available for Common Stock' 426 389 10 10 ~ DATA PER COMMON SH ARE g. Earnings 3.46 5 3.18 9% 6% i k1;

• Dividends Paid 2.61 2.49 5

4 / Book Value-23.82 23.54 1 3 rh hj - Stock Price Range 37-328/4 39-26 % 9' 9' uu FINANCIAL POSITION AT DECEMBER 31 C Assets $ 11,396 - 5 10,303 11 % 10 % ?)![ Capitalization 7,585 7,152 6 6 hh

Capital Structure.

' j.l6 fong-Term Debt and Capital Irase Obligations 57 % 55 %

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- Preferred Stock 4 4 i, Common Equity 39 41 N! C . Q% OTHER STATISTICS o > Return on Average Common Equity 14.6 % 13.8 % g Market to Book Value (Year End) 147 % 136 % 'gg , Cash Fkwv' $ 1,132 $ 1,088 kj ' Common Shares (Average, Thousands) 123,205 122,220 [j%

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I rA L I I I C U R P 1 1 To Our Shareholders "4" '3P(y < s i he merger with Utah Power is a f]' ' 3 concreteexampleof the strategic h, cp e direction of PacifiCorp; namely, ' o W jt., < ? Ep 4.% d 'i4 to stick with the businesses that we know and understand, to -) continue to sharpen our comper-itive edge in those businesses, 1 and to expand and contract when or where we can enhance our overall ability to compete. ] The merger with Utah Power is at the i A ^I Gled5o" ) heart of becoming more competitive it took 17 months, untold hours and millions of have done alone. This will give us the ability pages of paper to e moicte, But the strategic to keep our electric rates at the k> west possi-position and long-term value make it worth ble levels in the highly competitive energy j the time and effort. marketplace of the 1990s. That enhn.ced { What was accomplished w hen the merger pace competitiveness provides us with new became effective on January 9 was to com-opportunities for earnings growth, plete the legal steps. The key objective now is The merger depositions PacifiCorp as to realire the economic benefits from this principally an electric utility, but an electric combination. Fortunately, the two utilities utility with important, successful and profit- ) t 2ve used the 17-month period to jointly able subsidiaries. In 19fs7, Pacific Power develop organizational and operational accounted for 48 percent of the total com-plans as the first major step in achieving pany's 52.3 billian of revenues. On a merged those benefits. basis, revenue fm 1988 rose to $3.5 billion-The two of us have been involved in past with the electric utility operations contribut-electric mergers and in many diversified ing 61 percent of the total. acquisitions. While none were of the magni-tude of the Utah Power merger, they pro-Nonelectric Businesses 5trong vided learning experiences. We know that The nonelectric businesses are still very two companies with dif ferent corporate cul-important, providing 39 percent of consoli-tures will require careful attention as they dated revenues, while requiring only 31 per-adapt to each other. But we intend to take the cent of invested capital. Their contributions best that both companies have to offer and are substantial and predictable, adding value { make the merged company even stronger and m & overall corporc. tion. Together, tele-more resilient. communications, mining and resource The merger's benefits, which are dewtopment and financial services contrib-described elsewhere in the annual report, d mady 5120 million to earnings-28 include increased opportunities, efficiencies percent of the corporate total. and savings that will far exceed u har either Our commitment to past diversification our l\\teific Power unit or Utah Power could remains strong and was backed up by expan-O w __

P A C I I I C U R P I l 1 1 4 E today's realities and tomorrow's opportuni-and growing, we must keep in touch with i ties. So, with all the recent changes, it's time g' to stop once again, get a clear picture of 1 where we are, and focus on where we need to place emphasis for the future. We'll grapple i with these questions through a strategic L planning activity which already occupies a ,s top spot on our 1989 agenda. ' [;' / As you read this report, our financial results willlook different from past years. As ) Dur . Frnbee a result of the merger and consolidation of. f financial services at the revenue line for the f sion in these areas. During 1988, NERCO f spent nearly $300 million acquiring natural first time,1988 revenues reached $3.5 bil-gas reserves, Paatic Telecom invested $92 lion, or 7 percent higher. Earnings per share milhon in an international communications n the combined basis were $3.46, against business and PacifiCorp Financial Services prior year earnings of $3.18. added to its portfolio. PacifiCorp common stock issued to Utah We would not, however, hesitate to narrow Power shareholders dramatically increased our activity in any of the nonelectric areas if the average number af shares outstanding fr m 69.7 million to 123.2 million. Our doing so enhanced our longer-term chauenge is to overcome the earnings per prospects. l share dilution resulting from those new Management Change Complete shares through the realization of merger ben-3 Our management transition was finalized efits and enhanced opportunities. in 1988 as the chief executive officer's duties We are confident of the ability of our non-were passed to :he president on January 1, elect ric units to continue to improve earnings ] 1989. The chairman retired from day-to-day and of our electric businesses so deliver the j [ operations upon reaching age 65 but con. merger related uvings. l tinues to serve as a board member and coun-We welmme our new shareholders from selor, as well as remaining mvolved in chic Utah Power ana we look forward to sharing I activities of importance to the company. the future with our expanded constituencies, You shou 1J see little noticeable change in including emplo>ees, customers and the direction of the company as a result of shareholders. the tranution. We've worked side-byside for the past several years to assure that. We both believe that the entrepreneurial style which A.M. Gleason allowed our different lines of business to P*l'"' "ul chief Executu r O/fu er grow and pnnper should continue as a Ley fundamental of the way we do busmess. Tb Leep the company com petitis e, health y Don C. Irnhee Chaueman

,) 'l 9_ A C If I ~ Cy .R l' i l 1 Competitive Edge For 1990s Requires Astlen Today - t I he1990s-th i increasingly competitive for American business. PacifiCorp's j s basic operations-electric utility, mining and resource devel-opment, telecommunications;and financial services-are already dealing with competition that will intensify. The 1990s will also be a decade of opportunity for those - j companies that acted on emerging industry trends in the 1980s in order to be prepared and equipped to meet competition. PacifiCorp's competitive edge for the 1990s is being shaped by several factors: a major position within the industry, entrepreneurial manage-ment, strong cash flow and effective use of that cash flow. Acting On Opportunity is Key -J In the last half of the 1980s, many electric utilities turned to adding. other lines of business as a way to grow. Diversification became' a j 1 byword in the industry and its results have been mixed. For PacifiCorp, diversification has been producing profitable, results since the early 1970s and the approach has differed l from others in the industry. In contrarc to buying a new line of business, PacifiCorp's diversification has generally devel-oped by building on resources existing within the company. PacifiCorp's telecommunications unit grew from an operation serving a few thousand customers. The mining venture was built on [ vast coal reserves acquired in the 1950s and 1960s. The seed of the financial services i business was also planted internally. O,

! A C i F

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.L Units Aim At Becoming Low-Cost spendmg project us snstaRation ,as -Q progugery ofa scrubber on Unir No.1 at l '*jh"' 8'f,8's'[,j",';[,6',,y,,, ~ e Competition is another industry \\ in 1990 at the cost of approxi. ma,,iy uo malym. trend, with the key to success being -g price and quality of service. Whether t 7

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1 it's a kilowatt-hour, a ton of coal, a long distance call or an equipment lease, customers are sensitive to price s ' and service. Strning to be a low cost pro. ' ducerpermeates paczftCorp's . operat,ons. 4t ucaco's The electric utility environment once was considered monopolistic precious metals mines, addinx h l '" 'c5"" 'h'o"8 "P o'"* and immune from competition. It is now challenged by other energy sup-activities helps lowerfuture costs-ver.au,,re. pliers and new technologies that can provide customers what they want l and need at competitive prices. The merger with Utah Power stemmed from this new competitive mar-ketplace-offering efficiencies that translate into stable or reduced prices. f' PacifiCorp's nonelectric businesses are also focused on becoming low-cost producers. Low costs and efficient operations are stressed at coal and pre-cious metals mines through improved techniques, productivity and reserve development. In the telecommunications business, long distance rates are , y falling, and the planned trans-Pacific fiber optic cable will offer an alterna-tive to higher-cost, lower-capacity cables already in place. Customer Service Grows in Importance in a competitive. marketplace, product quality and the customer serv-ices surrounding it can give one company en # an edge over another. Both Pacific j Power and Utah Power are stressing cus-tomer relationships, offering broader D L 9

y } t ' ; b ' c I' ^ R'r A F I cO s ~E S"" "d' "h f ,",'l'", [,,"ff,'j,",,,f services such as a water heater replacement Pacsfic Telecom's long distance j ' - program for residen,tial Customers. For m. dus-1 syneur in Alaska. The major 5 carrier m the state, the com-leany', compet, rive position is trial and commercial users, energy use studies -- i enhanced by services ranging l [ / rom bag sinanc, coni"x 'o i help make their operations more efficient and. manne radig telex, telegram, Ils$ln""f[ad[oai"<"eIt 7,'72n h cost effective. In the coal business, NERCO's y . broadcaning. y y ' understanding of the electric utih.ty mdustry bzw ( adds value to its utility. customers. Arid the : service quality in Pacific Telecom'9 wJ and long distance businesses j I anchors its success in these areas. Industry Position Provides Strength 4 i A strong, competitive position within an industry demands invest-: ment,-commitment, and adaptability-and PacifiCorp is well posi tioned in all the marketplaces it serves. The merger with Utah Power makes PacifiCorp's electric utility opera-a tions the third largest in the West and 14th among investor-owned utili - ties in the nation. NERCO ranks sixth in the nation for coal sales'and is' q s a major domestic silver producer. In the local telephone business, Pacific j Telecom is among the top 10 independents in the United Sta'tes. And in j l four years, PacifiCorp Financial Services has become a top 10 leasing j company. Putting Cash Flow To Work The amount of cash generated for discretionary use sets companies apart today-and will remain an important yardstick in the decade ahead.' ] i l AU

>t1 P A_C i F I C O ' R[ PL T i i At the start of the 1980s, PacifiCorp needed more money than it was able to generateinternally as construction of new utility plant remained high. l That picture has changed. For the past several years, the company has. met its construction needs from cash flow without major borrowings. Strong cash flow in electric and nonelectric units provides opportu- { nity for PacifiCorp to continue investing in its businesses, with that . investment totalling $2 billion in the past three years, excluding finan-cial services. Growing cash flow also underpins the ability to increase f ~ dividends, which PacifiCorp has done on an average of 4 percent annu- ): ally since 1985. Strategic Planning For The Future l l In a full-bknvn strategic planning effort in 1984, PacifiCorp deter-f L mined that it would place its major emphasis on the businesses that it L. 1 [ knows best. The company's growth initiative is geared toward its exist-L ing businesses-the majority of which are in the service industry sector 1 ,emams headquarraca" arac veau n,*"d" ,,, sati EP * ' s 9 thatisanticipated toexperiencerapid 4,3 takc ory. gh, - growth in the 1990s. For those companies that can tap 1 L it, the global marketplace offers vast potential for the future. With much of I its operations on the West Coast, PacifiCorp is aware of the opportuni-ties wnhin the Pacific Rim and is making inroads into the Far East with L its telecommunications, mining and energy services businesses. l o 1..

! A'C'I f I C 0 R ! Merger With Utah Power Brings Opportunities he merger with Utah Power is a strategic step into the 1990s. It strengthens PacifiCorp's electric utility operations, better posi-tioning both Utah Power and Pacific Power for growth in an industry that has become highly competitive. The driving force behind the merger is the opportunity for benefits that will help hold down electricity prices for several years-a crucial factor in the energy marketplace. Together, the two utilities are aiming at benefits ranging from nearly $50 million in 198'), to approximately $160 million annually by 1993 and totalling some $500 million over a five-year period. A large part of the benefits come d 8"'/ica"' 6cac/ ol'he 1 mergeris combined operation .. ~.

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Salt Lake Csty, helps coordi-n***. power supply systems on an inte-nat, the movemen, ofpou,, throughout the seven state grated basis-a significant plus due syst<m. to peaking differences. In Utah Power's system, the heaviest demand i for electricity is in the summer, pushed upward by air conditioning and irrigation. It is just the opposite for Pacific Power's system which peaks in the winter to provide space heating needs. Dispatching power between the two systems puts generating resources to maximum use and lessens the need to purchase peaking power. Combining generating resources also stretches out the t:me frame for adding new capacity. l l Combining workforces also creates opportunities for savings. Both Pacific Power and Utah Power are well on the way to reducing, through attrition,900 positions in the next five years.

I eA C I rI C O R t A I 1 i ,i,$e[IiI2[s't$'O,Illb([ N Ed M @ I@;N' M With the merger, PacifiCorp's ' '* C",['""# '" #" "l,# 24. j,, i.' electric operations rank third in the from Salt Lake Cay. , yf t &? West based on the number of cus-e&s& \\ t e u,w 'L' g tomers, revenues and kilowatt-hour Utah is a land of wntrasts-

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sales-all of which provide new and o/five nationalparks. Arches National Park, where 5m~ Ne"I 17,N'ahIrNart Opportunities. Anticipated merger of the slate. efficiencies are reducing prices to Utah Power customers, beginning with a 2 percent reduction in early 1989. The ability to lower prices makes the Utah Power division more competitive and aids economic development efforts. In addition to the retail sector, opportunities to sell electricity to other utilities are enhanced as a result of the merger. Utah Power's transmis-sion lines move power north and south and Pacific Power's run east and west. Meshed together, the system is highly flexible, providing access to a larger market area. Approval of the merger by the Federal Energy Reg-ulatory Commission carried conditions that open the transmission paths to others but most of the potential benefits are retained for PacifiCorp's operations. i A Look At PaciflCorp's Newest Division The addition of Utah Power to PacifiCorp dramatically changes the face of the company. With it, PacifiCorp's electric utility operations are nearly doubled, both in revenue and number of customers. Utah Power brings to the company:

• 527,000 electric utility customers in 400 communities in Utah, southeastern Idaho and southwestern Wyoming. (PacifiCorp now serves some 1.2 million electric customers in seven states.)

~ 4 1

if A C I F-I C 0 R !

• 19 billion in kilowatt-hour sales in 1988-an 8 percent increase over 4

1987, (Between Utah Power and Pacific Power, the company sold 46 bil-lion kilowatt-hours in 1988.) ~

• 3 million kilowatts ofinstalled capacityat six coal-fired plants and' 23 hydro plants. (Total installed generating capacity for electric opera-tions totals 7 million kilowatts-85 percent of which is coal-fired.)

l Performance improves Substantially Utah Power turned in substantially improved financial results in 1988. l As a stand-alone company, it recorded a 12 percent rise in earnings per i share from $2.39 to $2.67. The improvement reflected 5 percent higher ~ revenue from increased kilowatt-hour gegzy% 1;.. p_4, rhe vias n>urr division,eries 74 percent of Utah's popula-L b sales, cost-containment programs (I . ?Iq tion as wenas tommunitre,in wutheastern Idaho and south. h western wy, ming. l ) and productivity gains at coal mines l' operated by Utah Power. The mines, ~ which supply adjacent company-owned power plants, are producing at all-time highs-37 tons of coal per man-hour shift in 1988, compared to 20 tons in 1986. The year's figures were achieved despite price reductions to Utah i i Power customers-amounting to $42 million annually-based on changes in federal income tax rates, re. financing of high-interest debt, lower coal costs and other cost cutting. j Like Pacific Pcwer, Utah Power has marketing and economic develop-ment plans in place. And,it is involved in the alternative energy business J through a subsidiary, Energy National, Inc. Under nine partnerships, ENI has some 553 megawatts of capacity installed or under construc-tion outside Utah Power's service territory, i

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P A C I f I C o R P Growth High Priority at Pacific Power lanning for joint operations with customer needs. Utah Riwer was at the top of the in addition to slow natural growth, there i list for Pacific Power in 1988. is the element of increasing competition Throughout the year, a good from other traditional energy suppliers-99 s share of the company's resources such as natural gas-as well as from new l-L and energy were put into merger-energy production ar.1 management related activities. technologies. Even with this additional Pacific Power is responding by: workload, Pacific lbwer ran its

• aggressive marketingofits available sur-

) ~ + ay-to-day operations better than ever, turn-plus energy supply. ing in record performance. Kilowatt-hour a broadening its array of energy products sales were up, carnings were steady and new and services. l initiatives furthered Pacific Power's evolution

• and expanding and diversifying its cus-

,oward an energy services company. tomer base through economic j development. orewth More Difficult in - L Changing Environnient Pricing, Marketing Go Together I In the mid 1970s, Pacific Power could i ?- A product of this competitive era is the [- barely keep pace with increasing demand for interrelationship of pricing and marketing i electric power. But, by the early 1980s, the strategies in Pacific Power's sales efforts. economy softened and with it the growth - Regulatory commissions recognize that curve in the company's Northwest and Pacific Power's prices must be competitive to Pacific Ibwer's innatunve plan Rocky Mountain service area. providingfor reptarement of For Pacific Rnver, the past five years have l I nuler heaters keeps customers new rate structures in three states-Califor-in hot uvrer-and keeps the been ones of rebuilding and redirecting sales 1 ma, Montana and Wyoming. Under the new ,.9,P,,,>.,,,,g, g,, and marketing efforts to stimulate growth-position. Montana rate, for example, the cost per kilo-as well as to find new ways to meet changing wart-hour now declines as more electncity is _e 3, w used. =' 1 Utility commissions in three other states served by Pacific lbwer-Oregon, Washing-( ton and iJaho-here vet to approve prices a that reflect the competitive environment, cit-ing concerns that current energy surpluses will diminish. L ~ Sales efforts, however, aren't aimed at increasing load at the expense of conserva-M tion. Efficient energy use is stressed in the j Q- [5., f 1 e

~ 'r A c_r r s_c o n r company's sales efforts-especially through ; tral heating systems, and the company is the Super Good Cents home concept' intro-;. aggressively promoting' electric heat pumps duced in 1988. by working with some 150 heat pump deal-Offering financial incentives to builders. ers and 300 certified installers. The success incorporating conservation features, the~- speaks for itself: of all new residential hous-program imposes strict standards for insula-. ing connections in 1988,28 percent tased a tion, heating and cooling equipment, doors heat pump compared to only 8 percent five and windows. These standards can reduce years ago. heating bills by as much as 50 percent, giving The other half of Pacific Power's residen-electric energy a more competitive edge as a tial customers use baseboard, ceiling or home heating source. other forms of zonal heating. To make addi-Expectations are high for the Super Good tional inmads with these customers, many of Cents program. For 1989, the first full year -. whom have shifted to wood stoves as a pri-of the campaign, the goal is to qualify 30 mary heating source, the company.is mar-percent of new all-electric construction in keting the use of energy-efficient zonal the company's service area, with that per-heaters combined with " smart" thermostats centage rising to 60 percent by 1991. that regulate heat usage. Succ-ssful test mar-keting of this concept was done in 1988 in New Products, Services Provide Oregon and the program is being offered sys-Broader Base For Future temwide in 1989 with minor modifications. A key ingredient of Pacific Power's market-ing program is identifying new products and - Efforts Yleid Custoneers, Jobs services with customer appeal. In its broader Pacific Power's economic development view as an energy services provider, the comt activity helps existing businesses needing pany's emphasis is on today's, customer who assistance in upgrading or expanding opera-is more interested m. what electricity can do tions as well as recruits new business to the in home and industry-than in electricity service area. Companies seeking to expand itself. or relocate operations in any part of Pacific A major success is the Hassle Free plan Ibwer's serv. ice territory are offered advisory which guarantees replacement of an electric assistance rangmg from site evaluation, per-water heater at company expense in mit approval facilitation, marketing studies exchange for a small monthly fee. Some and financial arrangements. 60,000 customers have opted for the plan In 1988, Pacific fbwer assisted 132 com-which is an innovative way to protect Pacific panies, adding or preserving 2,900 jobs in Power's existing water heating load as well as the service territory and $15 million in a step toward providing broader energy annual electric revenues. Success ranged services. from siting a manufacturing facility in With home heating a large part of Paci ic t southern Oregon for Bayliner, the nation's Ibwer's residential load, this market offers largest recreational boat builder, to a West the best opportunity for sales growth. German company choosing Sandpoint, Nearly 50 percent of all residentialliving Idaho over several U.S. and Canadian loca-units in Pacific Ibwer's service area has. cen-tions for a high-tech fabrics plant.

P A C I I I C o N P ~~ ^^ ^ : KiloweH. Hour Sales Move Up Houung starts urre un 10 k .Q; . og Marketing activities, combined with an percent un lacsfuc F,wer's h.' ' 4. '"m. service area in 1988. In Cres- ? s cent City Cahfornia more than -] + e ]' improving economic environment, are 500 homes were added to pro-4 e + resulting in higher kilowatt-hour sales. Dur-vide for new ressdents who.edl ' 4 sta// a prisot constructed. 1. ing 1988, total kilowatt-hour sales rose 4 1 ?"yyMnw y. percent-to 27 billion. 3,, Iv...[(... ~,.. ,e ....n The retail sector-residential, commercial _ CME 4 -

g. s tf e; and industrial customers-grew 3 percent,

".. y,, f,,,,4. ;gj q - while sales to other utilities were up 7

n; Putting anotherform o/ energy 4.

f;

• to urk, Paciftc lbwer prorudes

' ' */. yarn that ts turned snto hats by ~ " A" ~ ' Y"" senior citizen volunteers. In the residential market, Pacific Power's Organizarsons such as the Pacific Power teamed up with Utah Power strong marketmg efforts and an increase in Salvation Army distribute the hats to those rn need. in an economic development effort that the number of customers added up to the =- helped keep one company in Cedar City, best sales year of the 1980s. Demand was up y Utah and brought in anather with 125 jobs. 3 percent compared to less than 1 percent the Goer Manufacturing, a producer of retail year before. y store fixtures and custom showcases, pur-1)uring 1988, total housing starts were 20 chased a manufacturing facility owned by a percent ahead of 1987 levels, with Oregon i division of Hallmark Cards that makes leading Pacific lbwer's six-state service area. g '~ fj greeting card display racks. The Hallmark Approximately 5,000 new residentialliving operation remains in the new Goer plant. units were connected, with 74 percent optmg n in the Portland area, Pacific Development, for electricity or electric heat pumps for inc, a PacifiCorp subsidiary, is managing space heating. the development of a 70-block site in the Widespread economic stabihty in the near-downtown area, most of which service area was also felt m the commercial A lies within Pacific Power's service sector as usage was up 2 percent. area. A new Oregon Con-Forty-nine percent of the year's kilowatt-vention Center is under hour growth came in the industrial segment construction in the vicin-which accounts for 42 percent of retail sales. ity, leadmg the way for The upturn was spread across several sectors p the area's revitalization a but the Wyoming od and gas mdustry, usmg and complementing electric intensive techniques to extract E " Pacific DeveIop-remainmg reserves from aging fields, topped ment's plans for the tist. commercial and low water conditions m the Pacific North-residential use. s, west m 1988 caused the federal power mar-keting agenc y-Bon neville Power Aummistration-to pull out of the day-to-day wholesale mar ket for several months. Without BpA's low-cost hydropower avail-able for sale into California, the market and 9

l riA c; s' r I co a e' in addition to res iewing cus- . - - - usuomer. tumers' energy management ~ j' operation resulting from the merger with k ~. systems, ONSITE ueks unth - firms such as this independent ~ With the generation of electricity a major cost of doing business, this area is getting de I p rgen ra i n a d special attention. Improved efficiency and independent power systems. 3 reliability, as well as extending plant life, are g ~i , y measures being taken to lower the cost of \\ Y producing energy. Two of Pacific Power's b major coal-fired plants-Dave Johnston and j I 8 Centralia-set generation records in 1988 (" and availability of all generating facilities / was a high 92 percent. The company has no new generating plant capacity requirements untillate in the 1990s, a major aid in keeping rates stable. 1 price for Pacific Power's coal-fired genera-i tion firmed, upping revenue from sales to Subsidia OffersEner y other utilities by 28 percent for the year. Systems, anageman Sales to other utilities amounted to 5.5 bil-The face of the utility is changing in how j lion kilowatt-hours or 20 percent of Pacific and what energy services are delivered. It is Power's 1988 total sales. Spot. market sales expanding beyond the traditional power accounted for 41 percent of sales to other plant, transmission line and meter into new utilities, with the rest supplied under ce > opportunities which are being explored by ONSITE Energy, Inc. This wholly owned tracts between one and 25 years. With an energy surplus in the region, utilities were subsidiary designs, installs, operates and less inclined to enter into new long-term tuaintains tailor-made energy systems. wholesale contracts. Pacific Power did, how-ONSITE started operation in 1986. Its ever, sign a 15 year pact to sell energy to first major project was the design and instal. lation f all utility systems and services Puget Sound Ibwer & Light Company. including telephones, waste water and a Cost Control Keeps Prices Down desalination plant at a Caribbean island q A major plank in Pacific Ibwer's competi-I resort. tive platform is the price of its product-The concept has caught on and several Overall prices have been stable to declining other projects are on the drawing board or in for the past two years due largely to cost cut-the bidding stage, including resorts planned ting, tax reductions and increased efficiency. in Hawaii. Aworking relationship has devel-The company is committed to no price oped with the Testin Hotel chain for provid-increases throughout its service area until at ing similar expertise at destination resorts. least 1992, based, in part, on benefits that ONSITE also develops cogeneration and can be gained by an integrated power supply independent power systems for industrial facilities, specializing in the forest products O-o

f i i and mining industries. In 1988, a biomass $145 million in annual revenues through' y. plant using kiawe trees as the fuel source was other energy services and products. completed in Molokai, Hawaii', and Costs to retail customers are expected to-ONSITE won a bid for a cogeneration facil-be held at or below 1986 levels through 1992 ity at. remote Canadian gold mine, by savings that will come from more efficient l Revenue for ONSITE's activity grew to use of existing power plants and benefits Sil million in 1988 from some $600,000 in flowing from the Utah Power merger. 1986. The signed contract backlog for 1988 Opportunities for continued growth m y exceeded $25 million. ONSITE has 145 non-trad;tional areas, such as the markets L megawatts of capacity currently operating or served by ONSITE, will help in the evolution 1 (- under construction in 20 proiects. toward the " energy services company" of the ( future. Growth initiativesIn Place Pacific lbwer played a pworal Pacific Ibwer is heading into the 1990s as a Shared Opportunities Ahead role ia Hewlett rackard's more streamlined, efficient operation with The merger with Utah Ibwer opens up decision to expand its inte-grated circuit rnanufacturing an increasing adeptness at selling its opportunities to sha re ideas and programs in plant at Corrallis, Oregon. The product. areas such as marketing and economic devel-5100 mdlio o additwn is antici-The company's goal is to increase kilo-opment. In power operations, that sharing is pated to yield approxonately 51.4 million in annual watt-hour sales by 3 percent annually at least already providing significant benefits. Just electnc revenues. through 1992, while adding an anticipated two months after the merger was completed, the company sold in excess of $1 million in f M electricity to other utilities in a single day- %1 the first time in more than a year. With power [- H ) - ,y 4'"' demands lower in the Utah Power division l during winter months, the company was / ) . w%.. - c able to draw energy from its Utah-based plants to sell out of the region. e ,l ) g_h* w L s ( [ .Q T

lll9 l

r'a c s r t c o n~r l ^ s i l 1 i 1 Natural Gas Acquisitions Add to NERCO's Business 1 ERCO is preparing for the settlements End Maler Disputes 4 1990s with an emphasis on in early 1988, NERCO's settlement of strengthening its business mix. long-standing disputes with several of its Although coal remains the major coal customers added significantly to foundation business, natural revenues. The settlements also freed the gas and precious metals are company from contract litigation for the playing growing roles. first time in six years. 't In 1988, natural gas and pre-The past disputes surfaced in recent years i cious metals activities pro-as electric utility customers sought to lower j duced 29 percent of NERCO's revenue. Just the cost of coal being purchased under long-five years ago, only I percent came from out-term contracts. Many of the contracts,20 to side the coal business. 25 years in length, were signed in the 1970s The emphasis on natural gas-through when energy market conditions drove up the the investment in 1988 of $284 million in demand for coal. producing properties-and precious The largest lump-sum settlement amount metals-with 19 exploration projects spread came from one customer-the lower Colo-from Alaska to Australia-strengthens these rado River Authority / City of Austin. In business segments far fu, ire development. return for cancelling a 25-year contract, At the same time, the coal business is NERCO received approximately $37 mil-aggressively marketing its product and lion. Another $8 million was received from extending its sales reach to the northeastern Detroit Edison and Commonwealth Edison United States, Canada, and the Far East. in settlement of disagreements over provi-Some $45 million of lump-sum payments sions in existing contracts, lloth utilities in settlement of coal contract disputes com-remain major customers and NERCO has bined with strong results from the gas and oit preserved the long-term value of the business to produce a record year for contracts. NERCOinvested some 3284 NERCO. Revenues rose 5 percent, while [,##f," "ffC earnings contribution grew 10 percent to st ar pr a r- . f% - ily Inuisiana, during 1988. $60 million. Some of the bayou locations %$MT?? } are shared withlocaluildhfe inhabitants. sGf ,Qt{ " 4 KT ~~ m ' N hh ( p

rA cI I I co a r l i NERCO's gas and od proper-both Canada and Japan. A spot sale delivery j went north to Canada's Ontario Hydro, ns e e s es ; d cingsome while the first U.S. coal from Montana's IS0 mdlion cubicfrel ofgas, 4 m., Powder River Basin was shipped toJapan for j n ua s Iqu d + +9 test burns by a local utility. / NERCO's ability to penetrate new domes-tic coal markets, as well as international f markets, signals its improved cost competi-g 2 f tiveness. Two factors are responsible: contin-N uing reduction of production costs at 4 NERCO's mines and declining costs to transport the coal to its destination. A new joint venture plays a key role in extending NERCO's geographical reach. The venture teams NERCO's western coal, among the lowest sulphur content coal in the Sales Increase in Soft Market United States, with Detroit Edison's coal. NERCO's success in addmg customers handling terminal facilities at Superior, Wis-and hitting record coal sales in 1988 are consin-the most western point of the Great bright contrasts against a soft domestic coal Lakes water system. Following a rail haul of .j market that is showing little growth. approximately 1,100 miles, the coal is trans-The company is expanding its customer ferred to large bulk vessels to continue its base and reaching new geographic areas by journey via low-cost water transport. tapping the spot market. To further sharpen its competitive edge, Although the spot market, covering sales NE RCO is improving productivity y at its coal under contracts of one year or less, offers the mines, with emphasis on two of its Wyoming best near-term gnwvth potential, NERCO's facilities. coal business is not dependent on that mar-A new dragline is on order for the Ante-Let. Inng-term contracts with electric utili-lope mine which will help double the annual ties, which have underpinned NERCO since coal production capacity-from approxi-5 its beginning 12 years ago, accounted for 92 mately 3 million to 6 million tons-and percent of the 31 million tons of coal sales reduce the cost of coal per ton in the future. during 1988. The $20 million dragline is planned to be l The spot market portion of NERCO's operationalbyearly 1990. At thejim Bridger business grew dramatically in 1988, repre-mine, a conveyor planned for installation senting almost 3 million tons. It also brought will ehminate the truck haul between the i first-time utihty customers, including Kan-mine and the adjacent power plant it serves. f sas City Power & l ight and Otter Tail Ibwer Coal sales were 5471 million in 1988, l Company. some 71 percent of NE RCO's total The international door opened a little revenues. wider last year as NERCO shipped coal to C

1 lF A ' Ci 1 F i'C 0 R'F ~ j i Silver, Gold Reserves Added DeLamar silver mine and, if a "go-ahead" Already a major player in precious metals decision is reached, construction could, .j production, NERCO is looking for addi. begin in the early 1990s. tional gold and silver reserves adjacent to its in all, NERCO has some 19 exploration existing mine sites and through exploration projects underway. The potential risks and projects in five western states, Australia and rewards in the search for silver, gold and plat-1 I Canada. inum reserves are shared with other minerals-Production remained at about the same companies. level as 1987 - 4.9 million ounces of silver NERCO is coping with less robust prices and 143,000 ounces of gold. I)espite that, on today's precious metals market through 1988 6ilver sales of 5 million ounces were cost cor. trol that keeps direct production i down from 9 million ounces in 1987 when a costs for silver at a low $4.25 per ounce, large, nonrecurring inventory sale was made, it has been difficult to cut direct produc-That inventory sale also accounted for pre-tion costs for gold which averaged $300 per 'i cious metals contributing less revenue.in ounce in 1988, a $15 per ounce increase over z 1988, $100 million compared to $132 mil-1987. To bring down costs, modernization lion in 1987, and lower operating income of efforts are underway at NERCO's major q 58.3 million compared to $13.6 million gold mine, the 50. year-old Con Mine, last year, located in the Northwest Territories of Basic to NERCO's strategy of expanding Canada. its precious metals operation, exploration is a top priority. Success in 1988 more than Gas And Oil Business Surges { replaced last year's production, proving up As a result of investing approximately reserves which contained 14 million addi-3284 million in producing properties in the tional ounces of silver and 565,003 ounces Gulf Coast area of Louisiana and Texas and of gold, beginning delivery to a major customer, As a result of exploration work, NERCO NERCO's gas and oil business is flourishing, is studying development of a new gold mine in 1988,it produced revenue of $89 mil-in Idaho. Test drilling is complete at a site lion-13 rercent of NERCO's total-up six called Florida Mountain near the existing fold from 1987. It was also profitable for the q Field uurk and laboratory i f rst time since entering this business in analysis are used m pror sng 1982, adding 59.5 million to operating up additional resert es at NERCO's precious met. sis mines. Last year, resers es ( The opportunity to make a significant as s 07s tmm into gas nd oil grew out of the coal J n 43 0 un business. Not only did the coal business pro-ounces o/ gold msned. 1 vide cash for reinvesting in a higher growth area,it also furnished the major customer-J# Louisiana power & Light Company. Lp&L had originally contracted with NERCO to supply coal for generating units 0

t P A C l~F i C O R P \\ I f l i l my ' rwwi' mmq The purchases significantly increase i

1. $ ' 'h NERCO's reserves and production capabil-

) ) i,

a ity. By the end of the year, reserves stood at N

310 billion cubic feet of gas,3.7 million bar-M rels of natural gas liquids and 5 million bar- . y3 m m reis of oil. Daily net production rates are up (' .a to 150 million cubic feet of gas,2,500 barrels gn 1:4 of oil and 2,500 barrels of natural gas f' liquids. NERCO's position in gas ana oil places it f A $h 4 as one of the largest gas producers in Louisi-nm' 7'%. ana and in the top 60 of some 400 indepen-e dent gas producers nationwide, l Resevrce Mix Varied For 1990s NERCO's major businesses are all well posi.ionec' for growth in the coming decade. NERCO's western coalis that were not built. Instead oflosing a coal There is an increasing worldwide appetite reachsng newgeographic markets by tapping water customer, NERCO gained a natural gas cus-for coal, although prices are expected to transportation on the Great tomer by signing a contract in mid-1988 to remain weak in the next three to five years Lakes system. Coalsales in 1988 h[t a new record high deliver gas to 1.p&l's existing gas-fired due to oversupply. NERCO's long-term con-ofslightly more than 31 power plants. tracts, however, and its improving price com-million sons. Under the contract, NERCO began sup-petitiveness in the spor market will keep this plying natural gas in June at the rate of up to business stable but with limited earnings 75 million cubic feet daily. In mid-1993, the growth until the market turns around. delivered amount will rise to a maximum of Of NERCO's businesses, natural gas 250 million cubic feet daily until the year offers the best opportunity to add increasing 2013. value as long as reserves can be acquired at NERCO's acquisitions have been aimed at attractive prices. giving the company the flexibility to poten-The capacity of NERCO's precious metals tially meet a significant portion of Lp&l's operations is planned to increase in the next contract needs from owned properties and to few years, with the possibility of one or two s L also access pipeline corridors to the new mines being added as a result of explo-Northeast. ration efforts. Acquisitions in 1988 included a 69 per-cent, $185 million working interest in Inu;si-l ana's Black Lake field and properties near Houston and off the Gulf Coast shore for i another 590 million_ l 9 1

LPlA C I F I C 0 R - P. P.cific r.i... expand ine.rnational pr.s.nce i acific Telecom strengthened its calls outside of Alaska provides service in k communications role in the three market areas-Anchorage, l~airbanks .z international arena in 1988, and Juneau-while Alascom offers a full doubling the number of foreign range of services throughout the entire state, countries it reaches and finaliz-including the most remote areas, ing plans for construction of the As part of that competitive environment, a first direct trans-Pacific fiber long-standing lawsuit in which the major f optic cable between the United competitor alleged antitrust activity by Alas-k States and Japan, com was resolved in May. In an out-of-court its core businesses-long distance in agreement, all claims were settled which Alaska and local telephone operations in resulted in a 55.6 million reduction in Pacific nine states-turned in improved perform-Telecom's second quarter net income. ance. Together, these businesses provided 91 Alascom is the state's only authorized pro-percent of Pacific Telecom's revenues in vider of intrastate long distance service, 1988. although competition is seeking to enter this Reduction of losses from a variety of market. An intrastate rate design filing by I smaller companies also added to the com-Alascom is currently before the Alaske pany's 1988 improvement. Public Utilities Commissiot.. The new rate J During 1988, telecommunications' reve-design would give Alascom greater flexibility nues gained 5 percent to $552 million and in meeting customer needs and would result the segment's contribution to PacifiCorp's in a more equitable rate structure for both ( earnings increased significantly from $36 million to $50 million. I l Long Distance Volvene Up 1 Pacific Telecom's regulated long distance ( subsidiary, Alascom, carries all the long dis-tance calls within Alaska and the majority of calls between Alaska and the rest of the world. The volume oflong distance originat-ing messages increased 7 percent in 1988 to a [ total of 61 million-68 percent intrastate N" o and 32 percent interstate, p,n The improvement resulted from a firming p 9a in the stete's economy and a return of some L 24 customers previously lost to competition through equal access balloting. <~ l U'# "'"'Id "'## #'"# ##'# "*dI' """' #" Alascom's only significant competitor in Alaska last year esa televsswn Iransmisswns the business of transmitting long distance camed over the company s Alaska.hased long dsstam e wmmunicatwns system. O 1

i eact i acosr I l 4 urban and rural Alaskans. warding, call waiting and speed dialing at i in serving Alaska, Alascom relies on its lower cost by using telephone central office j 1 satellite and a state-wide network of carth switching equipment, rather than cus-stations. Nearly 60 percent of all long dis-tomers' PilX equipment. tance messages are transmitted via satellite Other services, including data links, three-

l A fuber optic communications cable that willbe built beturen while the remainder are routed over land on way calling and wake-up service, are steadily the United States andJapan microwave systems. Alascom's existing satel-gaining acceptance among local relephone will use six glass strands similar to the one in the photo capable lite,in service since 1982, is nearing the end customers, of carrying aileast 18,000 of its life cycle and will be replaced in 1991'

. telephone cala ssmultaneousIv. The undersca rable is plannell when Aurora 11 is launched at a cost to internailenal Reach Expands r complcrion m oecem-Pacific Telecom of approximately $83 The market for providing international million. communications service is growing fast and in addition, a spur from the trans-Pacific so is Pacific Telecom's involvement. fiber optic cable is planned to land at just two years ago, the company was get-b Seward, Alaska and, when completed, will ring its feet wet in international waters. 'I be available to the company's long distance Today, Pacific Telecom provides voice and system. data services between the United States and some 90 countries. Revenue from this nonts-Local Service Growing gulated business is approaching the $130 Pacific Telecom's local telephone opera-million level, up from $4 milhon two years tions are growing at a rate above industry ago as a result of acquisitions. average. During 1988, growth in the nine-Building on existing international service, state system was more than 4 percent, with Pacific Telecom acquired TRT Communica-the number of business customers rising .tions in tate 1988 forapproximately $92 mil-nearly 7 percent. lion. International direct distance dialing The fastest growth-5.4 percent-is and leased channeh for voice, high-speed occurring in several communities around data and telex transmission services are pro-Washington's Puget Sound area, mainly to vided on a worldwide network using satellite I the east and west of Seattle. An improved and fiber optic cable circuits. 1 interstate freeway in the area is opening up The approximately $3 hillion interna-s \\ commercial development and new service tional communicatLa market for U.S.- i j opportunities. based companies is dominated by AT&T, l ~ Business users, which account for approx-which holds somc 75 percent of the business. imately 21 percent of all access lines, are a Pacific Telecom's international operations f key growth market. The company is promot-currently rank fourth. l ing a new system aimed at these cus-tomers in three states-Oregon, Montana and Alaska. The state-of-the-art Digir ex system provides enhanced services such as call for-e \\

3 r A. c I r I coa r. i I

\\

l l' Localtelephone operations are Ocean-floor mapping was completed in ' ""* ~ ' ~ " growing especiallyaroundthe mid-1988, with material fabrication taking Seattlearea. Animproved interstate highwayis spurring I place in 1989. Cable laying begins in early , "p [,[",, , both o d ij ~ date of December 1990. 1990,' to meet'a planned ready-for service communications needs. y. 1 lavestenent Positlens Decrease 1 Concentrating on its basic communica-tions businesses, Pacific Telecom pared its investment positions in smaller companies l during 1988, selling interests in cellular tele-phone, background music and discount long Tjff. m fJ, distance service. Certain other investments i have been transferred to another PacifiCorp Caisle Proiett Underway subsidiary and will be accounted for at the In expanding its communications busi-corporate level. Performance in the invest-ness overseas, Pacific Telecom is going' ment portfolio improved in 1988, posting undersea as a major co-owner in a fiber optic $10 million in after-tax losses down from cable project. $25 million in 1987. The new North Pacific Cable will open much needed capacity between the United Fotore Lies internationally States, Japan and the Far East at a time when Regulated long distance and local tele-demand is burgeoning. phone businesses are expected to continue Pacific Telecom's involvement in the proj-growing into the early 1990s. Pacific Tele-ect is through 80-percent-owned Pacific Tele-com's highest potential for growth, however, com Cable, which will own and operate the lies in the international market. The new 'i U.S. end. A consortium of investors,includ-trans-Pacific fiber optic cable is e significant ing C. Itoh, Toyota and Cable & Wireless ' opportunity to capitalize on an merging plc, own the Japanese end. market. The cable's U.S. landing points are at Pacific City on the Oregon coast with a spur to Seward, Alaska. The 5,200-mile cable system will be con-structed at the cost of approximately $400 million, with Pacific Telecom's cost ranging between $235-5250 million. The cable will follow the Great Circle route, providing a link some 2,000 miles shorter than others. It will also be the highest capacity one in operation-capable of handling 18,000 1 simultaneous telephone calls. O-

P A C I F I C 0 R P l i Financial Services Sharpens Business Focus I or PacifiCorp's financial services PacifiCorp Financial Services is in a process l segment,1988 was a year of of corporate integration, as it solidifies, cen-internal expansion-building tralizes and strengthens activities for effi-on people and existing busi-ciency and market penetration. nesses-and of reorganization. Accouwing changes resulted Niche Markets Targeted l in financial services being fully Pacificorp Financial Services bases its i consolidated at the PacifiCorp business on niche markets where it can offer level, adding nearly $230 mil-specialized services and emerge as a leading 9,.gg lion to corporate revenue and competitor. 3 ) 52.2 billion to combined assets. Computer Leasing and Remarketing: Tb pull together financial services activ-With assets of $423 million, this area ities existing elsewhere in PacifiCorp. Pac-encompasses targeted computer leasing, " Y "U' ' "E } Calsfornia's largest wholesale nursery, Color Spot America, Pacific Telecom, and the company's invest-ices for commercial customers, primarily in Inc., gnues flowers and plants ment in Equitec Financial Group were com-IllM computer mainframes and peripheral for sale to supermarket chains and commerciallandscapers. bined into financial services results, along equipment. Assets in this unit increased 64 in 1988 Paci/rCorp l'mancial I with PacifiCorp Financial Services. percent in 1988, adding firms such as AT&T Services provtded thefirm with $30 million in loans and Earnings contribution from PacifiCorp and New Jersey 11 ell as customers. credit lines. Financial Services' core leasing and lending Aviation Financing: Revenues from icas-activities increased nearly $8 million over ing and lending on aircraft for passenger and 1987 to $17 million. Results of the two freight use tripled in 1988, with some 570 ) smaller units, with combined losses of $8 million of equipment placed under new million, lowered the total financial services' operating leases. Currently, the company contribution to 59 million. finances 60 aircraft for firms ranging from ) Northwest Airlines to Federal Express. liy Business Focused in 10 Areas the end of 1988, aviation financing assets PacifiCorp Financial were 5270 million. Services' business is Industry-Focused Financing: Selected l focused on providing markets, including franchising, broadcast l 1 1 various specialized media and medical equipment, are targeted i commercial loan, for financing packages. This area now has equipment leasing and 5239 million in assets, most of which are financing packages related to fast food franchises such as Wen-C, through 10 strategic business lines. dy's,11 urger King, Taco liell and Para Hut. l MMk After its early history of building by Project financing: 1.arge project-type dnk acquisition, PacifiCorp Financial Services is transactions in 1988 ranged from leveraged WA *_ m now emphasizing internal development and leases such as one for 520 million of locomo-building on its own experience. tives for Amtrak to financing of two afford- \\ With its lending and leasing business able housing developments. Project ,c

m

't f formed from several smaller companies, financing has assets of $248 milhon, repre-q h m

i

P A C 1 F i C O R P ( t involve leasing and receivables financing for public utilities and development of financial restructurmg transacuans. ~M. w' _'., Smaller Units Suffer Losses

- Troubled by reduced sa'es of its traditional real estate products in certain parts of the United States and slow development of new financial products, Equitec Financial Group suffered a loss in 1988.

( With a new management team in place, ( the emphasis in 1989 is on cost containment, developing new offerings for the financial marketplace and asset management. PacifiCorp acquired its now 49 percent ownership interest in Equitec, which has Proerdingfinancingfor the senting $1.2 billion of f acilities and nearly $4 billion of real estate and invest-broadcast media, such as the ment securities under management, in late ( '9*P*'" localNBCaffihate in Eugene, 1987. The relationship with PacifiCorp Oregon is part of Pact /icorp Commerciallending. Inans to cornmer-FinancialSereices' market. F Af pened up new pr duct line possibilities and cial customers includes advances secured bY radw and teleersion assets now in 1988 a $50 million limited partnership standat 537 mdhon. plant, accounts receivable, inventory and based on equipment leases to venture capital equipment representing assets of $230 mil-g firms w s introduced to the marketplace. lion-up 58 percent over 1987. Consolidated into financial services in late Distribution Financing: In this busm.ess 1988, Paccom Irasing has assets of $194 mil. segment, which manages almost 5200 mil-lion invested in equipment leases. After sev-( tion in assets, the company fm.ances cus-eral years of profitability,it incurred a loss in tomer purchases of equipment-a sellm.g tool for the manufacturer and a financMg resource for the customer, Market Penetration Sought New relationships were built m 1988 with ( Specified market definition and penetra-Fujitsu to provide financing for point-of-sale "'"EY "' *""'" " fI" "'i I * f """ I" s> stems and automated teller machines and ices n the next decade. At top priority is with American Seating, a firm that sells developing expertise in targeted customer office furniture and stadium seats, segments, which can be serviced with a Two other PacifiCorp Financial Services broad range of financial products, units offer specialized lease financing to fed-eral, state and local governmental entities, and insests funds through an externally managed securities portfolio. In addition, two business lines in the start-up stage O (

) Finanslal Content]- p $ Management's Financial Review $ Summary Results of Operations h Liquidity and Capital Resources 8 IndustrySegments h Report of Management ) O Independent Auditors' Report @ Statements of Consolidated Income and Retained Earnings 8 Consolidated Balance Sheets. 8 Statements of Consolidated Cash Flows O Notes to Consolidated Financial Statements On January 9,1989, PacifiCorp merged l [ with Utah Power & Light Company in a business combination ' accounted for as a pooling of interests. The accompanying j financial statements and other financial information have been restated to reflect the combination as if the companies had ) been merged for all years presented. Separate audited financial statements for PacifiCorp and Utah Power & Light Com- ? pany have been filed in a Current Report on Form 8-K with the Securities and Exchange Comrnission and are available by contacting PacifiCorp's investor rela-I tions department. 1 0 r

Managesnentt FinancialReview ( ( Utah Power Conselldatedin 1933 units. Increases were posted at the corporate EARNINGS M8 The merger with Utah Power, a major level in total revenues, operating income, net j SNA t (dolla s) event in PacifiCorp's history, significantly-income and earnings per share. Earnings per 5 [- changes the company's complexion. share rose 9 percent to $3.46 from $3.18. 1 i Although the merger was not completed Revenues rose 7 percent to $3.5 billion as 4-l until early 1989, 1988 financial statements all four segments gained during 1988. Oper-reflect the consolidation and past years have ating income edged up 1 percent on the { 3: been restated. Electric operations, represent-strength of increases in the mining and ~ J ing both Pacific Power and Utah Power, now resource development and financial services 2: comprise a greater proportion of the com. segments. All segments turned in higher pany's assets, revenue, income from opera-earnings with the exception of financial ( 84 85 86 87 88 tions and earnings. PacifiCorp's nonelectric services. Financial services' mainstay busi-1 M PaahCorp operations also continue to make solid bot. nesses tiported higher plufits, but were off-D Standard & nmr's 400induurw. tom-line contributions. set by losses at other financial services ' $/E'd ^#' In addition, as a result of new accounting entities. Earnings contribution was up 10 requirements, financial services subsidiaries, percent to $426 million compared to $389 formerly reported on the equity method of million last year. accounting with no separate disclosures for revenue or operating income, are now fully Building Shareholder Valve consolidated. Increasing dividends, total investment i Prior to the merger, for the year ended return and return on common equity are all December 31,1988, electric operations rep-measures of how well PacifiCorp performs gA resented 46 percent of revenue and 56 per-for its shareholders. ( cent I earnings c ntribution. Combined The common stock dividend was raised 5 Q$NEAR ND with Utah Power, revenues from electric percent with the May 1988 payment. The

1. 4-1988 operations rose to 61 percent and earnings increase raised PacifiCorp's quarterly divi-18 -

contribution to 73 percent. Before the mer-dend to $.66 per share from 5.63 for an t ger, approximately 47 percent of Pacifi-annualized dividend payment of $2.64. pi Corps total assets were in the electric utility Based on the stock's year-end price of $35, business compared to 57 percent on the the dividend yield was 7.5 percent. i w. i present basis. PacifiCorp's total investment return-the s l PacifiCorp's assets increased $3 billion sum of stock price appreciation and divi-n; l with the inclusion of Utah Power and $2 bil-dends-for 1988 was 15.7 percent. The divi-lion with the consolidation of the financial dend portion of that return was 7.5 percent f services segment. Consolidation of financial and price appreciation was 8.2 percent. The g. services, which uses a higher proportion of comparable figure for the Standard & Poor's E Paci6 Corp debt to equity than electric operations, low. 400 industrials was 15.8 percent and was a standard & nur., N,r'. ered the equity portion of total capital by 5 17.1 percent for the Standard & Poor's 22 as percentage points and increased long-term electric utilities. 22 %"" debt by an equivalent amount. In a longer-term view, PacifiCorp's five- { year totalinvestment return was 15.6 percent Earnings Risein 1988 annually, slightly higher than the 15.2 per-In 1988, solid financial results were cent reported for the Standard & Poor's achieved in a highly competitive environ-industrials and below the 16.9 percent of the ment for each of PacifiCorp's four business Standard & loor's 22 electric utilities. 1 0

) ). RETURN Return on shareholders' common equity dividends since 1986 has increased 14 per-ON AVERAGE ) COMMON was 14.6 percent, up from 13.8 percent in cent compounded annually. ROUffY (pmeno 1987 and nearly 3 percentage points above As construction in 1988 of $437 million is : the 1986 low of 11.9 percent. The 1988 represented just 39 percent of cash flow from I return was above comparative electric utili-operations, there is potential for dividend 16 ties as the Salomon Brothers' 100 electric growth and investment opportunity in the ) utilities stood at 13.1 percent. PacifiCorp's company's diversified operations. M - 1986 return on equity was adversely affected Capital spending during 1988, excluding by a 544 million after-tax charge relating to financial services additions to operating 12 i fuel costs recorded by Utah Ibwer. assets, totalled 5875 million, an increase PacifiCorp's common stock book value from 5683 million in 1987. l 1 increased 1 percent over 1987 to $23.82 and With continuing expaosion of 8 85 86 87 88 a raci6 corp has grown at an annual compound rate of 3 PacifiCorp's nonelectric operations,5610 8 y*'g",,B"lthers' percent since 1984. The ratio of market price million, or 70 percent, of 1988's capital ) E g,gr'$ to book value at year-end stood at 147 per. spending was in nonelectric areas. Acquisi-cent, while the average market-to-book tions and investments accounted for $438 value for the electric utility industry was 121 million, or 50 percent, of capital spending, percent. PacifiCorp's price / earnings ratio at with 5284 million or 65 percent spent in the year-end was 10.1 times, above the industry mining and resource development segment. average of 9.4 times. Pre-tax interest coverage for 1988 was 2.5 times, down from 2.7 times last year. The ? Merger Adds 53 Million Shores incorporation of financial services' debt Utah Power common shareholders reduced this measure as the overall level of CASH FLOW received.909 shares of PacifiCorp stock for debt increased. gS cach Utah Ibwer share. A total of 53.5 mil-PacifiCorp's quality of carnir';;s is reflected SY SEGMENT lion new PacifiCorp common shares were in part by the fact that capitalized interest as (millwns of dalltrs) i2oo : issued for 59.0 million Utah Ibwer shares, a percent of carnings availab!c to common i increasing PacifiCorp's total number of com-stock was just 3 percent, reflecting no major 900 : l mon shares outstanding 77 percent, electric utility construction projects. The l Due to PacifiCorp's ability to internally company is not anticipating the need for ,,oo generate an adequate level of funds needed large electric utility construction projects for ) for capital expenditures, the issuance of new the next several years, due in part to the mer-30o ; l shares is not necessary. Shares used for the ger with Utah Ibwer. dividend reinvestment program are pur- ] l chased on the open market and, with the 7 o 86 87 83 exception of shares issued in conjunction 5 Fmancial Semces D Telecommunicanons with the Utah Power merger, there are no O fl*j @'" plans to issue new shares in the near future. p 7 R Dectric Operanons O Corporate ) Cash Flow Sets Record With solid performances by each of PacifiCorp's businesses in 1988, the addition of Utah Ibwer and consolidation of financial f seaices, cash flow from operating activities reached a record 51.1 billion. Cash flow after

i i _i Roseles of OperaHens ( MILLIONS OF DOLT. AR5/FOR THE YF AR 1988 to 1987 Com un 1988~ 1987 1986 1983 1984 CIn,"$' G n" REVENUES $3,519.3 $3,277.0 $3,117.7 $3,041.3 $2,751.7 7% 6% INCOME FROM l- ' OPERATIONS 1,046.2 1,031.2 932.0 967.0 968.7 1 2 NET INCOME 446.7 411.1 353.4 401.0 358.1 9 6 EARNINGS CONTRIBUTION ON COMMON STOCK Electric Operations 309.0 291.0 227.0 284.1 224.8 6 8 Mining and P.esource Development 59.8 54.2 52.0 35.8 52.2 10 3 Telecommunications 50.2 35.8 33.9 25.3 15.0 40 35 y Financial Services 8.6 10.0 4.1 2.4 (14) Corporate (1.6) (2.5) (2.2) 3.8 1.2 36 3 TOTAL $ 426.0 $ 388.5 5 314.8 5 351.4 $ 293.2 10 10 ( EARNINGS PER SHARE $ 3.46 $ 3.18 $ .2.66 5 3.09 $ 2.74 9 6 . POOLED COMPANIES CASH DIVIDENDS 5 PAID PER COMMON SHARE PacifiCorp - 2.61'" $ 2.49 $ 2.40 $ 2.34 $ 2.24* 5 4 i Utah Power 2.32 2.32 2.32 2.32 2.32 Total assets 511,396 - $ 10,303 $ 9,362 5 8,730 $ 7,750 11 10 Corporate identifiable assets

• 346 5 274 5 157 5 47 $

180 26 18 Book value per share $ 23.82 $ 23.54 $ 22.68 $ 22.18 5 21.26 1 3 Market price per share 35 5 32i/s $ 3 57/s S 311/4 $ 247/ 9 9 Price earnings multiple 10.1 10.1 13.5 10.1 9.1 3 Pre-tax interest coverage 2.5 2.7 2.6 2.9 2.8 (7) (3) Tctal employees 16,418 15,718 16,124 14,901 14,113 4 4 1 Common shareholders of record (Thousands) 188.0 196.7 192.0 202.2 210.4 (4) (3) 'Not a meaningful number. "' Five dividends were dedared in 1988, one of which (5.66 per share) was paid in 1989. Four dividends were paid in 1984, one of which (5.54 per share) was declared in 1983. Corporate assets are principally cash and temporary cash investments. I s O

f Mm ) MILLIONS OF DOLI ARS/ QUARTER ENDi'D March June September December I 31 30 30 31 ] J 1988' Revenues $885.0* $813.6 $889.0 $931.7 1 Income from operations 312.8 217.0 256.7. 259.7- = Net income 144.1 89.8 106.9 105.9 Earnings on common stock 138.9 84.8' 101.7 100.6 Earnings per common share ' 1.13 .69 .83 .82 I Common dividends paid per share. .63 .66 .66 .66") Common stock price per share (NYSE) High 35 % 37 36 % 36 % i tow 32 % 33 % 33 % 34 % 1987 Revenues $819.1 5796.6 $810.0 $851.3 Income from operations 278.0 231.6 257.1 264.5 ~ E" j Net income 108.0 91.4 95.5 116.2. ("' "**"d " dol'd'5) 38 : Earnings on common stock 101.3' ' 85.5 _. 90.7 111.0 Earnings per common share - .84 .70 .74 .90 3' Common dividends paid per share .60 .63 .63 .63 Common stock price per share (NYSE) f High - 39 36 % 36 % 35 % 3d low 34 % 31 % 333/s 26 % 32 . A significant portion of the operations are of a seasonal nature. "' Previously reported quarterly information has been revised to reflect the merger with Utah Power & Light Company on a pooling of interests basis and the consolidation of Financial Services. 'S Includes approximately $45 million in revenues from coal contract settlements. "' In addition, a dividend of $ 66 per share was declared in December 1988 payable in February 1989. 3o 'q'i di$ d45 didid4 '1987 1988 i ) ): l ) l ) ) i F )- l ) \\ O \\

( Llegulality and Capital Resource 3 ( ( Mit i IONS OF dot.t.ARS/FOR THE YE AR - ACTilAl PROJE C1 E D 1986 1987 1988 1989 1990 1991 NET CASH FIDW FROM OPERATING ACTIVITIES Electric Operations $577 5637 5605 Mining and Resource Development 153 192 193 Telecommunications 155 131 137 Financial Services 80 115 203 i I Other (21) 13 (6) TOTAL 944 1,088 1,132 CASH DIVIDENDS PAID 329 333 339 j NET $615 5755 5793 $859-900 $800-850 $850-900 ( CONSTRUCTION Electric Operations $333 $258 $259 $338 $359 $343 ( Mining and Resource Development 33 60 94 145 107 84 Telecommunications 84 76 72 178 277 224 Other 5 12 12 3 3 450 399 437 673 746 654 ACQUISITIONS AND INVESTMENTS'" Electric Operations 26 28 6 Mining and Resource Development 49 96 284 24 Telecommunications 72 14 100 Financial Services 34 138 42 Other 8 6 17 i TOTAL CAPITAL SPENDING 631 683 875 714 746 654 MATURITIES OFIDNG-TERM DEBTAND CAPITAL LEASE OBLIGATIONS Electric Operations 15 1 40 39 45 82 Mining and Resource Development 20 50 17 6 5 7 Telecommunications 92 24 29 21-23 35 i Financial Services 59 49 283 234 203 164 Other 3 1 1 190 186 127 369 301 277 478 Other refinancing 398 172 456 4 ( '" Excludes Financial Services additions to operating assets. ( ( t O

L L The consolidated financial statements for 1988 reflect changes resulting from the expansion and evolution of the Company's businesses, as well as new reporting requirements for its Financial Services segmeat. Consummation of the merger with Utah Ibwer & Light Company, which has been reported on the pooling ofinterests basis, dramati-cally expanded the Company's electric operations. At December 31,1987, prior to the merger, electric utility assets comprised 47% of total assets. The consolidation of Financial Services added approximately $2 billion to assets . but, as a result of the merger with UP&L, the electric utility portion of total assets at December 31,1988 increased to 57%. NERCO has resolved disputes involving its major coal contracts and significantly increased its oil and gas f ' operations. Pacific Telecom has continued to focus its efforts on the telecommunications industry, disposing of .j certain investments in diversified activities and expanding its international operations. Financial Services, now reflected on a consolidated basis with the Company's other operations, has continued to expand through both acquisition and internal growth. As a result of the merger, the Company has agreed not to increase prices for Pacific lbwer customers for four to five )

years and to effect 5% to 10% price reductions for regular, firm retail customers served by Utah Ibwer over the next four years. In accordance with this commitment, the Company reduced prices to these Utah Ibwer customers 2%

gg, j effective in March 1989. The Company expects merger cost savings to be sufficient to support these price commit-ments. SeeMENT @ ment) ) Over the last three years, NERCO has resolved all of the disputes involving its major coal contracts, in several cases too receiving cash payments in settlement which were used primarily for repayment of high cost debt and investments in oil and gas properties. Renegotiation of these contracts avoided protracted litigation and, in most cases, generally y maintained their original value. However, the settlement payments were received in pan for price concessions, thereby reducing coal revenues in 1988 and future years. One of the settlements included replacing a coal contract, l } under which coal was never delivered, with a 25-year gas supply contract. In addition, NERCO spent approxi-50 mately $284 million on the acquisition of oil and gas producing properties in 1988, significantly increasing current and projected revenues from oil and gas operations. As a result, changing oil and gas prices can be expected to have a 25 larger impact on NERCO's future revenues. j Pacific Telecom has continued to focus its efforts on its core businesses within the telecommunications industry and o" 88 has disposed of substantially all of its diversified investments, including several acquired in early 1989 by Inner PacifiCorp, Inc., a wholly-owned subsidiary of the Company. In addition, Pacific Telecom has expanded its interna- {l{^Q tional operations with the December 1988 acquisition of TRT Communications, Inc. ("TRT"), and the December a Telecommunicadons 1985 acquisition of FTC Communications, Inc. ("FTCC"). These subsidiaries provide international telex, message Q"sgym p telephone and private line services. Pacific Telecom is also expanding its communications facilities through the a uccmc opeunons construction of a fiberoptic cable between the United States and Japan, with a spur between Alaska and the lower 48 states, which is expected to be in service by December 1990. The Financial Services segment had total assets of over $2.2 billion at December 31,1988, including $194 million from a leasing subsidiary previously reported in the Telecommunications segment. The growth in Financial Services j has been financed primarily by debt,includinglong-term debt of $906 million and short-term debt of $663 million at December 31,1988. Financial Services, as typical in that industry, employs more leverage than the Company's other businesses and, consequently, the consolidation of that segment lowered the Company's percentage of equity to total capital by five percentage points. The Company anticipates that net cash flow from operating activities less dividends will be sufficient to cover total capital spending in the 1989-91 period. ) Electric Operations' construction program for the period of 1989 through 1991 consists of construction of distribu-tion and transmission facilities and retrofit of coal-fired plants with pollution abatement equipment. All of the $18 million to be spent on the pollution abatement facilities during this period has already been financed through the ) issuance of pollution control revenue bonds, the proceeds of which are on deposit with trustees and are temporarily invested until spent on the construction of the facilities. Electric Operations believes the merger has extended the period of its energy sufficiency until the late 1990s. Accordingly, construction expenditures in the years 1989 through 1991 do not include amounts for construction of major generation facilities. ) I L e i

( ( Mining and Resource Development's 1989 construction and acquisition expenditures are expected to be: coal oper-ations, $65 million; precious metals and minerals, $57 million; oil and gas, $20 million; and corporate and other, $3 million. These amounts are expected to be used for the purchase of mining and distribution equipment and facilities and the purchase of oil and gas producing properties. Telecommunications' construction expenditures for 1989 are expected to be: local telephone operations, $51 mil-lion; long lines, $53 million; international communications, $73 million; and other communications subsidiaries, $1 million. Telecommunications' 1990 and 1991 construction expenditures are expected to be allocated 18% to local telephone operations,29% to long lines,52% to international communications and 1% to other communica-tions subsidiaries. MR.l.loNs oF Dol.1 tJt5/Dich MM R.H 1988 1987 1986 1985 1984 ( CAPITALIZATION Common equity $2,936 52,901 $2,724 $2,582 52,347 Preferred stock 246 249 284 389 516 COMMON Redeemable preferred stock 56 56 67 67 67 soumr long-term debt and capital lease obligations 3,441 3,395 3,399 3,264 3,138 yof"#*""#'"' ( Financial Services'long-term debt 906 551 239 128 TOTAL $7,585 $7,152 $6,713 $6,430 56,068 2250 15 " In prior years, NERCO financed its business with internally generated cash, gold bullion financing and bank and i private placement borrowings. During 1988 NERCO registered $200 million of debt, of which $140 million was issued as medium-term notes, at rates between 9% and 9.85%. NERCO also began a $100 million commercial 750 paper program, of which $100 million was issued and outstanding, with $ 80 million classified as long-term debt. In addition, with the funds received from coal contract settlements, NERCO retired $140 million of 13.25% notes. g NERCO also has two gold bullion financing facilities outstanding at year end totaling $72 million, or 15 8,212 84 85 86 87 88 ounces of gold. Pacific Telecom's 1988 acquisition of TRTwas financed with short-term borrowings under its domestic bank credit agreement and other bank credit arrangements. Future construction expenditures include approximately $83 mil-lion for a new satellite expccted to be launched during the second quarter of 1991 and approximately $235 to $250 million for the fiber optic cable. Pacific Telecom's construction program for 1989 is not expected to exceed inter-nally generated cash; however, external funding will be required for a portion of the satellite and fiber optic cable in l 1990 and 1991. ( Financial Services obtained the cash required to fund its business activities from operations ($ 203 million in 1988) and from financing activities ($642 million in 1988). Financial Services increased short-term debt, prirnarily com-mercial paper, issued medium-term notes and borrowed from banks and other sources. Financial Services limits exposure to imerest rate fluctuations by substantially match-funding fixed-rate assets with fixed-rate debt with similar maturities. The Company's Restated Art;cles of incorporation limit the amount of unsrcured debt outstanding to the equiva-lent of 30% of total defined equity and secured debt. Under this provision, approximately $1.1 billion principal amount of additional unsecured debt could have been outstanding at December 31,1988. Issuance of the Com-pany's first mortgage and collateral trust bonds or preferred stock is limited by earnings coverage and fundable property provisions of the Company's mortgage indentures and Restated Articles of Incorporation. Under these { provisions and at current interest rates, approximately $1.5 billion of additional first mortgage and collateral trust bonds or $1.9 billion of additional preferre d stock could have been issued at December 31,1988. However, certain of the Company's credit facilities would have limited additional borrowings to approximately $700 million. For information regarding bank credit agreements, lines of credit and other short-term borrmving facilities and related limitations on born wings, see Note 4 to Consolidated Financial Statements. t 9

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J

l ) l INFLATION Due to the capitalintensive nature of the Company's businesses,inf'.ition may have a significant impact on replace-ment of preperty or acquisition and development activities. The effects of inflation on the Company's utility busi-nesses are not significant to ongoing operations. While the rate-making process gives no recognition to the current cost of replacing plant, based upon past practices, the Company's utility businesses will be allowed to recover and earn on the incicased cost of its net investment when replacement of facilities actually occurs. The majority of Mining and Resource Development's long-term coal contracts and the long-term gas supply agreement provide for the adjustment over time of elements of the sales price either thmugh indexes, formulas, or direct pass-through of costs. Prices for precious metals, oil and gas may fluctuate dramatically over short periods of time due to the rate of inflation and other factors not controlled by Mining and Resource Development. 1 ACCOUNTING FOR INCOME TAXES In December 1987, the Financial Accounting Standards Board issued Statement No. 96 " Accounting for Income Taxes" effective for fiscal years beginning after December 15,1989. The new standard requires companies to use the liability method to reflect the tax effect of differences between taxable income and pre-tax financial income and to adjust deferred tax liabilities or assets for changes in tax rates in the period such law is enacted. Due to the primarily regulated nature cf he Company, adoption of this new standard is not expected to have a material effect on results t of operations. The Company's unrecorded deferred tax liabilities and corresponding future receivables from cus-tomers will be recorded upon adoption of this new standard. The Company expects to adopt this accounting stand-ard beginning in 1990 and, at this time, plans to present the effects in a manner similar to the cumulative effect of a change in accounting principle rather than restate prior period financial statements. k O

-( eleseds C;_ a2: MHUoN5 oF dollars /FOR THE YEAR "*'5 iossmi,s7 com n 1988 1987 1986 1985 1984 cIm"[5% c REVENUES General sales $1,890.4 $1,852.1 $1,816.6 $1,784.2 $1,649.7 2% 3% Sales to other utilities. 238.2 -191.5 203.7-333.4 281.3 24 (4) Other 31.0 -35.2 35.5 37.5 44.4 (12) (9)- [ TOTAL 2.159.6 2,078.8 2,055.8 2,155.1 1,975.4 4 2 EXPENSES \\ Depreciation and amortization 231.4 230.4 212.8 205.0 197.2 4 i Operations, maintenance and other 1,183.4 1,096.6 1,186.8 1,190.6 1,033.9 8 3 'IUTAL 1,414.8 1,327.0 1,399.6 1,395.6' 1,231.1 7 4 ' INCOME FROM OPERATIONS 744.8 751.8 656.2 759.5 744.3 (1) k NET INCOME 329.7 313.6' 265.6 333.7 289.7 5 3 PREFERRED DIVIDEND 'I REQUIREMENT 20.7 22.6 38.6 49.6 64.9 (8) (25) g F ARNINGS CONTRIBilTION'n $ 309.0 $ 291.0 $ 227.0 $ ~ 284.1 $ 224.8 6 8' ' (mdtmas o/dolla ~I . identifiable assets $ ' 6,459 $ 6,480 $ 6,382 5 6,278 $ 5,957 2 2400 .5 Capital spending S 265.$ 286 $ 359 $ 334 $ 278 (7) (1) w-c::558' ENERGY SALES 3300 ; 1 (Billions of kwh) General sales 38,0 35.9 34.3 34.4 33.5 6-3 ' Sales to other utilities - 8.4 8.1 8.2 11.7 9.4 4 (3) 1200 i { ~ ENERGY SOURCE (%) Coal 81 77 64 74 70 5 4 Hydro 7 8 10 8 12 (13) (13) 600; i ase and exchange contracts 1 14 25 17 17 (2 ) (b) I ur Residential average annual 84 85 86 87 88 usage (kwh) 10,070 9,780 9,863 10,496 10,546 3 (1) $p",,"a i a income Number of customers (Thousands) 1,202 1,189 1,179 1,167 1,147 1 1 Number of emplovees 9.092 9,376 9,861 9,213 9,016 (3) E Earnings Contribunon I "' Does not reficct elimination ofinterest on intercompany borrowing arrangements and includes income taxes on a separate-company basis. ELECTRIC OPERATIONS

• COAL ACTIVITIES in addition to coal activities by NERCO, Electric Operations has interests in coal mines which supply coal exclu-sively to affiliated electric generating facilities. Coal information included in Electric Operations is as follows:

Ml! DONS OF Doll.ARS/FOR THE Yt AR 1988 to 1987 com sh 198R 1987 1986 1985 1984 cIm"p'E% cn"S'd Fuel expense (revenue equivalent) 5219.3 $196.6 $206.7 $151.3 $194.3 12 3 Depreciation 16.2 16.0 14.4 16.2 23.5 1 (9) Capital spending 18 I 23.4 34.5 31.6 7.7 (23) 24 Identifiable assets 242.7 223.2 224.9 197.0 196.0 9 3 RESERVES AND PRICE INFORMATION (Thousands of sons) Proven and probable reserves 318,000 341,000 350,000 393,000 449,000 (7) (8) Amounts mined 8,900 7,800 6,300 5,100 5,900 14 11 Average sales price per ton $16 $20 $22 $21 $22 (20) (8)

l9' 88 COMPARED 101987 . Revenues increased $81 million or 4%

• General sales were up $38 million or 2%, reflecting increased kilowatt-hour sales of 6%, which were partially offset by lower prices
• Sales to other utilities increased $47 million or 24% due to higher prices and a 4% increase in kilowatt-hour sales.

Operating expenses increased $88 million or 7%

• Fuel and other operation expenses increased $53 million generally due to increased energy sales and higher ther-

. mal generation.

• Maintenance expense increased $21 million primarily due to scheduled major overhauls at thermal plants.
• Decreased credits allowed under the Regional Act increased purchased power expense and general sales revenue

$13 million each, with no effect on income from operations. KILOWA'T" Earnings contribution increased $18 million or 6% m SALSSBY '

• Income from operations decreased $7 million or 1%

CUSTOfnER

• Interest expense, net of interest capitalized, increased $8 million primarily due to increased short-term debt, higher interest rates and decreased interest capitalized of $2 million.
• Other income declined $16 million primarily due to the net effect of the 1987 sale of power entitlement offset by the write-down of nuclear project costs.
• Income from equity investments increased $8 million generally from a settlement of a cogeneration project dispute.
• Provision for income taxes declined $41 million primarily due to the lower federal tax rate and the decrease in taxable income.

i 1987 COMPARED TO 1986 E Residential Revenues increased $23 million or 1% a commmiA

• General sales were up $36 million reflecting increased kilowatt-hour sales, with the greates improvement in sales

$fNiher Unihines to commercial and industrial customers.

• Sales to other utilities decreased $12 million or 6% generally due to lower prices.

Operating expenses decreased $73 million or S W

• Their was no fuel adjustment recorded in 1987, while $86 million was recorded in 1986.

e Adverse water conditions leading to a limited supply of hydro energy resulted in purchased power decreasing $23 million. Kilowatt-hour sales increases of 4% and reduced purchased power resulted in increased thermal genera-tion, creating a $40 million increase in fuel expense.

• Maintenance expenses decreased $17 million mainly due to major maintenance reductions at thermal plants located in Utah.
• Depreciation and amortization expense increased $18 million due to increases in nuclear plant amortization and increased plant in service, partially offset by reduced depreciation rates.

Earnings contribution rose $64 million or 28%

• Income from operations increased $96 million or 15% primarily due to the effects of the 1986 fuel adjustment.
• Interest expense increased $6 million primarily due to interest on federal income tax payments on IRS audit adjustments. Inwer interest rates were offset by a $16 million decline in interest capitalized.

?

• Other income rose $19 million primarily due to the $88 million gain from the sale of power entitlement and $4 million of related interest income, offset in part by the $66 million write-down of nuclear project costs.

)

• Provision for income taxes rose $45 million principally due to increased ta xable income and to the $12 million net

) effect of taxes related to the sale of power ca.titlements and the write-down of nuclear project costs.

• Preferred dividends decreased $16 million.

O

Mining anel Resourse Developenent MILLION5 OF DOI.l.AR$/FOR THE YEAR 19H8 to 1987 Com n) 1988 1987 1986 1983 198407m'p*a2 ( i REVENUES Coal / unaffiliated customers $386.5 $391.8 $423.5 $375.6 $374.1 (1)% 1% Coal / affiliated customers 84.0 93,1 88.7 128.1 93.7 (10) ' (3) Oil and gas 88.9 14.1 4.5 3.8 1.6 173 { ' Gold, silver and other 102.4 133.3 78.0 26.4 1.5 (23) 187 TOTAL 661.8 632.3 594.7 533.9 470.9 5 9 I EXPENSES Deprr>ciation. depletion and amortization 77.5 54.6 41.9 42.5 37.6 42 20 Operations, maintenance and other 435.1 457.1 421.1 416.3 334.5 (5) 7 l TOTAL 512.6 - 511.7 463.0 458.8 372.1 8 W INCOME FROM OPERr10NS 149.2 120.6 131.7 75.1 98.8 24 11 1 NET INCOME 66.5 60.1 57.5 39.5 50.3 11 7 8" i I Minority interest 6.7 5.9 5.5 3.7 2.1 14 34 Stock sale gain 4.0 (,00 i EARNINGS CONTRIBUTION'" $ 59.8 5 54.2 5 52.0 $ 35.8 5 52.2 10 3 Identifiable assets $1,172 $ 856 $ 775 5 716 5 649 37 16 4* l I Capital spending 5 378 $ 156 $ 82 $ 106 $ 105 142 38 COAL (Thousands of tons) 200 ! Proven and probable reserves 1,000,000 1,001,000 1,023,000 1,033,000 1,067,000 (2) Sold / Mined 23,767 24,857 23,168 20,763 17,882 (4) 7 Sold / Purchased for resale 7,538 5,877 6,157 7,100 6,833 28 2 84 85 86 87 88 Average sales price e Revenues per ton mined $14 $16 518 519 520 (13) (9) s operatingin-ne 5 Larnings bntribution ' GAS (Millions ofcubicfeet) Proven and probable reserves 309,657 58,883 8,819 8,978 4,463 189 . Sold / Produced 26,738 4,538 1,327 691 306 Purchased for resale 12,473 Average sales price per mcf $1.75 $1.71 $1.73 $2.68 53.19 2 (14) GOLD (Thousands ofounces) 8 Proven and probable reserves 1,993 1,478 1,026 444 302 35 60 Amounts mined 143 146 80 61 45 (2) 34 Sold 139 153 110 58 7 (9) 111 Average sales price per ounce $455 $428 5372 5327 $371 6 5 StLVER (Thousands ofounces) Proven and probable reserves 57,469 46,850 47,050 39,950 23,200 23 25 Amounts mined 4,860 5,003 4,117 3,603 3,260 (3) 10 Sold 5,015 9,094 5,230 1,069 (45) Average sales price per ounce 56.92 56.96 56.69 $6.78 (1) Number of employees 2,370 2,231 2,144 1,992 2,196 6 2 'Not a meaningful number, q

• Does not reflect elimination for interest on intercompany borrowing arrangements and includes income taxes on a separate company basis.

I m L)

F - 1988 COMPARED TO 1987 Rennues increased $30 million or 5% o Revenues from coal sales declined $14 million primarily due to a lower average selling price per ton of coal, $14.24 in 1988 compared to $16.47 in 1987, offset in part by $45 million from the settlement of disputes over several long-

term coal contracts.

-

• Oil and gas revenues increased $75 million due to higher natural gas sales resulting from acquisitions of produc-h L ing oil and gas properties during the second half of 1988 and a new 25-year gas supply agreement with a Louisiana utility which replaced a terminated coal supply agreement under which no coal was sold.
• Gold, silver and other revenues dedined $31 million due to higher sales volumes in 1987 resulting from the dispo.

sition of 4.4 million ouncts of silver inventory carried over from pnor years. 1 Oherating expenses were virts,Ily unchanged. l

• Increased depletion and operadons expense for oil and gas operations was generally offset by decreased coal extraction taxes and royalties resvting from lower average coal sales prices and lower silver volume sold.

Earnings contribution increased $6 mis.Non or 10% i mm e income from operations increased $29 mdlion or 24% Coal operations increased $20 million primarily due to ,[""#""" revenues from co.d contract settlements.

• Other income declined $15 million generally due to asts in the current year relating to the retirement of certain 3;

debt prior to maturity. {

• Provision for income taxes increased $7 million generally due to higher taxable income.

4 1987 COMPARED TO 1986 30 Revenuesincreated $38 million or 6%

• Revenues from coal sales to unaffiliated customers declined $32 million primarily due to a $29 million payment u u u o 88 included in 1986 revenues as consideration for termination of a long-term coal supply contract and lower per ton D Pun:hased For Resale i

coal prices, offset in part by increased coal volume sold. s Mined l

• Precious metal revenues increased $55 million primarily due to increased volumes sold and higher prices. Sales included substantially all of the precious metals inventory held over from prior years and additional gold produc-tion from a Canadian mine acquired in late 1986.

]

• Oil and gas revenues increased $10 million as a result ofincreased production related to 1987 purchases of produc-j 3

~ ing oil and gas properties. )- Operating expenses increased $49 million or 11%

• Operations expenses increased $38 million and depreciation and amortization increased $13 million primarily due to increased coal and precious metal solumes sold.

Earnings contribution increased $2 million or 4%

• Income from operations decreased $11 million primarily due to the effect of the $29 million contract settlement in 1986.
• Interest income rose $6 million primarily due to the $4 million payment of interest on $102 million of withheld funds relating to a coa! ccmtract settlement, previously recorded as revenues.

)

• Provision for income taxes decreased $6 million primarily due to a lower federal tax rate.

) F O

I

- Telesenumenisetless 1 Mit.1foN5of Dol.l.ARs/FoR THE Yt AR 4 Year nt 1 Md 1988 '1987 1986 1985 1984 compen.a on Gn-ih 1 REVENUES i local network service $. 50.1 5 48.0 $ 46.8 5 38.9 5 26.9 4% 17 % Network access service 153.6 148.6 154.9 148.0 89.9 3 14 Long distance network - f service 198.2 187.9 188.1 177.3 188.2 5 1 Private line service 89.3 88.8 61.1 59.5 58.5 1 11 Other 60.9 53.3 43.1 37.2 35.6- -14 14 TOTAL 552.1 526.6 494.0 460.9 399.1 5 8 EXPENSES j Depreciation and amortization 98.6 92.3 89.0 82.6 71.5 7 8 Operations, maintenance and other 335.7 302.4 266.0 248.0 202.0 11 14 CATIOles ( TOTAL 434.3 394.7 355.0 330.6 273.5 10 12 soo 1 INCOME FROM OPERATIONS 117.8 131.9 139.0 130.3 125.6 (11) (2) i l NET INCOME ' 58.4 44.6 44.2 34.7 24.4 31 24 450 : Minority interest, allocated Corporate interest charges 3no ; and other 9.2 7.7 9.6 7.6 9.4 19 (1) i j Reclassification ofleasing-33 o : lending subsidiary (1.0) 1.1 .7 1.8 ] E ARNINGS CONTRIBUTION"5 50.2535.8 5 33.9 5 25.3 5 15.0 40 35 o_ 84 85 86 87 88 Identifiable assets 5 1,206 5 1,128 5 1,171 51,232 5 964 7 6 D Revenues I. Capital spending 5 172 5 90 5 156 5 216 5 129 91 7 m operating income Access lines (Thousands) 240 230 225 221 165 4 10 "E*"""8'"'"*"""" Originating messages longlines (Millions) 61.2 57.2 59.0 60.4 55.1 7 3 l Number of emphiyees 4,215 3,626 3,749 3,395 2,824 16 11 f 'Not a meaningfd number.

• Does not reflect ehmination for interest on intercompany borrowing arrangements and includes income taxes on a separate-4 company basis.

1988 COMPARED'ID 1987 Revenues increased $M million or SW

• long distance network service revenue increased $10 million or 5% due to the revenue effect of the General Com-munications, Inc. ("GCl") lawsuit sett!cment and increased intrastate message volume. Telecommunications expects FCC approval for its inclusion of the net settlement costs as an operating expense recoverable under the settlement process. A portion of long distance revenue is derived from a settlement arrangement with AT&T.

However, this settlement arrangement is currently under review and may be changed. l i

• $9 million in additional revenues were associated with consolidating the results of nonregulated communications operations, formerly accounted for as equity investees, and from growth in nonreg.ilated communications subsid-iaries.
• Network access service revenues increased $5 million primarily due to the effect of recognizing increased operat-ing expenses in setting interstate access rates which were partially offset by the effect of the reduced income tax rate.

i o (

a L L l Operating expenses increased $40 million or 10% l 1 -

• Administrative and general expense increased $23 mil! ion principally due to the accounting treatment of the GCI lawsuit settlement costs of $28 million and $2 million of development costs for customer suppon software offset l

by $10 million received in connection with lawsuit counterclaims.

• Operating expenses increased $11 million as a result of consolidating the results of nonregulated communications j

operations and $3 million from FCC-approved depreciation rate adjustments. . Earnings contribution increased $14 million or 40%

• Ihcome from operations decreased $14 million or 11% primarily due to the effects of the GCIlawsuit settlement and the effects of a reduced federalincome tax rate on revenues.

]

• Equiry in the losses of diversified activities decreased $14 million or 38% pritnarily due to $11 million of pre-tax gains from sales of two comranies and the favorable effects of discontinuing cenain operations during 1987, offset in pan by a loss from the sale of a portion of the common stock of an equity investee and the related valua-i tion adjustment to the remaining common stock interest.
• Provision for income taxes decreased $17 million or 61% primarily due to the reduction in the federal tax rate and g

the income tax benefits recognized on the sale of an equity investee's common stock. ,,,,,g,; 300 3 .t. 1987 COMPARED TO 1986 - 'i m! Revenues increased $33 million or 7%

• $31 million in additional revenues, primarily private line services, resulted from the acquisition of F1EC.
• long distance network services, excluding acquisitions, decreased $5 million due to the termination of the $15

.l million AT&T transitional supplement which was panially offset by reduced intrastate settlements with local j exchange companies for both current and prior years. long lines interstate message volume declined in 1987 and ] 1986 as the result of competition. However,in 1988 Telecommunications substantially recouped this decline, j I () 1 / e Other revenues increased $10 million largely as a result of the classification of billing and collection revenues and u as u. 87 as the deregulation of customer premise equipment. 5 Othn 5 Al.uka Operating expenses increased $40 million or 11L n racdic Nunhnst '

• Operating expenses increased $30 million due to the acquisition of FTCC.

l

• Operating expenses increased $11 million due to informational advertising in Alaska, expansion of nonregulated communications' operations and increased legal costs.

Earnings contribution rose $2 million or 6%

• Income from operations decreased $7 million primarily due to the effect of the decreased federal income tax rate on revenues.
• Interest expense dropped $6 million due to decreased levels of debt and lower interest rates.

j

• Equiryin the losses of diversified activities increased $6 million primarily as a result of Telecommunica: ions' $6 million share of Amnet's 1987 operating losses contrasted with Telecommunications' $4 million share of Amnet's favorable results in 1986, offset in part by a $2 million gain on disposal of certain diversified investments.
• Interest income rose $4 million due to the estimated effect of a regulatory commission ordered settlement of a disputed intrastate settlement issue with an Alaskan kral exchange company.

j e Provision for income taxes decreased $5 million generally due to a lower federal tax rate. O

Financial 5:rvi20s i ) Mil.1IONSOF dot 1 ARs/FOk THI Yi AR 14Ris to 19R7 comnou 1988 1987 1986 1985 cfo?Tf.% O,Y REVENUES Net financing 5 215.8 $ 129.0 $ 61.7 $ 19.5 67 % 123 % ) Other 14.0 3.4 .2 TOTAL 229.8 132.4 61.9 19.5 74 128 Interest and debt expense 115.3 58.6 34.1 9.4 97 131 NET 114.5 73.8 27.8 10.1 55 125 Depreciation and amortization 11.5 5.3 .7 .3 117 Other expenses 68.6 41.6 22.0 7.7 65 107 INCOME FROM OPERATIONS 34.4 26.9 5.1 2.1 28 154 NET INCOME 23.4 21.3 7.7 1.8 10 135 Allocated Corporate interest charges, E7d preferred dividends and other 14.8 11.3 3.6 (.6) 31 I""#'"" "#"## EARNINGS CONTRIBUTION " 8.6 5 10.0 5 4.1 $ 2.4 (14) 53 y Identifiable assets 5 2,213 $ 1,565 5 877 5 457 41 69 Capital spending 5 42 5 138 $ 34 $ 145 (70) (34) 225 : Number of employees 634 387 277 207 64 45 FINANCIAL POSITION iso : Net investment in finance receivables and leases $1,846.6 51,273.2 $816.7 5422.7 45 63 i 75 Marketable securities 125.7 139.2 (10) Other assets 268.0 180.9 68.0 39.9 48 89 g Short-term notes 662.9 480.4 354.0 195.5 38 50 85 86 87 88 i Debt due affiliates 9.3 18.5 28.1 21.3 (50) (24) 8 Rc*aue$ E Operating income long-term debt 906.0 550.9 239.2 128.3 64 92 m i:.annngs comnsunon Otherliabilities 341.3 240.2 116.8 34.7 42 114 Preferred stock 40.0 40.0 40.0 1.0 Common equity 280.8 263.3 106.6 81.8 7 51 'Not a meaningfulnumber.

• Does not reflect income taxes on a separate-company basis. PacifCorp Iinancial Services. Inc. is mmpensated for certam tax benchts regardless of when the company can utihre these benefits.

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t 1988 COMPARED TO 1987 Revem.es increased $97 million or 74 %. o Financing revenues increased $87 million or 67% primarily due to the growth in commercial computer leasing i and remarketing, aviation financing and commercial lending, offset in part by lower traditional municipal fundings.

• Other revenues increased $U million due to higher average investments in marketable securities and more stable market conditions in 1988.

Interest and debt expense increased SS7 million or 97% generally due to increased debt associated with higher investment levels. Operating expenses increased $33 million or 71% o The companies strengthened their loan loss reserves in 1988 increasing expenses by $13 million.

• Salaries increased $9 million and otheroperating expenses increased $11 million generallydue to acquisitions and internal growth.

Earnings contribution decreased $1 million or 14%

• Net income rose $2 million or 10% reflecting PacifiCorp Financial Services' increased net income of $8 million, offset in part by Telecommunications' leasing-lending business decrease of $3 million and increased equity in the losses of Equitec of $3 million.
• A valuation adjustment to the Corrpany's investment in Equitec ir. creased Corporate allocated charges to Finan-cial Services by $4 million.

1987 COMPARED TO 1986 Revenues increased $71 million or D4%.

• Financinpevenues increased $67 million or 109% due to the full-year results for PacifiCorp Capital, the acquisi-tion of Thomas Nationwide Computer Corporation on July 1,1987, and higher investment levels.

Interest and arbt expenses increased $25 million or 72 % generally due to higher investment levels. Earnings contribution increased $6 million or 144%.

• Net income rose $14 million or 177% generally due to acquisitions, higher investment levels and improved operat-ing results.
• Corporate interest allocation associated with investment costs inctrased $5 million and preferred dividends increased $2 million.

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Copert of Managenart The management of PacifiCorp has the responsibility for preparing the accompanying financial statements and for I their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is respon-sible for its accuracy and consistency with the financial statements. The Company's financial statements have been audited by Deloitte Haskins & Sells, independent certified public ) accountants. Management has made available to Deloitte Haskins & Sells all the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Management of the Company has established and maintains an internal control structure that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The internal control structure provides for appropriate division of responsibility and is continually monitored for compliance. The Company maintains an internal auditing program that independently assesses the effectiveness of the internal control struc-ture and recommends possible improvements. Deloitte Haskins & Sells also considered the internal control struc-ture in connection with its audit. Management has considered the internal auditors' and Deloitte Haskins & Sells' recommendations concerning the Company's internal control structure and has taken cost. effective actions to respond appropriately to these recommendations. The Company's principles of business conduct, publicized throughout the Company, addresses, among other things, potential conflicts of interest, compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the Chairpersons of subsidiary audit committees, management, Deloitte Haskins & Sells, and internal auditors to review the work of each and ensure that its responsibilities are being properly discharged. Deloitte Haskins & Sells and internal auditors have access to the Committee, without management present, to discuss their audit work and their evaluations of the adequacy of the internal control structure and the quality of financial reporting. Independent Auditors' Report To the Directors and Shareholders of PacifiCorp: We have audited the accompanying consolidated balance sheets of PacifiCorp and subsidiaries as of December 31, 1988 and 1987 and the related statements of consolidated income and retained earnings and of consolidated cash flows for each of the three years in the period ended December 31,1988. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate-rial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonab!e basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of PacifiCorp and subsidiaries at December 31,1988 and 1987 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1998 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements,in 1988 the Company changed its consolidation policy to conform with Statement of Financial Accounting Standards No. 94.

1. nD del.OITTE HASKINS & SELLS i artland, Oregon February 20,1989 O

Statessments of Consolidated Incesne and Roteissed Eerseings Mll. LIONS OF DOI.I.ARS/YF AR ENDFD DFCT MRI R 31 1988 1987 1986 REVENUES 53,519.3 53,277.0 $3,117.7 EXPENSES Operations and maintenance 1,439.0 1,316.9 1,355.0 Administrative and general 329.1 292.4 268.7 l Depreciation and amortization 419.0 382.6 344.4 l Taxes, other than income taxes 170.7 195.3 183.6 Financial Services' interest expense 115.3 58.6 34.0 TOTAL 2,473.1 2,245.8 2,185.7 INCOME FROM OPERATIONS 1,046.2 1,031.2 932.0 l INTEREST EXPENSE AND OTHER Interest expense 342.6 333.3 329.7 Interest capitalized (14.9) (17.2) (32.7) c:SPOSmOOdOF losses from equity and other investments 19.4 40.7 32.4 f, E " ' Minority interest and other 32.4 (10.4) 14.4 (='ll"=' o/ dolla'51 1200 : TOTAL 379.5 346.4 343.8 I income before income taxes 666.7 684.8 588.2 ,go. Income taxes 220.0 273.7 234.8 NET INCOME 446.7 411.1 353.4 ,og ; RETAINED EARNINGS, JANUARY 1 650.2 570.5 547.7 CASH DIVIDENDS DECLARED

• i Preferred stock (20.8)

(23.6) (38.7) Common stock (364.6) (307.8) (291.9) RETAINED EARNINGS, DECEMBER 31 5 711.5 5 650.2 5 570.5 86 87 ss EARNINGS ON COMMON STOCK (Net income less Z"'d['"""8' preferred dividend requirement) $ 426.0 $ 388.5 5 314.8 minanneTues Average number of common shares outstanding (Thousands) 123,205 122,220 118,328 EARNINGS PER COMMON SHARE 5 3.46 5 3.18 5 2.66 (See accompanying Notes to Consolidated Financial Statements) 9

ConseHdeled Caleno Slee:ts Mill IONS OF dol LARS/DECE MBE R 31 ASSE15 1988 1987 PROPERTY, PLANTAND EQUIPMENT Electric $ 7,248.0 $ 7,120.1 Mining and Resource Development 1,223.2 843.5 ) Telecommunications 1,422.6 1,258.0 Other 24.4 12.3 Accumulated depreciation and amortization (2,853.6) (2,534.5) Net 7,064.6 6,699.4 Construction work in progress 215.6 176.4 TOTAL PROPERTY, PLANTAND EQUIPMENT 7,280.2 6,875.8 FINANCIAL SERVICES' INVESTMENTS Marketable securities 125.7 139.2 Investment in finance receivables (less allowance PG4btf for credit losses: 1988 / 524.8 and 1987/ $i3.9) 1,134.3 835.4 Net investment in leveraged leases 241.0 200.2 j{ Net investment in equipment under operating leases 471.3 237.6 8000; TOTAL FINANCIAL SERVICES' INVESTMENTS 1,972.3 1,412.4 CURRENTASSETS 6000i ' i Cash and temporary cash investments 263.6 219.9 Accounts receivable (less allowance for doubtful 4000 l accounts: 1988 / 59.9 and 1987/$7.9) 744.3 684.2 Materials, supplies and fuel stock (at average cost) 192.5 204.9 inventory 81.2 72.9 Prepayments 41.5 45.2 i 84 85 86 87 88 TOTAL CURRENTASSETS 1,323.1 1,227.1 D CTIP OTHER ASSETS a uming a g,soo,c, Investments in and advances to affiliated companies 160.2 153.7 o D"["'g,,3,,, Cost in excess of net assets of busmesses acquired 170.8 169.9 e ucctric Deferred charges and other 489.5 463.8 TOTALOTHER ASSETS 820.5 787.4 TOTAL ASSETS $11,396.1 $10,302.7 (See accompanying Notes to Consolidated Financial Statements) 0

l~ knu tows or nonAnseorcrun a n CAplTAll7ATION AND LIABILITIES 1988 1987 COMMON EQUITY Common stock, $3.25 par value: authorized 300,000,000 shares; outstanding 1988 /123,258,733 shares; 1987/123,212,668 shares 400.6 5 400.4 Additional paid-in capital 1,851.3 1,850.1 Retained earnings 711.5 650.2 Guarantees of Employee Stock Ownership Plan borrowings (27.5) TOTAL COMMON EQUITY 2,935.9 2,900.7 1 PREFERRED STOCK 246.3 248.9 REDEEMABLE PREFERRED STOCK 56.3 56.3 - LONG-TERM DEBTAND CAPITAL LEASE OBLIGATIONS 3,441.0 3,395.4 FINANCIAL SERVICES' DEBT mm, Short-term notes payable 662.9 480.4 @<=0 "' i ~' long-term debt and capital lease obligations 906.0 550.9 i TOTAL FINANCIAL SERVICES' DEBT 1,568.9 1,031.3 75 i CURRENT LIABILITIES t i Iong-term debt and capitallease obligations currently maturing 59.8 90.5 50 ! Notes payabic and commercial paper 335.3 93.7 Accounts payable 372.1 339.2 Taxes, interest and dividends payable 308.3 312.8 25 ! Customer deposits and other 216.6 186.3 i TOTAL CURRENT LIABILITIES t,292.1 1,027.5 0' s as 86 87 :: DEFERRED CREDITS a Common Equity income taxes 959.0 829.3 " P"W S"d El financial services' Debt investment tax credits 249.3 275.6 einn Term twbr & Mining accruals and other 500.8 401.7 TOTAL DEFERRED CREDITS 1,709.1 1,506.6 MINORITY INTEREST 146.5 136.0 bMMITMENTS AND CONTINGENCIES (See Notes) TOTAL CAPITALIZATION AND LIABILITIES $ 11,396.1 510,302.7 (See accompanying Notes to Consolidated Financial Statements) - 9

d Mws i Mit IION50F Dol.1 AR$!YF AR FNDFD DFCF MBER 31 1988 1987 1986 CASH FLOWS FROM OPERATING ACTIVITIES Net income - S 446.7 5 411.1 5 353.4 Adjustments to reconcile net income to net cash I provided by operating activities Depreciation and amortization 502.4 420.0 363.9 Deferred income taxes and investment tax credits-net 50.7 95.1 229.2 Interest capitalized on equity funds (7.2) (9.2) (18.9) (Gains) losses from unconsolidated entities-net (2.9) 23.4 3.5 Gain from sale of power entitlement (88.1) Write-down of remaining WNP3 costs 66.1 Fuel adjustment F5.7 Minority interest, accrued reclamation and other 138.0 (1.9) 108.5 Accounts receivable and prepayments (3.4) (27.6) (24.1) l Materials, supplies, fuel stock and inventory (14.9) 42.1 (30.2) Accounts payable and accrued liabilities 22.9 156.7 (126.6) NETCASH PROVIDED BY OPERATING ACTIVITIES 1.132.3 1,087.7 944.4 CASH FIDWS FROM INVESTING ACTIVITIES Construction (436.6) (399.4) (449.7) Operating companies and assets acquired (393.3) (211.5) (139.7) Investments in and advances to affiliated companies (44.8) (72.3) (41.6) Proceeds from sale of assets 54.9 11.5 72.7 Financial Services Proceeds from sales of assets and principal payments 597.8 440.8 170.0 Purchase of assets (1,383.6) (1,031.1) (906.8) Changes in short-term investments (29.8) (35.0) f Other (16.6) 56.5 26.6 NETCASH USED IN INVESTING ACTIVITIES (1,652.0) (1,240.5) (1,268.5) CASH FLOWS FROM FINANCING ACTIVITIES Changes in short-term debt 236.6 (88.6) 45.0 Proceeds from long-term debt 520.5 279.3 613.2 Proceeds from issuance of common stock 1.2 97.7 122.7 Proceeds from issuance of subsidiaries' stock 2.1 41.9 .2 Proceeds from issuance of preferred stock 147.8 Dividends paid (339.3) (332.5) (329.2) Repayments of long-term debt and capital lease obligations (542.8) (250.3) (525.0) Redemptions and repurchases of preferred stock (2.2) (210.5) (137.0) Unearned revenue pursuant to bullion loans 59.7 40.0 Unearned revenue recognized (19.9) (8.0) Financial Services t Changes in short-term debt 182.0 106.5 3.4 Proceeds from long-term debt 619.5 308.1 134.2 Repayments of long-term debt (282.6) (49.1) (58.6) Proceeds from leveraged lease nonrecourse debt 147.1 188.4 465.5 Repayments of leveraged lease nonrecourse debt and deferred equity (18.5) (8.8) (3.5) NETCASH PROVIDED BY FINANCING ACTIVITIES 563.4 261.9 402.9 INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS $ 43.7 5 109.1 5 78.8 (See accompanying Notes to Consolidated Financial 5tatements) O

Notes to Consolidated Fiseencial Statessnesets Decomeber 01, ILO, IL'_,7 and 1C 86 NorFE 1.

SUMMARY

OF SIGNIFICANTACCOUNTING POLICIES 1 l Basis of Presentation OnJanuary 9,1989, PacifiCorp merged with Utah Ibwer & Light Company ("UP&L")in a business combination accounted for as a pooling of interests (see Note 2). Separate audited financial statements of PacifiCorp and UP&L for the appropriate periods ended December 31,1988 have been filed with the Securities and Exchange Commission. The accompanying consolidated financial statements have been restated to include the 1 accounts of UP&L, reclassif;cd to conform to PacifiCorp's presentation, for all periods presented. These restated financial statements will now be the primary financial statements of PacifiCorp (the " Company") and its subsidi-

aries, in accordance with the Statement of Financial Accounting Standards (FAS) No. 94-Consolidation of All Majority-Owned Subsidiaries, effective December 31,1988, the Company changed its consolidation policy. The consolidated financial statements n,w contain the accounts of the Financial Services businesses formerly reported on the equity method. The 1987 and 1986 consolidated financial statements and related footnotes have been restated to reflect this change. The restatement had no effect on the Company's common equity, net income or earnings per share. Summary financial information is reported in the table on page 40 of this report.

The consolidated financial statements of the Company encompass two businesses primarily of a utility nature-Electric Operations (Pacific Power and Utah Power) and an 87% owned Telecommunications operation (Pacific Telecom,Inc.), a 90% owned Mining and Resource Development business (NERCO, Inc.), including a 50% inter-est in the assets, liabilities and results of operation >: of a commercial coal mining joint venture, and two leasing-lending subsidiaries referred to as Financial Services (PacifiCorp Financial Services, Inc. and Paccom leasing Corporation). Together these businesses are referred to herein as the Companies. Significant intercompany transac-tions and balances have been eliminated. The financial activity of each of the above segments is separately reported in the tables on pages 34,36,38 and 40 of this report. Such information is an integral part of these financial statements. The Company's proportionate share ofincome or loss from equity investments and certain majority-owned invest-n.ents, where control is expected to be temporary, is included in losses from equity and other investments. Regulatory Authorities Accounting for the utility businesses conforms with generally accepted accounting princi-ples as applied to regulated public utilities ad as prescribed by federal agencies and the commissions of the various states in which the utility businesses operate. Cash and Temporary CashIm'estments For the purposes of these financial statements, the Company considers all liquid investments with matrMs of three months or less to be cash equivalents. Marketable Securities Equity securities are carried at their lower aggregate cost or market, and other investments are carried at cost, which approximates market. Realized gains and losses on equity securities are determined by specific identification. Income from interest and dividends on investments is recognized when earned. Property, Plant and Equipment Property, plant and equipment are stated at original cost of contracted services, direct labor and material, interest capitalized during construction and indirect charges for engineering, supervision-and similar overhead items. The cost of depreciable utility propenies retired, including the cost of removal, less salvage, is charged to accumulated depreciation. Depreciation and Amortization Depreciation is computed generally by the straight-line method over the esti-mated useful lives of the related assets. Provisions for depreciation (excluding amortization of capital leases)in the utility businesses were 3.9% of average depreciable assets in each of the years presented. The cost in excess of net assets of consolidated businesses acquired is generally being amortized over 15 to 40 years. Finance and lease Income Recognition Interest revenue on lending transactions is recognized on an accrual basis commencing in the month of origination using methods that generally approximate the stated interest rate for the transaction. Direct financing lease revenue is recognized as a constant percentage return on asset carrying values. Operating lease revenue consists of periodic rentals, primarily monthly. The cost of equipment under operating lease is depreciated on a straight-line basis over the lease term. leveraged lease revenue is recorded so as to produce a constant yield on the outstanding investments in periods when the Company's net investment in the lease is positive. O

i i I AllowanceforCreditlosses Allowance for credit losses is maintained at a level considered adequate to provide for potential credit losses based on management's assessment of various factors affecting the investment in finance receivables. Inventory Valuation Inventories are generally valued at average cost or market, whichever is lower. 7 nterest Capitalized-Costs of debt and equity funds applicable to utility properties are capitalized during con-I I struction. Generally, the composite capitalization rate used was 10.3% for 1988,10.5% for 1987 and 11.6% for '1986. Income Taxes Electric Operations provides deferred taxes for differences due to book versus tax depreciation lives and methods and certain other timing differences. Telecommunications' regulated operations have provided deferred taxes for all timing differences since 1987. Prior to 1987, deferred taxes were not provided for certain costs which were capitalized. Deferred income taxes are not provided for certain other differences in the utility business. l It is expected that regulatory practices affecting the utility businesses will permit recovery through revenues of l? income taxes, not provided for currently, when such taxes become payable. 1 ( Deferred income taxes are provided for all timing differences in the Mining and Resource Development, Telecom-munications nonrate regulated and Financial Services operations. Investment tax credits are deferred and amortized in accordance with the accounting practices prescribed by regula-tory authorities. Investment tax credits generated before 1981 by Pacific Power were deferred and amortized to reduce income tax expense. Investmerit tax credits generated after 1980 by Pacific Power are deferred and are amor-tized to nonutility income over the average estimated lives of the property. Investment tax credits generated by Ut ih Ibwer and Telecommunications are deferred and amonized to operating income over the average estimated lives of the property. Mining and Resource Development's and other nonregulated operations' investment tax credits flow through to income in the year the credits are recognized in the financial statements. Revenue Recognition The Company accrues estimated unbilled revenues for services provided after cycle billing through month-end. Reclassification Certain amounts from prior years have been reclassified to conform with the 1988 method of presentation. NOfrE 2. MERGER AND ACQUISITIONS On January 9,1989, PacifiCorp and UP&L were merged in a business combination accounted for as a pooling of interests. As a result of the merger, each outstanding UP&L common share was converted into.909 shares of the Corapany's common stock, $3.25 par value, or an aggregate of approximately 53,526,000 shares after consider-ation of fractional shares paid in cash. As stipulated in the merger agreement, the conversion ratio was based on the . average market price of PacifiCorp common stock during a 10-day trading period. Each UP&L preferred share as to nich dissenters' rights had not been perfected was converted into one share of the Company's No Par Serial Pre-ferred Stock bearing the same dividend rate as the share converted. The separate pre-merger operating results of PacifiCorp and UP&Lwere: MILiloNsof DOllARsdoR1HE YEAR 198R 1987 1986 Pacifi. Pacifi-Pacifi-Corp UP&L Corp UP&L Corp UP&L Revenues'" $2,495.0 $1,027.9 $2,296.5 $982.8 $2,134.1 $984.9 Net income 286.1 160.6 266.3 144.8 250.9 102.5 Earnings on common stock 268.5 157.5 248.6 139.9 230.7 84.1

• Elimination of revenue from power sales between Pacit. Corp and 'UP&l.was 53.6 million in 1988,52.3 million in 1987 and 51.3 million in 1986.

During 1988, the Companics purchased producing and developmental oil and gas properties for $284 million and acquired a company which provides a broad range of international and domestic telecommunications services for $92 million. The acquisitions were recorded using the purchase method of accounting and are included in these financial statements since the dates of acquisitions. Including the results of operations for these acquisitions on a pro forma basis would not have a material effect on the Company's reported results of operations. O

NUTE 3. FINANCIAL SERVICES

• INVESTMENTS Fiaance Receivables initial payment terms of finance receivables are generally from two to five years. Net finance receivables include amounts for unearned income which are deferred and amortized over the term of the respective receivables so as to produce a constant rate of return.

Contractual maturities of finance receivables outstanding at December 31,1988 were as follows: MilllONs oF Doll ARs/ tor THE YE AR 1989 1990 1991 1992 1993 Thereafter Direct finance leases $212.0 $138.7 $105.5 5 67.6 5 38.2 5 45.8 Other finance receivables 379.4 41.9 48.3 68.7 28.7 98.6 TOTAL FINANCE RECEIVABLES $591.4 $180.6 $153.8 $136.3 $ 66.9 $144.4 The estimated unguaranteed residual value ofleased equipment included in finance leases was $55 million and $56 million at December 31,1988 and 1987, respectively. At the end of the lease period, the lessee usually has the option to buy the equipment. Unearned income related to leases was $114 million and $113 million at December 31,1988 and 1987, respectively. Inre.stment in Leveraged bases Financial Services' investment in leveraged leases was as follows: MillioNsoF Dol.1 AR$/Dt(1 miter 31 1988 1987 Minimum lease payments receivable (net of principal and interest on third party nonrecourse debt) $189.5 $163.1 Estimated unguaranteed residual value ofleased assets 127.8 106.0 Deferred income and investment tax credits (76.3) (68.9) NET INVESTMENT IN LEVERAGED LEASES $241.0 $200.2 Deferred income tax liability arising from leveraged leases was $151 million and $100 million at December 31,1988 and 1987, respectively. On certain leveraged leases, Financial Services has obligations to make subsequent equity investments. The present value of these obligations is shown as a liability and as a corresponding increase in investment in leveraged leases. ) Equipment Under Operating bases Financial Services' net investment in equipment under operating leases was $471 million and $238 million after deduction of $83 million and $44 million for accumulated depreciation at ) December 31,1988 and 1987, respectively. ) NOTE 4. SilORT-TERM BORROWING ARR ANGEMENTS The Companies' borrowing arrangements are as folk >ws: Mit.lloNsof Doll ARs/tH(i mbt R 31.19MR PACIHCORP SUB5IDIARIES Bank revolving credit and term loan agreements $300 $1,298 Commercial paper 325 1,000 Lines of credit 25 f At December 31,1988, pacifiCorp had outstanding $195 million of commercial paper. Borrowings under bank lines, the revolving cn lit agreement and cnmmercial paper may not exceed $325 million at any one time. Cove-nants in the $300 million revolving credit agreement limit short. term borrowings to 12% of defined capitalization (limiting such borrowings to approximately $660 million at December 31,1988). Subsidiaries had $327 million bank loan and commercial paper capacity available at December 31,1988. Commitment fees were approximately $2 million in 1988 and $3 million in both 1987 and 1986. s

NOTE 5. COMMON AND PREFERRED STOCK Changes in shares of capital stock and the excess of net proceeds over par or stated value credited to additional paid-in capital are listed below. A!! common stock activity for 1986,1987 and 1988, prior to the merger, has been tdjusted to reflect the exchange ratio. THOUSANDS of $HAkt $/ Mll1.loNS OF Do!.l. ARS SilARES 5 HARES ADDITIONAL COMMON PREFERRED PAID-IN STOCK STOCK CAPITAL. BALANCE, JANUARY 1,1986 116,395 13,055 51,655.8 1986 issuance under Employees' Stock Plans 356 8.2 Sales through Dividend Reinvestment and Stock Purchase Plans 3,350 99.7 Redemptions and repurchases (4,178) (.6) BALANCE, DECEMBER 31,1986 120,101 8,877 1,763.1 paymmenn 1987 Issuance under Employees' Stock Plans 286 7.7 N Sales through Dividend Reinvestment (mahons o/domm) and Stock Purchase Plans 2,826 79.0 80 i Sales to public 1 (1.4) Redemptiora and repurchases (5,376) 1.7 60 ; BALANCE, DECEMBER 31,1987 123,213 3,502 1,850.1 1988 Issuance under Employees' Stock Plans 46 1.1 4o j Redemptions and repurchases (28) Treasury shares - 20 l Purchased (80) (2.5) Reissued 80 2.6 BALANCE, DECEMBER 31,1988 - 123,259 3,474 51,851.3 84 85 86 87 88 At December 31,1988, there were 2,121,317 authorized but unissued shares of common stock reserved for issuance { under the Dividend Reinvestment and Stock Purchase Plan. Eligible employees may participate in the K Plus Employee Savings and Stock Ownership Plan. Under the plan, employees may purchase Company stock with pre-tax contributions, and the Company will make contributions not to exceed 6% of the participant's annual compen-( sation. Shares purchased for participants under the plan are acquired in the market. Dcring 1986 and 1987, the Company continued its recapitalization program begun in 1984. When market and I economic conditions were favorable, the Company, from time to time, repurchased shares of various series of pre- ] ferred stock. The par value and any premium or discount on such preferred shares w ere removed from total capitali-zation. In accordance with regulatory orders, gain or loss on the repurchase of these shares has been deferred and, beginning in 1988, is being amortized through rates over a five-year period. At December 31,1988, the net loss deferred was $23 million. Generally, preferred stock is redeemable at stipulated prices plus accrued dividends, subject to certain restrictions. Upon involuntary liquidation, all preferred stock is entitled to par or stated value per share. O

• N$$$$UNENE!Yi$h!T$IEEI50 1988 1988 1987 1987 SERIES SHARES AMOUNT SilARES AMOUNT SUBJECT TO MANDATORY REDEMITION SERIAL PREFERRED $100 PARVALUE PER SHARE,3,500 SHARES AUTHORIZED 9.15%

63 $ 6.3 63 5 6.3 ] NO PAR SERIAL PREFERRED,16,000 SHARES AUTHORIZED $7.12 ($100 stated value) 500 50.0 500 50.0 TOTAL SUBJECT 10 MANDATORY REDEMITION $ 56.3 $ 56.3 NOT SUBJECT TO MANDATORY REDEMITION SERIAL PREFERRED $100 PARVALUE PER SHARE,3,500 SHARES AUTHORIZED 4.52 % 2 5 .2 2 .2 4.56 % 85 8.5 85 8.5 4.72 % 70 7.0 70 7.0 j 5.00 % 42 4.2 42 4.2 5.40 % 66 '6.6 66 6.6 6.00 % 6 .6 6 .6 ' 7.00% 18 1.8 18 1.8 j 7.96 % 139 13.9 150 15.0 8.92 % 70 7,0 76 7.6 9.08 % 169 16.9 176 17.6 l 5% PREFERRED, $100 PAR VALUE,127 SH ARES AUTHORIZED AND OUTSTANDING 127 12.7 127 12.7 NO PAR SERIAL PREFERRED,16,000 SHARES AUTHORIZED $1.16 ($25 stated value) 200 5.0 200 5.0 $1.18 ($25 stated value) 480 12.0 480 12.0 $1.28 ($25 stated value) 400 10.0 400 10.0 $1.76 ($25 stated value) 400 10.0 400 10.0 $1.98 ($25 stated value) 520 13.0 520 13.0 $2.13 ($25 stated value) 679 16.9 683 17.1 Dutch Auction Rate Transferable Securities" ($100,000 stated value)'" 1 100.0 1 100.0 TOTAL NOT SUBJECT TO MANDATORY REDEMITION $246.3 $248.9 '" At December 31,1988, the dividend rates on the 500 shares of Series A and 500 shares of Series B were 8.1% and 7.79%, respectively. ' Mandatory redemption requirements at par value plus accrued dividends on the 9.15% Serial Preferred Stock are i 31,250 shares annually beginning in 1989 and on the $7.12 No Par Serial Preferred Stock are 15,000 shares annually I beginning in 1993. If the Company is in default in its obligation to make any such purchases,it may not pay cash dividends on common stock. O

NOTE 6. LONG-TERM DEBTAND CAPITAL LEASE OBLIGATIONS The Company's long-term debt and capitallease obligations were as follows: Mll.l.lONS OF DOLi ARh/DLCFMBER 31 1988 1987 FIRST MORTGAGE BONDS Maturing 1989 through 1993 /4V2%-SVs% $ 138.0 $ 170.5 Maturing 1994 through 1999/4% 9 %%'" 327.4 327.4 Maturing 2000 through 2004/7V2%-11.2% 244.4 281.2 Maturing 2005 through 2017/6%%-13% 1,066.2 1,147.4 GUARANTY OF POLLUTION CONTROL REVENUE BONDS Variable rate due 2011 through 2016* 258.2 258.3 6%-8V2% due 2003 through 2005 36.9 36.9 5.9 11Ve% due 2004 through 2017* 311.0 311.0 Funds held by trustees (84.1) (94.7) EMBEDDED OTHER CDST OF Eurodollar loan agreement 25.0 25.0 7.50% Debentures due 1991 70.0 70.0 (Percent) 12 3 Term loan agreement due 1994

• 55.0 55.0 2%-12.4% First mongage notes and bonds maturing through 2021 135.5 139.3 l

Unsecured 6 12% notes due through 2007 65.5 73.7 9l l Unsecured domestic credit agreement ** 20.0 20.0 l Commercial paper *** 345.4 221.2 6%-11.25% Notes due through 2002 12.1 29.9 i 6i Promissory notes due 1989-2000'* 101.4 78.6 13W% Unsecured notes 140.0 3! l 8.5 10.11% Medium-term notes due through 1995 160.9 Irveraged ESOP loan guarantees"" 27.5 o:84 85 86 87 88 Unamortized premium and discount (16.7) (21.1) Capitallease obligations (Note 7) 201.2 216.3 l TOTAL 3,500.8 3,485.9 Less current maturities 59.8 90.5 I LONG-TERM DEBT $3,441.0 $3,395.4 FINANCIAL SERVICES 7.5%16.77% Nonrecourse debt due through 2027 $ 144.2 92.6 I 7.14 10.97% Senior debt due through 1993 447.8 328.3 8.5%-10.5% Senior subordinated debt due through 1998 77.3 35.2 10 10.45% Junior subordinated debt due through 1998 69.5 21.0 Commercial paper *"" 165.0 70.0 { Capitallease obligations (Note 7) 2.5 4.2 Discount on long-term debt assumed (.3) ( 4) 1 TOTAL $ 9'.)6.0 $ 550.9 i m includes 550 million in 9%% bonds issued to secure obligations under an equivalent 10-year yen loan. A currency swap con-verted the fixed rate yen liability to a floating rate U.S. dollar lialility based on six-month LIBOR plus.02% (interest rate 8.52% at December 31,1988.)

• Through December 31,1988, the Companies have effectively fixed the rate on $495 million through 22 interest rate exchanges which have niaturities of one to nine years. The rates fixed through such exchanges approximate 6.6% to 13.1%.
• Secured by pledged first mortgage bonds generally at the same interest rates, maturity dates and redemption provisions as the iccured pollution control revenue bonds.

'* Interest rates fluctuare based on various rates, primarily on certificate of deposit rates, interbank borrowing rates or prime rates.

• The Company has the abihty to support commercist paper borrowings and current debt being refinanced on a long-term basis through subsidiaries
• revolving lines of credit and term loan agreements and therefore, based upon management's intent, has classified these borrowings as long-term debt.

'* Guarantees of debt associated with the levecaged ESOP Trust established under the PacifiCorp K Plus Employee Savings and Stock Ownership Plan. The debt was used to acquire 1,059,613 shares of the Company's common stock. Common equiry has been reduced and long-term debt has been increased by the amount of the debt guaranteed.

Substantially all of the Companies' assets secure long-term debt. First mortgage bonds of the Company may be issued in amounts limited by property, earnings and other provisions of the mortgage indentures. ' Nonrecourse long-term notes are secured by assignment of certain finance receivables as collateral. The noteholders i have no additional recourse to the Company. j Subordinated long-term debt is subordinated to senior short-term notes and senior long-term debt. junior subordi-

nated debt is further subordinated to senior subordinated debt.

] Maturity and sinking fund requirements on all long-term debt, alllong-term capitallease obligations and redeem-able preferred stock outstanding are as follows: Mll1 ton 5 OF DOli.AR5 GOR THE YL AR 1989 1990 1991 1992 1993 Totai requirements ' 5301.1 5277.1 5478.4 5235.8 5177.2 Portionof totalpayableincash 297.2 273.1 474.7 232.9 175.1 [ Propeny additions certifiable in lieu of cash

• 6.4 6.4 5.7 4.9 3.6
• Certain cash sinking fund requirements may be satisfied on the basis generally of 60% of property additions.

During 1988, the Companies repurchased or defeased certain long-term debt as follows: 581.2 million of the 590 million First Mortgage Bonds 13% series due 2012; 537 million of the 550 million First Mortgage Bonds adjustable rate series due 2002; and $140 million of 13.25% notes. The Company's Mortgages and Deeds of Trust, as supplemented, relating to its long-term debt, restrict the pay- . ment of cash dividends and other distributions on common stock. At December 31,1988, the Company's retained l earnings available for these purposes were 5627 million. The Company madt interest payments, net of capitalized interest, of $418 million,5362 million and $364 million in 1988,1987 and 1986, respectively. NUTE 7. LEASES l The Companies lease certain properties, including the Wyodak coal-fired generating plant, under leases expiring }' during the next 18 years. Rentals on lease renewals are subject to negotiation. Certain leases provide for options to I purchase at fair market value. The Companies are also committed to pay all taxes, expenses of operation (other l than depreciation) and maintenance applicable to the leased property. Property, plant and equipment include the following amounts for leases which have been capitalized: MilllONs OF DOLL.ARs/DECE MH R 31 1988 1987 ' Electric $185 5185 [ Mining and Resource Development 45 49 Telecommunications 45 45 275 279 Irss accumulated amortization 92 80 $183 5199 lease amortization expense is included in depreciation expense except for Electric Operations. Consistent with state regulators' treatment for Electric Operations rate-making purposes, an amount equal to the annual lease pay-3 ments is included in rent expense. lmputed interest components and amortization components of those lease pay-( ments approximated $12 million and SS million in 1988,513 million and 55 million in 1987 and $12 million and 56 million in 1986. f' ) e

MINIMUM RENTALS UNDER NONCANCELLABLE LEASES Mil.lloNs oF Dot.L AR5/ DEU Mht R 31,1938 OPERATING CAPITALIZED LEASES LEASES f 1989 $ 62.4 5 34.1 l 1990 39.5 35.8 ( l 1991 34.9 20.7 1992 31.3 20.5 1993 20.6 20.4 Thereafter 66.7 192.8 TOTAL $255.4 324.3 l less imputed interest 120.6 Present value of minimum rental payments 203.7 Less current portion 18.6 ( LONG-TERM CAPITAL LEASE OBLIGATIONS $185.1 Net rent expense,it.cluding Electric Operations' rent expense attributable to capitalized leases, for the years ending ')ecember 31,1988,1987 and 1986 was $83 million, $81 million and $84 million, respectively. l NOTE 8. COMMITMENTS AND CONT 1NGENCIES [ Construction and Other Construction programs are estimated at $673 million for 1989. As a part of these pro-grams, substantial commitments have been made. Telecommunications has contracts for the construction of a fiber optic cable, with its share of the cost expected to range from $235 to $ 250 million, and a replacement satellite, with its share of the cost expected to be $83 million. Estimated 1989 construction expenditures include $54 million of such costs. Electric Operations has agreed to purchase from an unaffiliated supplier 1.28 million tons of coal per year over the next 24 years. Telecommunications is committed through 1991 for telemetry, tracking, control and protection services for its existing sate!!ite at a cost of approximately $11 million per year. { In connection with certain option provisions contained in its partnership agreements, Pacific Development, Inc. may be obligated to purchase the other partners' interests at various times through 1992 for an aggregate of approxi-mately $65 million. The Company and its subsidiaries are parties to various legal claims, actions and complaints, certain of which involve material amounts. Although it is impossible to predict whether or not the Company and its subsidiaries will [ ultimately be successful in these legal proceedings or, if not, what the impact might be, management presently believes that disposition of these matters will not have a material adverse effect on the Company's consolidated results of operations. k O A

JointlyOwnedanc leasedPlant At December 31,1988, Electric Operations

• participation in plants jointly owned cnd jointly leased w is as follows:

q Mll1.loNS of IX)l.1 ARs ELECTRIC PLANT CONSTRUCTION d OPERATIONS' IN ACCUMULATED WORK IN SHARE SERVICE DEPRECIATION PROGRESS JOINTLYOWNED PLANTS Centralia 47.5 % $157.8 5 76.6 $ 1.0 Jim Bridger Units 1,2,3 and 4 66.7-690.8 191.9 13.6 Trojan 2.5 17.2 6.4 1.3 Colstrip Units 3 and 4 10.0 197.8 25.9 .1 Hunter Unit 1 93.8 248.6 61.1 .8 Hunter Unit 2 60.3 158.0 33.4 .6 l JOINTLY LEASED PLANT Wyodak 80.0 250.2 44.6 .8 i ENERGY Under the joint agreements, each participating utility is responsible for financing its share of construction, operat-SOURG ing and leasing costs. Electric Operations' portion is recorded in its applicable operations, maintenance and tax m accounts. Consolidated revenues include coal sales to the Jim Bridger Power Plant joint-venture partner of $42 milhon in 73 l 1988,541 million in 1987 and $48 million in 1986. ~ i i Substantial amounts of power are purchased f.om several hydroelectric projects under long-term arrangements with so ! a f public utility districts. These purchases are made on a " cost-of-service" basis for a stated percentage of project out- ~ l l l - put and for a like percentage of project annual costs (operating expenses and debt service). These costs are included c [ 25 l in operations expense. Electric Operations is required to pay its portion of the debt service, whether or not any power is produced. The arrangements provide for nonwithdrawable power and most of them also provide for addi-tional power, withdrawable by the districts upon one to five years' notice. For 1988, such purchases approximated oil i I 84 " 8' 87 88 3.9% of energy requirements; an additional 6.9% was obtained through other purchase and ret interchange "8 ~ arrangements. ra E Hydro Purchase At December 31,1988, Electric Operations' share of long-term arrangements with public utility districts was as a co,3 follows: GENERATING YEAR CONTRACT CAPACITY PERCENTAGE ANNUAL FACILITY EXPIRES (KW) OF OUTPUT COSTS

• Wanapum 2009 155,444 18.7

$3.7 Priest Rapids 2005 109,602 13.9 2.7 Rocky Reach 2011 64,297 5.3 1.4 Wells 2018 54,198 7.0 1.3 TOTAL $ 9.1 "' Annual costs, stated in millions, include debt service of 54.8 million. The Company has transfered 21% of its 25% interest in the Intermountain Power Project (" Project"), located in central Utah, to other Project participants. The Company and the City of Los Angeles have agreed, subject to neces-sary city approval, that the City will purchase capacity and energy from Company plants equal to the Company's remaining 4% entitlement of the Project at a price equivalent to 4% of the expenses and debt service of the Project. The Company remains contingently liable for any obligations not discharged by the other participants. Upon the fulfillment of certain conditions, including refunding of approximately $ 50 million of bonds issued to finance the Project (which the Company may request at its expense), this contingent obligation will be discharged. ) O t

NOFE 9. INCOME TAXES The Company's effective combined state and federalincome tax rate was 33% in 1988 and 40% in 198[and 1986. The difference between taxes calculated as if the statutory federal tax rate of 34% in 1988,40% in 1987 and 46% in ' 1986 were applied to income before income taxes and the recorded tax expense is reconciled as folknvs: MililoNS of IK)t t '.R$/ FoR THE ) L AR 1988 1987 1986 } COMPUTED FEDERAL INCOME TAXES $226.7 $273.9 $270.6 REDUCTION IN TAX RESULTING FROM Interest capitalized during construction .5 2.0 13.5 Deficiency of tax over book depreciation (flow-through basis) (11.7) (8.4) (7.1) investment tax credit i1.9 20.4 24.9 l Depletion 5.7 11.6 10.7 Effect of items taxed as capital gains (.6) 1.0 2.6 Insses (income) from equity investments 5.2 (4.6) (1.3) EFFECTIVE Other items capitalized and miscellaneous differences 18.0 (.7) 5.8 INCom45 TAX RATE Federal tax reductions 29.0 21.3 49.1 (pment) i FEDERAL INCOME TAX 197.7 252.6 221.5 STATE INCOME TAX, NETOF FEDERAL INCOME TAX BENEFIT 22.3 21.1 13.3 TOTAL INCOME TAX EXPENSE $220.0 $273.7 $234.8 INCOME TAX EXPENSE CONSISTS OF THE FOLIDWING TAXES CURRENTLY PROVIDED Federal $163.7 $161.6 $ 5.2 35 : State-20.2 17.0 1.8 DEFERRED INCOME TAXES 3n i 4 Depreciation differences 36.3 46.6 62,9 84 85 86 87 88 j Mining development and exploration costs 3.9 1.6 1.4 Abandoned nuclear projects (4.4) (33.4) 106.5 Inss on reacquired debt 19.7 Disputed coal contracts (12.0) 11.1 Sale of contract entitlement (37.6) 37.6 Irasing income recognition differences 73.5 57.8 43.2 Fuel adiustment (1.5) 43.5 (42.0) Other (22.9) (10.6) 27.5 INVESTMENT TAX CREDITS / NET (11.2) (36.0) (2.5) TOTAL INCOME TAX EXPENSE $220.0 $273.7 $234.8 Deferred income taxes have not been provided on certain book and tax timing differences as the method of rate-making is based on taxes currently payable, and it is expected that there will be recovery of future taxes through revenues. At December 31,1988, accumulated timing differences for which deferred taxes have not been provided amounted to approximately $1.4 billion. The Company made income tax payments of $156 million, $52 million and $89 million in 1988,1987 and 1986, respectively. D) ___-_-_-_______-_____-_a

l i NOTE 10. RETIREMENT PLANS ) The Companies have pension plans covering substantially all of their employees. Benefits under these plans are I generally based on the employee's years of service and average monthly pay in the five consecutive years of highest pay out of the last ten years, with adjustments, except for Utah Ibwer, to reflect benefits estimated to be received from Social Security. Pension costs are funded annually by no more than the maximum amount of pension expense which can be deducted for federal income tax purposes. At December 31,1988, plan assets were prirnarily invested in common stocks, bonds and U.S. government obligations. The Company also has a nonqualified plan for certain management employees that provides for benefit payments based on final salary upon retirement or death. The plan is being funded by Company-owned life insurance on the lives of plan participants. As a result of regulatory orders, the Company defers all benefits and costs under the plan, and maintains sufficient life insurance related to the plan such that the present value of the life insurance proceeds will at least equal the present value of all plan costs and prem ums on the life insurance. At December 31,1988 and 1987, accumulated deferred benefits and costs, net of accumulated insurance proceeds, amounted to $80 million and $55 million, respectively, which are included in deferred charges in the accompanying balance sheets. The life insurance policies which have total cash surrender values at December 31,1988 and 1987 of $41 million and $34 million, respectively, are not considered to be assets of the plan for purposes of determining net periodic cost. Effective January 1,1987, the Company changed its method of accounting for pension costs to conform with FAS No. 87," Employers' Accounting for Pensions." The change did not have a material effect on operating income. Unfunded prior service costs are amortized over the remaining service period of employees expected to receive bene-fits. Net pension cost is summarized as follows: Mit floNs of IMM LARh/FoR THE YEAL 1988 1987 Service cost-benefits earned $ 17.1 $ 14.3 Interest cost on projected benefit obligation 52.7 48.4 Actual gain on plan assets (43.1) (11.0) Net amortization and deferral 9.0 (23.7) Regulatory deferral" (14.8) (11.0) Net pension cost $ 20.9 $ 17.0 " Utah Power has received accounting orders from its regulators to defer the difference between pension cost as determined in accordance with FAS 87 and that determined for funding purposes. O

( i The funded status and net pension liability and significant assumptions are as follows: l MILLloNS of DOLL ARs/DECEMB1 R 31 { PLANS WITH PLANS WITH ASSETS IN EXCESS OF ACCUMULATED BENEFITS .l ACCUMULATED BENEFITS IN EXCESS OF ASSETS 1988 1987 1988 1987 Actuarial present value of benefit obligations ( Vested benefit obligation $ 214.1 5 189.9 $ 255.6 5 220.8 { Accumulated benefit obligation 219.7 203.8 277.0 262.9 l I Projected benefit obligation 299.5 280.3 356.2 385.6 Plan assets at fair value, primarily listed stocks and bonds 336.3 300.1 166.6 153.9 Assets in excess of (or less than) projected benefit obligation 36.8 19.8 (189.6) (231.7) i Unrecognized prior service costs (5.2) Unrecognized net loss (gain) .4 22.5 (35.9) 9.1 Unrecognized net (asset) obligation at January 1, being amortized (wer 7 to 22 years (38.0) (4.t.3) 164.8 173.9 Net pension liability $ (6.0) $ (60.7) $ (48.7) - Discount rate 8-9% 8-9% 8.75-9 % 8% I Expected long-term rate of return on assets 8-9% 8-9% 8% 8-9% Rate of increase in compensation levels 6% 6% 5-6.5% 4.25-6.5 % i in 1986, prior to the adoption of FAS No. 87, pension expense was $18 million. The Companies provide health care and life insurance benefits for their retirees on a basis substantially similar to those who are active employees. The cost of these benefits, which is charged to expense as incurred, was $6 million in 1988, $7 million in 1987 and $6 million in 1986. l NOTE 11. GAIN FROM SALE OF POWER ENTITLEMENT In jnne 1987, Pacific Power sold its rights to receive electric power from Bonneville Ibwer Administration ("BPA"), under the terms of an exchange agreement, to Sacramento Muaicipal Utility District. Pacific Power received these entitlement in a settlement between the Company and BPA resolving litigation over the Company's obligation to participate further in the construction of Washington Public Pbwer Supply System Unit 3 ("WNP3"). The gain of $88 million from the sale of the entitlement was recorded in income during 1987. The related income tax expense i was $37 million. { t i -__ J

{ NOTE 12. WRITE-DOWN OF NUCLEAR PROJECTCOSE in view of the competitive energy environment and the pressure to keep electric prices low,it was no longer feasible in the Company's judgment to anticipate future price increases to allow recovery of nuclear project costs, beyond j those that had been already allowed. As a result,in June 1987, the Company charged to income the remaining 566 l million of costs associated with WNP 3. The related reduction ofincome tax expense was $25 million. l i ) NOTE 13. FUEL ADJUSTMENT Utah Ibwer agreed to provide price reductions to customers of approximately $86 million over a seven-year period ) commencing in 1987. The agreement settled allegations that from 1982 through 1985 customers had been over-charged due to inefficiencies, waste and mismanagement by Emery Mining Corporation, the former mine operator, and foi inadequate oversight by Utah Ibwer. These reductions, which reduced 1986 net income by $44 million, have no effect on net income in years subsequent to 1986. I 1 i ) I ) ) ) ) ) 1

i paresters i o . Charles M. Binkley,68 Stanley K. Hathaway,64 Eugene L. Shields,69. President and Chief ' Partner President Executive Officer ' Hathaway, Speight, Kunz, Shields Bag & Printing Co. Alaska Riverways,1nc. Trautwein & Barrett Yakima, Washington ) ' Fairbanks, Alaska Cheyenne, Wyoming 1979

• I' ' '

I'I Robert A.Skotheim,56 C.M. Bishop, jr. 64 Betty E. Hawthorne,68 Director . President Dean Emeritus Henry E. Huntington i Pendleton. Woolen Afills College cf Home Economics Library krtland, Oregon Oregon State University San Maring California 1970 Corvallis, Oregon 1984 ) I'7' Richard C. Edgley,53. A.W. Sweet, 69 Managing Director, William D. Hendry,68 Chairman Emeritus Finance and Records Former President and Western Bank 7he Church ofJesus Christ ChiefExecutive Officer Coos Bay, Oregon ofLatter-day Saints Household Finance 1979 l Salt Lake City, Utah Corporation Don M. Wheeler,60 j 1987. Pasadena, California President and General 1986 Don C. Frisbee,65 Manager Chairman Philip H. Knight,51 Wheeler Machinery PacifiCorp . President and Chairman Company krtland, Oregon NIKE, Inc. Salt Lake City, Utah 1966 Beaverton, Oregon 1989 I# A.M. Gleason,58 Nancy Wilgenbusch,41 .i President and Chief Michael O. lxavitt,38 President Executive Officer President and Chief Marythurst College PacifiCorp Executive Officer Marythurst, Oregon krtland, Oregon The Iravitt Group 1986 1988 Salt Lake City, Utah -) Royr... Young,68 y9g9 John C. Hampton,63 Director i Chairman and Chief John A. Lindquist, Sr. 69 Officefor Natural Executive Officer Chairman of the Board Resources klicy Hampton Resources, Inc. Lindquist & Sons Oregon State University l krtland, Oregon Salt Lake City, Utah Corvallis, Oregon l 1983 1989 1974 ' Louis B. Perry,71 Retired Chairman StandardInsurance Company i krtland, Oregon l 1969 + Year elected to board. i i I -O J

OHie:rs l PACIFICORP PACIFIC POWER PACIFICORP POLICY GROUP FINANCIAL SERVICES Paul G. lorenzini,46 Executive Vice President Steven E Raioth,41 1987 Executive Vice President a + and Chief FinancialOfficer 1970 Robert W. Moench,62 1 Executive Vice President 1951 James K. Chiu,38 Senior Vice President ( UTAH POWER 1988 fx*fc f {e Frisbee,65 Frank vis,64 jl"j 'u it e r resident Gary V. Hayward,52 1969 Senior Vice President and Pacif Corp Utah Ibwcr + 1953 1948 Chief Credit Officer 1966 Robert M. Smith,60 Executive Vice President 4 1930 William J. Glasgow,42 W .A Senior Vice President and General Counsel Veri R. Topham, 54 I988 Executive Vice President N PACIFICORP t t CORPORKFE GROUP Harry A. Haycock,53 A.M. Gleason, 58 Lawrence E. Heiner,50 Senior Vice President Robert E Lanz,46 Vice President and Treasurer President and Chief President 1960 l Executive Officer NERCO 1973 PacifiCorp 1970 NERCO Charles C. Adams,45 Stan M. Marks,42 Y5" Y50'"' ""0 Senior Vice President Controller 3974 A980 g .eQ Sally A.Nofziger,52 S r Vi e Pres t j 3977 Corporate Secretary 'R 1962 c 91' l I r Roy R. Watts,41 Gerard K. Drummond,51 Charles E. Robinson,55 Senior vice President and D2*el L. Spalding, 35 py,g l Executive Vice President Chairman and Chief Chief FinancialOfficer ,9g, l PacifiCorp Executive Officer 1978 Chairman and Chief Pacific Telecom l Executive Officer 1960 PACIFIC TELECOM GENER AL COUNSEL l NERCO John E. McGill,55 StoelRives BoleyJones 1977 Executive Vice President & Grey 1976 l g" Charles E. Peterson,52 INDEPENDENT ? Executive Vice President AUDITORS ) l

• f 1972 Deloitte Haskins & Sells

= j ,){ Vern K. Dunham,55 v Senior Vice President 1972 David E Bolender,56 Gayle L. Veber,49 President Chairman and Chief Pacific Ibwer Executive Officer 1975 PacifiCorp Financial + Warjoinedcompany. Services 1982

] WW Lj j - JUNE 1988: DECEMBER 1988: 1 ' AUGUST 1987: 4 I Boards of Utah Power Utah Public Service Following hearings in and PacifiCorp agree to the Commission initially November, Utah commis-j mergerc approves merger, sion reinstates its approval. p: rder. FERC administrative law - . SEl'TEMBER 1987: judge recommends merger Ten-day pricing period i ~' be disapproved, begins December 19. Applications for merger approval filed in seven states served by Ut'ah Power and JULY 1988: J ANUARY 1989: Pacific lbwer. FERC trial staff recom-Pricing period ends mends that the commission January 3, yielding average r: OCMBER 1987: approve the merger with price for PacifiCorp stock i c nditions. of $35.713. Price sets con-ig Merger filing made with version ratio of.909 j- - the Federal Energy Regula-Merger apprcwal granted ' tory Commission, by Oregon and Washington PacifiCorp shares for each Utah Power share, regulatory commissions. Merger effective on DECEMBER 1987: January 9 with PacifiCorp ii SElrFEMBER 1988: reincorporated in Oregon. Shareholders of both ~ companies overwhelmingly FERC discusses the q approve the merger, merger at a full commission hearing. Requests more ' ;) I"I '* ** " I'*" I'? **"" FEBRUARY 1988: before.issumg decision. 4 Initial order approving the merger received from OCTOBER 1988-Montana Public Service f Commission. Wyoming Merger approved by Public Service Commission FERC with conditions, also issues approval. including a mechanism giving othee utilities access

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' ' " 5" MARCH 1988: system. Hearings at the Federal Utah Public Service Energy Regulatory Com.. Commission suspends its mission held, with o posi-previous order pending a tion coming mainly rom review of FERC pubhc power groups. conditions. j APRIL 1988: Regulatory commissions in Idaho and California give merger okay. 1 0

y W Q , c. + 2 BRWe"for Infoguention ' 6 I CORPORATE The' company's preferred. Aforgan Guaranty Trust - ' DIVIDEND PAYMENTo HEADQUARTERS

stock and first mortgage CompanyofNew Nrk

' Dividends on the com-p,cjfjco,p _ bonds are infrequently Corporate Trust Dept.- pany's common and prefer-t" traded in the over-the. 30 WestBroadway red stock in 1989 are. 8511 W Sixth Avenue h Nrtland, Oregon 97204 - c unter market. New York, New York 10015, expected to be paid on or ? ^ l 503-464-6000 PUBLICINFORMATION OPERATING Financial analysts, stock- - Bondholders needing 7 February 15- [ COMPANIES. brokers, interested investors . further assistance should

Afay15,

August 15, and financial media desir.

contact: .PaciRc nmer ' ing information about

PacifiCorpS are o er November 15' A

h h ld i 9201W. Sixth Avenue ' PacifiCorp should contact . Services =' DIVIDEND ~ Nrtland, Oregon 97204 the followingindividualsin S03-464-6160, ,g IN E P N-03 4 64-5000-corporate investor relations: TollFree Nurnbert remvestment plan is a. j Utah Mmer Dolores Chenourth 1407 West North Temple? '503-464-6060'. . ANNUAL MEETING 1 convement way for share- ~i Salt Lake City, Utah 84140 The annual meeting of; holders toincrease their; y 801-220-2000 'Chris Hunter PacifiCorp shareholders ' investment in the company.L 0 503 464-6090: - will be:.. . Under the plan, quarterly ', i I.. . Pacific Telecom, Inc.

Wednesday, May 17,1989 :

h ' dividends from common.

805 Broadway

. SHAREHOLDER _ 1:30 p.m. and preferred shares (all or.' N 'i i' Nst Office Box 9901' . INFORMATION,. Salt Lake County Civic - a portion) may be automat- . Vancouver, WA 98668 - ' inquiries ~concerning lost Auditorium Lically applied toward pur. > < + 206-696-0983-stock certificates, dividend 100 South' West Temple St. chase of additional sharei -

payments, change of ',

Salt Lake City, Utah d of common stock;ln'a'ddi-i ' address, account status and . NERCO, Inc.. . dividend reinvestment plan Proxy material will be tion, cash' contributions oi t 1 c 4 y In & W Columbia Street. . Nrtland, Oregon 97201 should be directed to: . mailed to shareholders of. up to $5,000 per quarter' 503 796-6600 - record during the first week can be made. All or t.ny. y PacifiCorp Shareholder in April. . Portion oithe remvestment ' shares can be sold through _ PacifiCorpFinancial

Services

'"E# he meet-th'e plan upon termination f i Services, Inc.

1. 11E Colmnbia Street t e 8V ij et

- f participation; A small.

• ng W1 D1 & W Fifth Avenue Suite 1050 are olders upon request.

commission feeis charged : ' Nst Office Box 1531 Nrtland, Oregon 97201 . when applicable. Nrtland, Oregon 97207 ' ' 503-464-6160 - INFORMATION : '503-222 7920. TollFree Number: MEETINGS - Existing shareholders can d b8 233J453 ne company plans open a dividend reinvest-- ' STOCK EXCHANGE to hold three reg,onal share-ment account with either. ~ i LISTINGS.

PacifiCorp's transfer holder information meet-dividends from existing PacifiCorp,s common' agent ist ings during 1989 in '

shares or with an initial stock is hsted on the New FirstInterstate Bcnk of Portland, Miami and - ' cash contribution, For a. York Stock Exchange; Oregon, N.A. Ins Angeles. . prospectus, enrollment card l Pacific Stock Exchange . Corporate Trust ? or other information, call and The London Stock FORM 10-k,, ' or write to PacifiCorp's Department VIDEOTAPES Exchange under the symbol Nst Office Bor 2971 shareholder services. A copy aithe company,s YN' krtland, Oregon 97208 198810-K, filed with the Daily quotes on the com-BONDHOLDER 5ecurities and Exchange any's common stock can ^ be obtained by checking the - INFORMATION Commtssion, may be .l New York Stock Exchange Inquiries c neerning1 st obtamed by contactmg composite transaction y nds, interest payments, corporate investor rel.aticns listed in local newspapers. changes f address and at the corporate headquar-PacifiCorp is usually abbre-other matters relating to ters address. viated "Pacifcp" for this ownership should be Mini-annual reports, directed to PacifiCorp,s annual meeting video tapes purpose. mortgage trustee: and other printed or audio visual materials are also I available.

g. a e' ? I [. '. = O PACIFICORP 851 Southwest Sixth Avenue Ibrtland, Oregon 97204 l l: i.I' l s A 1 ?e <}}