For the quarterly period ended March 31, 2001
--------------
OR
Exact name of registrant as specified I.R.S.
in its charter, state of incorporation, Employer
Commission address of principal executive offices, Identification
File Number Telephone Number
1-16305 PUGET ENERGY, INC. 91-1969407
A Washington Corporation
411 - 108th Avenue N.E.
Bellevue, Washington 98004-5515
(425) 454-6363
1-4393 PUGET SOUND ENERGY, INC. 91-0374630
A Washington Corporation
411 - 108th Avenue N.E.
Bellevue, Washington 98004-5515
(425) 454-6363
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____
As of March 31, 2001, (i) the number of shares of Puget Energy, Inc. (“Puget Energy”) common stock outstanding was 86,167,199 ($.01 par value) and (ii) all of the outstanding shares of Puget Sound Energy, Inc. (“PSE”) common stock were held by Puget Energy.
1
Table of Contents Page
- ----------------- Number
------
Filing Format 2
Part I. Financial Information
Item 1. Financial Statements
Puget Energy, Inc.
Consolidated Statements of Income - 3 months ended March 31, 2001 and 2000 3
Consolidated Statements of Comprehensive Income - 3 months ended
March 31, 2001 and 2000 4
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 5
Consolidated Statements of Cash Flows - 3 months ended
March 31, 2001 and 2000 7
Puget Sound Energy, Inc.
Consolidated Statements of Income - 3 months ended March 31, 2001 and 2000 8
Consolidated Statements of Comprehensive Income - 3 months ended
March 31, 2001 and 2000 9
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 10
Consolidated Statements of Cash Flows - 3 months ended
March 31, 2001 and 2000 12
Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
This Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two different registrants: Puget Energy and PSE. Puget Energy became the holding company for PSE on January 1, 2001. Any references in this report to the "Company" are to Puget Energy and PSE collectively. PSE makes no representation as to the information contained in this report relating to Puget Energy and the subsidiaries of Puget Energy other than PSE and its subsidiaries.
2
PUGET ENERGY, INC
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31
(Thousands except per share amounts)
(Unaudited)
2001 2000
------------- ------------
Operating Revenues:
Electric $ 765,007 $ 438,356
Gas 304,270 205,469
Other 50,587 3,398
------------- ------------
Total operating revenue 1,119,864 647,223
------------- ------------
Operating Expenses:
Energy costs:
Purchased electricity 390,216 196,203
Purchased gas 216,609 108,205
Electric generation fuel 102,384 20,749
Residential Exchange (16,741) (12,199)
Utility operations and maintenance 61,179 54,878
Other operations and maintenance 30,140 3,775
Depreciation and amortization 53,128 45,885
Conservation amortization 1,601 2,619
FAS-133 unrealized loss on derivative instruments 26,466 -
Taxes other than federal income taxes 70,081 58,485
Federal income taxes 54,260 52,738
------------- ------------
Total operating expenses 989,323 531,338
------------- ------------
Operating Income 130,541 115,885
Other Income 1,941 4,390
------------- ------------
Income Before Interest Charges 132,482 120,275
Interest Charges, Net of AFUDC 45,435 42,083
------------- ------------
Income Before Cumulative Effect of Accounting Charge 87,047 78,192
Cumulative Effect of Implementation of FAS-133 Derivative
Instruments and Hedging Activities (net of tax) 14,749 -
------------- ------------
Net Income 72,298 78,192
Less: Preferred Stock Dividends Accrual 2,157 2,303
------------- ------------
Income for Common Stock $ 70,141 $ 75,889
============= ============
Common Shares Outstanding - Weighted Average 86,036 85,074
============= ============
Basic Earnings per Share Before Cumulative Effect
of Accounting Change $ 0.99 $ 0.89
Cumulative Effect of Accounting Change (0.17) -
============= ============
Basic Earnings Per Common Share $ 0.82 $ 0.89
============= ============
Diluted Earnings per Share Before Cumulative
Effect of Accounting Change $ 0.98 $ 0.89
Cumulative Effect of Accounting Change (0.17) -
============= ============
Diluted Earnings Per Common Share $ 0.81 $ 0.89
============= ============
3
PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31
(Dollars in Thousands)
(Unaudited)
2001 2000
----------- -----------
Net Income $ 72,298 $ 78,192
----------- -----------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period (796) 3,845
Reclassification adjustment for gains included in net income - (683)
FAS-133 unrealized gains during period 415,667 -
Reversal of FAS-133 unrealized gains settled during the period (106,068) -
----------- -----------
Other comprehensive income 308,803 3,162
----------- -----------
Comprehensive Income $ 381,101 $ 81,354
=========== ===========
4
PUGET ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
March 31, December 31,
--------- ------------
2001 2000
---- ----
Utility Plant: (at original cost, including construction
work in progress of $161,965 and $164,221 respectively)
Electric $ 4,112,836 $ 4,054,551
Gas 1,472,125 1,459,488
Common 359,093 351,051
Less: Accumulated depreciation and amortization (2,066,637) (2,026,681)
--------------- ---------------
Net utility plant 3,877,417 3,838,409
-------------- --------------
Other Property and Investments 324,628 292,297
-------------- --------------
Current Assets:
Cash 56,393 36,383
Accounts receivable 370,969 343,108
Unbilled revenue 146,384 211,784
Materials and supplies, at average cost 61,713 99,001
Purchased gas receivable 144,049 96,050
Current portion of FAS-133 unrealized gain (net of tax) 216,378 -
Prepayments and other 9,273 11,607
-------------- --------------
Total current assets 1,005,159 797,933
-------------- --------------
Long-Term Assets:
Regulatory asset for deferred income taxes 201,722 207,350
Regulatory asset for PURPA buyout costs 243,430 243,071
FAS-133 unrealized gain (net of tax) 93,220 -
Other 201,979 177,609
-------------- --------------
Total long-term assets 740,351 628,030
-------------- --------------
Total Assets $ 5,947,555 $ 5,556,669
============== ==============
5
PUGET ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
2001 2000
---- ----
Capitalization:
Common shareholder's investment:
Common stock $0.01 par value, 250,000,000 shares
authorized, 86,167,199 shares outstanding at 3/31/01
and $10 stated value, 150,000,000 shares authorized,
85,903,791 shares outstanding at 12/31/00 $ 862 $ 859,038
Additional paid-in capital 1,337,071 470,179
Earnings reinvested in the business 123,121 92,673
Accumulated other comprehensive income 313,553 4,750
Preferred stock not subject to
mandatory redemption 60,000 60,000
Preferred stock subject to
mandatory redemption 50,662 58,162
Corporation obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the corporation 100,000 100,000
Long-term debt 2,160,801 2,170,797
--------------- -----------
Total capitalization 4,146,070 3,815,599
--------------- -----------
Current Liabilities:
Accounts payable 242,722 410,619
Short-term debt 449,448 378,316
Current maturities of long-term debt 29,000 19,000
Accrued expenses:
Taxes 155,810 103,996
Salaries and wages 17,309 17,445
Interest 50,145 43,955
Other 122,956 26,685
--------------- -----------
Total current liabilities 1,067,390 1,000,016
--------------- -----------
Deferred Income Taxes 591,760 608,185
--------------- -----------
Other Deferred Credits 142,335 132,869
--------------- -----------
Total Capitalization and Liabilities $ 5,947,555 $5,556,669
=============== ===========
6
PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(Dollars in Thousands)
(Unaudited)
2001 2000
---- ----
Net Income $ 72,298 $ 78,192
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 53,128 45,885
Deferred income taxes and tax credits - net (10,797) 2,000
Other (1,293) (7,249)
Change in certain assets and liabilities (Note 4) 15,166 71,625
- ---------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 128,502 190,453
- ---------------------------------------------------------------------------------------
Investing Activities:
- ---------------------
Construction expenditures - excluding equity AFUDC (98,558) (76,628)
Additions to energy conservation program (1,808) (947)
Acquisition by InfrastruX (32,987) -
Other (3,358) 4,222
- ----------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (136,711) (73,353)
- ----------------------------------------------------------------------------------------
Financing Activities:
- ---------------------
Change in short-term debt - net 71,131 (183,599)
Dividends paid (35,324) (34,720)
Redemption of preferred stock (7,500) (7,500)
Issuance of bonds - 225,000
Redemption of bonds and notes - (115,980)
Other (88) (959)
- ----------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 28,219 (117,758)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 20,010 (658)
Cash at Beginning of Year 36,383 65,707
- ---------------------------------------------------------------------------------------
Cash at End of Period $ 56,393 $ 65,049
=======================================================================================
7
PUGET SOUND ENERGY, INC
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31
(Dollars in Thousands)
(Unaudited)
2001 2000
--------------- --------------
Operating Revenues:
Electric $ 765,007 $ 438,356
Gas 304,270 205,469
Other 22,047 3,398
--------------- --------------
Total operating revenue 1,091,324 647,223
--------------- --------------
Operating Expenses:
Energy costs:
Purchased electricity 390,216 196,203
Purchased gas 216,609 108,205
Electric generation fuel 102,384 20,749
Residential Exchange (16,741) (12,199)
Utility operations and maintenance 61,179 54,878
Other operations and maintenance 3,122 3,775
Depreciation and amortization 51,485 45,885
Conservation amortization 1,601 2,619
FAS-133 unrealized loss on derivative instruments 26,466 -
Taxes other than federal income taxes 70,081 58,485
Federal income taxes 54,811 52,738
--------------- --------------
Total operating expenses 961,213 531,338
--------------- --------------
Operating Income 130,111 115,885
Other Income 2,843 4,390
--------------- --------------
Income Before Interest Charges 132,954 120,275
Interest Charges, Net of AFUDC 45,326 42,083
--------------- --------------
Income Before Cumulative Effect of Accounting Change 87,628 78,192
Cumulative Effect of Implementation of FAS-133 Derivative
Instruments and Hedging Activities (net of tax) 14,749 -
--------------- --------------
Net Income 72,879 78,192
Less: Preferred Stock Dividends Accrual 2,157 2,303
--------------- --------------
Income for Common Stock $ 70,722 $ 75,889
=============== ==============
8
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31
(Dollars in Thousands)
(Unaudited)
2001 2000
------------ -----------
Net Income $ 72,879 $ 78,192
Other comprehensive income net of tax:
Unrealized holding gains (losses) arising during period (796) 3,845
Reclassification adjustment for gains included in net income - (683)
FAS-133 unrealized gains during period 415,667 -
Reversal of FAS-133 unrealized gains settled during the period (106,068) -
------------ -----------
Other comprehensive income 308,803 3,162
------------ -----------
Comprehensive Income $ 381,682 $ 81,354
============ ===========
9
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
March 31, December 31,
--------- ------------
2001 2000
---- ----
Utility Plant: (at original cost, including construction
work in progress of $161,965 and $164,221 respectively)
Electric $ 4,112,836 $ 4,054,551
Gas 1,472,125 1,459,488
Common 359,093 351,051
Less: Accumulated depreciation and amortization (2,066,637) (2,026,681)
----------------- ----------------
Net utility plant 3,877,417 3,838,409
----------------- ----------------
Other Property and Investments 213,838 292,297
----------------- ----------------
Current Assets:
Cash 51,936 36,383
Accounts receivable 338,391 343,108
Unbilled revenue 146,384 211,784
Materials and supplies, at average cost 56,204 99,001
Purchased gas receivable 144,049 96,050
Current portion of FAS-133 unrealized gain (net of tax) 216,378 -
Prepayments and other 7,689 11,607
----------------- ----------------
Total current assets 961,031 797,933
----------------- ----------------
Long-Term Assets:
Regulatory asset for deferred income taxes 201,722 207,350
Regulatory asset for PURPA buyout costs 243,430 243,071
FAS-133 unrealized gain (net of tax) 93,220 -
Other 201,979 177,609
----------------- ----------------
Total long-term assets 740,351 628,030
----------------- ----------------
Total Assets $ 5,792,637 $ 5,556,669
================= ================
10
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
--------- ------------
2001 2000
---- ----
Capitalization:
Common shareholder's investment:
Common stock, $10 stated value,
150,000,000 shares authorized,
85,903,791 shares outstanding $ 859,038 $ 859,038
Additional paid-in capital 382,584 470,179
Earnings reinvested in the business 130,228 92,673
Accumulated other comprehensive income 313,553 4,750
Preferred stock not subject to
mandatory redemption 60,000 60,000
Preferred stock subject to
mandatory redemption 50,662 58,162
Corporation obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the corporation 100,000 100,000
Long-term debt 2,160,801 2,170,797
--------------- ---------------
Total capitalization 4,056,866 3,815,599
--------------- ---------------
Current Liabilities:
Accounts payable 234,241 410,619
Short-term debt 410,898 378,316
Current maturities of long-term debt 29,000 19,000
Accrued expenses:
Taxes 155,469 103,996
Salaries and wages 17,309 17,445
Interest 50,145 43,955
Other 112,927 26,685
--------------- ---------------
Total current liabilities 1,009,989 1,000,016
--------------- ---------------
Deferred Income Taxes 591,760 608,185
--------------- ---------------
Other Deferred Credits 134,022 132,869
--------------- ---------------
Total Capitalization and Liabilities $ 5,792,637 $ 5,556,669
=============== ===============
11
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(Dollars in Thousands)
(Unaudited)
2001 2000
---- ----
Operating Activities:
- ---------------------
Net Income $ 72,879 $ 78,192
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 51,485 45,885
Deferred income taxes and tax credits - net (10,797) 2,000
Other (19,678) (7,249)
Change in certain current assets
and liabilities (Note 4) 35,418 71,625
- -----------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 129,307 190,453
- -----------------------------------------------------------------------------------
Investing Activities:
- ---------------------
Construction expenditures - excluding equity AFUDC (98,558) (76,628)
Additions to energy conservation program (1,808) (947)
Other (3,358) 4,222
- -----------------------------------------------------------------------------------
Net Cash Used by Investing Activities (103,724) (73,353)
- -----------------------------------------------------------------------------------
Financing Activities:
- ---------------------
Change in short-term debt - net 32,581 (183,599)
Dividends paid (35,324) (34,720)
Redemption of preferred stock (7,500) (7,500)
Issuance of bonds - 225,000
Redemption of bonds and notes - (115,980)
Issue costs of bonds and stock (27) (959)
Other 240 -
- -----------------------------------------------------------------------------------
Net Cash Used by Financing Activities (10,030) (117,758)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 15,553 (658)
Cash at Beginning of Year 36,383 65,707
- -----------------------------------------------------------------------------------
Cash at End of Period $ 51,936 $ 65,049
===================================================================================
12
On January 1, 2001, PSE reorganized into a holding company structure. This reorganization resulted in the creation of a new holding company, Puget Energy. Puget Energy was incorporated in the State of Washington and all of it operations are conducted through its subsidiaries.
Pursuant to the reorganization, Puget Energy became the owner of all PSE's outstanding common stock. Holders of PSE's existing common stock exchanged their stock on a one-for-one basis for common stock of Puget Energy. Puget Energy is a public utility holding company under the Public Utility Holding Company Act of 1935 but is exempt from regulation under such Act.
The consolidated financial statements of Puget Energy include the accounts of Puget Energy and its subsidiaries, including PSE. PSE's consolidated financial statements include the accounts of PSE and its subsidiaries. The consolidated financial statements are presented after elimination of all significant intercompany items and transactions. Certain amounts previously reported have been reclassified to conform with current year presentations with no effect on total equity or net income.
The consolidated financial statements contained in this Form 10-Q are unaudited. In the respective opinions of the managements of Puget Energy and PSE, all adjustments necessary for a fair presentation of the results for the interim periods have been reflected and were of a normal recurring nature. These condensed financial statements should be read in conjunction with the audited financial statements (and Notes thereto) included in the combined Puget Energy and PSE annual report on Form 10-K for the year ended December 31, 2000.
Puget Energy's basic earnings per common share have been computed based on weighted average common shares outstanding of 86,036,000 and 85,074,000 for the three months ended March 31, 2001 and 2000.
Puget Energy's diluted earnings per common share have been computed based on weighted average common shares outstanding of 86,417,000 and 85,291,000 for the three months ended March 31, 2001, and 2000, respectively. These shares include the dilutive effect of securities related to employee and director equity plans.
13
The following provides additional information concerning cash flow activities:
PUGET ENERGY Three Months Ended March 31 2001 2000 - --------------------------- ---- ---- Changes in current asset and current liabilities: Accounts receivable and unbilled revenue $ 37,539 $ 27,610 Materials and supplies 37,288 19,498 Prepayments and other 2,334 (744) Purchased gas receivable (47,999) 12,702 Accounts payable (167,897) (47,552) FAS-133 unrealized loss 49,157 - Accrued expenses and other 104,744 60,111 - --------------------------------------------------------------------- ------------- Net change in current assets and current liabilities $ 15,166 $ 71,625 - --------------------------------------------------------------------- ------------- Cash payments: Interest (net of capitalized interest) $ 38,125 $ 52,917 Income taxes 128,600 - - --------------------------------------------------------------------- ------------- PUGET SOUND ENERGY Three Months Ended March 31 2001 2000 - --------------------------- ---- ---- Changes in current asset and current liabilities: Accounts receivable and unbilled revenue $ 70,117 $ 27,610 Materials and supplies 42,797 19,498 Prepayments and other 3,352 (744) Purchased gas receivable (47,999) 12,702 Accounts payable (176,378) (47,552) FAS-133 unrealized loss 49,157 - Accrued expenses and other 94,372 60,111 - --------------------------------------------------------------------- ------------ Net change in current assets and current liabilities $ 35,418 $ 71,625 - --------------------------------------------------------------------- ------------ Cash payments: Interest (net of capitalized interest) $ 38,125 $ 52,917 Income taxes 128,600 - - --------------------------------------------------------------------- ------------
The Company operates primarily in one business segment, Regulated Utility Operations. The Company's regulated utility operation generates, purchases and sells electricity and purchases, transports and sells natural gas. The Company's service territory covers approximately 6,000 square miles in the state of Washington.
The other business segment is non-utility lines of business which include development and marketing of customer information and billing system software, specialized contracting services to utilities and telecommunications companies(See Note 7) and real estate investment and development. Reconciling items between segments are not material.
14
Financial data for business segments are as follows:
(Dollars in Thousands) Regulated
Three Months Ended March 31, 2001 Utility Other Total
- -------------------------------------------------------------------------------
Revenues $1,069,277 50,587 $1,119,864
Net Income 60,419 11,879 72,298
Total Assets 5,655,739 291,816 5,947,555
- -------------------------------------------------------------------------------
Regulated
Three Months Ended March 31, 2000 Utility Other Total
- -------------------------------------------------------------------------------
Revenues $643,827 $3,396 $647,223
Net Income 76,357 1,835 78,192
Total Assets 4,965,512 152,402 5,117,914
- -------------------------------------------------------------------------------
On January 1, 2001, Puget Energy adopted Financial Accounting Standards Board Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Statement No. 138. Statement No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Puget Energy enters into both physical and financial contracts to manage its energy resource portfolio. Certain of these contracts met the derivative classification requirements of the statement and are reported at fair value in the balance sheet. Beginning with the implementation of Statement No. 133, changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a qualifying cash flow hedge under the statement. Puget Energy recognized the cumulative effect of this change in accounting principle by recording an after-tax decrease to current earnings of approximately $14.7 million and a corresponding liability. In addition, Puget Energy recorded approximately $26.5 million, pre-tax, decrease to current earnings and a corresponding liability for the mark-to-market of electric derivative transactions for the quarter. When the underlying contracts giving rise to the income statement charges are fulfilled in 2001 and the liabilities (included in other current liabilities on the balance sheets) established under Statement No. 133 will be reversed.
Puget Energy also recorded a deferred asset for electric energy contracts designated as qualifying cash flow hedges of approximately $309.6 million after-tax at March 31, 2001 and a corresponding increase of approximately $309.6 million in other comprehensive income. Puget Energy anticipates approximately $216.4 million of the $309.6 million will reverse over the following twelve months as the underlying contracts are settled and will, as a result, report a corresponding decrease to the deferred asset and to other comprehensive income for this reversal. The decrease in the deferred asset and in other comprehensive income will have no net effect on current earnings and the economic effects of the transactions will be recorded upon settlement. These estimates are based upon the forward market prices for energy at March 31, 2001. Retail gas related derivative transactions are deferred under Puget Energy's Purchased Gas Adjustment Mechanism and recorded in earnings as the transactions are executed under the PGA Incentive Mechanism.
On August 1, 2000, InfrastruX Group Inc. ("InfrastruX"), a wholly-owned subsidiary of Puget Energy, purchased 88% of the outstanding shares of Utilx Corporation ("Utilx") pursuant to a cash tender offer. The remaining shares were acquired on September 15, 2000. Utilx is a provider of infrastructure construction services to utilities and telecommunications providers in the United States and around the world. Its primary business is installing, replacing and restoring underground cables and pipes. On September 28, 2000, InfrastruX completed the acquisition of Lineal Industries ("Lineal"), a privately held pipeline infrastructure construction company. Lineal provides pipeline construction, maintenance and rehabilitation services primarily for the natural gas and petroleum industries and currently operates in seven states. These acquisitions mark Puget Energy's entry into the business of providing design, construction and engineering services to the utility industry. The total purchase price of the two acquisitions was approximately $87.1 million.
15
The acquisitions of Utilx and Lineal have been accounted for using the purchase method of accounting and, accordingly, the operating results of Utilx and Lineal have been included in the consolidated financial statements since the date of acquisition. Goodwill representing the excess of cost over the net tangible and identifiable intangible assets of the acquired businesses was approximately $40.7 million. Goodwill is being amortized on a straight-line basis up to 30 years. The pro forma combined revenues, net income, and earnings per common share of Puget Energy presented below give effect to the acquisitions as if they had occurred on January 1, 2000. This pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisition been consummated for the period for which it is being given effect.
Unaudited (Thousands, except per share amounts) For the three months ending: March 31, 2000 - -------------------------------------------------------- Operating Revenues $ 679,854 Net Income 76,294 Basic Earnings per Common Share $ .90 Diluted Earnings per Common Share $ .89
On March 30, 2001, InfrastruX completed the acquisition of InterCon Construction, Inc. ("InterCon"), a privately held infrastructure construction company with annual revenues of approximately $47 million. InterCon provides construction services for natural gas, electric, telecommunication and cable industries in the Midwest United States. InterCon also provides directional drilling services throughout the United States.
The acquisition of InterCon has been accounted for using the purchase method of accounting and, accordingly, the operating results of InterCon have been included in Puget Energy's consolidated financial statements, since the acquisition. Goodwill representing the excess of cost over the net tangible and identifiable intangible assets of the business was approximately $26.1 million. Goodwill is being amortized on a straight-line basis over 30 years. The pro forma combined revenues, net income, and earnings per common share of Puget Energy presented below give effect to the acquisitions as if they had occurred on January 1, 2000. This pro forma information includes the effect of the acquisitions of Utilx and Lineal and is not necessarily indicative of the results of operations that would have occurred had the acquisition of InterCon been consummated for the period for which it is being given effect.
Unaudited (Thousands, except per share amounts) For the three months ending: March 31, 2001 March 31, 2000 - ---------------------------------------------------------------------------- Operating Revenues $1,126,213 $ 687,620 Net Income 69,656 76,058 Basic and Diluted Earnings per Common Share $ .81 $ .89
On April 18, 2001, InfrastruX completed the acquisition of Trafford Corporation a privately held Pittsburgh based natural gas pipeline construction company with annual revenues of approximately $25 million.
16
In February 2001, PSE signed an unsecured revolving credit agreement with an investment bank for a period of four months of up to $125 million. At March 31, 2001, PSE had $125 million of borrowings outstanding under the agreement.
In March 2001, InfrastruX signed a six-month revolving credit agreement with several banks for up to $75 million. At March 31, 2001, InfrastruX had $33 million of borrowings outstanding under the agreement.
On April 5, 2001, the Washington Utilities and Transportation Commission approved an agreement between PSE and its 12 largest industrial customers tied to a market-based rate index. Under the agreement, PSE's six largest industrial customers - with a combined load of about 250 average megawatts - now can purchase electricity directly or through PSE, from other suppliers at negotiated prices or, if they choose, they can self-generate their electricity. Certain small industrial customers, representing a small portion of the current market index load of PSE (approximately 25 average megawatts) will be allowed to transfer to other fixed rate plans under the settlement.
The following discussion of the Company's business includes some forward-looking statements that involve risks and uncertainties. Words such as "estimates," "expects," "anticipates," "plans," and similar expressions identify forward-looking statements involving risks and uncertainties. Those risks and uncertainties include, but are not limited to, the ongoing restructuring of the electric and gas industries and the outcome of regulatory proceedings related to that restructuring. The ultimate impacts of both increased competition and the changing regulatory environment on future results are uncertain, but are expected to fundamentally change how the Company conducts its business. The outcome of these changes and other matters discussed below may cause future results to differ materially from historic results, or from results or outcomes currently expected or sought by the Company.
Puget Energy's net income for the three months ended March 31, 2001, was $72.3 million on operating revenues of $1.1 billion, compared with net income of $78.2 million on operating revenues of $647.2 million for the same period in 2000. Income for common stock was $70.1 million for the first quarter of 2001 compared to $75.9 million for the first quarter of 2000. Basic earnings per share were $0.82 for the first quarter of 2001 compared to $0.89 for the first quarter of 2000. Diluted earnings per share were $0.81 for the first quarter of 2001 compared to $0.89 for the first quarter of 2000. First quarter results for 2001 are net of a charge to earnings of $0.17 per basic and diluted share associated with the adoption of Statement of Financial Accounting Standards 133 "Accounting for Derivative Instruments and Hedging Activities".
Total kilowatt-hour electric sales were 7.5 billion, including 1.8 billion in sales to other utilities and marketers, for the first quarter of 2001, compared to 8.5 billion, including 2.4 billion in sales to other utilities and marketers, for the first quarter of 2000.
Total gas volumes were 369.4 million therms, including 49.0 million therms in transportation volumes for the three months ended March 31, 2001, compared to 402.5 million therms, including 58.6 million therms of transportation, for the same period in 2000.
PSE's operating revenues and associated expenses are not generated evenly during the year. Variations in energy usage by consumers do occur from season to season and from month to month within a season, primarily as a result of weather conditions. PSE normally experiences its highest energy sales in the first and fourth quarters of the year.
17
PSE meets its forecasted electric supply needs throughout the year through PSE-owned electric generation and by obtaining power through long-term contracts, annual contracts and short-term markets. PSE meets its forecasted natural gas supply needs throughout the year through PSE-owned gas storage and by purchasing gas supplies through long-term contracts, annual contracts and short-term markets. PSE also performs risk management activities to optimize the value of energy supply and transmission assets and to ensure that physical energy supply is available to meet the customer demand loads. PSE also purchases energy when demand exceeds available supplies in its portfolio; likewise PSE makes sales to other utilities and marketers when surplus energy is available. These transactions are part of PSE's normal operations to meet retail load. Electric sales to other utilities and marketers vary by quarter and year depending principally upon water conditions for the generation of hydro-electric power, retail customer usage, the energy requirements of other utilities and energy market conditions in the Pacific Northwest. The April 19, 2001, seasonal water supply forecast published by the National Weather Service indicated that the total forecasted runoff into the Grand Coulee reservoir for the period April through September 2001 would be 63% of average. PSE, therefore, expects the total annual generation from the Mid-Columbia projects and PSE-owned hydro-electric projects will be below normal in 2001.
Beginning in the second half of 2000, the West Coast wholesale energy market began experiencing energy prices that greatly exceeded historical norms, reflecting unfavorable hydro conditions and increased consumer demand in California, among other factors. As a result, certain of PSE's industrial index-rate electric customers have been reducing their usage due to these high prices. Other customers' usage in general has declined slightly due to energy conservation measures by PSE's customers. To the extent electric retail load is reduced, PSE, when in a surplus power situation, has more power to sell into the wholesale market or when in a deficit power situation, has to purchase less power in the wholesale market to meet its electric retail load.
Temperatures based on heating-degree-days measured at Seattle-Tacoma airport during the three months ended March 31, 2001 and March 31, 2000 were near normal.
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Results of Operations
Comparative Three Months Ended
March 31, 2001 vs. March 31, 2000
Increase (Decrease)
Amount
------
(In Millions)
Operating revenue changes
General rate increases $ 4.1
BPA Residential Purchase & Sale Agreement 2.6
Electric sales to other utilities and marketers 275.0
Electric revenue sold at index rates 132.0
Electric revenue sold to conservation trust 0.7
Electric load and other changes (87.7)
Gas revenue change 98.8
InfrastruX revenues 28.5
Other revenue changes 18.6
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Total operating revenue change 472.6
Operating expense changes
Energy costs:
Purchased electricity 194.0
Purchased gas 108.4
Electric generation fuel 81.6
Residential exchange credit (4.5)
Utility operations and maintenance 6.3
InfrastruX operations and maintenance 27.0
Other operations and maintenance (0.6)
Depreciation and amortization 7.2
Conservation amortization (1.0)
FAS-133 unrealized loss 26.5
Taxes other than federal income taxes 11.6
Federal income taxes 1.5
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Total operating expense change 458.0
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Other income (net of tax) (2.4)
Interest charges 3.4
FAS-133 transition adjustment loss (net of tax) 14.7
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Net income change $ (5.9)
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The following is additional information pertaining to the changes outlined in the above table.
Electric revenues for the three months ended March 31, 2001 increased $326.7 million compared to the same period in 2000. Electric sales to other utilities and marketers increased $275.0 million in the three months ended March 31, 2001 compared to the same period in 2000 due to increased prices in the wholesale electricity market while wholesale sales volumes declined by 536.5 million kWh or 22.7% as compared to 2000. Retail sales volumes declined 8.0% from 6.1 billion kWh in 2000 to 5.7 billion kWh in 2001. Retail sales revenue increased as a result of higher rates paid by industrial customers on index rate tariffs and contracts.
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Electric revenues in the first quarter of 2001 increased significantly due to increased prices related to electric energy sales to other utilities and marketers and sales to customers whose rates are tied to a market index. Several factors, including unfavorable hydro conditions and increased consumer demand in California have raised wholesale market prices on the West Coast. PSE, to date, has protected its core customers from the negative impact of the volatile West Coast power markets through its effective management of its energy supply resources and its efficient operation of its distribution system. PSE continues to operate without an electric rate adjustment mechanism.
Revenues in 2001 and 2000 were reduced because of the credit that PSE received through the Residential Purchase and Sale Agreement with the Bonneville Power Administration ("BPA"). The agreement enables PSE's residential and small farm customers to receive the benefits of lower-cost federal power. On January 29, 1997, PSE and BPA signed a Residential Exchange Termination Agreement. The Agreement ends PSE's participation in the Residential Purchase and Sale agreement with BPA. As part of the Termination Agreement, PSE will receive payments by the BPA of approximately $235 million over an approximately five-year period ending June 2001. These payments are recorded as a reduction of purchased electricity expenses. Under the rate plan approved by the Washington Commission in its merger order, PSE will continue to reflect in customers' bills, the level of Residential Exchange benefits in place at the time of the merger with Washington Energy Company in 1997. Over the remainder of the Residential Exchange Termination Agreement from April 2001 through June 2001, it is projected that PSE will credit customers approximately $13.5 million more than it will receive from BPA.
The allocation of future benefits of low-cost federal power, for the five-year BPA rate plan period 2001 to 2006, will be decided at least in part as part of a current BPA rate case process. In May 2000, the BPA published an initial Record of Decision in its Subscription process. BPA allocated benefits intended to be equivalent to 1900 average MW of cost-based federal power to the residential and small farm customers of the Pacific Northwest investor-owned utilities ("IOUs"). The regional Public Utility Commissions in turn recommended an allocation of the benefits among the IOUs for their residential and small farm customers, with PSE's proposed annual share equal to about 700 average MW of benefits over the five-year period October 2001 through September 2006. In August 2000, the BPA determined that certain aspects of its initial Record of Decision would be revisited in its power rate case that is expected to continue through May 2001. On October 30, 2000, PSE signed a five-year contract with the BPA (as required by BPA's Subscription timeline) for receipt of the federal power benefits allocated by the Subscription and Commission processes. The contract describes the form (power and cash) of the about 700 average MW benefits to be provided, and provides PSE a right to terminate the contract upon completion of BPA's rate case. The results of the case and regulatory and judicial reviews of BPA's actions will determine and affect any benefits actually received and the value of any benefits actually received by PSE and other Northwest IOUs for their residential and small farm customers from the Subscription benefits allocation process.
To meet customer demand, PSE's power supply portfolio includes net purchases of power under long-term supply contracts. However, depending principally upon streamflow available for hydro-electric generation and weather effects on customer demand, from time to time, PSE may have surplus power available for sale to wholesale customers. In addition, PSE manages its core energy portfolio through short and intermediate-term purchases, sales, arbitrage and other risk management techniques. PSE has a Risk Management Committee that oversees energy price risk matters.
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PSE operates within the western wholesale market and has made sales into the California energy market. During the first quarter of 2001, PSE received partial payments for sales made in the fourth quarter of 2000. At December 31, 2000, PSE's receivables from the California Independent System Operators (CAISO) and other counter-parties, net of reserves, were $41.8 million and at March 31, 2001, such receivables were reduced to approximately $26.6 million.
Gas operating revenues for the three months ended March 31, 2001 increased by $98.8 million from the same period in 2000. Total gas sales volumes decreased 8.2% from 402.5 million therms in 2000 to 369.4 million therms in 2001. The primary reason for the increase in gas sales revenue was higher natural gas prices that are passed through to customers in the Purchased Gas Adjustment (PGA). Increases under the PGA were effective August 1, 2000 and January 12, 2001. As a result of the PGA increases, gas rates to all sales customers increased by an average of 30.2% on August 1, 2000 and 26.4% on January 12, 2001.
Other operating revenues for the three months ended March 31, 2001 increased by $47.1 from the same period in 2000. The primary reason for the increase in other operating revenues was due to $28.5 million of InfrastruX's two subsidiaries, Utilx and Lineal, that were acquired in the third quarter of 2000 and an increase of $18.6 million in property sales by PSE's subsidiary, Puget Western, Inc.
Purchased electricity expenses increased $194.0 million for the three month period ended March 31, 2001 compared to the same period in 2000. The increase was due primarily to increased prices for non-firm power from other utilities and marketers in the West Coast power market.
Purchased gas expenses increased $108.4 million for the three month period ended March 31, 2001 compared to the same period in 2000. The increase was due primarily to the impact of increased gas costs, which are passed through to customers through the PGA mechanism. During the three month period ended March 31, 2001, PSE has deferred $48.0 million of under-recovered purchased gas costs, which includes carrying costs allowed through the PGA mechanism.
Fuel expense increased $81.6 million for the three month period ended March 31, 2001 compared to the same period in 2000 as a result of increased generation and higher fuel costs at PSE-owned combustion turbine facilities.
Utility operations and maintenance increased $6.3 million for the three months ended March 31, 2001 compared to the same period in 2000. This increase was primarily due to increased costs of $2.3 million related to the Personal Energy Management energy-efficiency program, charges of $1.1 million to restore electric service following a February, 2001 snow storm, $0.7 million of repair costs related to the February 28, 2001 earthquake in the Puget Sound region and costs of $1.0 million net of estimated insurance recoveries to repair the PSE-owned Fredonia combustion turbine plant which went out of service on February 21, 2001 and will return to service in early May 2001.
InfrastruX's operations and maintenance expenses for the three months ended March 31, 2001 were $27.0 million due to the activities of its two subsidiaries, Utilx and Lineal, that were acquired during the third quarter of 2000.
21
Depreciation and amortization expense increased $7.2 million for the three month period ended March 31, 2001 compared to the same period in 2000 due primarily to the effects of new plant placed into service during the past year, including PSE's ConsumerLinX(TM) customer information and billing system in 2000.
Financial Accounting Standards Board Statement No. 133 (FAS-133) was adopted on January 1, 2001. A decrease to current earnings of approximately $26.5 million was recognized for unrealized losses associated with electric derivative transactions during the quarter and a $14.7 million, after-tax, transition adjustment loss resulting from recognizing the cumulative effect of this change in accounting principle.(For further discussion see Note 6).
Taxes other than federal income taxes increased $11.6 million for the three month period ended March 31, 2001 compared to the same period in 2000 primarily due to increases in municipal and state excise taxes which are revenue based.
Other income, net of federal income tax, decreased $2.4 million for the three month period ended March 31, 2001 compared to the same period in 2000, due primarily to the reduction of dividends from certain non-core assets.
Interest charges, which consist of interest and amortization on long-term debt and other interest, increased $3.4 million for the three month period ended March 31, 2001 compared to the same period in 2000. Interest on long-term debt increased $7.2 million in the three month period ended March 31, 2001 compared to the same period in 2000 as a result of the issuance of $225 million 7.96% Senior Medium-Term Notes, Series B, in February 2000, the issuance of $25 million 7.61% Senior Medium-Term Notes, Series B, in September 2000, and the issuance of $260 million 7.69% Senior Medium-Term Notes, Series C, in November 2000. Other Interest Expense decreased $4.2 million in the three month period ended March 31, 2001 compared to the same period in 2000 due primarily to interest offset related to the PGA.
Current construction expenditures for generation, transmission and distribution are designed to meet continuing customer growth and to improve efficiencies of PSE's energy delivery systems. Construction expenditures, excluding equity AFUDC, were $98.6 million for the three months ended March 31, 2001. Capital expenditures for the year are expected to be $247 million.
Puget Energy issued common stock for the Company's Stock Purchase and Dividend Reinvestment Plan of $6.4 million (263,462 shares) in the three months ended March 31, 2001 compared to $6.7 million (302,891 shares) for the same period in 2000.
On March 31, 2001, PSE had available $375 million in lines of credit with various banks, which provide credit support for outstanding bank loans and commercial paper of $267.2 million, effectively reducing the available borrowing capacity under these lines of credit to $107.8 million. In addition, PSE has agreements with several banks to borrow on an uncommitted, as available, basis at money-market rates quoted by the banks. There are no costs, other than interest, for these arrangements. There was $18.5 million outstanding under these arrangements at March 31, 2001.
22
In February 2001, PSE signed an unsecured revolving credit agreement with an investment bank for a period of four months of up to $125 million. At March 31, 2001, PSE had $125 million of borrowings outstanding under the agreement.
On March 31, 2001, InfrastruX and its subsidiaries had available $87 million in lines of credit with various banks, which provide credit support for outstanding bank loans of $38.6 million, effectively reducing the available borrowing capacity under these lines of credit to $48.4 million.
On December 8, 2000, PSE filed a request with the Washington Commission to pass through the rising costs of natural gas purchased for customers under terms of the long established purchased gas adjustment (PGA) mechanism. The PGA mechanism passes through to customers increases or decreases in the gas supply portion of the natural gas service rates based upon changes in the price of natural gas purchased from producers and wholesale marketers or changes in gas pipeline transportation costs. PSE does not profit from changes under the PGA. The PGA is separate from PSE's general gas service rates that have been under a rate stability plan since 1997. On January 11, 2001, the Washington Commission approved PSE's request to increase rates by an overall average of 26.4% to all natural gas customers effective January 12, 2001.
Puget Energy is exposed to market risks, including changes in commodity prices and interest rates.
PSE's energy related businesses are exposed to risks related to changes in commodity prices. As part of its business, PSE markets power to wholesale customers by entering into contracts to purchase or supply electric energy or natural gas at specified delivery points and at specified future delivery dates. PSE's energy risk management function manages PSE's core electric and gas supply portfolio.
PSE manages its energy supply portfolio to achieve three primary objectives:
(i) Ensure that physical energy supplies are available to serve retail customer requirements; (ii) Manage portfolio risks to limit undesired impacts on PSE financial results; and (iii) Optimize the value of PSE's energy supply assets.
The portfolio is subject to major sources of variability (e.g., hydro generation, temperature-sensitive retail sales, and market prices for gas and power). At certain times, these sources of variability can mitigate portfolio imbalances; at other times they can exacerbate portfolio imbalances.
Hedging strategies for PSE's energy supply portfolio interact with portfolio optimization activities. Some hedges can be implemented in ways that retain PSE's ability to use its energy supply portfolio to produce additional value; other hedges can only be achieved by forgoing optimization opportunities.
The prices of energy commodities are subject to fluctuations due to unpredictable factors including weather, generation outages and other factors that impact supply and demand. This commodity price risk is a consequence of purchasing energy at fixed and variable prices and providing deliveries at different tariff and variable prices. Costs associated with ownership and operation of production facilities are another component of this risk. PSE may use forward delivery agreements, swaps and option contracts for the purpose of hedging commodity price risk. Unrealized changes in the market value of these derivatives are generally deferred and recognized upon settlement along with the underlying hedged transaction. Effective January 1, 2001, pursuant to Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivative instruments to be recorded on the balance sheet at fair value, changes in the fair value of PSE's derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as a qualifying hedge under the statement. PSE does not consider its current operation to meet the definition of trading activities as described by the Emerging Issues Task Force of the Financial Accounting Standards Issue No. 98-10, "Accounting for Contracts involved in Energy Trading and Risk Management Activities".
23
At March 31, 2001, PSE had an after-tax asset of approximately $309.6 million of energy contracts designated as qualifying as cash flow hedges and a corresponding amount in other comprehensive income. PSE also had energy contracts that were marked-to-market through current earnings during the first quarter of 2001 of $31.9 million after-tax which includes $14.7 million for the cumulative effect of the accounting change. A hypothetical 10% increase in the market prices of natural gas and electricity prices would increase the fair value of qualifying cash flow hedges by appropriately $52.8 million after-tax and would decrease current earnings for those contracts marked-to-market in earnings by approximately $6.1 million after-tax.
In addition, PSE believes its current rate design, including its Optional Large Power Sales Rate, various special contracts and the PGA mechanism mitigate a portion of this risk.
Market risk is managed subject to parameters established by the Board of Directors. A Risk Management Committee separate from the units that manage these risks monitors compliance with PSE's policies and procedures. In addition, the Audit Committee of PSE's Board of Directors has oversight of the Risk Management Committee.
The Company believes interest rate risk of the Company primarily relates to the use of short-term debt instruments and new long-term debt financing needed to fund capital requirements. The Company manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. The Company does utilize bank borrowings, commercial paper and line of credit facilities to meet short-term cash requirements. These short-term obligations are commonly refinanced with fixed rate bonds or notes when needed and when interest rates are considered favorable. The Company may enter into swap instruments to manage the interest rate risk associated with these debts.
Contingencies arising out of the normal course of the Company's business exist at March 31, 2001. The ultimate resolution of these issues is not expected to have a material adverse impact on the financial condition, results of operations or liquidity of the Company.
(a) The following exhibits are filed herewith:
12-1 Statement setting forth computation of ratios of earnings to
fixed charges (1996 through 2000 and 12 months ended
March 31, 2001) for Puget Energy
25
12-2 Statement setting forth computation of ratios of earnings to
combined fixed charges (1996 through 2000 and 12 months ended
March 31, 2001) for PSE
(b) Reports on Form 8-K
Filed by Puget Energy:
Form 8-K dated April 17, 2001, Item 5 - Other Events, related to release of first quarter earnings.
Form 8-K filed January 10, 2001, Item 5 - Other Events, related to Declaring Dividends.
Form 8-K filed January 2, 2001, Item 5 - Other Events, related to Formation of Holding Company.
Filed by Puget Energy & Puget Sound Energy:
Form 8-K dated April 6, 2001, Item 5 - Other Events, related to Puget Sound Energy Announces Constructive Settlement with Industrial Customers.
Form 8-K filed March 13, 2001, Item 5 - Other Events, related to Puget Sound Energy, Industrial Customers Agree on New Power Arrangement.
Form 8-K filed January 29, 2001, Item 5 - Other Events, related to Proposal Threatens Puget Sound Energy's Ability to Serve Customers.
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
James W. Eldredge
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Date: May 9, 2001
Chief accounting officer and officer duly authorized to sign this report on behalf of each registrant