The following is additional information pertaining to the changes outlined in the above table.
Operating Revenues - Electric
Electric revenues for the three months ended September 30, 2001 were $474.3 million, a decrease of $412.4 million compared to the same period in 2000. Electric sales to other utilities and marketers in the western wholesale market, including the Pacific Northwest, decreased $303.3 million in the three months ended September 30, 2001 compared to the same period in 2000 due to decreased prices in the wholesale electricity market, while wholesale sales volumes declined by 3.4 billion kWh or 61.1% in the three months ended September 30, 2001 compared to the same period in 2000. Retail sales volumes declined 8.9% from 4.8 billion kWh in 2000 to 4.4 billion kWh in 2001. Retail sales revenue decreased 25.3% as a result of lower rates paid by industrial customers on market index rates and several index rate customers switching to transportation rate tariffs beginning in July 2001 as allowed by a Washington Commission order dated April 5, 2001 authorizing the establishment of a transportation tariff.
Electric revenues for the nine months ended September 30, 2001, were $2.0 billion, an increase of $196.5 million or 11.1% over the same period in 2000. Electric sales to other utilities and marketers in the western market, including the Pacific Northwest, increased $213.7 million in the nine months ended September 30, 2001 compared to the same period in 2000 due to increased prices in the wholesale electricity market while wholesale sales volumes declined by 4.7 billion kWh or 44.0% as compared to 2000. Retail sales volumes declined 7.0% from 15.8 billion kWh in 2000 to 14.7 billion kWh in 2001. Retail sales revenue increased slightly as a result of higher rates paid by industrial customers on market index rate tariffs and contracts offset by those customers switching to transportation rate tariffs beginning in July 2001. A 1.7% increase in the number of electric customers served also contributed to the increase in revenue.
Electric revenues in the third quarter of 2001 decreased significantly compared to that of the third quarter of 2000 due to decreased prices related to wholesale electric energy sales to other utilities and marketers and sales to customers whose rates are tied to a market index. Several factors, including the near historically low hydroelectric conditions in the Pacific Northwest and the increased consumer demand in California had raised wholesale market prices on the West Coast to unprecedented levels beginning in May 2000. Since June 2001, wholesale electric energy prices have dramatically declined due to several factors. PSE continues to operate without an electric rate adjustment mechanism.
Electric revenues were reduced by approximately $9.9 million and $13.4 million for the three and nine months ended September 30, 2001, respectively, related to a customer conservation incentive credit which was approved by the Washington Commission on April 25, 2001. The conservation incentive credit was to reduce customers' bills by $0.05 per kWh for each kWh reduction in excess of 10% from the same billing period in the prior year through December 31, 2001. On November 7, 2001, the Washington Commission approved PSE's request to terminate the conservation incentive credit program effective November 8, 2001.
On April 25, 2001, the Washington Commission approved "time-of-day" rates for approximately 300,000 residential electric customers for the period May 1, 2001 through September 30, 2001. On September 26, 2001, the Washington Commission authorized the extension of the "time-of-day" rates pilot program for residential customers through May 31, 2002 and to allow approximately 20,000 business customers to participate in a "time-of-day" rates program from October 1, 2001 through September 30, 2002. In the order, if the cumulative revenues collected under "time-of-day" tariffs during the beginning through the end of the programs exceed the revenues that would have been collected under the original tariffs, PSE must defer any overcollection and refund it to participating customers. Through September 30, 2001, revenues billed under the "time-of-day" tariff have been slightly less than original tariffs by an immaterial amount, thus no deferred liability was established at September 30, 2001. Personal Energy ManagementTM consumption information is available to all classes of customers. Customers are able to monitor their energy usage and shift usage to low-demand off-peak periods. This program reduces the demand for peak power generation.
Revenues from electric customers in the first nine months of 2001 and 2000 were reduced by a Residential and Farm Energy Exchange credit tariff in place since October 1, 1995. Under the rate plan approved by the Washington Commission in its merger order, PSE reflected in customers' bills the level of Residential Exchange benefits in place at the time of the merger with Washington Energy Company in 1997. On January 29, 1997, PSE and Bonneville Power Administration (BPA) signed an agreement under which PSE received payments from BPA of approximately $235 million over an approximately five-year period that ended June 2001. These payments were recorded as a reduction of purchased electricity expenses.
On June 13, 2001, the Washington Commission approved an amended Residential Purchase and Sale Agreement between PSE and BPA, under which PSE's residential and small farm customers would receive benefits of federal power. Completion of this agreement enables PSE to continue to provide, and in fact increase, effective January 1, 2002, the Residential and Farm Energy Exchange credit. Under the amended settlement agreement, PSE will receive cash payments during the period July 1, 2001 through September 30, 2006 and benefits in the form of power and/or cash equivalent to approximately 648 annual average MW from October 1, 2006 through September 30, 2011. The level and form of any federal benefits to be received by PSE's residential and small farm customers may vary, depending on the outcome of regulatory and legal proceedings and reviews. For calendar 2001, the benefits of the Residential and Farm Energy Exchange credited to customers is anticipated to be approximately $103.2 million as compared to an offsetting reduction in Purchased Electricity Expense of $72.9 million. Beginning July 1, 2001, the cash payments received from BPA by PSE will be passed-through to eligible residential and small farm customers, with an offsetting reduction in Purchased Electricity Expense recorded. PSE expects payments from BPA spread monthly in the amount of $127.3 million for the period January 2002 through September 2002 and $702.2 million for the period October 2002 through September 2006.
To implement this agreement for rate purposes, the Washington Commission approved tariff revisions to transfer the Residential and Farm Energy Exchange credit in effect since October 1, 1995 in the amount of 1.085 cents per kWh, to general rates effective July 1, 2001. Also approved was a supplemental Residential and Farm Energy Exchange credit for eligible residential and small farm customers. This Residential and Farm Exchange Benefit Supplemental Rider will be a credit of 0.265 cents per kWh for the period January 1, 2002 through September 30, 2002, 0.600 cents per kWh for the period October 1, 2002 through May 31, 2006 and 1.050 cents per kWh for the period June 1, 2006 through September 30, 2006. The approval of the tariffs by the Washington Commission, effective July 1, 2001, was without predetermining or prejudicing any argument as to whether or how the terms of the Washington Commission's order dated February 5, 1997, regarding the merger of Washington Natural Gas Company and Puget Sound Power and Light Company into Puget Sound Energy, "have been fulfilled, or as of what effective date any relief, if warranted, should be granted". On October 17, 2001, the Public Counsel Section of the Washington State Attorney General's Office filed a complaint with the Washington Commission stating PSE has violated the Washington Commission's 1997 merger order by following the Commission's order issued June 13, 2001 in connection with the BPA Residential Exchange. The Public Counsel's complaint is that PSE's residential and small farm customers should receive both the benefits of the residential exchange credit in place prior to June 30, 2001, and in addition, the benefits of the amended Residential Purchase and Sale Agreement effective July 1, 2001, even though BPA is paying to PSE only the amounts under the amended agreement. If Public Counsel's position were upheld, PSE's electric revenues for the last six months of 2001 would be reduced by approximately $47.9 million. While PSE believes this complaint is without merit, PSE is unable to predict the outcome of this proceeding.
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 hydroelectric generation and weather effects on customer demand, from time to time, PSE may have surplus power available for sale to wholesale customers. PSE manages its core energy portfolio through short and intermediate-term purchases, sales, arbitrage and other risk management techniques. PSE also operates its combustion turbine plants located in Western Washington when it is cost-effective to do so. During the first nine months of 2001, PSE has operated its combustion turbine plants extensively to meet retail load requirements. PSE's Risk Management Committee oversees energy price risk matters.
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. At September 30, 2001, such receivables, net of reserves, were approximately $26.6 million.
Operating Revenues - - Gas
Gas operating revenues for the three months ended September 30, 2001 increased by $19.0 million from the same period in 2000. Total gas sales volumes decreased 2.8% from 136.2 million therms in 2000 to 132.4 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 in gas rates to all sales customers under the PGA of 30.2% and 26.4% were effective August 1, 2000 and January 12, 2001, respectively. Offsetting this is an 8.9% decrease in gas rates under the PGA to all sales customers effective September 1, 2001.
For the nine months ended September 30, 2001, gas operating revenues increased $182.8 million or 48.6% from $376.3 million in the nine months ended September 30, 2000, to $559.1 million in the nine months ended September 30, 2001, while total gas volumes decreased 4.9%. The increase in revenues in the period was primarily due to net higher natural gas rates as previously mentioned.
Operating Revenues - Other
Other operating revenues for the three and nine months ended September 30, 2001 increased by $34.1 million and $130.6 million from the same periods in 2000. This increase in other operating revenues was due primarily to InfrastruX, which has acquired several companies beginning in the third quarter of 2000. InfrastruX contributed to an increase of $36.5 million and $110.5 million for the three and nine month periods ended September 30, 2001, respectively, and PSE's subsidiary, Puget Western, Inc. contributed to an increase of $26.9 million from property sales in the nine months of 2001.
Operating Expenses
Purchased electricity expenses decreased $399.1 million for the three months ended September 30, 2001 compared to the same period in 2000 and increased $92.1 million for the nine months ended September 30, 2001 compared to the same period in 2000. The three-month period decrease reflects the dramatic decline of wholesale electricity prices since June 2001 from year-ago levels. The nine month period increase was due primarily to increased prices for non-firm power from other utilities and marketers in the West Coast power market during a period of near historic low hydroelectric conditions, moderated by the decline of wholesale electricity prices from year-ago levels beginning in June 2001. In addition, PSE experienced an 83 day unplanned outage of one of PSE's 104 MW combustion turbine electric generating units located at its Fredonia generating station during the first half of 2001.
Purchased gas expenses increased $15.1 million and $181.5 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000. The increase was due primarily to the impact of increased gas costs, which are passed through to customers through the PGA mechanism.
Electric generation fuel expense increased $12.6 million and $127.4 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 as a result of increased generation and higher fuel costs at PSE-owned combustion turbine facilities. These facilities operated at much higher levels during the nine months ended September 30, 2001 compared to the same period in 2000 due to adverse hydroelectric conditions.
Utility operations and maintenance increased $8.3 million and $21.6 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 primarily due to costs related to the Personal Energy ManagementTM energy-efficiency program, increases in non-production costs, repair costs associated with the earthquake in the Pacific Northwest on February 28, 2001, and a net cost of $1.0 million after insurance recovery of $11.8 million to repair the PSE-owned Fredonia combustion turbine plant which was out of service from February 21, 2001 through May 14, 2001. PSE has received a partial payment of $4.0 million associated with the $11.8 million insurance claim and is awaiting payment on the remainder. PSE's Personal Energy Management program helps to minimize energy purchases at peak times when electric energy is most costly.
InfrastruX's operations and maintenance expenses for the three and nine months ended September 30, 2001 were $30.9 million and $95.8 million higher than comparable periods in 2000 due to the activities of its subsidiaries that were acquired beginning in the third quarter of 2000.
Depreciation and amortization expense increased $4.5 million and $15.4 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 due primarily to the effects of new plant placed into service during the past year. Also contributing to the increase are the acquisitions by InfrastruX which increased depreciation and amortization by $1.5 million and $4.5 million for the three and nine month periods, respectively.
Financial Accounting Standards Board Statement No. 133 ("Statement No.133") was adopted on January 1, 2001. During the three months ended September 30, 2001 a decrease to current earnings of approximately $0.6 million pre-tax ($0.4 million after-tax) was recognized for unrealized losses associated with electric derivative transactions during the quarter. During the nine months ended September 30, 2001 an increase to current earnings of approximately $14.5 million pre-tax ($9.4 million after-tax) was recognized for unrealized gains associated with electric derivative transactions and a $14.7 million after-tax transition adjustment loss was recorded during the nine months ended September 30, 2001 resulting from recognizing the cumulative effect of this change in accounting principle. (For further discussion see Note 6).
Taxes other than federal income taxes decreased $3.9 million and increased $9.1 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 primarily due to municipal and state excise taxes which are revenue based.
Other Income
Other income, net of federal income tax, increased $2.6 million and decreased $5.1 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000, due primarily to an $8 million gain from sale of the assets of ConneXt to Alliance Data Systems offset by ConneXt's operating loss of approximately $1 million through the date of the sale in the third quarter of 2001. Other income also includes an increase in goodwill amortization expense related to acquisitions by InfrastruX during the three and nine months ended September 30, 2001 of $0.1 million and $1.2 million, respectively.
Interest Charges
Interest charges, which consist of interest and amortization on long-term debt and other interest, increased $3.0 million and $11.9 million for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000. Interest on long-term debt increased $8.9 million and $22.6 million in the three and nine month periods ended September 30, 2001 compared to the same period in 2000 as a result of the issuance of $25 million 7.61% Senior Medium-Term Notes, Series B, in September 2000, the issuance of $260 million 7.69% Senior Medium-Term Notes, Series C, in November 2000, and the issuance of $200 million 8.40% Trust Preferred Securities in May, 2001. Other Interest Expense decreased $5.9 million and $10.7 million in the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 due primarily to interest offset related to the PGA and lower interest rates on lower short term borrowing.
Capital Expenditures, Capital Resources and Liquidity
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 $194.9 million for the nine months ended September 30, 2001 compared to $223.2 million for the same period in 2000. 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 (265,400 shares) and $19.2 million (799,680 shares) in the three and nine months ended September 30, 2001 compared to $6.6 million (274,498 shares) and $16.6 million (716,485 shares) for the same periods in 2000.
On September 30, 2001, PSE had available $375.0 million in lines of credit with various banks, which provide credit support for outstanding bank loans and commercial paper of $201.1 million, effectively reducing the available borrowing capacity under these lines of credit to $173.9 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 $100.5 million outstanding under these arrangements at September 30, 2001.
On September 30, 2001, InfrastruX and its subsidiaries had available $166.5 million in lines of credit with various banks, which provide credit support for outstanding bank loans of $79.8 million, effectively reducing the available borrowing capacity under these lines of credit to $86.7 million.
Because of the steep decline in wholesale electric prices since June 30, 2001 and the record low hydro conditions, PSE estimates that the value of its projected surplus electric supply has declined significantly. That decline in value increased PSE's projected net power costs, resulting in a significant under recovery in rates of those costs. Therefore, on August 21, 2001, PSE made a filing with the Washington Commission for emergency rate relief in the form of a cost-recovery mechanism whereby customers' electric bills would be linked to PSE's actual net power costs. Through this mechanism, PSE sought to immediately begin deferring the difference between its net power costs and the amounts currently being recovered through existing customer rates and reflect these amounts in customers' bills beginning November 2001. This plan would remain in place until PSE's general rate case, which will be filed in November 2001, is decided. On October 4, 2001, the Washington Commission denied PSE's request.
On October 12, 2001, PSE filed a petition for reconsideration and rehearing of the decision, asking the Washington Commission to grant a hearing to hear evidence of the adverse impacts on credit quality (because of the decline in earnings and cash flows), costs to customers and, ultimately, the liquidity of the Company that denial of emergency relief, and, thereby continued under recovery of power costs, would cause. On October 24, 2001, the Washington Commission denied PSE's petition. PSE is expected to file a general rate case in November 2001. General rate cases in Washington state typically take 11 months to complete. PSE also expects to file in November 2001 a request for interim rate relief. Without interim rate relief, the projected increase in PSE's net power costs for the remainder of 2001 and 2002 will result in significant negative impacts on estimated electric margins. Current estimates of expected under recovery of power costs for the period September through December 31, 2001 and for calendar 2002 are $100 million and $175 million, respectively.
On October 8, 2001, Standard & Poor's lowered its long-term ratings on Puget Energy and PSE following the Washington Commission's order of October 4, 2001 denying PSE's request of August 21, 2001 for a power cost recovery mechanism and interim rate relief. On October 30, 2001, Standard & Poor's further downgraded its long-term ratings of Puget Energy and PSE following the Washington Commission's order of October 24, 2001, denying PSE's petition that the Washington Commission reconsider their October 4, 2001 decision.
On October 9, 2001, Moody's Investor Service placed the rating of Puget Energy and PSE under review for possible downgrade as a result of the Washington Commission's order of October 4, 2001. On October 26, 2001, Moody's issued a report stating they were continuing their review for possible downgrade of its long-term ratings until the Washington Commission acted on PSE's expected filing for interim rate relief (after PSE's general rate case filing November 2001).
As a result of recent rating agency downgrades, PSE's borrowing cost will increase and its access to capital markets may become more limited.
Other
In October 2000, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of Senior Notes secured by a pledge of First Mortgage Bonds, Subordinated Debentures or Trust preferred Securities. On November 9, 2000, PSE issued $260 million principal amount of 7.69% Senior Medium-Term Notes, Series C. The Notes are due February 1, 2011. On May 24, 2001, PSE issued $200 million principal amount of 8.40% Trust Preferred Securities. The Trust Preferred Securities have a maturity date of June 30, 2041.
On October 31, 2001, a Purchased Gas Adjustment ("PGA") Incentive Mechanism in place since July 1, 1998 expired. The PGA Incentive Mechanism's purpose was to encourage competitive gas purchasing and management of pipeline and gas storage in order to benefit both customers and shareholders of PSE. PSE will consider whether to extend or revise the PGA Incentive Mechanism in the context of its upcoming general rate case.
On June 18, 2001, the Federal Energy Regulatory Commission issued an order extending its price mitigation plan for the California wholesale sales to the entire 11 state western region. Under the plan, the market price of wholesale sales will be based upon the bid price of the highest cost gas-fired unit located in California that is needed to serve the California Independent Systems Operator's load when the generating operating reserves in California are below 7 percent. The bid price will reflect a published gas cost plus an additional amount for operating and maintenance expenses. The mitigation plan will terminate September 30, 2002.
On July 24, 2001, PSE filed a request with the Washington Commission to lower gas rates due to lower natural gas costs purchased for customers under terms of the Purchased Gas Adjustment (PGA) mechanism. On August 29, 2001, the Washington Commission approved a decrease in PSE natural gas rates by 8.9 % effective September 1, 2001. 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's gas margin and net income is not affected by changes under the PGA.
On July 25, 2001, the Federal Energy Regulatory Commission (FERC) ordered an evidentiary hearing to determine what refunds California energy buyers are due for purchases in the spot markets operated by the California Independent System Operator Corporation or the California Power Exchange Corporation covering the period October 2, 2000 through June 20, 2001. The presiding Administrative Law Judge in this proceeding has set a trial schedule through March 8, 2002 when the presiding Administrative Law Judge will issue his finding of fact and record on the matter. PSE entered into transactions that may be subject to refund in this proceeding and is unable to predict the outcome of this FERC proceeding or any judicial proceeding arising therefrom.
On July 25, 2001, FERC also established a separate preliminary evidentiary proceeding for the purpose of exploring whether there have been excessive charges for spot market sales in the Pacific Northwest for the period December 25, 2000 through June 20, 2001. The presiding Administrative Law Judge in this Pacific Northwest proceeding has issued a recommendation that refunds with respect to such charges during such period were not warranted. FERC is reviewing this recommendation. PSE made transactions that may be subject to refund in this proceeding. PSE is unable to predict the outcomes of this FERC proceeding or any judicial proceeding arising therefrom.
In August 2001, Schlumberger North America paid off their outstanding loan balance of $64.1 million due PSE under the Schlumberger/CellNet agreement. The loans were made by PSE to Schlumberger/CellNet so Schlumberger/CellNet could finance the Automated Meter Reading ("AMR") network system deployment in PSE's service territory. The network system was used as collateral for the loan.
On August 30, 2001, PSE and Alliance Data Systems Corp. announced a contract under which Alliance Data will provide data processing and billing services for PSE. In providing services to PSE under the 10-year agreement, Alliance Data will use ConsumerLinX software, PSE's customer-information software developed by its ConneXt subsidiary. Alliance Data acquired the assets of ConneXt, including the use of the ConsumerLinX software for 10 years. Alliance Data will offer ConsumerLinX as part of its integrated, single-source customer relationship management solution for large-scale, regulated utility clients.
Puget Energy is exposed to market risks, including changes in commodity prices and interest rates.
Commodity Price Risk
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 Board Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities".
At September 30, 2001, PSE had an after-tax net liability of approximately $42.1 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 for the three and nine month periods of $0.4 million and $5.3 million after-tax which includes $14.7 million for the cumulative effect of the accounting change in the first quarter. 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 approximately $9.0 million after-tax and would have an immaterial impact on current earnings for those contracts marked-to-market in earnings.
In addition, PSE believes its current rate design, including the various special contracts and the PGA mechanism mitigate a portion of the commodity price 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.
Interest rate risk
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.
Statement Regarding Forward-Looking Statements
The Company is including the following cautionary statement in this Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of the Company. This report includes forward-looking statements, such as statements of the Company's plans, objectives, expectations and intentions. Words such as "anticipate," "believe," "expect," "future" and "intend" and similar expressions are used to identify forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.
Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, but there can be no assurance that the Company's expectations, beliefs or projections will be achieved or accomplished.
In addition to other factors and matters discussed elsewhere in this report, some important factors that could cause actual results or outcomes for the Company to differ materially from those discussed in forward-looking statements include:
o prevailing legislative developments, governmental policies and regulatory
actions with respect to allowed rates of return, financings, or industry and
rate structures;
o weather and hydroelectric conditions;
o wholesale energy
prices;
o effectof competition;
o changes in and compliance with environmental
and endangered species laws and policies;
o population growth rates and
demographic patterns;
o capital market conditions; and
o legal and regulatory
proceedings.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
On October 17, 2001, the Public Counsel Section of the Washington State Attorney General's Office filed a complaint with the Washington Commission stating PSE has violated the Washington Commission's 1997 merger order by following the Commission's order issued June 13, 2001 in connection with the BPA Residential Exchange. The Public Counsel's complaint is that PSE's residential and small farm customers should receive the benefits of the residential exchange credit in place prior to June 30, 2001 in addition to the benefits of the amended Residential Purchase and Sale Agreement effective July 1, 2001, thus providing PSE's customers the benefits twice. If Public Counsel's position were upheld, PSE's electric revenues for the last six months of 2001 would be reduced by approximately $47.9 million. While PSE believes this complaint is without merit, PSE is unable to predict the outcome of this proceeding.
Contingencies arising out of the normal course of the Company's business exist at September 30, 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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Exhibit Index for list of exhibits.
(b) Reports on Form 8-K
Filed by Puget Energy:
---------------------
Form 8-K dated July 19, 2001, Item 5 - Other Events, related to the release
of second quarter earnings.
Filed by Puget Energy & Puget Sound Energy:
------------------------------------------
Form 8-K dated August 30, 2001, Item 5 - Other Events, related to a
strategic partnership with Alliance Data Systems.
Form 8-K dated August 30, 2001, Item 5 - Other Events, related to Puget
Sound Energy filing a rate design proposal with the Washington Utilities And
Transportation Commission for recovering net power costs.
Form 8-K dated September 19, 2001, Item 5 - Other Events, related to the
Washington Utilities and Transportation Commission Order establishing a
procedural hearing on the rate design proposal filed August 21, 2001.
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.
PUGET ENERGY, INC.
PUGET SOUND ENERGY, INC.
James W. Eldredge
-----------------------------
James W. Eldredge
Corporate Secretary and Chief Accounting Officer
Date: November 9, 2001
Chief accounting officer and officer duly authorized to sign this report on behalf of each registrant
EXHIBIT INDEX
- -------------
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 September 30, 2001) for Puget
Energy.
12-2 Statement setting forth computation of ratios of earnings to fixed
charges (1996 through 2000 and 12 months ended September 30, 2001) for PSE.
