<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
_____________________________
Commission File Number 1-4393
_____________________________
PUGET SOUND ENERGY, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0374630
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
411 - 108th Avenue N.E., Bellevue, Washington 98004-5515
(Address of principal executive offices)
(206) 454-6363
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares of registrant's common stock outstanding at October 31,
1997 was 84,560,689.
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except shares and per share amounts)
(Unaudited)
<CAPTION>
Pro Forma
Three Months Ended June 30, 1997 1996 1996
(Note 1)
- ------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Electric $ 269,977 $ 257,318 $ 257,318
Gas 71,930 148,673 78,694
Other 10,711 8,607 7,808
--------- --------- ---------
Total operating revenue 352,618 414,598 343,820
--------- --------- ---------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 111,324 96,863 96,862
Purchased gas 29,384 69,465 33,395
Utility operations and maintenance 72,490 68,488 66,014
Other operations and maintenance 5,904 7,209 7,114
Depreciation and amortization 38,131 36,390 36,378
Taxes other than federal income taxes 35,328 40,569 34,922
Federal income taxes 14,824 25,373 16,048
--------- --------- ---------
Total operating expenses 307,385 344,357 290,733
--------- --------- ---------
OPERATING INCOME 45,233 70,241 53,087
OTHER INCOME 17,804 845 (33)
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES 63,037 71,086 53,054
INTEREST CHARGES 29,597 29,257 29,256
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 33,440 41,829 23,798
DISCONTINUED OPERATIONS -- 419 (327)
--------- --------- ---------
NET INCOME 33,440 41,410 23,471
Less: Preferred stock dividends accrual 5,415 5,518 5,518
--------- --------- ---------
INCOME FOR COMMON STOCK $ 28,025 $ 35,892 $ 17,953
========= ========= =========
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 84,561,055 84,400,401 84,441,732
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ 0.33 $ 0.43 $ 0.22
From discontinued operations -- -- (0.01)
--------- --------- ---------
EARNINGS PER COMMON SHARE $ 0.33 $ 0.43 $ 0.21
========= ========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except shares and per share amounts)
(Unaudited)
<CAPTION>
Pro Forma
Six Months Ended June 30, 1997 1996 1996
(Note 1)
- ------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Electric $ 569,545 $ 588,326 $ 588,326
Gas 228,419 269,198 227,367
Other 18,070 16,490 15,335
--------- --------- ---------
Total operating revenue 816,034 874,014 831,028
--------- --------- ---------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 241,644 219,962 219,962
Purchased gas 101,345 125,242 102,860
Utility operations and maintenance 145,268 138,040 135,685
Other operations and maintenance 11,745 14,419 14,111
Depreciation and amortization 76,568 72,808 72,809
Merger and related costs 55,789 -- --
Taxes other than federal income taxes 81,475 83,926 80,429
Federal income taxes (81) 62,012 57,434
--------- --------- ---------
Total operating expenses 713,753 716,409 683,290
--------- --------- ---------
OPERATING INCOME 102,281 157,605 147,738
OTHER INCOME 22,707 1,991 1,448
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES 124,988 159,596 149,186
INTEREST CHARGES 58,940 59,191 58,772
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 66,048 100,405 90,414
DISCONTINUED OPERATIONS (2,622) 686 (746)
--------- --------- ---------
NET INCOME 63,426 99,719 89,668
Less: Preferred stock dividends accrual 10,963 11,015 11,016
--------- --------- ---------
INCOME FOR COMMON STOCK $ 52,463 $ 88,704 $ 78,652
========= ========= =========
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 84,559,600 84,374,601 84,420,233
========== ========= ==========
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ 0.65 $ 1.06 $ 0.94
From discontinued operations (0.03) (0.01) (0.01)
--------- -------- ---------
EARNINGS PER COMMON SHARE $ 0.62 $ 1.05 $ 0.93
========= ======== =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
June 30 December 31
1997 1996
- ------------------------------------------------- --------- ---------
UTILITY PLANT:
Electric $3,533,035 $3,479,652
Gas 1,195,794 1,129,849
Less: Accumulated depreciation and amortization (1,551,813) (1,493,024)
--------- ---------
Net utility plant 3,177,016 3,116,477
--------- ---------
OTHER PROPERTY AND INVESTMENTS:
Investment in Bonneville Exchange Power Contract 82,881 86,772
Investment in Cabot 70,496 69,014
Subsidiary properties and investments 70,637 80,770
Other 38,262 43,444
--------- ---------
Total other property and investments 262,276 280,000
--------- ---------
CURRENT ASSETS:
Cash 18,898 4,335
Accounts receivable 213,524 263,245
Less: Allowance for doubtful accounts (2,304) (1,700)
Materials and supplies, at average cost 57,699 61,638
Prepayments and other 4,664 10,458
PRAM accrued revenues -- 40,470
--------- ---------
Total current assets 292,481 378,446
--------- ---------
LONG-TERM ASSETS:
Regulatory asset for deferred income taxes 271,988 242,454
Unamortized energy conservation charges 41,599 44,673
Other 133,887 165,420
--------- ---------
Total long-term assets 447,474 452,547
--------- ---------
TOTAL ASSETS $4,179,247 $4,227,470
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
June 30 December 31
1997 1996
- ------------------------------------------------- --------- ---------
CAPITALIZATION:
Common shareholders' investment:
Common stock, $10 stated value,
150,000,000 shares authorized,
84,560,844 and 84,511,245 shares outstanding $ 845,608 $ 845,112
Additional paid-in capital 447,814 446,910
Earnings reinvested in the business 76,710 86,355
--------- ---------
1,370,132 1,378,377
Preferred stock not subject to
mandatory redemption 200,037 215,000
Preferred stock subject to
mandatory redemption 86,640 87,839
Corporation obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the corporation 100,000 --
Long-term debt 1,162,686 1,165,584
--------- ---------
Total capitalization 2,919,495 2,846,800
--------- ---------
CURRENT LIABILITIES:
Accounts payable 77,132 95,736
Short-term debt 104,673 298,122
Current maturities of long-term debt 102,894 100,062
Purchased gas liability 16,673 41,368
Accrued expenses:
Taxes 99,934 57,419
Salaries and wages 21,719 28,215
Interest 30,424 27,173
Other 34,194 51,906
--------- ---------
Total current liabilities 487,643 700,001
--------- ---------
DEFERRED INCOME TAXES 616,999 586,661
--------- ---------
OTHER DEFERRED CREDITS 155,110 94,008
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $4,179,247 $4,227,470
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Pro Forma
Six Months Ended June 30 1997 1996 1996
(Note 1)
- ------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
- --------------------
Net income $ 63,426 $ 99,719 $ 89,668
Adjustments to reconcile net income to
net cash provided by operating activities:
Pre-tax loss on writedown of coal properties 4,044 -- --
Depreciation and amortization 76,568 72,808 72,809
Deferred income taxes and tax credits - net 1,845 9,018 5,137
PRAM accrued revenues 40,737 36,565 36,565
Other 88,489 (6,750) (8,544)
Change in certain current assets
and liabilities 21,953 62,552 82,882
- -----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 297,062 273,912 278,517
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- --------------------
Construction expenditures - excluding equity AFUDC (115,742) (104,645) (110,005)
Additions to energy conservation program (508) (3,160) (3,323)
Other 15,975 (7,855) (7,327)
- -----------------------------------------------------------------------------------------
Net Cash Provided (Used) by
Investing Activities (100,275) (115,660) (120,655)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- --------------------
Decrease in short-term debt (181,890) (58,274) (51,719)
Dividends paid (83,907) (81,621) (81,648)
Issuance of common and preferred securities 100,070 1,909 1,858
Issuance of bonds -- 34,592 17
Redemption of bonds and notes -- (65,141) (35,001)
Redemption of preferred stock (15,788) (1,199) (1,199)
Other (748) (18) (18)
- -----------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (182,263) (169,752) (167,710)
- -----------------------------------------------------------------------------------------
Increase (Decrease) in Cash 14,524 (11,500) (9,848)
Cash at Beginning of year 4,335 21,814 21,814
Adjustment to conform fiscal year of WECo 39 -- (1,623)
- -----------------------------------------------------------------------------------------
Cash at End of Period $ 18,898 $ 10,314 $ 10,343
=========================================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Puget Sound
Energy, Inc. ("the Company"), formerly Puget Sound Power & Light Company
("PSPL"), and its wholly-owned subsidiaries, after elimination of all
significant intercompany items and transactions.
The financial statements contained in this Form 10-Q are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
the results for the interim periods have been reflected and were of a normal
recurring nature other than as described in footnotes 2 & 5.
These condensed financial statements should be read in conjunction with the
Company's current report on Form 8-K filed with the Securities and Exchange
Commission on October 24, 1997 as well as the financial statements and the
notes thereto contained in the Annual Report to Stockholders and Form 10-K
filed with the Securities and Exchange Commission for the Company and
Washington Energy Company ("WECo") for the fiscal years ended December 31,
1996 and September 30, 1996, respectively.
On February 10, 1997, the Company consummated its merger with WECo. The
merger has been accounted for as a pooling of interests. Accordingly, the
consolidated financial statements have been retroactively restated to include
the results of operations, financial position and cash flows of WECo for all
periods prior to consummation of the merger.
PSPL's fiscal year-end was December 31 and WECo's fiscal year-end was
September 30. The financial data for the three and six month periods ended
June 30, 1996 reflect the combined results for periods ended June 30, 1996
for PSPL and March 31, 1996 for WECo. Pro forma financial data for the
periods ended June 30, 1996 reflect results for the three and six months
ended June 30, 1996 for both PSPL and WECo.
Effective with the merger, WECo's 1996 fiscal year-end was changed from
September 30 to December 31 to conform to the Company's year-end.
Accordingly, WECo's operations for the three months ended December 31, 1996,
have been reported as an adjustment of $10.8 million to consolidated retained
earnings in the first quarter of 1997. WECo's revenues for the three months
ended December 31, 1996, were $148.6 million, net income was $16.9 million,
common stock issued was $1.0 million and common stock dividends declared were
$6.1 million for the same period.
Included in consolidated results of operations for the month of January 1997
(the merger was effective February 10, 1997) and for the six months ended
June 30,1996, are the following results of the previously separate companies
for those periods:
MONTH ENDED JANUARY 31, 1997
(Dollars in Thousands)
-----------------------------------------
Company WECo Consolidated
---------- --------- ------------
Revenues $123,051 $60,486 $183,537
Net Income $19,671 $9,378 $29,049
Common Dividends Declared $29,244 -- $29,244
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996
(Dollars in Thousands)
---------------------------------------
Company WECo Consolidated
-------- -------- ------------
Revenues $591,229 $282,785 $874,014
Net Income $ 68,051 $ 31,668 $ 99,719
Common Dividends Declared $ 58,550 $ 12,049 $ 70,599
(2) MERGER WITH WASHINGTON ENERGY COMPANY
Effective February 10, 1997, WECo and its wholly-owned subsidiary,
Washington Natural Gas Company ("WNG") were merged into PSPL which then
changed its name to Puget Sound Energy, Inc.
Pursuant to the Agreement and Plan of Merger ("Merger Agreement") between
the two companies, each share of WECo common stock was exchanged for 0.86
share of the Company's common stock (approximately 20,921,000 shares of
Company stock were issued). On February 10, 1997, the Company increased the
number of authorized shares to 150,000,000. Based on the capitalization of
the Company and WECo on February 10, 1997, holders of the Company's and
WECo's common stock held approximately 75% and 25% respectively, of the
aggregate number of outstanding shares of the merged company's common stock.
In accordance with the Merger Agreement, the preferred stock of Washington
Natural Gas Company, a wholly-owned subsidiary of WECo, was converted into
preferred shares of the merged company. The merger has been structured as a
tax-free exchange of shares, and has been accounted for as a pooling of
interests for financial statement purposes.
The order approving the merger, issued by the
Washington Commission, contains a rate plan that is designed to provide a
five-year period of rate certainty for customers and provide the Company
with an opportunity to achieve a reasonable return on investment. As
required under the stipulated settlementmerger order, the Company filed
tariffs, effective February 8, 1997, that resulted in an average electric
rate decrease of 5.6% related to the termination of the Periodic Rate
Adjustment Mechanism ("PRAM"), and an increase in electric general rates of
between 1.0% and 2.5%, depending on rate class. The general rate increase
has a positive impact on earnings while the decrease related to the PRAM
does not affect earnings because all previously accrued PRAM revenues were
fully collected. The net impact on customer rates was an average rate
decrease of 3.7%, including a decrease in residential rates of 3.24%.
General electric rates for residential and industrial customers will
increase by 1.5% on January 1 of each of the four following years, while
those for small commercial customers will increase by 1.0% in each of the
following three years. General rates for all classes of natural gas
customers will remain unchanged until January 1, 1999, when they will
decrease sufficiently to reduce utility margin by 1 percent.
In connection with the merger, the Company recognized direct and indirect
merger-related expenses of $55.8 million during the first quarter of 1997.
The charge consisted primarily of severance costs of $15.5 million, benefit-
related curtailment costs of $9.1 million, transaction costs of $13.7
million and systems and facilities integration costs of $7.2 million. The
nonrecurring charge reduced net income by approximately $36.3 million ($0.43
per share) in the six months ended June 30, 1997. In addition, merger
related costs of $4.8 million were recognized in the fourth quarter of 1996
by PSPL.
<PAGE>
(3) EARNINGS PER COMMON SHARE
Earnings per common share for the three and six months ended June 30, 1997
and 1996 have been computed by dividing income for common stock by the
weighted average number of common shares outstanding after adjusting WECo's
historical amounts for the conversion into .86 shares of the Company's common
stock.
(4) UNAMORTIZED ENERGY CONSERVATION COSTS
Certain of the Company's energy conservation expenditures are accumulated as
unamortized conservation charges. These costs are amortized over various
future periods up to ten years at the direction of the Washington
Commission. The Company's total remaining unamortized conservation balance
at June 30, 1997, was $41.6 million. On August 6, 1997, the Company sold
its remaining $35.2 million unamortized investment in customer-owned energy
conservation measures to a grantor trust. The proceeds of the sale were
used to pay down short-term debt. The Company recognized no gain or loss on
the sale.
(5) DISCONTINUED OPERATIONS
On March 5, 1997, the Company conveyed its interests in undeveloped coal
properties through its wholly-owned subsidiary Thermal Energy, Inc. to Wesco
Resources, Inc. effective February 1, 1997. In return for this conveyance,
Wesco Resources, Inc. agreed to assume future coal property obligations and
liabilities and to pay the Company a 2% royalty on coal mined from the
transferred coal properties now held by Wesco Resources, Inc. In the
September 1996 consolidated financial statements of WECo these activities
were reflected as discontinued operations. The Company has determined, based
on a report by mining consultants, that the development of the transferred
coal properties in the foreseeable future is speculative. As a result, the
Company does not expect to receive any amounts under the 2% royalty
agreement. Therefore, in March 1997, the Company's remaining $4.0 million
investment in Thermal Energy, Inc. was written off to expense and appears in
the consolidated financial statements as discontinued operations. Prior
periods have been restated to include Thermal Energy, Inc. operations as
discontinued operations.
<PAGE>
(6) Consolidated Statements of Cash Flows
The following provides additional information concerning cash flow
activities:
<TABLE>
<CAPTION>
1996
Six Months Ended June 30 1997 1996 Pro Forma
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in current asset and current liabilities:
Accounts receivable $ 69,993 $ 27,393 $ 67,361
Materials and supplies 40 20,201 11,726
Prepayments and Other 6,567 583 2,718
Purchased gas liability (19,168) 28,687 19,684
Accounts payable (40,635) (12,615) (8,530)
Accrued expenses and Other 5,156 (1,697) (10,077)
- ---------------------------------------------------------------------------------------
Net change in current assets and current liabilities $ 21,953 $ 62,552 $ 82,882
=======================================================================================
Cash payments:
Interest (net of capitalized interest) $ 56,595 $ 57,967 $ 59,133
Income taxes $(48,684) $ 41,000 $ 41,000
- ---------------------------------------------------------------------------------------
</TABLE>
(7) Other
In the first quarter of 1997, the Company recorded an income tax refund of
$57 million associated with the method of accounting for taxes related to
conservation expenditures for the years 1991-1994. The benefit of the tax
refund, as a result of an agreement between the Company and the Washington
Commission, was passed on to retail customers as a $48.6 million reduction of
the PRAM accrued revenue balance. The $48.6 million reduction in revenues
was offset by a $17 million decrease in federal income taxes related to the
reduction in PRAM revenues, a $26.5 million reduction in federal income taxes
as a result of the change in accounting for conservation expenditures, $4.6
million in interest income (net of tax) relating to the tax refund and a $.8
million reduction in other taxes. The overall affect of recording the
conservation tax refund and the related PRAM entries was an increase to net
income of approximately $.3 million.
On June 26, 1997, the Company received a $48.9 million payment from the
Internal Revenue Service ("IRS") with regard to the abandonment of terminated
nuclear project ("WNP-3") of the Washington Public Power Supply System. The
$48.9 million was comprised of a tax refund in the amount of $24 million and
interest owed the Company by the IRS in the amount of $24.9 million. The
Company did not take a federal income tax deduction for the abandoned plant
in 1985 because the Company exchanged the investment in WNP-3 for a power
contract in settlement of its lawsuit against BPA and did not believe the IRS
would allow the deduction. However, the Company did file a protective claim
with the IRS pending the outcome of the IRS ruling related to the WNP-3
abandonment deductions claimed by other investor-owned utilities involved.
The IRS subsequently ruled that the investor-owned utilities could take the
WNP-3 investment as an abandoned plant deduction. The Company recorded, in
June 1997, the tax refund together with a corresponding deferred tax
liability and interest income of $13.6 million after tax.
In June 1997, Puget Sound Energy Capital Trust I issued $100 million
principal amount of 8.231% Capital Securities. The proceeds from the sale of
<PAGE>
the Capital Securities were invested in 8.231% Junior Subordinated Deferrable
Interest Debentures issued by the Company, which are scheduled to mature on
June 1, 2027. The accounts of Puget Sound Energy Capital Trust I have been
consolidated with the Company.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
No. 128"). Statement No. 128 will change the computation, presentation and
disclosure requirements for earnings per share. Statement No. 128 is
effective for financial statements for periods ending after December 15, 1997
and requires restatement of all prior period earnings per share amounts.
Management believes that Statement No. 128 will not have a material impact on
the computation of earnings per share.
On June 30, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Comprehensive Income" ("Statement
No. 130"). Statement No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. Management is currently evaluating the requirements of Statement
No. 130.
On June 30, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement No. 131"). Statement No. 131
establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Statement No.
131 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented. Management is currently
evaluating the requirements of Statement No. 131.
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion reflects comparison of the results of Puget Sound
Energy in 1997 with the combined results of the Company, formerly Puget
Sound Power & Light Company, and Washington Energy Company as shown in the
1996 pro forma financial statements. Comparison of the 1997 periods to the
pro forma periods for 1996 have been made in the following discussion as the
Company considers this comparison to be more meaningful as a result of the
seasonality of the utility business.
Net income for the three months ended June 30, 1997, was $33.4 million on
operating revenues of $352.6 million, compared with net income of $23.5
million on operating revenues of $343.8 million for the same period in 1996.
Income for common stock was $28.0 million for the second quarter of 1997
compared to $18.0 million for the second quarter of 1996. Earnings per
common share were $0.33 for the second quarter of 1997 compared to $0.21 for
the second quarter of 1996 based on 84.6 million and 84.4 million weighted
average common shares outstanding, respectively.
The increase in net income and earnings per share for the three months ended
June 30, 1997, includes after-tax interest income of $13.6 million (16 cents
per share) associated with income tax refunds on amended returns for prior
years. Excluding the interest income related to the tax refunds, income for
common stock from continuing operations was $14.4 million (17 cents per
share) for the second quarter compared to $18.3 million (22 cents per share)
or a decrease of 21.3% from the same period in 1996. The decrease from 1996
is a result of increased electric energy costs and higher operations and
maintenance expense.
For the first six months of 1997, net income was $63.4 million on operating
revenues of $816.0 million, compared with net income of $89.7 million on
operating revenues of $831.0 million for the corresponding period in 1996.
Income for common stock was $52.5 million for the first half of 1997 and
$78.7 million for the same period in 1996. Earnings per common share were
$0.62 for the six months ended June 30, 1997 and $0.93 for the same period in
1996 based on 84.6 million and 84.4 million weighted average common shares
outstanding, respectively.
The decrease in net income and earnings per share for the first six months of
1997 reflects an after-tax charge of $36.3 million (43 cents per share) for
costs related to the merger including transaction expenses, employee
separation and system and facilities integration. Net income also includes an
after-tax charge of $2.6 million (3 cents per share), to write off the
Company's remaining investment in undeveloped coal reserves and related
activities in southeastern Montana. These charges were partially offset by
the aforementioned interest income related to income tax refunds. Excluding
the impact of these charges and credits to income, continuing operations for
the first six months of 1997 produced earnings of $.92 per share, a slight
decrease compared to combined earnings of $.94 per share for the Company and
WECo during the same six month period last year.
Total kilowatt-hour sales were 6.0 billion, including 1.3 billion in sales to
other utilities, for the second quarter of 1997, compared to 5.4 billion,
including 0.8 billion in sales to other utilities, for the second quarter of
1996. For the six month periods ended June 30, 1997 and 1996, total kilowatt-
hour sales were 12.8 billion, including 2.4 billion in sales to other
<PAGE>
utilities, and 12.1 billion, including 1.8 billion in sales to other
utilities, respectively.
Total gas sales in the second quarter were $71.9 million compared to $78.7
million in the second quarter of 1996, a decrease of 8.6% on a 4.3% decrease
in gas volumes sold and transported. Total gas sales for the six months ended
June 30, 1997, were $228.4 million compared to $227.4 million in the six
months ended June 30, 1996, an increase of .4% on a 1.7% increase in gas
volumes sold and transported.
The Company's operating revenues and associated expenses are not generated
evenly during the year. Variations in energy usage by customers do occur
from season to season and from month to month within a season, primarily as
a result of changing weather conditions. The Company normally experiences
its highest energy sales in the first and fourth quarters of the year.
Electric sales to other utilities also vary by quarter and year depending
principally upon water conditions for the generation of hydroelectric power,
customer usage, energy requirements of other utilities and market
conditions.
Temperatures during the three months ended June 30, 1997, averaged 55.3
degrees, compared to a 30-year average of 55.1 degrees and an average of 54.4
degrees during the same period in 1996. Temperatures during the six months
ended June 30, 1997, averaged 48.7 degrees, compared to a 30-year average of
49.1 degrees and an average of 48.8 degrees during the first half of 1996.
<PAGE>
Comparative Periods Ending
June 30, 1997 vs. June 30, 1996
Increase (Decrease)
Three Six
Month Month
Period Period
-------------------
(In Millions)
Operating revenue changes
PRAM revenues $ (41.1) $(127.3)
BPA Residential Purchase & Sale Agreement 0.6 .3
Sales to other utilities 10.8 15.5
Load and other changes 45.3 95.5
Gas revenue change (6.8) 1.0
---- -----
Total operating revenue change 8.8 (15.0)
Operating expense changes
Energy costs:
Purchased electricity 14.4 21.7
Purchased gas (4.0) (1.5)
Utility operations and maintenance 6.4 9.6
Other operations and maintenance (1.2) (2.4)
Depreciation and amortization 1.8 3.8
Merger costs -.- 55.8
Taxes other than federal income taxes .4 1.0
Federal income taxes (1.2) (57.5)
----- -----
Total operating expense change 16.6 30.5
Other income 17.8 21.3
Interest charges .3 .2
----- -----
Income from continuing operations $ 9.7 $ (24.4)
Discontinued operations (.3) 1.8
----- -----
Net income change $ 10.0 $ (26.2)
===== =====
The following is additional information pertaining to the changes outlined
in the above table.
Operating Revenues - Electric
Electric operating revenues for both the three and six month periods ended
June 30, 1997, increased compared to the same period in 1996 due to
continued growth in the number of electric customers and a general rate
increase effective February 8, 1997, of between 1.0% and 2.5% depending on
rate class.
Electric operating revenues for the six months ended June 30, 1997 include a
$48.6 reduction due to the IRS tax refund and related interest received in
the first quarter associated with conservation expenditures for the years
1991-1994. Based on the Company's agreement with the Washington Commission,
the benefit of the tax refund was passed on to retail customers as a
<PAGE>
reduction of the PRAM accrued revenue balance. The $48.6 million reduction
in revenues was offset by reductions in federal and state taxes, by a
reduction in interest expense and an increase in interest income.
PRAM revenues also decreased in 1997 compared to the prior year due to the
elimination of the PRAM effective September 30, 1996, under a stipulated
negotiated settlement approved by the Washington Commission. Overcollection
of the PRAM which resulted from the pass-through of the conservation tax
refunds discussed above, was refunded to customers in the second quarter of
1997. Also, on September 30, 1996, the Washington Commission issued an
order granting a joint motion by the Company and the Washington Commission
Staff to transfer annual revenues of $165.5 million which were being
collected in PRAM rates to the Company's permanent rate schedules.
Revenues in 1997 and 1996 were reduced because of the credit that the
Company received through the Residential Purchase and Sale Agreement with
the Bonneville Power Administration ("BPA"). The agreement enables the
Company's residential and small farm customers to receive the benefits of
lower-cost federal power. On January 29, 1997, the Company and BPA signed a
Residential Exchange Termination Agreement. The Agreement ends the
Company's participation in the Residential Purchase and Sale agreement with
BPA. As part of the Termination Agreement, the Company will receive
payments by the BPA of approximately $235 million over five years. Under
the rate plan approved by the Washington Commission in its merger order, the
Company will continue to reflect, in customers' bills, the current level of
Residential Exchange benefits. Over the five year period, it is projected
that the Company will credit customers approximately $250 million more than
it will receive from BPA. The Company expects the difference will be made
up through a series of annual electric customer general rate increases
approved in the merger order and additional reductions in operating
expenses. Revenues were reduced by $22.2 million and $56.4 million during
the three and six month periods ended June 30, 1997, respectively, as a
result of BPA Residential Exchange Credits which were partially offset by
reductions in purchase power costs of $14.3 million and $36.9 million for
the three and six month periods ended June 30, 1997, respectively,
representing BPA Residential Exchange benefits in accordance with the
Residential Exchange Termination Agreement.
Operating Revenues - Gas
Gas operating revenues for the quarter ended June 30, 1997 decreased by $6.8
million or 8.6% from the prior year quarter. Total gas volumes decreased
4.2% from 195.3 million therms to 187.0 million therms. During the quarter,
there was some shifting of commercial and industrial customers from firm
sales to transportation service. In the current rate design, the Company
earns the same margin on transportation service as it does on large volume
gas sales. Gas sales were adversely impacted in the second quarter by warmer
temperatures in 1997 as compared to 1996. The average temperature during
the quarter ended June 30, 1997, was 55.3 degrees as compared to an average
of 54.4 degrees during the quarter ended June 30, 1996.
Gas sales margin (regulated utility sales less the cost of gas sold) of
$42.5 million declined by $2.8 million compared to the same quarter last
year.
For the six months ended June 30, 1997, gas revenues of $228.4 million
increased $1.0 million from the prior year while total gas volumes increased
1.7%. Gas margin for the six months increased by $2.6 million or 2.1% due
primarily to a 4.2% increase in the average number of gas customers.
<PAGE>
Operating Expenses
Purchased electricity expenses increased $14.4 million and $21.7 million for
the three and six month periods ended June 30, 1997, respectively, compared
to the same periods in 1996. The increase was due primarily to decreased
credits associated with the Residential Purchase and Sale Agreement with BPA
and increased secondary purchases from power marketers.
Purchased gas expenses decreased $4.0 million for the three months ended
June 30, 1997, and $1.5 million for the six months ended June 30, 1997,
compared to the prior year primarily due to reduced purchases to serve gas
customers as a result of warmer weather in May 1997.
Operations and maintenance expenses increased $5.2 million and $7.2 million
for the three and six month periods ended June 30, 1997, respectively,
compared to the same periods in 1996. The increase was due primarily to
transition activities, costs of fuel used for electric generation, increased
amortization expense associated with the Company's conservation program and
transmission and distribution system maintenance.
Depreciation and amortization expense increased $1.8 million and $3.8
million for the three and six month periods June 30, 1997, respectively,
from the same periods in 1996 due to the effects of new plant placed into
service during the past year.
Merger related costs recorded in the six months ended June 30, 1997, were
$55.8 million including amounts related to transaction expenses, employee
separation and systems and facilities integration. On an after-tax basis the
charge was $36.3 million or 43 cents per share during the first six months
of 1997. (See Footnote 2 to the Consolidated Financial Statements.)
Federal income taxes decreased $1.2 million for the three months ended June
30, 1997, compared to the same period in 1996, due to lower pre-tax
operating income from continuing operations for the quarter.
Federal income taxes decreased $57.5 million for the six months ended June
30, 1997 from the same period in 1996 due to a number of factors. A federal
income tax refund related to the method of accounting for taxes on
conservation expenditures during the first quarter decreased federal income
taxes by $26.5 million. In addition, there was a $17.0 million reduction
associated with a decrease in PRAM revenues of $48.6 million. Merger costs
expensed in the first quarter further reduced federal income taxes by $19.3
million. These decreases were partially offset by an increase of $5.3
million due to higher pre-tax operating income from continuing operations.
Other Income
Other income, net of federal income tax, increased $17.8 million and $21.3
million for the three months and six months periods ending June 30, 1997,
respectively from the same periods in 1996. The increases were due primarily
to interest income received from the IRS on tax refunds for prior years in
connection with a plant abandonment loss, conservation tax refunds and
certain additional research and experimental credits claimed for tax
purposes.
Interest Charges
Interest charges, which consist of interest and amortization on long-term
debt and other interest, increased slightly for the three and six month
<PAGE>
periods ended June 30, 1997, as compared to the same periods in 1996, due to
higher levels of short-term debt and higher interest rates.
Construction expenditures (excluding Allowance for Funds Used During
Construction ("AFUDC") and Allowance for Funds Used to Conserve Energy
("AFUCE")) for the second quarter of 1997 were $50.2 million, including $.1
million of energy conservation expenditures, compared to $58.0 million,
including $1.2 million of energy conservation expenditures, for the second
quarter of 1996. Year-to-date construction expenditures (excluding AFUDC
and AFUCE) totaled $114.0 million, including $.5 million of conservation
expenditures, compared to $105 million, including $2.7 million of
conservation expenditures, for the same period in 1996. Construction
expenditures (excluding AFUDC and AFUCE) for 1997 and 1998 are expected to
be $247 million and $249 million, respectively. Construction expenditure
estimates are subject to periodic review and adjustment.
On June 30, 1997, the Company had available $400.0 million in lines of
credit with various banks, which provide credit support for outstanding
commercial paper in the amount of $22.7 million, effectively reducing the
available borrowing capacity under these lines of credit to $377.3 million.
In addition, the Company 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 uncommitted arrangements.
For a discussion of Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings Per Share", see Note 7 to the Consolidated Financial
Statements.
For a discussion of FASB Statement No. 130, "Comprehensive Income", see Note
7 to the Consolidated Financial Statements.
For a discussion of FASB Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information", see Note 7 to the Consolidated
Financial Statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUGET SOUND ENERGY, INC.
James W. Eldredge
_____________________________
James W. Eldredge
Corporate Secretary and Controller
Date: November 13, 1997 Chief accounting officer and officer
duly authorized to sign this report
on behalf of the registrant
