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 September 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>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except shares and per share amounts)
(Unaudited)
<CAPTION>
Pro Forma
Three Months Ended September 30, 1997 1996 1996
(Note 1)
- --------------------------------------- ------------- ------------- ---------
<S> <C> <C> <C>
OPERATING REVENUES:
Electric $ 288,683 $ 252,882 $ 252,882
Gas 46,135 78,694 52,215
Other 6,203 18,407 18,791
--------- ---------- ---------
Total operating revenue 341,021 349,983 323,888
--------- ---------- ---------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 128,904 103,525 103,525
Purchased gas 16,493 33,395 19,083
Electric generation fuel 12,291 11,168 11,168
Utility operations and maintenance 55,599 55,363 53,809
Other operations and maintenance 5,721 10,270 9,509
Depreciation and amortization 46,533 35,926 35,486
Taxes other than federal income taxes 32,810 33,981 32,012
Federal income taxes 7,249 15,424 12,763
--------- ---------- ---------
Total operating expenses 305,600 299,052 277,355
--------- ---------- ---------
OPERATING INCOME 35,421 50,931 46,533
OTHER INCOME 6,029 411 65
--------- ---------- ---------
INCOME BEFORE INTEREST CHARGES 41,450 51,342 46,598
INTEREST CHARGES 29,452 29,056 29,016
--------- ---------- ---------
INCOME FROM CONTINUING OPERATIONS 11,998 22,286 17,582
DISCONTINUED OPERATIONS -- 327 820
--------- ---------- ---------
NET INCOME 11,998 21,959 16,762
Less: Preferred stock dividends accrual 3,516 5,586 5,586
Preferred stock redemptions 471 -- --
--------- ---------- ---------
INCOME FOR COMMON STOCK $ 8,953 $ 16,373 $ 11,176
========== ========== ==========
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 84,560,781 84,438,241 84,483,949
========== ========== ==========
EARNINGS PER COMMON SHARE:
From continuing operations $ 0.11 $ 0.20 $ 0.14
From discontinued operations -- (0.01) (0.01)
---------- ---------- ---------
EARNINGS PER COMMON SHARE: $ 0.11 $ 0.19 $ 0.13
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except shares and per share amounts)
(Unaudited)
<CAPTION>
Pro Forma
Nine Months Ended September 30, 1997 1996 1996
(Note 1)
- -------------------------------------- ------------- ------------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Electric $ 858,229 $ 841,208 $ 841,208
Gas 274,554 347,892 279,582
Other 24,273 34,896 34,126
---------- ---------- ----------
Total operating revenue 1,157,056 1,223,996 1,154,916
---------- ---------- ----------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 370,548 323,487 323,487
Purchased gas 117,838 158,636 121,943
Electric generation fuel 29,696 27,441 27,441
Utility operations and maintenance 183,752 177,130 173,222
Other operations and maintenance 17,466 24,689 23,621
Depreciation and amortization 122,811 108,733 108,294
Merger and related costs 55,789 -- --
Taxes other than federal income taxes 114,285 117,908 112,442
Federal income taxes 7,169 77,436 70,196
---------- ---------- ----------
Total operating expenses 1,019,354 1,015,460 960,646
---------- ---------- ----------
OPERATING INCOME 137,702 208,536 194,270
OTHER INCOME 28,736 2,402 1,514
---------- ---------- ----------
INCOME BEFORE INTEREST CHARGES 166,438 210,938 195,784
INTEREST CHARGES 88,391 88,247 87,789
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 78,047 122,691 107,995
DISCONTINUED OPERATIONS 2,622 1,012 1,565
---------- ---------- ----------
NET INCOME 75,425 121,679 106,430
Less: Preferred stock dividends accrual 14,480 16,603 16,602
Preferred stock redemptions 471 -- --
---------- ---------- ----------
INCOME FOR COMMON STOCK $ 61,416 $ 105,076 $ 89,828
========== ========== ==========
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 84,559,948 84,396,101 84,440,261
========== ========== ==========
EARNINGS PER COMMON SHARE:
From continuing operations $ 0.76 $ 1.26 $ 1.08
From discontinued operations (0.03) (0.01) (0.02)
---------- -------- ----------
EARNINGS PER COMMON SHARE $ 0.73 $ 1.25 $ 1.06
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
<CAPTION>
September 30 December 31
1997 1996
- ------------------------------------------------- --------- ---------
<S> <C> <C>
UTILITY PLANT:
Electric $3,571,092 $3,479,652
Gas 1,212,167 1,129,849
Less: Accumulated depreciation and amortization (1,584,575) (1,493,024)
--------- ---------
Net utility plant 3,198,684 3,116,477
--------- ---------
OTHER PROPERTY AND INVESTMENTS:
Investment in Bonneville Exchange Power Contract 80,894 86,772
Investment in Cabot 70,073 69,014
Subsidiary properties and investments 76,015 80,770
Other 38,769 43,444
--------- ---------
Total other property and investments 265,751 280,000
--------- ---------
CURRENT ASSETS:
Cash 3,409 4,335
Accounts receivable 187,158 263,245
Less: Allowance for doubtful accounts (1,865) (1,700)
Materials and supplies, at average cost 59,410 61,638
Prepayments and other 8,372 10,458
PRAM accrued revenues -- 40,470
--------- ---------
Total current assets 256,484 378,446
--------- ---------
LONG-TERM ASSETS:
Regulatory asset for deferred income taxes 264,278 242,454
Unamortized energy conservation charges 6,669 44,673
Other 130,795 165,420
--------- ---------
Total long-term assets 401,742 452,547
--------- ---------
TOTAL ASSETS $4,122,661 $4,227,470
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
<CAPTION>
September 30 December 31
1997 1996
- ------------------------------------------------- --------- ---------
<S> <C> <C>
CAPITALIZATION:
Common shareholders' investment:
Common stock, $10 stated value,
150,000,000 shares authorized,
84,560,720 and 84,511,245 shares outstanding $ 845,607 $ 845,112
Additional paid-in capital 450,923 446,910
Earnings reinvested in the business 41,936 86,355
--------- ---------
1,338,466 1,378,377
Preferred stock not subject to
mandatory redemption 95,488 215,000
Preferred stock subject to
mandatory redemption 78,139 87,839
Corporation obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the corporation 100,000 --
Long-term debt 1,162,696 1,165,584
--------- ---------
Total capitalization 2,774,789 2,846,800
--------- ---------
CURRENT LIABILITIES:
Accounts payable 75,087 95,736
Short-term debt 256,972 298,122
Current maturities of long-term debt 102,920 100,062
Purchased gas liability 6,528 41,368
Accrued expenses:
Taxes 60,180 57,419
Salaries and wages 23,144 28,215
Interest 33,551 27,173
Other 33,004 51,906
--------- ---------
Total current liabilities 591,386 700,001
--------- ---------
DEFERRED INCOME TAXES 610,636 586,661
--------- ---------
OTHER DEFERRED CREDITS 145,850 94,008
--------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $4,122,661 $4,227,470
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Pro Forma
Nine Months Ended September 30, 1997 1996 1996
(Note 1)
- -------------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 78,047 $122,691 $107,995
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 122,811 108,733 108,294
Deferred income taxes and tax credits - net 3,192 (7,953) (12,882)
PRAM accrued revenues 40,777 53,345 53,345
Other 77,916 16,301 14,315
Change in certain current assets
and liabilities (Note 6) (6,634) 93,538 79,341
- ----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 316,109 386,655 350,408
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ---------------------
Construction expenditures - excluding equity AFUDC (176,306) (154,504) (164,460)
Additions to energy conservation program (2,849) (4,162) (4,162)
Cash received from sale of conservation assets-net 34,380 -- --
Other 17,785 (11,234) (11,234)
- ----------------------------------------------------------------------------------------
Net Cash Used by
Investing Activities (126,990) (169,900) (179,856)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- --------------------
Decrease in short-term debt (29,591) (75,413) (29,881)
Dividends paid (127,664) (122,503) (122,540)
Issuance of common and preferred securities 100,066 2,888 2,656
Issuance of bonds -- 34,609 --
Redemption of bonds and notes (1) (65,142) (35,002)
Redemption of preferred stock (128,742) (1,200) (1,200)
Issue costs of bonds and stock (1,530) (23) (145)
- ----------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (187,462) (226,784) (186,112)
- ----------------------------------------------------------------------------------------
Increase (Decrease) in cash from continuing operations 1,657 (10,029) (15,560)
Decrease in cash from discontinued operations
Operating activities (2,622) (1,012) (1,565)
- ----------------------------------------------------------------------------------------
Net decrease in cash (965) (11,041) (17,125)
Cash at Beginning of year 4,335 21,814 21,814
Adjustment to conform fiscal year of WECo 39 -- --
- ----------------------------------------------------------------------------------------
Cash at End of Period $ 3,409 $ 10,773 $ 4,689
========================================================================================
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 nine month periods ended
September 30, 1996 reflect the combined results for periods ended September
30, 1996 for PSPL and June 30, 1996 for WECo. Pro forma financial data for
the periods ended September 30, 1996 reflect results for the three and nine
month periods ended September 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 nine months ended
September 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>
NINE MONTHS ENDED SEPTEMBER 30, 1996
(Dollars in Thousands)
---------------------------------------
Company WECo Consolidated
-------- -------- ------------
Revenues $856,701 $367,295 $1,223,996
Net Income $ 88,172 $ 33,507 $ 121,679
Common Dividends Declared $ 87,825 $ 18,094 $ 105,919
(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 merger
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 nine months ended September 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 nine months ended September 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 September 30, 1997, was $6.7 million. On August 6, 1997, the Company
sold $35.2 million of its 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.
(6) Consolidated Statements of Cash Flows
The following provides additional information concerning cash flow
activities:
<TABLE>
<CAPTION>
Nine Months Ended September 30 1996
1997 1996 Pro Forma
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in current asset and current liabilities:
Accounts receivable $ 95,921 $ 56,391 $ 67,024
Materials and supplies (1,671) 19,490 10,057
Prepayments and Other 2,386 (1,004) 1,092
Purchased gas liability (29,314) 33,763 11,735
Accounts payable (42,680) (9,194) (4,659)
Accrued expenses and Other (31,276) (5,908) (5,908)
- ----------------------------------------------------------------------------------------
Net change in current assets and current liabilities $ (6,634) $ 93,538 $ 79,341
========================================================================================
Cash payments:
Interest (net of capitalized interest) $ 81,123 $ 85,607 $ 84,685
Income taxes $ (2,152) $ 68,609 $ 68,609
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(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
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.
On July 15, 1997, the Company redeemed 3,000,000 shares of its 7.875% Series
Preferred Stock at a redemption price of $25.00 per share.
On August 15, 1997 the Company completed a tender offer for various issues of
its preferred stock. The following number of shares of each series were
tendered and redeemed at the noted redemption price per share: 51,854 shares
of 4.70% Series, $100 par value Preferred Stock at $89.32 per share, 33,148
shares of 4.84% Series, $100 par value Preferred Stock at $91.51 per share
and 1,181,994 shares of Adjustable Rate Series B, $25 par value Preferred
Stock at $25.625 per share.
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.
<PAGE>
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 has 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 September 30, 1997, was $12.0 million
on operating revenues of $341.0 million, compared with net income of $16.8
million on operating revenues of $323.9 million for the same period in 1996.
Income for common stock was $9.0 million for the third quarter of 1997 and
$11.2 million for the third quarter of 1996. Earnings per common share were
$0.11 for the third quarter of 1997 compared to $0.13 for the third quarter
of 1996 based on 84.6 million and 84.5 million weighted average common
shares outstanding, respectively.
The decrease in net income and earnings per share for the three months ended
September 30, 1997, is due primarily to the inclusion of higher than normal
real property dispositions in the third quarter of 1996 which resulted in
$5.9 million additional income (after-tax) and a one-time benefit of $2.1
million (after-tax) in the third quarter of 1996 in connection with a
reduction of previously established environmental reserves at Washington
Energy Company.
For the nine months ended September 1997, net income was $75.4 million on
operating revenues of $1,157.1 million, compared with net income of $106.4
million on operating revenues of $1,154.9 million for the corresponding
period in 1996. Income for common stock was $61.4 million for the nine
months ended September 30,1997, and $89.8 million for the same period in
1996. Earnings per common share were $0.73 for the nine months ended
September 30, 1997 and $1.06 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 nine months ended
September 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 after-tax interest income of $13.6 million (16 cents per share)
related to income tax refunds on amended returns for prior years. Excluding
the impact of these charges and credits to income, continuing operations for
the first nine months of 1997 produced earnings of $1.03 per share, a
decrease of $.03 per share compared to the same nine month period last year.
<PAGE>
Total kilowatt-hour sales were 7.1 billion, including 2.6 billion in sales to
other utilities, for the third quarter of 1997, compared to 5.7 billion,
including 1.2 billion in sales to other utilities, for the third quarter of
1996. For the nine month periods ended September 30, 1997 and 1996, total
kilowatt-hour sales were 19.9 billion, including 5.0 billion in sales to
other utilities, and 17.8 billion, including 3.0 billion in sales to other
utilities, respectively.
Total gas sales in the third quarter were $46.1 compared to $52.2 million
in the third quarter of 1996, a decrease of 11.6% on a 5.7% decrease in gas
volumes sold and transported.
Total gas sales for the nine months ended September 30, 1997, were $274.6
million compared to $279.6 million in the nine months ended September 30,
1996.
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
for power.
Temperatures during the three months ended September 30, 1997, averaged 64.2
degrees, compared to an average of 63.8 degrees during the same period in
1996 which was the same as the 30-year average mean temperature. Temperatures
during the nine months ended September 30, 1997, averaged 53.9 degrees,
compared to a 30-year average of 54.0 degrees and an average of 53.8 degrees
during the first nine months of 1996.
<PAGE>
Comparative Periods Ending
September 30, 1997 vs. September 30, 1996
Increase (Decrease)
Three Nine
Month Month
Period Period
(In Millions)
Operating revenue changes
General rate increases $27.2 $118.9
PRAM revenues (33.1) (160.4)
BPA Residential Purchase & Sale Agreement 0.1 0.5
Sales to other utilities 31.4 46.8
Load and other changes (2.4) 1.3
Gas revenue change (6.1) (5.0)
------- -------
Total operating revenue change 17.1 2.1
Operating expense changes
Energy costs:
Purchased electricity 25.4 47.0
Purchased gas (2.6) (4.1)
Electric generation fuel 1.1 2.3
Utility operations and maintenance 1.8 10.5
Other operations and maintenance (3.8) (6.2)
Depreciation and amortization 11.0 14.5
Merger costs -- 55.8
Taxes other than federal income taxes 0.8 1.9
Federal income taxes (5.5) (63.0)
------- -------
Total operating expense change 28.2 58.7
Other income 6.0 27.3
Interest charges 0.5 0.6
------- -------
Income from continuing operations (5.6) (29.9)
Discontinued operations (0.8) 1.1
------- -------
Net income change $(4.8) $(31.0)
======= =======
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 nine months ended
September 30, 1997, increased as compared to the same periods 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. Also, on September 30, 1996, the Washington Commission issued
<PAGE>
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 associated with both the PRAM rate transfer to permanent rate
schedules and the February 8, 1997, general rate increase were $27.2 million
and $118.9 million for the third quarter ended September 30, 1997, and the
nine months ended September 30, 1997, respectively.
Electric operating revenues for the nine months ended September 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 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.
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 in 1997 were reduced by $19.1 million and $75.4 million
during the three and nine month periods ended September 30, 1997,
respectively, as a result of BPA Residential Exchange Credits which were
partially offset by reductions in purchase power costs of $13.9 million and
$50.8 million for the three and nine month periods ended September 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 September 30, 1997 decreased by
$6.1 million or 11.6% from the prior year quarter. Total gas volumes
decreased 5.7% from 136.7 million therms to 128.9 million therms. During the
quarter, there was some shifting of commercial 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 third quarter by a warm September
during which the average temperature was 61.6 degrees compared to an average
temperature of 58.0 degrees in September 1996 (the 30 year average for
September is 60.6 degrees).
<PAGE>
Gas sales margin (regulated utility sales less the cost of gas sold) of
$29.6 million declined by $3.5 million compared to the same quarter last
year due to decreased gas sales as a result of warmer weather in September
1997 compared to September 1996.
For the nine months ended September 30, 1997, gas revenues of $274.6 million
decreased $5.0 million from the prior year while total gas volumes increased
.2%.
Operating Expenses
Purchased electricity expenses increased $25.4 million and $47.0 million for
the three and nine month periods ended September 30, 1997, respectively,
compared to the same periods in 1996. The increases were due primarily to
decreased credits of $4.5 million for the third quarter and $21.7 million
for the nine months ended September 30, 1997, associated with the
Residential Purchase and Sale Agreement with BPA and increased secondary
power purchases related to an increase in wholesale power sales. Wholesale
sales were up as a result of favorable hydroelectric and market conditions
as well as expanded commodity trading operations.
Purchased gas expenses decreased $2.6 million for the three months ended
September 30, 1997 and $4.1 million for the nine months ended September 30,
1997 compared to the prior year primarily due to reduced purchases to serve
gas customers as a result of warmer weather in May and September 1997.
Fuel expense increased $1.1 million and $2.3 million for the three and nine
month periods ended September 30, 1997 when compared to the same periods in
1996 due to increased generation at the Company's steam generation and
combustion turbine plants.
Operations and maintenance expenses decreased $2.0 million for the third
quarter of 1997 when compared to the same period in 1996. Lower overall
operations and maintenance expenses at both the Company and its subsidiaries
were partially offset by two factors. Colstrip operations and maintenance
expenses in the third quarter of 1997 increased $2.7 million as compared to
the same quarter in 1996 as a result of higher usage and in the third
quarter of 1996, Washington Energy recorded a one-time benefit of $3.3
million related to a change in the accounting treatment of certain prior
environmental remediation expenses.
Operations and maintenance expenses for the nine month period ended
September 30, 1997 compared to the same period in 1996 increased $4.3
million. The increase was due primarily to transition activities, increased
amortization expense associated with the Company's conservation program and
transmission and distribution system maintenance.
Depreciation and amortization expense increased $11.0 million and $14.5
million for the three and nine month periods September 30, 1997,
respectively, from the same periods in 1996 due to the effects of a new
plant placed into service during the past year and the results of an August
1997 Washington Commission Order. The order authorized the Company to record
interest income of $8.3 million related to a conservation tax refund but
required the Company to write-off deferred storm damage costs in the amount
of $7.4 million, and establish a $1.0 million reserve to cover the costs of
a Company retail pilot program.
<PAGE>
Merger related costs recorded in the nine months ended September 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
nine months of 1997. (See Footnote 2 to the Consolidated Financial
Statements.)
Federal income taxes decreased $5.5 million for the three months ended
September 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 $63.0 million for the nine months ended
September 30, 1997 from the same period in 1996 due to a number of factors.
An IRS 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.
Other Income
Other income, net of federal income tax, increased $6.0 million and $27.3
million for the three months and nine months periods ending September 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 nine month
periods ended September 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 third quarter of 1997 were $61.4 million, including $2.3
million of energy conservation expenditures, compared to $54.0 million,
including $.8 million of energy conservation expenditures, for the third
quarter of 1996. Year-to-date construction expenditures (excluding AFUDC
and AFUCE) totaled $175.3 million, including $2.7 million of conservation
expenditures, compared to $164.4 million, including $3.5 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.
<PAGE>
On September 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 $153.0 million, effectively reducing the
available borrowing capacity under these lines of credit to $247.0 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 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: December 4, 1997 Chief accounting officer and officer
duly authorized to sign this report
on behalf of the registrant
