--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________ to _________
----------------------------
Commission File Number 1-4393
----------------------------
PUGET SOUND ENERGY, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0374630
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
411 - 108th Avenue N.E., Bellevue, Washington 98004-5515
(Address of principal executive offices)
(425) 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) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file for such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
The number of shares of registrant's common stock outstanding at September
30, 2000 was 85,638,843.
--------------------------------------------------------------------------------
1
<PAGE>
Table of Contents
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income -
3 month periods ended September 30, 2000 and 1999 3
Consolidated Statements of Income -
9 month periods ended September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Income -
3 month periods ended September 30, 2000 and 1999 5
Consolidated Statements of Comprehensive Income -
9 month periods ended September 30, 2000 and 1999 5
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 6
Consolidated Statements of Cash Flows -
9 month periods ended September 30, 2000 and 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE>
PUGET SOUND ENERGY, INC
CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Periods Ended September 30
(Thousands except per share amounts)
(Unaudited)
<CAPTION>
2000 1999
-------------------- ------------------
<S> <C> <C>
OPERATING REVENUES:
Electric $ 886,696 $ 345,257
Gas 72,798 57,705
Other 19,487 8,429
-------------------- ------------------
Total operating revenue 978,981 411,391
-------------------- ------------------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 660,249 178,815
Purchased gas 35,885 22,185
Electric generation fuel 55,381 11,531
Residential Exchange (7,983) (7,554)
Utility operations and maintenance 55,947 60,407
Other operations and maintenance 19,393 5,218
Depreciation and amortization 49,677 43,191
Conservation amortization 1,188 1,814
Taxes other than federal income taxes 42,556 36,434
Federal income taxes 9,090 7,906
-------------------- ------------------
Total operating expenses 921,383 359,947
-------------------- ------------------
OPERATING INCOME 57,598 51,444
OTHER INCOME 5,273 9,805
-------------------- ------------------
INCOME BEFORE INTEREST CHARGES 62,871 61,249
INTEREST CHARGES, net of AFUDC 43,876 36,337
-------------------- ------------------
NET INCOME 18,995 24,912
Less: Preferred stock dividends accrual 2,229 2,800
-------------------- ------------------
INCOME FOR COMMON STOCK $ 16,766 $ 22,112
==================== ==================
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 85,502 84,561
==================== ==================
BASIC & DILUTED EARNINGS PER COMMON SHARE $ 0.20 $ 0.26
==================== ==================
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
PUGET SOUND ENERGY, INC
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Month Periods Ended September 30
(Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------------------- ------------------
<S> <C> <C>
OPERATING REVENUES:
Electric $ 1,762,543 $ 1,082,966
Gas 376,284 322,722
Other 26,177 17,346
-------------------- ------------------
Total operating revenue 2,165,004 1,423,034
-------------------- ------------------
OPERATING EXPENSES:
Energy costs:
Purchased electricity 1,094,557 540,088
Purchased gas 190,273 139,263
Electric generation fuel 106,034 32,586
Residential Exchange (29,255) (27,869)
Utility operations and maintenance 169,192 179,579
Other operations and maintenance 27,213 22,766
Depreciation and amortization 144,878 128,775
Conservation amortization 5,187 5,469
Taxes other than federal income taxes 144,984 129,058
Federal income taxes 75,339 67,356
-------------------- ------------------
Total operating expenses 1,928,402 1,217,071
-------------------- ------------------
OPERATING INCOME 236,602 205,963
OTHER INCOME 16,541 28,963
-------------------- ------------------
INCOME BEFORE INTEREST CHARGES 253,143 234,926
INTEREST CHARGES, net of AFUDC 128,587 109,193
-------------------- ------------------
NET INCOME 124,556 125,733
Less: Preferred stock dividends accrual 6,761 8,689
-------------------- ------------------
INCOME FOR COMMON STOCK $ 117,795 $ 117,044
==================== ==================
COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE 85,289 84,561
==================== ==================
BASIC & DILUTED EARNINGS PER COMMON SHARE $ 1.38 $ 1.38
==================== ==================
The accompanying notes are an integral part of the financial statements.
</TABLE>
4
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Month Periods Ended September 30
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------------- --------------
<S> <C> <C>
Net Income $ 18,995 $ 24,912
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period (1,053) --
Reclassification adjustment for gains included in net income -- --
----------------- --------------
Other comprehensive income (loss) (1,053) --
----------------- --------------
Comprehensive Income $ 17,942 $ 24,912
================= ==============
</TABLE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Month Periods Ended September 30
(Dollars in Thousands)
(Unaudited)
<TABLE>
2000 1999
----------------- ---------------
<S> <C> <C>
Net Income $ 124,556 $ 125,733
Other comprehensive income (loss), net of tax:
Unrealized holding gains arising during period 1,212 3,482
Reclassification adjustment for gains included in net income (3,160) (12,284)
------------------ ---------------
Other comprehensive income (loss) (1,948) (8,802)
----------------- ---------------
Comprehensive Income $ 122,608 $ 116,931
================= ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
5
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
<S> <C> <C>
UTILITY PLANT: (at original cost, including
construction work in progress
of $212,919 and $311,317 respectively)
Electric $ 4,016,770 $ 3,966,220
Gas 1,434,343 1,371,589
Common 355,332 314,770
Less: Accumulated depreciation and amortization 1,992,062 1,901,658
---------------- -----------------
Net utility plant 3,814,383 3,750,921
---------------- -----------------
OTHER PROPERTY AND INVESTMENTS 216,187 264,160
---------------- -----------------
CURRENT ASSETS:
Cash 37,280 65,707
Accounts receivable 231,798 213,020
Unbilled revenue 92,551 121,303
Materials and supplies, at average cost 91,021 69,241
Purchased gas receivable 42,870 33,700
Prepayments and other 16,326 9,866
---------------- -----------------
Total current assets 511,846 512,837
---------------- -----------------
LONG-TERM ASSETS:
Regulatory asset for deferred income taxes 217,276 228,454
Regulatory asset for PURPA buyout costs 242,134 238,734
Other 222,750 150,500
---------------- -----------------
Total long-term assets 682,160 617,688
---------------- -----------------
TOTAL ASSETS $ 5,224,576 $ 5,145,606
================ =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
----- ----
<S> <C> <C>
CAPITALIZATION:
Common shareholders' investment:
Common stock, $10 stated value,
150,000,000 shares authorized,
85,638,844 and 84,922,405 shares outstanding $ 856,388 $ 849,224
Additional paid-in capital 465,430 454,982
Earnings reinvested in the business 65,023 66,019
Accumulated other comprehensive income 6,900 8,848
Preferred stock not subject to
mandatory redemption 60,000 60,000
Preferred stock subject to
mandatory redemption 58,162 65,662
Corporation obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the corporation 100,000 100,000
Long-term debt 1,920,792 1,783,139
----------------- ------------------
Total capitalization 3,532,695 3,387,874
----------------- ------------------
CURRENT LIABILITIES:
Accounts Payable 192,259 178,218
Short-term debt 545,009 604,712
Current maturities of long-term debt 19,000 47,620
Accrued expenses:
Taxes 70,029 72,688
Salaries and wages 18,948 18,023
Interest 41,921 43,955
Other 25,656 24,259
----------------- ------------------
Total current liabilities 912,822 989,475
----------------- ------------------
DEFERRED INCOME TAXES 621,384 636,735
-----------------
------------------
OTHER DEFERRED CREDITS 157,675 131,522
----------------- ------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 5,224,576 $ 5,145,606
================= ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 124,556 $ 125,733
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 144,878 128,775
Deferred income taxes and tax credits - net (4,173) 8,371
Gain from sale of investment in Cabot stock -- (18,899)
Gain from sale of Homeguard Security Services -- (11,659)
Gain from sale of securities (6,476) --
Other 24,704 21,143
Change in certain current assets
and liabilities (Note 3) (15,766) 26,947
----------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 267,723 280,411
----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Construction expenditures - excluding equity AFUDC (223,153) (244,754)
Additions to energy conservation program (4,325) (4,111)
Proceeds from sale of Centralia Plant 30,128 --
Proceeds from sale of investment in Cabot stock 51,463 37,353
Loans to Cellnet Data Services (1,325) (25,800)
Proceeds from sale of securities 6,757 13,399
Purchase of Utilx and Lineal (80,587) --
Other (7,452) 1,951
----------------------------------------------------------------------------------
Net Cash Used by Investing Activities (228,494) (221,962)
----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Change in short-term debt, net (59,702) (37,027)
Dividends paid (107,764) (125,476)
Redemption of preferred stock (7,501) (42,575)
Issuance of bonds 250,000 250,000
Redemption of bonds and notes (140,980) (57,370)
Issue costs of bonds and stock (1,709) (2,057)
----------------------------------------------------------------------------------
Net Cash Used by Financing Activities (67,656) (14,505)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Net Increase (decrease) in cash (28,427) 43,944
Cash at Beginning of year 65,707 28,216
----------------------------------------------------------------------------------
Cash at End of Period $ 37,280 $ 72,160
==================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Consolidation Policy
The consolidated financial statements include the accounts of Puget Sound
Energy, Inc. ("the Company") and its wholly-owned subsidiaries, after
elimination of all significant intercompany items and transactions. Certain
amounts previously reported have been reclassified to conform with current year
presentations with no effect on total equity or net income.
The consolidated financial statements contained in this Form 10-Q are
unaudited. In the 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. These condensed financial statements should be
read in conjunction with the Company's annual report on Form 10-K.
(2) Earnings per Common Share
Basic earnings per common share have been computed based on weighted
average common shares outstanding of 85,502,000 and 85,289,000 for the three and
nine months ended September 30, 2000 and 84,561,000 for the three and nine
months ended September 30, 1999.
Diluted earnings per common share have been computed based on weighted
average common shares outstanding of 85,700,000 and 85,483,000 for the three and
nine months ended September 30, 2000, and 84,764,000 and 84,763,000 for the
three and nine months ended September 30, 1999, respectively. These shares
include the dilutive effect of securities related to long-term employee
compensation plans approved by shareholders.
(3) Consolidated Statements of Cash Flows
The following provides additional information concerning cash flow
activities:
<TABLE>
<CAPTION>
Nine Months Ended September 30 2000 1999
------------------------------ ---- ----
<S> <C> <C>
Changes in current asset and current liabilities:
Accounts receivable and unbilled revenue $ 9,974 $ 102,388
Materials and supplies (21,780) (10,620)
Prepayments and other (6,460) (12,507)
Purchased gas receivable (9,170) (28,503)
Accounts payable 14,041 (24,481)
Accrued expenses and Other (2,371) 670
---------------------------------------------------------------------------
Net change in current assets and current liabilities $(15,766) $ 26,947
===========================================================================
Cash payments:
Interest (net of capitalized interest) $ 135,284 $116,472
Income taxes $ 77,100 $ 47,750
---------------------------------------------------------------------------
</TABLE>
9
<PAGE>
(4) Segment Information
The Company operates primarily in one business segment, Regulated Utility
Operations. The Company's regulated utility operation generates, purchases and
sells electricity and purchases, transports and sells natural gas. The Company's
service territory covers approximately 6,000 square miles in the state of
Washington.
Principal non-utility lines of business include development and marketing
of customer information and billing system software, specialized contracting
services to utilities and telecommunications companies (See "Acquisition of
Utilx and Lineal" below), real estate investment and development and small
hydro-electric project development. Reconciling items between segments are not
material.
Financial data for business segments are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Regulated
Three Months Ended September 30, 2000 Utility Other Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 959,494 $ 19,487 $ 978,981
Net Income 20,233 (1,238) 18,995
Total Assets 4,988,882 235,694 5,224,576
---------------------------------------------------------------------------------------------
Regulated
Three Months Ended September 30, 1999 Utility Other Total
---------------------------------------------------------------------------------------------
Revenues $ 402,962 $ 8,429 $411,391
Net Income 18,136 6,776 24,912
Total Assets 4,670,657 123,378 4,794,035
---------------------------------------------------------------------------------------------
(Dollars in Thousands) Regulated
Nine Months Ended September 30, 2000 Utility Other Total
-------------------------------------------------------------------------------------------
Revenues $2,138,827 $26,177 $2,165,004
Net Income 123,704 852 124,556
Total Assets 4,988,882 235,694 5,224,576
-------------------------------------------------------------------------------------------
Regulated
Nine Months Ended September 30, 1999 Utility Other Total
-------------------------------------------------------------------------------------------
Revenues $1,405,688 $17,346 $1,423,034
Net Income 113,052 12,681 125,733
Total Assets 4,670,657 123,378 4,794,035
-------------------------------------------------------------------------------------------
</TABLE>
(5) Other Investments
In the second quarter of 2000, the Company sold all of its 1,134,000 shares
of 6% convertible redeemable preferred stock in Cabot Oil & Gas Corporation for
$51.4 million, after expenses. The sale resulted in approximately $40.8 million
in after-tax cash proceeds. There was no significant gain or loss on the
transaction. In the second quarter of 1999, the Company sold all of its
investment in common stock of Cabot Oil & Gas Corporation for $37.4 million,
resulting in a one-time after tax gain of $12.3 million. As a result of these
two transactions, the Company no longer holds any securities of Cabot Oil & Gas
which were obtained by the Company in 1997 when Washington Energy Company was
merged into the Company.
10
<PAGE>
(6) Acquisition of Utilx and Lineal
On August 1, 2000, InfrastruX Group Inc., a wholly-owned subsidiary of the
Company, purchased 88% of the outstanding shares of Utilx Corporation pursuant
to a cash tender offer. The remaining shares were acquired on September 15,
2000. Utilx is a provider of infrastructure construction services to utilities
and telecommunications providers in the United States and around the world. Its
primary business is installing, replacing and restoring underground cables and
pipes. On September 28, 2000, InfrastruX Group Inc. completed the acquisition of
Lineal Industries, a privately held pipeline infrastructure construction
company. Lineal provides pipeline construction, maintenance and rehabilitation
services primarily for the natural gas and petroleum industries and currently
operates in seven states. These acquisitions mark the Company's entry into the
business of providing design, construction and engineering services to the
utility industry. The total purchase price of the two acquisitions was
approximately $81 million.
The acquisitions of Utilx and Lineal have been accounted for using the
purchase method of accounting and, accordingly, the operating results of Utilx
and Lineal have been included in the Company's consolidated financial statements
since the date of acquisition. Goodwill representing the excess of cost over the
net tangible and identifiable intangible assets of the acquired businesses was
approximately $33 million. Goodwill is being amortized on a straight-line basis
over the estimated future periods to be benefited. The pro forma combined
revenues, net income, and earnings per common share of the Company presented
below give effect to the acquisitions as if they had occurred on January 1, 2000
and 1999, respectively. This pro forma information is not necessarily indicative
of the results of operations that would have occurred had the acquisition been
consummated for the period for which it is being given effect.
<TABLE>
<CAPTION>
(Thousands, except per share amounts)
For the nine months ending: September 30, 2000 September 30, 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues $2,242,666 $1,505,303
Net Income 121,589 122,737
Basic & Diluted Earnings per Common Share $ 1.35 $ 1.35
</TABLE>
(7) Other
In September 1998, the Company 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. On March 9, 1999, the Company issued $250
million principal amount of Senior Medium-Term Notes, Series B, which consisted
of $150 million principal amount due March 9, 2009 at an interest rate of 6.46%
and $100 million principal amount due March 9, 2029 at an interest rate of 7.0%.
On February 22, 2000, the Company issued $225 million principal amount of 7.96%
Senior Medium-Term Notes, Series B due February 22, 2010. Proceeds were used to
redeem the Encogen project debt of approximately $112 million assumed by the
Company on November 1, 1999 upon the purchase of the Encogen project and pay
down a portion of the Company's short-term debt. Premiums and related expenses
of approximately $4.7 million associated with the redemption of the Encogen debt
were capitalized and will be amortized over nine years in conformance with an
order issued by the Washington Commission. On September 8, 2000, the Company
issued the remaining $25 million principal amount of Senior Notes from the shelf
registration. The 7.61% Senior Medium Term Notes, Series B are due September 8,
2008.
11
<PAGE>
On October 4, 2000, the Company filed a shelf registration statement with
the Securities and Exchange Commission, which became effective October 30, 2000,
for the offering on a delayed or continuous basis of up to $500 million
principal amount of Senior Notes, Subordinated Debentures or Trust Preferred
Securities. On November 9, 2000, the Company issued $260 million principal
amount of Senior Medium-Term Notes, Series C. The Notes are due February 1, 2011
at an interest rate of 7.69%.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement No. 133"). In July 1999, the FASB issued Statement of Financial
Accounting Standards No. 137 which delayed the effective date of Statement No.
133 for one year, to fiscal years beginning after June 15, 2000. Statement No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has organized a project team for implementing
Statement No. 133. The team has substantially completed the Company's inventory
of financial instruments, commodity contracts and other commitments for the
purpose of identifying and assessing all of the Company's derivatives. The team
is in the process of estimating the fair value of the derivatives, designating
certain derivatives as hedges and assessing the effectiveness of those
derivatives as hedges. Until the Company finishes the above procedures and can
better project actual amounts at year-end, the impact that the adoption of
Statement No. 133 will have on its financial statements is not known.
12
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's business includes some
forward-looking statements that involve risks and uncertainties. Words such as
"estimates," "expects," "anticipates," "plans," and similar expressions identify
forward-looking statements involving risks and uncertainties. Those risks and
uncertainties include, but are not limited to, the ongoing restructuring of the
electric and gas industries and the outcome of regulatory proceedings related to
that restructuring. The ultimate impacts of both increased competition and the
changing regulatory environment on future results are uncertain, but are
expected to fundamentally change how the Company conducts its business. The
outcome of these changes and other matters discussed below may cause future
results to differ materially from historic results, or from results or outcomes
currently expected or sought by the Company.
Results of Operations
Net income for the three months ended September 30, 2000, was $19.0 million
on operating revenues of $979.0 million, compared with net income of $24.9
million on operating revenues of $411.4 million for the same period in 1999.
Income for common stock was $16.8 million for the third quarter of 2000 compared
to $22.1 million for the third quarter of 1999. Basic and diluted earnings per
share were $0.20 for the third quarter of 2000 compared to $0.26 for the third
quarter of 1999.
For the first nine months of 2000, net income was $124.6 million on
operating revenues of $2.165 billion, compared with net income of $125.7 million
on operating revenues of $1.423 billion for the corresponding period in 1999.
Income for common stock was $117.8 million for the first nine months of 2000 and
$117.0 million for the same period in 1999. Basic and diluted earnings per
common share were $1.38 in both the nine months ended September 30, 2000, and
the same period in 1999.
Earnings per share for the three months and nine months ended September 30,
1999, were positively impacted by a net gain of 4 cents per share related to
sale and assignment of certain non-core assets and gas supply transportation
contracts. Results from non-utility operations for the nine months ended
September 30, 1999, were also positively impacted by approximately 10 cents per
share which was the result of a gain from the sale of the Company's investment
in common stock of Cabot Oil & Gas Corporation, which was partially offset by
the cost of a wholly-owned subsidiary's exiting certain product lines.
Total kilowatt-hour electric sales were 10.3 billion, including 5.5 billion
in sales to other utilities and marketers, for the third quarter of 2000,
compared to 7.6 billion, including 2.9 billion in sales to other utilities and
marketers, for the third quarter of 1999. For the nine month periods ended
September 30, 2000 and 1999, total kilowatt-hour sales were 26.5 billion,
including 10.7 billion in sales to other utilities, and 23.9 billion, including
8.3 billion in sales to other utilities, respectively.
Total gas volumes were 136.2 million therms, including 46.7 million therms
in transportation volumes for the three months ended September 30, 2000,
compared to 149.3 million therms, including 50.8 million therms of
transportation, for the same period in 1999. For the nine months ended September
30, 2000, total gas volumes were 742.8 million therms, including 154.7 million
therms of transportation, compared to 769.7 million therms, including 177.3
million therms of transportation, for the same period in 1999.
The Company's operating revenues and associated expenses are not generated
evenly during the year. Variations in energy usage by consumers do occur from
season to season and from month to month within a season, primarily as a result
of weather conditions. The Company normally experiences its highest energy sales
in the first and fourth quarters of the year.
13
<PAGE>
The Company meets its forecasted electric supply needs throughout the year
through Company-owned electric generation and by obtaining power through
long-term contracts, annual contracts and short-term markets. The Company meets
its forecasted natural gas supply needs throughout the year through
Company-owned gas storage and by purchasing gas supplies through long-term
contracts, annual contracts and short-term markets. The Company also performs
risk management activities to optimize the value of energy supply and
transmission assets and to ensure that physical energy supply is available to
meet the customer demand loads. The Company also purchases energy when demand
exceeds available supplies in its portfolio; likewise the Company makes sales to
other utilities and marketers when surplus energy is available. These
transactions are part of the Company's normal operations to meet retail load.
Electric sales to other utilities and marketers vary by quarter and year
depending principally upon water conditions for the generation of hydroelectric
power, retail customer usage, the energy requirements of other utilities and
energy market conditions in the Pacific Northwest.
Temperatures based on heating-degree-days measured at Seattle-Tacoma
airport during the three and nine month periods ended September 30, 2000 were
near normal and 5% warmer than both comparable periods in the prior year.
14
<PAGE>
<TABLE>
Results of Operations
Comparative Three & Nine Month Periods Ending
September 30, 2000 vs. September 30, 1999
Increase (Decrease)
<CAPTION>
Three Month Period Nine Month Period
------------------ -----------------
(In Millions)
Operating revenue changes
<S> <C> <C>
General rate tariff increase - electric $3.5 $12.4
BPA Residential Purchase & Sale Agreement (0.5) (1.0)
Electric sales to wholesale customers 454.4 542.8
Electric load and other changes 84.0 125.4
Gas revenue change 15.1 53.6
Other revenue changes 11.1 8.8
--------- ---------
Total operating revenue change 567.6 742.0
--------- ---------
Operating expense changes Energy costs:
Purchased electricity 481.4 554.5
Purchased gas 13.7 51.0
Electric generation fuel 43.9 73.5
Residential exchange credit (0.4) (1.4)
Utility operations and maintenance (4.5) (10.4)
Other operations and maintenance 14.2 4.4
Depreciation and amortization 6.5 16.1
Conservation amortization (0.6) (0.3)
Taxes other than federal income taxes 6.1 15.9
Federal income taxes 1.2 8.0
--------- ----------
Total operating expense change 561.5 711.3
--------- ----------
Other income (4.5) (12.5)
Interest charges 7.5 19.4
---------- ----------
Net income change ($5.9) ($1.2)
========== ==========
</TABLE>
The following is additional information pertaining to the changes outlined
in the above table.
Operating Revenues - Electric
Electric revenues for the three months and nine months ended September 30,
2000 increased $541.4 million and $679.6 million, respectfully, compared to the
same periods in 1999. Electric sales to other utilities and marketers increased
$454.4 million and $542.8 million in the three and nine months ended September
30, 2000, respectfully, compared to the prior year periods due to increased
volumes and prices in the wholesale electricity market. During this period, the
Company benefited from being relatively long on resources in a time of volatile
energy markets. Electric margin was up $6.0 million and $17.8 million in the
three and nine months ended September 30, 2000, respectfully, compared to the
prior year periods.
15
<PAGE>
Electric revenues in the three and nine months ended September 30, 2000
increased $3.4 million and $11.2 million, respectively, compared to the same
periods in 1999 due to a January 1, 2000 general electric rate increase that
averaged 1.2%. The number of electric customers served increased 1.7% and 1.8%
in the three and nine months ended September 30, 2000, respectively, compared to
the prior year.
Revenues in 2000 and 1999 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 an approximately five-year period ending June
2001. These payments are recorded as a reduction of purchased electricity
expenses. Under the rate plan approved by the Washington Commission in its
merger order, the Company will continue to reflect in customers' bills, the
level of Residential Exchange benefits in place at the time of the merger with
Washington Energy Company in 1997. Over the remainder of the Residential
Exchange Termination Agreement from October 2000 through June 2001, it is
projected that the Company will credit customers approximately $53 million more
than it will receive from BPA during the following periods:
<TABLE>
<CAPTION>
Credit to Received from Excess
Customers BPA Credits
Period (in Millions)
----------------------- --------- -------------- -------
<S> <C> <C> <C>
October - December 2000 $28.1 $11.7 $16.4
January - June 2001 63.6 27.0 36.6
--------- -------------- -------
$91.7 $38.7 $53.0
</TABLE>
The value of benefits of low-cost federal power allocated to the Company
subsequent to June 2001 will be established in BPA's Subscription process and
related power rate case. In May 2000, the BPA published an initial Record of
Decision in its Subscription process. BPA allocated benefits intended to be
equivalent to 1900 average MW of cost-based federal power to the residential and
small farm customers of the Pacific Northwest investor-owned utilities (IOU's).
The regional Public Utility Commissions in turn recommended an allocation of the
benefits among the IOU's, with the Company's proposed annual share equal to 700
average MW of benefits over the five-year period October 2001 through September
2006. In August 2000, BPA determined that certain aspects of its initial Record
of Decision would be revisited in its power rate case that is expected to
continue through May 2001. On October 30, 2000 the Company signed a five year
contract with BPA (as required by BPA's Subscription timeline) for receipt of
the federal power benefits allocated by the Subscription and Commission
processes. The contract describes the form (power and cash) of the 700 average
MW benefits to be provided, and provides the Company a right to terminate the
contract upon completion of BPA's rate case. The results of the rate case will
affect the value of benefits actually received by the Company and other
Northwest IOU's from the Subscription benefits allocation process.
16
<PAGE>
Operating Revenues - Gas
Gas operating revenues for the quarter ended September 30, 2000 increased
by $15.1 million from the prior year quarter. Total gas volumes decreased 8.7%
from 149.3 million therms in 1999 to 136.2 million therms in 2000. Gas margin
increased by $0.5 million, or 1.8% in the third quarter of 2000 as compared to
the third quarter of 1999. The primary reason for the increase in gas sales
revenue was higher natural gas prices which are passed through to customers in
the Purchased Gas Adjustment (PGA). Increases under the PGA were effective
November 1, 1999 and August 1, 2000. As a result of the PGA increases, gas rates
to all sales customers increased by an average of 16 % on November 1, 1999 and
28% on August 1, 2000. Rates for gas transportation service as well as gas
margins remained unchanged. Partially offsetting the increase in revenue from
higher gas prices were lower sales volumes due to warmer temperatures in the
three months ended September 30, 2000, compared to the three month period ended
September 30, 1999.
For the nine months ended September 30, 2000, gas operating revenues
increased $53.6 million or 16.6% from $322.7 million in the nine months ended
September 30, 1999, to $376.3 million in the nine months ended September 30,
2000, while total gas volumes decreased 3.5%. The increase in revenues in the
period was primarily due to higher natural gas prices passed through to
customers in the PGA as previously mentioned. Gas margin decreased by $1.3
million, or 0.9% in the nine months ended September 30, 2000 as compared to the
same period in 1999.
Operating Expenses
Purchased electricity expenses increased $481.4 million and $554.5 million
for the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999. The increases were due primarily to greater volumes and
higher prices for non-firm power purchases from other utilities and marketers.
The increases were partially offset by a reduction in purchased electricity
expenses related to the purchase of the 160-megawatt Encogen electric
cogeneration plant in November 1999. This reduction in purchased electricity
expenses was offset in part by increases in fuel, operations and maintenance,
depreciation and interest expenses related to Encogen. Prior to the purchase,
the Company was obligated to purchase the net output of the plant under a 1990
power purchase contract.
The Colstrip Unit 4 generating plant, located in eastern Montana, went out
of service on September 3, 2000, because of cracks discovered in the generator
shaft. The unit, which the Company owns in part and buys power from in part,
provides 225 MW of capacity and energy. It went back into service the weekend of
October 21, 2000. Loss of power from this unit increased the Company's cost of
power and reduced energy margins.
Purchased gas expenses increased $13.7 million and $51.0 million for the
three and nine month periods ending September 30, 2000, respectively, compared
to the same periods in 1999. The increases were due primarily to the impact of
increased gas costs which are passed through to customers through the PGA.
Fuel expense increased $43.9 million and $73.5 million for the three and
nine month periods ending September 30, 2000, respectively, compared to the same
period in 1999 as a result of Encogen fuel expenses of $9.4 million in the third
quarter of 2000 and $27.7 million in the nine month period ended September 30,
2000. The Company's acquisition of the 160 megawatt Encogen natural gas-fired
cogeneration plant was completed on November 1, 1999. In addition, fuel expenses
in the three months and nine months ended September 30, 2000 were approximately
$36.8 million and $46.7 million higher than the comparable periods in 1999 due
to the Company generating more electricity and higher gas prices at
Company-owned combustion turbines.
17
<PAGE>
Utility operations and maintenance expenses decreased $4.5 million and
$10.4 million for the three and nine month periods ending September 30, 2000,
respectively, compared to the same periods in 1999. These decreases were due
primarily to higher 1999 costs related to Y2K readiness and electric service
restoration following a number of storms which occurred early in 1999.
Other operations and maintenance expenses increased $14.2 million and $4.4
million in the three and nine month periods ended September 30, 2000, primarily
as a result of the acquisition of Utilx by our unregulated subsidiary,
InfrastruX. Also, a wholly-owned subsidiary exited certain product lines in the
second quarter of 1999, thereby eliminating operations and maintenance expenses
related to these activities.
Depreciation and amortization expense increased $6.5 million and $16.1
million for the three and nine month periods ended September 30, 2000, compared
to the same periods last year due primarily to the effects of new plant placed
into service during the past year, including the Encogen plant purchased in
November 1999, and the Company's ConsumerlinX(TM) customer information and
billing system in April 2000.
Taxes other than federal income taxes increased $6.1 million and $15.9
million for the three and nine month periods ended September 30, 2000,
respectively, compared to the same periods last year primarily due to increases
in municipal and state excise taxes which are revenue based.
Federal income taxes increased $1.2 million and $8.0 million for the three
and nine month periods ended September 30, 2000, respectively, primarily due to
higher pre-tax operating income for the periods.
Other Income
Other income, net of federal income tax, decreased $4.5 million in the
quarter ended September 30, 2000 compared to the same period in 1999 which
included a net gain of $3.6 million related to sale and assignment of certain
non-core assets and gas supply transportation contracts. Other income, net of
federal income tax, decreased $12.4 million in the nine month period ended
September 30, 2000 compared to the same period in 1999 due to the $12.3
after-tax gain from the sale of Cabot common stock reported in the second
quarter of 1999 which was partially offset by costs associated with a
wholly-owned subsidiary's exiting certain product lines as well as the
aforementioned gain of $3.6 million in the third quarter of 1999. In the third
quarter of 2000, the Company recorded an after-tax gain of approximately $1.6
million related to the sale of its interest in the Centralia generating plant
(see discussion in "Other").
Interest Charges
Interest charges, which consist of interest and amortization on long-term
debt and other interest, increased $7.5 million and $19.4 million for the three
and nine month periods ended September 30, 2000 compared to the same periods in
1999. Interest on long-term debt increased $2.8 million and $8.7 million in the
three and nine month periods ending September 30, 2000 compared to the prior
year periods as a result of the issuance of $225 million Senior Medium-Term
Notes, Series B, in February 2000 and the issuance of $25 million Senior
Medium-Term Notes, Series B, in September 2000. These increases were partially
offset by the repayment of $132 million in Secured Medium-Term Notes since
September 1999. Other interest expense increased $4.5 million and $10.4 million
for the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999 as a result of higher weighted average interest rates and
higher average daily short-term borrowings.
18
<PAGE>
Capital Expenditures, Capital Resources and Liquidity
Capital expenditures which include energy conservation expenditures and
exclude AFUDC for the third quarter of 2000 were $70.8 million, compared to
$80.3 million, for the third quarter of 1999. Year to date capital expenditures
were $219.4 million compared to $241.4 million for the same period in 1999.
Capital expenditures for 2000 and 2001 are expected to be $269 million and $250
million, respectively. Cash provided by operations (net of dividends and AFUDC)
as a percentage of capital expenditures (excluding AFUDC) was (123) % and 5% for
the third quarters of 2000 and 1999, respectively. Cash provided by operations
(net of dividends and AFUDC) as a percentage of capital expenditures (excluding
AFUDC) was 33% and 61% for the nine month periods ended September 30, 2000 and
1999, respectively. Capital expenditure estimates are subject to periodic review
and adjustment.
The Company issued common stock for the Company's Stock Purchase and
Dividend Reinvestment Plan of $6,562,000 (274,498 shares)and $16,607,000
(716,467 shares) in the three and nine months ended September 30, 2000,
respectively. No new Company stock was issued for the Dividend Reinvestment Plan
for the comparable periods in 1999.
On September 30, 2000, the Company had available $375 million in lines of
credit with various banks, which provide credit support for outstanding bank
loans and commercial paper of $283.8 million, effectively reducing the available
borrowing capacity under these lines of credit to $91.2 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. There was $261.2 million
outstanding under these arrangements at September 30, 2000.
Other
On May 5, 2000, the Company sold its 7% interest in the 1,340 MW Centralia
coal-fired generating project to TECWA Power, Inc., a subsidiary of TransAlta
Corporation of Calgary, Canada. The sales price of approximately $37.4 million
resulted in a pre-tax gain of approximately $23.5 million. Under the order
issued by the Washington Commission, approximately $2.5 million of this gain
($1.6 million after-tax) goes to Company shareholders and $21.0 million has been
deferred for pass through to electric customers in the form of a one-time refund
to electric customers, based on electric consumption during the month of
November 2000. Any final true-up of the gain will be collected or refunded
through the Company's conservation rider.
On July 20, 2000, the Company and PPL Global, LLC (formerly PP&L Global,
Inc.) terminated an Asset Purchase Agreement dated as of November 1, 1998, under
which PPL Global, LLC had proposed purchasing the Company's 735 megawatt
interest in the four-unit Colstrip power plants and associated transmission
capacity across Montana. As a result, the Company will retain its 50 percent
interest in Colstrip Units 1 & 2 and 25 percent interest in Colstrip Units 3 &
4.
On June 28, 2000, the Company filed a request with the Washington
Commission to pass through the rising costs of natural gas purchased for
customers under terms of the long established purchased gas adjustment (PGA)
mechanism. The PGA mechanism passes through to customers increases or decreases
in the gas supply portion of the natural gas service rates based upon changes in
the price of natural gas purchased from producers and wholesale marketers or
changes in gas pipeline transportation costs. The Company does not profit from
changes under the PGA. The PGA is separate from the Company's general gas
service rates that have been under a rate stability plan since 1997. On July 31,
2000, the Washington Commission approved the Company's request to increase rates
by an overall average of 28% to all natural gas customers effective August 1,
2000.
The Company's Board of Directors has given final approval to formation of a
holding company, Puget Energy, Inc., to be effective January 1, 2001. The
holding company formation was initially approved by the Board of Directors on
April 23, 1999 and approved by the Company's shareholders on June 23, 1999. All
necessary regulatory approvals related to the holding company formation have
been secured.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risks, including changes in commodity
prices and interest rates.
Commodity Price Risk
The Company 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 Company financial
results; and
(iii) Optimize the value of the Company'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 the Company's energy supply portfolio interact with
portfolio optimization activities. Some hedges can be implemented in ways that
retain the Company'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
which 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. The
Company 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. In addition, the Company believes its
current rate design, including its Optional Large Power Sales Rate, various
special contracts and the PGA mechanism mitigate a portion of this risk.
Market risk is managed subject to parameters established by the Board of
Directors. A Risk Management Committee separate from the units that manage these
risks monitors compliance with the Company's policies and procedures. In
addition, the Audit Committee of the Company'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.
20
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Contingencies arising out of the normal course of the Company's business
exist at September 30, 2000. 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 4 Submission of Matters to a Vote of Security Holders
None.
Item 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
12-a Statement setting forth computation of ratios of earnings
to fixed charges (1995 through 1999 and 12 months ended September
30, 2000)
12-b Statement setting forth computation of ratios of earnings to
combined fixed charges and preferred stock dividends (1995
through 1999 and 12 months ended September 30, 2000)
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated July 21, 2000, Item 5 - Other Events, related to
release of second quarter earnings.
Form 8-K filed July 3, 2000, Item 5 - Other Events, related to
InfrastruX, a wholly-owned subsidiary of the Company, acquiring Utilx
Corporation.
21
<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 9, 2000 Chief accounting officer and officer duly
authorized to sign this report
on behalf of the registrant
22
<PAGE>
