UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
| Exact name of registrant as specified | I.R.S. | |||
| in its charter, state of incorporation, | Employer | |||
| Commission | address of principal executive offices, | Identification | ||
| File Number | telephone number | Number |
| 1-16305 | PUGET ENERGY, INC. | 91-1969407 | |
| A Washington Corporation | |||
| 411 - 108th Avenue N.E. | |||
| Bellevue, Washington 98004-5515 | |||
| (425) 454-6363 |
| 1-4393 | PUGET SOUND ENERGY, INC. | 91-0374630 | |
| A Washington Corporation | |||
| 411 - 108th Avenue N.E. | |||
| Bellevue, Washington 98004-5515 | |||
| (425) 454-6363 |
Securities registered pursuant to Section 12(b) of the Act:
| Name of each exchange | |
| Title of each class |
on which listed |
| Puget Energy, Inc. | |
| Common Stock, $0.01 par value | N. Y. S. E. |
| Preferred Share Purchase Rights | N. Y. S. E. |
| Puget Sound Energy, Inc. | |
| 7.45% Series II, Preferred Stock | |
| (Cumulative, $25 Par Value) | N. Y. S. E. |
| 8.4% Capital Securities | N. Y. S. E. |
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class |
|
| Puget Sound Energy, Inc. | |
| Preferred Stock (Cumulative, $100 Par Value) | |
| 8.231% Capital Securities | |
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes/X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of Puget
Energy, Inc. at December 31, 2001, was approximately $1,904,938,000. The number of
shares of Puget Energy, Inc.‘s common stock outstanding at March 1, 2021,
was 87,327,324.
All of the outstanding shares of voting stock of Puget Sound Energy, Inc. are
held by Puget Energy, Inc.
Documents Incorporated by Reference
Portions of the Puget Energy proxy statement for its 2002 Annual Meeting of Shareholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after December 31, 2001 are incorporated by reference in Part III hereof.
This Annual Report on Form 10-K is a combined report being filed separately by two different registrants: Puget Energy, Inc.
(Puget Energy) and Puget Sound Energy, Inc. (PSE). PSE makes no representation as to the information contained in this report
relating to Puget Energy and the subsidiaries of Puget Energy other than PSE and its subsidiaries.
INDEX
Definitions
Forward-Looking Statements
Part I
1. Business
General
Utility Industry Overview
Regulation and Rates
Electric Supply
Electric Operating Statistics
Gas Supply
Gas Operating Statistics
Energy Conservation
Environment
Executive Officers of the Registrants
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Part II
5. Market for Registrant's Common Equity and Related Shareholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and Results of Operations
7a. Quantitative and Qualitative Disclosures about Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrants
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Exhibit Index
DEFINITIONS
AFUCE Allowance for Funds Used to Conserve Energy
AFUDC Allowance for Funds Used During Construction
BPA Bonneville Power Administration
CAAA Clean Air Act Amendments
CAISO California Independent System Operator
Cabot Cabot Oil & Gas Corporation
Chelan Public Utility District No. 1 of Chelan County, Washington
Dth Dekatherm (one Dth is equal to one MMBtu)
FERC Federal Energy Regulatory Commission
InfrastruX InfrastruX Group, Inc.
KW Kilowatts
KWH Kilowatt Hours
LNG Liquefied Natural Gas
MMBtu One Million British Thermal Units
MW Megawatts (one MW equals one thousand KW)
MWH Megawatt Hours
Montana Power The Montana Power Company
NPC Williams/Northwest Pipeline Corporation
PGA Purchased Gas Adjustment
PG&E Pacific Gas & Electric Company
PGT Pacific Gas & Electric Gas Transmission - Northwest
PSE Puget Sound Energy, Inc.
PUDs Washington Public Utility Districts
Puget Energy Puget Energy, Inc.
PURPA Public Utility Regulatory Policies Act
RTO Regional Transmission Organization
Schlumberger Schlumberger North America
WEGM Washington Energy Gas Marketing Company
Washington Commission Washington Utilities and Transportation Commission
WNG Washington Natural Gas Company
Puget Energy and PSE are including the following cautionary statement in this Form 10-K to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of Puget Energy or PSE. This report includes forward-looking statements, which are statements of expectations, beliefs, plans, objectives, assumptions or future events or performance. Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will likely result,” “will continue” or similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. Puget Energy's and PSE's expectations, beliefs and projections are expressed in good faith and are believed by Puget Energy and PSE, as applicable, to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in records and other data available from third parties, but there can be no assurance that Puget Energy's and PSE's expectations, beliefs or projections will be achieved or accomplished.
In addition to other factors and matters discussed elsewhere in this report, some important factors that could cause actual results or outcomes for Puget Energy and PSE to differ materially from those discussed in forward-looking statements include:
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, Puget Energy and PSE undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
ITEM 1. BUSINESS
GENERAL
On January 1, 2001, Puget Sound Energy, Inc. (PSE) reorganized into a holding company structure. This reorganization resulted
in the creation of a new holding company, Puget Energy, Inc. (Puget Energy). Pursuant to the reorganization, Puget Energy became the
owner of all PSE's outstanding common stock. Holders of PSE's existing common stock exchanged their common stock on a one-for-one
basis for common stock of Puget Energy.
Puget Energy is an energy services holding company incorporated in the State of Washington in 1999. All of its operations are
conducted through its subsidiaries. Subject to limited exceptions, Puget Energy is exempt from regulation as a public utility
holding company pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935.
Puget Sound Energy, Inc.
PSE is a public utility incorporated in the State of Washington. PSE furnishes electric and gas service in a territory
covering approximately 6,000 square miles, principally in the Puget Sound region of Washington state.
At December 31, 2001, PSE had approximately 940,600 electric customers, consisting of 834,200 residential, 100,600 commercial,
4,000 industrial and 1,800 other customers; and approximately 606,000 gas customers, consisting of 556,000 residential, 47,100
commercial, 2,800 industrial and 100 other customers. At December 31, 2001, approximately 298,600 customers purchased both forms of
energy from PSE. For the year 2001, PSE added approximately 17,000 electric customers and approximately 15,200 gas customers,
representing annualized growth rates of 1.8% and 2.6%, respectively. During 2001, PSE's billed retail revenues from electric utility
operations were derived 42% from residential customers, 36% from commercial customers, 20% from industrial customers and 2% from
other customers. PSE's retail revenues from gas utility operations were derived 60% from residential customers, 32% from commercial
customers, 6% from industrial customers and 2% from transportation and other customers. During this period, the largest customer
accounted for 3.4% of PSE's operating revenues.
PSE is affected by various seasonal weather patterns throughout the year and, therefore, utility revenues and associated
expenses are not generated evenly during the year. Variations in energy usage by consumers occur from season to season and from month
to month within a season, primarily as a result of weather conditions. PSE normally experiences its highest retail energy sales in
the first and fourth quarters of the year. Sales of electricity to wholesale customers also vary by quarters and years depending
principally upon streamflow conditions for the generation of surplus hydro-electric power, customer usage and the market demand by
wholesale customers. Earnings can be significantly influenced by surplus electric sales, regional energy prices, variations in
weather, hydro conditions and market demand. PSE has a Purchased Gas Adjustment mechanism (PGA) in retail gas rates to recover
variations in gas supply and transportation costs. PSE continues to operate without an electric rate adjustment mechanism.
During the period from January 1, 1997 through December 31, 2001, PSE made gross electric utility plant additions of
$913 million and retirements of $161 million. In the five-year period ended December 31, 2001, PSE made gross gas utility plant
additions of $537 million and retirements of $63 million. In the same five-year period, PSE made gross common utility plant additions
of $311 million and retirements of $30 million. Gross electric utility plant at December 31, 2001 was approximately $4.2 billion,
which consisted of 58% distribution, 27% generation, 6% transmission and 9% general plant and other. Gross gas utility plant at
December 31, 2001 was approximately $1.6 billion, which consisted of 85% distribution, 6% transmission and 9% general plant and
other. Gross common utility general plant at December 31, 2001 was approximately $363 million.
At year-end PSE had 2,480 aggregate full-time equivalent employees.
InfrastruX Group, Inc.
InfrastruX Group, Inc. (InfrastruX) was incorporated in the State of Washington in 2000
as a holding company for nonregulated
businesses that provide design, construction, engineering and other infrastructure services to the utility industry. Since its
formation, InfrastruX has acquired nine companies engaged in some or all of the following services in their respective regions,
primarily the Mid-West, Texas and the Eastern United States:
At year-end, InfrastruX and its subsidiaries had 1,492 aggregate full-time equivalent employees.
UTILITY INDUSTRY OVERVIEW
In 1996 and 1997, the Federal Energy Regulatory Commission (FERC) issued orders that require utilities, including PSE, to file
open access transmission tariffs that will make utilities' electric transmission systems available to wholesale sellers and buyers on
a nondiscriminatory basis. A number of states, including California, have restructured their electric industries to separate or
"unbundle" power generation, transmission and distribution in order to permit new competitors to enter the marketplace. However, due
to the extreme price volatility, energy shortages and financial collapse of utilities that occurred in California during 2000,
several states are reviewing their policies on open access. To date, Washington state has not provided a statutory regulatory framework
for retail competition with respect to customers of investor-owned utilities. On April 15, 2001, however, the Washington Utilities
and Transportation Commission (Washington Commission) issued an order allowing PSE's large industrial customers whose
rates were linked to a market index to choose their supplier of electricity or to self-generate. If an industrial customer
chooses an alternate supplier, PSE will provide the transportation of electricity to the customer's premise and charge that customer for
the service. In 2001, 13 commercial and industrial customers chose such service.
Beginning in mid-2000 through June 2001, the West Coast energy market was
experiencing extraordinary market conditions.
Wholesale energy prices had greatly exceeded historical norms, reflecting unfavorable hydro conditions and unscheduled outages of
generating facilities in the West, among other factors. Supply constraints led to rolling blackouts in certain areas of California
during 2000. The region's turbulence and the financial troubles of the California energy market are drawing attention from various
state and federal regulatory and political authorities. Numerous changes have been proposed to address the region's issues. On June
19, 2001, FERC implemented price controls on wholesale electricity sales in the western states and a dramatic decline in wholesale
electric prices occurred by the end of the second quarter of 2001. This decline has diminished the value of PSE's excess electric
energy during that period and into the foreseeable future.
On December 20, 1999, FERC issued Order 2000 to advance the formation of Regional
Transmission Organizations (RTOs). This
regulation required each public utility that owns, operates or controls facilities for the transmission of electric energy in
interstate commerce to file with FERC by October 15, 2000 plans for forming and participating in an RTO. FERC's goal is to promote
efficiency in wholesale electricity markets and to reduce prices electricity consumers pay to the lowest price possible for reliable
service. On October 16, 2000, PSE and five other utilities filed with FERC their proposal for an independent transmission company,
which would serve six states. The independent transmission company would be a member of the planned regional transmission
organization. Any final proposal that emerges is subject to approval by FERC and relevant state public utility commissions.
Since 1986, PSE has been offering gas transportation as a separate service to industrial
and commercial customers who choose to
purchase their gas supply directly from producers and gas marketers. The continued evolution of the natural gas industry, resulting
primarily from FERC Orders 436, 500 and 636, has served to increase the ability of large gas end-users to independently obtain gas
supply and transportation services. Although PSE has not lost any substantial industrial or commercial load as a result of such
activities, in certain years up to 160 customers annually have taken advantage of unbundled transportation service; in 2001, 112
commercial and industrial customers, on average, chose to use such service. The shifting of customers from sales to transportation
does not materially impact utility margin, as PSE earns similar margins on transportation service as it does on large volume,
interruptible gas sales.
REGULATION AND RATES
PSE is subject to the regulatory authority of (1) the Washington Commission as to
retail utility rates, accounting, the
issuance of securities and certain other matters and (2) FERC with respect to the transmission of electric energy, the resale of
electric energy at wholesale, accounting and certain other matters. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Rate Matters".)
ELECTRIC SUPPLY
At December 31, 2001, PSE's peak electric power resources were approximately
4,970,035 KW. PSE's historical peak load of approximately 4,847,000 KW occurred on December 21, 1998.
During 2001, PSE's total electric energy production was supplied 33.9% by its own resources,
14.8% through long-term contracts with several of the Washington Public Utility Districts (PUDs) that own hydroelectric projects on the Columbia
River, 26.8% from other firm purchases and 24.5% from non-firm purchases.
The following table shows PSE's electric energy supply resources at December 31, 2001,
and energy production during the year:
Peak Power Resources
at December 31, 2001 2001 Energy Production
---------------------------------------- --------------------------------------
Kilowatt-Hours
Kilowatts % (Thousands) %
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
Purchased resources:
Columbia River
PUD contracts (hydro) 1,431,900 28.8% 4,230,574 14.8%
Other hydro¹ 535,660 10.8% 964,628 3.4%
Other producers¹ 1,211,675 24.4% 6,706,560 23.4%
Non-firm energy purchases N/A N/A 6,987,319 24.5%
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
Total purchased 3,179,235 64.0% 18,889,081 66.1%
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
Company-controlled resources:
Hydro 300,000 6.0% 1,101,373 3.9%
Coal 700,000 14.1% 5,038,834 17.6%
Natural gas/oil 790,800 15.9% 3,543,880 12.4%
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
Total Company controlled 1,790,800 36.0% 9,684,087 33.9%
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
Total 4,970,035 100.0% 28,573,168 100.0%
- --------------------------------------- --------------------- ----------------- ---------------------- --------------
¹ Power received from other utilities is classified between hydro and other producers based on the character of the utility system used to supply the power or, if the power is supplied from a particular resource, the character of that resource.
COMPANY-CONTROLLED ELECTRIC GENERATION RESOURCES
PSE and other utilities are joint owners of four mine-mouth, coal-fired, steam-electric
generating units at Colstrip, Montana,
approximately 100 miles east of Billings, Montana. PSE owns a 50% interest (330,000 KW) in Units 1 and 2 and a 25% interest (370,000
KW) in Units 3 and 4. The owners of the Colstrip Units purchase coal for the Units from Western Energy Company (Western Energy),
under the terms of long-term coal supply agreements. The coal supply agreements for Colstrip 1 and 2 and Colstrip 3 and 4 will expire
in 2009 and 2019, respectively. PSE also has the following plants with an aggregate net generating capability of 1,090,750 KW:
Plant Name Plant Type Total KW Year Installed
Upper Baker River Hydro 91,000 1959
Lower Baker River Hydro 71,000 Reconstructed 1960
Upgraded 2001
White River Hydro 70,000 1911
Snoqualmie Falls Hydro 42,000 1898 to 1911 and 1957
Electron Hydro 26,000 1904 to 1929
Fredonia 1 & 2 Dual fuel combustion turbines 210,000 1981
Fredrickson Units 2 & 3 Dual fuel combustion turbines 150,000 1981
Whitehorn Units 2 & 3 Dual fuel combustion turbines 150,000 1984
Fredonia 3 & 4 Dual fuel combustion turbines 108,000 2001
Encogen Natural gas cogeneration 170,000 1999
Crystal Mountain Internal combustion 2,750 1969
All of these generating facilities, except the Colstrip, Montana plants, are located
in PSE’s service territory.
On December 19, 1997, PSE was issued a 50-year license by FERC for its existing and
operating White River project which includes authorization to install an additional 14,000 KW generating unit. PSE has filed for a
rehearing with FERC on conditions of the license related to measures designed to enhance salmon runs on the White River, because those
conditions may make the plant uneconomic to operate. On June 30, 1999, FERC issued a stay in the license proceeding. This additional time
allows PSE, state agencies, local governments and public interest groups to resolve common issues relating to the plant’s continued
operation and economics. The licensing proceeding is ongoing. The initial license for the existing and operating Snoqualmie Falls project
expired in December 1993, and PSE continues to operate this project under a temporary license. PSE is continuing the FERC application process
to relicense this project.
COLUMBIA RIVER ELECTRIC ENERGY SUPPLY CONTRACTS
During 2001, approximately 14.8% of PSE’s energy output was obtained at an average cost
of approximately 17.98 mills per KWH through long-term contracts with several of the Washington PUDs that own and operate hydroelectric
projects on the Columbia River.
PSE’s purchases of power from the Columbia River projects are generally on a “cost
of service” basis under which PSE pays a proportionate share of the annual debt service and operating and maintenance costs of each
project in proportion to the contractual shares that PSE has rights to from such project. Such payments are not contingent upon the
projects being operable, which means PSE is required to make the payments even if power is not being delivered. These projects are
financed through substantially level debt service payments, and their annual costs may vary over the term of the contracts as
additional financing is required to meet the costs of major maintenance, repairs or replacements or license requirements.
PSE has contracted to purchase from Chelan County PUD (Chelan) a 50% share of the output
of the original units of the Rock Island Project, which percentage will remain unchanged for the duration of the contract that expires
in 2012. PSE has also contracted to purchase the output of the additional Rock Island units for the duration of the contract.
As of December 31, 2001, PSE's aggregate annual capacity from all units of the Rock Island Project was 495,900 KW. PSE's share of
output of the additional Rock Island units may be reduced by up to 10% per year which began July 1, 2000, subject to a maximum aggregate
reduction of 50%, upon the exercise of rights of withdrawal by Chelan for use in its local service area. The schedule of
withdrawals by Chelan for the additional Rock Island units is as follows:
Date of Withdrawal Withdrawal Percentage PSE Capacity after Withdrawal
July 1, 2000 5% 95%
July 1, 2002 10% 85%
July 1, 2003 10% 75%
February 1, 2005 10% 65%
July 1, 2005 10% 55%
November 1, 2006 5% 50%
PSE has contracted to purchase from Chelan 38.9% (505,000 KW as of December 31, 2001)
of the annual output of the Rocky Reach Project, which percentage remains unchanged for the remainder of the contract which expires in
2011. PSE has contracted to purchase from Douglas County PUD 31.3% (261,000 KW as of December 31, 2001) of the annual output of the Wells
Project, the percentage of which remains unchanged for the remainder of the contract which expires in 2018. PSE has contracted to
purchase from Grant County PUD 8.0% (72,000 KW as of December 31, 2001) of the annual output of the Priest Rapids Development and 10.8%
(98,000 KW as of December 31, 2001) of the annual output of the Wanapum Development, which percentages remain unchanged for the remainder
of the contracts which expire in 2005 and 2009, respectively.
On December 28, 2001, PSE signed a contract offer for new contracts for the Priest
Rapids and Wanapum Developments. Under terms of these contracts, PSE will continue to obtain capacity and energy for the term of
any new license to be obtained by Grant County PUD for these Developments. The terms and conditions of these contracts are being finalized.
ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH OTHER UTILITIES
PSE has entered into long-term firm purchased power contracts with other utilities
in the region. PSE is generally not obligated to make payments under these contracts unless power is delivered.
Under a 1985 settlement agreement relating to Washington Public Power Supply System
Nuclear Project No. 3, in which PSE had a 5% interest, PSE is entitled to receive from BPA beginning January 1, 1987, electric power
during the months of November through April. Under the contract, PSE is guaranteed to receive not less than 191,667 MWH in each
contract year until PSE has received total deliveries of 5,833,333 MWH. PSE expects the contract to be in effect until at least June
2008. Also pursuant to the 1985 settlement agreement, BPA has an option to request that PSE deliver up to 67 MW of exchange energy to
BPA in all months except May, July and August through the remaining term of the agreement which is no earlier than June 2008. BPA exercised
its option for the period January through April 2001 and PSE delivered 59 MW of exchange energy in each month.
On April 4, 1988, PSE executed a 15-year contract, with provisions for early termination
by PSE, for the purchase of firm energy supply from Avista Corporation (formerly Washington Water Power Company). This agreement calls
for the delivery of 100 MW of capacity and 657,000 MWH of energy from the Avista system annually (75 annual average MW). Minimum and
maximum delivery rates are prescribed. Under this agreement, the energy is to be priced at Avista's average generation and transmission
cost, subject to certain price ceilings. This contract expires on December 31, 2002.
On October 27, 1988, PSE executed a 15-year contract for the purchase of firm power and
energy from PacifiCorp. Under the terms of the agreement, PSE receives 120 average MW of energy and 200 MW of peak capacity. This contract
expires on October 31, 2003.
On October 1, 1989, PSE signed a contract with The Montana Power Company under which
Montana Power provides PSE, from its share of Colstrip Unit 4, 71 average MW of energy (97 MW of peak capacity) over a 21-year period.
This contract expires December 2010.
PSE executed an exchange agreement with Pacific Gas & Electric Company (PG&E) which became
effective on January 1, 1992. Under the agreement, 300 MW of capacity together with 413,000 MWH of energy are exchanged seasonally every
year on a unit for unit basis. No payments are made under this agreement. PG&E is a summer peaking utility and will provide power
during the months of November through February. PSE is a winter peaking utility and will provide power during the months of June through
September. Each party may terminate the contract for various reasons. In January 2001, PG&E did not meet all of its exchange delivery
obligations to PSE due to resource shortfalls on the PG&E electrical system. On December 20, 2001, PSE gave notice to PG&E of
termination of the exchange agreement under the five-year notice provision of the contract.
In October 1997, a 10-year power exchange agreement between PSE and Powerex (a subsidiary
of a British Columbia utility) became effective. Under this agreement Powerex pays PSE for the right to deliver power up to 1,500,000
MWH annually to PSE at the Canadian border in exchange for PSE delivering power to Powerex at various locations in the United States.
ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH NON-UTILITIES
As required by the federal Public Utility Regulatory Policies Act (PURPA), PSE entered
into long-term firm purchased power contracts with non-utility generators. The most significant of these are the contracts described
below which PSE entered into in 1989, 1990 and 1991 with operators of natural gas-fired cogeneration projects. PSE purchases the net
electrical output of these three projects at fixed and annually escalating prices which were intended to approximate PSE's avoided cost of
new generation projected at the time these agreements were made. PSE's estimated payments under these three contracts are $209.0 million
for 2002, $208.0 million for 2003, $222.0 million for 2004, $225.0 million for 2005, $231.0 million for 2006 and in the aggregate,
$1.3 billion thereafter through 2012.
On June 29, 1989, PSE executed a 20-year contract to purchase 70 average MW of energy and 80
MW of capacity, beginning October 11, 1991, from the March Point Cogeneration Company (March Point), which owns and operates a natural
gas-fired cogeneration facility known as March Point Phase I, located at the Equilon refinery in Anacortes, Washington. On December 27,
1990, PSE executed a second contract (having a term coextensive with the first contract) to purchase an additional 53 average MW of energy
and 60 MW of capacity, beginning in January 1993, from another natural gas-fired cogeneration facility owned and operated by March Point,
which facility is known as March Point Phase II and is located at the Equilon refinery in Anacortes, Washington.
On February 24, 1989, PSE executed a 20-year contract to purchase 108 average MW of energy
and 123 MW of capacity, beginning in April 1993, from Sumas Cogeneration Company, L.P., which owns and operates a natural gas-fired
cogeneration project located in Sumas, Washington.
In December 1999, PSE bought out the remaining 8.5 years of one of the natural gas supply
contracts serving Encogen from Cabot Oil & Gas Corporation (Cabot) which provided approximately 60% of the plant’s natural gas requirements.
PSE became the replacement gas supplier to the project for 60% of the supply under the terms of the Cabot Agreement. The Washington
Commission issued an order creating a regulatory asset relating to the $12 million payment that requires PSE to accrue carrying costs on
the unamortized balance over the first three years.
On March 20, 1991, PSE executed a 20-year contract to purchase 216 average MW of energy
and 245 MW of capacity, beginning in April 1994, from Tenaska Washington Partners, L.P., which owns and operates a natural gas-fired
cogeneration project located near Ferndale, Washington. In December 1997 and January 1998, PSE and Tenaska Washington Partners entered
into revised agreements in which PSE became the principal natural gas supplier to the project and power purchase prices under the Tenaska
contract were revised to reflect market-based prices for the natural gas supply. PSE obtained an order from the Washington Commission
creating a regulatory asset related to the $215 million restructuring payment. In addition, PSE is responsible for any potential tax
indemnification to the seller imposed by the Internal Revenue Service up to a maximum of $30 million. Under terms of the order, PSE is
allowed to accrue as an additional regulatory asset one-half the carrying costs of the deferred balance over the first five years.
ELECTRIC RATES AND REGULATION
The order approving the merger of Puget Sound Power & Light Company, Washington Energy
Company and Washington Natural Gas Company (Merger), issued by the Washington Commission on February 5, 1997, contained a rate plan
designed to provide a five-year period of rate certainty for customers and to provide PSE with an opportunity to achieve a reasonable
return on investment. General electric tariff rates were stipulated to increase annually between 1.0% and 1.5% depending on rate class on
January 1 of 1998 through 2001. PSE has had no electric rate adjustment mechanism during the rate stability period to adjust for changes
in electric energy supply costs or fuel costs. These variances may now significantly influence earnings. The rate stabilization period
ended on December 31, 2001.
On November 26, 2001, PSE filed a petition with the Washington Commission requesting
an electric rate increase of $228.3 million. The Washington Commission is expected to make a decision on the general rate increase by
no later than October 25, 2002. Also, on December 3, 2001, PSE filed a petition with the Washington Commission requesting an electric
interim rate increase of $170.7 million to be collected by the end of October 2002. The interim filing requested deferral of excess
power costs and an increase in rates to recover the underrecovered power costs until long-term rates are authorized. On December
28, 2001, the Washington Commission issued an order authorizing PSE to defer certain excess power costs from January 1, 2002
through March 31, 2002 for consideration of recovery in the interim and general rate cases. On February 11, 2002, PSE filed rebuttal
testimony revising the collection period for the requested $170.7 million interim request as follows: collection of $136.2 million over
the period March 15, 2002 through October 31, 2002 with the remaining deferral of $34.5 million over the period November 1, 2002 through
October 31, 2003. A decision on the requested interim relief will be made by the Washington Commission before March 31, 2002.
On April 25, 2001, the Washington Commission approved "time-of-day" rates for
approximately 300,000 residential electric customers for the period May 1, 2001 through September 30, 2001. On September 26, 2001,
the Washington Commission authorized the extension of the "time-of-day" rates pilot program for residential customers through May 31,
2002 to allow approximately 20,000 business customers to participate in a "time-of-day" rates program from October 1, 2001 through
September 30, 2002. In the order, if the cumulative revenues collected under the "time-of-day" tariffs during the beginning through
the end of the program exceed the revenues that would have been collected under the original tariffs, PSE must defer any overcollection
and refund it to participating customers. Through December 31, 2001, revenues billed under the "time-of-day" tariff have been slightly
less than original tariffs by an immaterial amount, thus no deferred liability was established at December 31, 2001. Personal Energy
Management consumption information is available to all classes of customers. Customers are able to monitor their energy usage and shift
usage to low-demand off-peak periods. This program is intended to reduce the demand for peak power generation and provide customers
information to effectively manage energy usage.
On April 25, 2001, the Washington Commission authorized PSE to provide a conservation
incentive credit to its retail electric customers. The conservation incentive credit was to reduce customers' bills by $.05 per kWh for
each kWh reduction in excess of 10% from the same billing period in the prior year through December 31, 2001. On November 7, 2001, the
Washington Commission approved PSE's request to terminate the conservation incentive credit program effective November 8, 2001. During
2001, conservation incentive credit decreased revenues by $19.5 million due to the reduction in customers' kWh usage above 10%.
On April 15, 2001, the Washington Commission issued an order allowing
PSE's large industrial customers whose rates were linked to a market index to choose their supplier of electricity or to self-
generate. If an industrial customer chooses an alternate supplier, PSE will provide the transportation of electricity to the
customer's premise and charge that customer for the service.
On June 13, 2001, the Washington Commission approved an amended Residential Purchase and
Sale Agreement between PSE and the BPA, under which PSE's residential and small farm customers would continue to receive benefits of
federal power. Completion of this agreement enabled PSE to continue to provide, and in fact increase, effective January 1, 2002, the
Residential and Farm Energy Exchange Credit to residential and small farm customers. The amended settlement agreement provides that,
for its residential and small farm customers, (a) PSE will receive cash payment benefits during the period July 1, 2001 through September
30, 2006 and (b) benefits in the form of power or cash payments during the period October 1, 2006 through September 30, 2011. Any such benefits
may vary, depending on the outcome of regulatory and legal proceedings and reviews. For example, a number of parties are challenging in
the Ninth Circuit Court of Appeals BPA's authority to enter into or perform the amended Residential Purchase and Sale Agreement between PSE and
BPA. For calendar year 2001, the benefits of the Residential and Farm Energy Exchange credited to customers were $103.1 million as
compared to an offsetting reduction in Purchased Electricity Expense of $75.9 million. PSE expects payments from BPA (recorded as a
reduction in Purchased Electricity Expense) in the amount of $127.3 million for the period January 2002 through September 2002 and
$702.2 million for the period October 2002 through September 2006. Eligible residential and farm customers will receive credits to
their bills in the same amounts.
To implement this agreement for rate purposes, the Washington Commission approved tariff
revisions (a) that were intended to transfer the Residential and Farm Energy Exchange credit in effect since October 1, 1995 in the
amount of 1.085 cents per kWh, to general rates effective July 1, 2001 and (b) to provide a supplemental Residential and Farm Exchange
credit for eligible residential and small farm customers. This Residential and Farm Exchange Benefit Supplemental Rider will be a credit
of .265 cents per kWh for the period January 1, 2002 through September 30, 2002, .600 cents per kWh for the period October 1, 2002
through May 31, 2006 and 1.050 cents per kWh for the period June 1, 2006 through September 30, 2006. The approval of the tariffs
by the Washington Commission, effective July 1, 2001, was without predetermining or prejudicing any argument as to whether or how the
terms of the Washington Commission's order dated February 5, 1997, regarding the merger of Washington Natural Gas Company and Puget Sound
Power and Light Company into Puget Sound Energy, "have been fulfilled, or as of what effective date any relief, if warranted, should be
granted". On October 17, 2001, the Public Counsel Section of the Washington State Attorney General's Office filed a complaint with
the Washington Commission alleging that PSE has violated the Washington Commission's 1997 merger order. The Public Counsel's complaint is that
PSE's residential and small farm customers should receive both the reduction in rates equal to the residential exchange credit in
place prior to July 1, 2001, and in addition, the benefits of the amended agreement for residential and small benefits received from
BPA. If Public Counsel's position were upheld, PSE's electric revenues for the last six months of 2001 would be reduced by
approximately $51.1 million. While PSE believes this complaint is without merit, PSE is unable to predict the outcome of this
proceeding. A decision in the proceeding is expected in 2002.
Twelve Months Ended December 31 2001 2000 1999
- ----------------------------------------------------- --------------------- --------------------- --------------------
Operating revenues by classes (thousands):
- ----------------------------------------------------- --------------------- --------------------- --------------------
Residential $ 583,714 $ 587,780 $ 586,416
Commercial 509,134 476,052 457,339
Industrial 281,161 292,975 169,508
Other consumers 25,351 98,888 35,919
- ----------------------------------------------------- --------------------- --------------------- --------------------
Operating revenues billed to consumers (1) 1,399,360 1,455,695 1,249,182
Unbilled revenues - net increase (decrease) (70,615) 66,700 (9,541)
- ----------------------------------------------------- --------------------- --------------------- --------------------
Total operating revenues from consumers 1,328,745 1,522,395 1,239,641
Transportation 2,537 6 1,643
Sales to other utilities and marketers 1,021,376 1,249,294 316,728
- ----------------------------------------------------- --------------------- --------------------- --------------------
Total operating revenues $2,352,658 $2,771,695 $1,558,012
- ----------------------------------------------------- --------------------- --------------------- --------------------
Number of customers (average):
Residential 826,187 811,443 797,421
Commercial 100,015 98,758 96,756
Industrial 4,012 4,111 4,222
Other 1,758 1,548 1,497
Transportation 5 -- 15
- ----------------------------------------------------- --------------------- --------------------- --------------------
Total customers (average) 931,977 915,860 899,911
- ----------------------------------------------------- --------------------- --------------------- --------------------
KWH generated, purchased and interchanged (thousands):
Company generated 9,684,087 9,502,386 7,941,632
Purchased power 18,758,449 28,907,317 26,716,328
Interchanged power (net) 130,632 118,586 19,650
- ----------------------------------------------------- --------------------- --------------------- --------------------
Total energy output 28,573,168 38,528,289 34,677,610
Losses and company use (1,152,840) (1,582,446) (1,512,571)
- ----------------------------------------------------- --------------------- --------------------- --------------------
Total energy sales 27,420,328 36,945,843 33,165,039
- ----------------------------------------------------- --------------------- --------------------- --------------------
Twelve Months Ended December 31 2001 2000 1999
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Electric energy sales, KWH (thousands):
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Residential 9,555,264 9,810,393 9,861,791
Commercial 7,953,165 7,677,032 7,482,280
Industrial 2,540,722 4,026,344 3,980,246
Other consumers 154,749 219,435 262,238
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Total energy billed to consumers 20,203,900 21,733,204 21,586,555
Unbilled energy sales - net increase (decrease) (278,392) 118,908 (155,023)
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Total energy sales to consumers 19,925,508 21,852,112 21,431,532
Sales to other utilities and marketers 7,494,820 15,093,731 11,733,507
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Total energy sales 27,420,328 36,945,843 33,165,039
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Per residential customer:
Annual use (KWH) 11,565 12,090 12,367
Annual billed revenue $ 725.75 $ 745.44 $ 762.78
Billed revenue per KWH $ 0.0628 $ 0.0617 $ 0.0617
Company-owned generation capability – KW:
Hydro 300,000 310,700 310,700
Steam 700,000 680,000 771,900
Natural gas/oil 790,800 745,550 813,050
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Total 1,790,800 1,736,250 1,895,650
- ---------------------------------------------------------- --------------- ---------------------- -------------------
Heating degree days 4,993 4,970 4,956
Percent of normal of 30-year average 101.7% 100.9% 101.0%
Load factor 59.8% 62.2% 62.6%
1 Operating revenues in 2001, 2000 and 1999 were reduced by $31.0 million, $35.4 million and $43.8 million, respectively, as a result of PSE’s sale of $237.7 million of its investment in customer-owned conservation measures. (See “Operating Revenues - Electric” in Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements.)
GAS SUPPLY
PSE currently purchases a blended portfolio of long-term firm, short-term firm and non-firm
gas supplies from a diverse group of major and independent producers and gas marketers in the United States and Canada. PSE also enters
into short-term physical and financial derivative instruments to hedge the cost of gas to service its customers. All of PSE's gas supply
is ultimately transported through facilities of Williams/Northwest Pipeline Corporation (NPC), the sole interstate pipeline delivering
directly into the Western Washington area.
Peak Firm Gas Supply at December 31, 2001 Dth per Day %
- --------------------------------------------------------------- ------------------- ----------------
Purchased gas supply:
British Columbia 181,800 22.5
Alberta 65,800 8.1
United States 51,400 6.4
- --------------------------------------------------------------- ------------------- ----------------
Total purchased gas supply 299,000 37.0
- --------------------------------------------------------------- ------------------- ----------------
Purchased storage capacity:
Clay Basin 96,600 11.9
Jackson Prairie 47,500 5.9
LNG 70,700 8.7
- --------------------------------------------------------------- ------------------- ----------------
Total purchased storage capacity 214,800 26.5
- --------------------------------------------------------------- ------------------- ----------------
Owned storage capacity:
Jackson Prairie 265,000 32.8
Propane-air injection 30,000 3.7
- --------------------------------------------------------------- ------------------- ----------------
Total owned storage capacity 295,000 36.5
- --------------------------------------------------------------- ------------------- ----------------
Total peak firm gas supply 808,800 100.0
- --------------------------------------------------------------- ------------------- ----------------
All peak firm gas supplies and storage are connected to PSE's market with firm transportation capacity.
For baseload and peak-shaving purposes, PSE supplements its firm gas supply portfolio by purchasing natural gas at generally
lower prices in months of low market demand for gas, injecting it into underground storage facilities and withdrawing it during the
winter heating season. Storage facilities at Jackson Prairie in Western Washington and at Clay Basin in Utah are used for this
purpose. Peaking needs are also met by using PSE owned gas held in NPC's liquefied natural gas (LNG) facility at Plymouth,
Washington, and by producing propane-air gas at a plant owned by PSE and located on its distribution system.
Twelve Months Ended December 31 2001 2000 1999
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Operating revenues by classes (thousands):
Regulated utility sales:
Residential sales $ 486,761 $ 372,900 $ 296,032
Commercial firm sales 196,904 144,046 113,058
Industrial firm sales 37,411 27,832 21,724
Interruptible sales 71,997 44,485 30,404
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Total gas sales 793,073 589,263 461,218
Transportation services 11,780 12,137 13,117
Other 10,218 10,911 11,153
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Total gas operating revenues $ 815,071 $ 612,311 $ 485,488
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Customers, average number served:
Residential 548,497 532,333 509,384
Commercial firm 45,998 44,817 43,567
Industrial firm 2,789 2,863 2,879
Interruptible 833 835 873
Transportation 112 98 103
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Total customers (average) 598,229 580,946 556,806
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Gas volumes (thousands of therms):
Residential sales 494,648 517,561 507,978
Commercial firm sales 214,713 221,170 221,804
Industrial firm sales 42,287 48,348 48,422
Interruptible sales 98,733 103,446 93,791
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Total gas volumes 850,381 890,525 871,995
Transportation volumes 188,196 204,035 236,704
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Total volumes 1,038,577 1,094,560 1,108,699
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Working-gas volumes in storage at year end (thousands of therms):
Jackson Prairie 59,537 67,827 60,673
Clay Basin 73,800 28,275 37,281
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Average use per customer (therms):
Residential 902 972 997
Commercial firm 4,668 4,935 5,091
Industrial firm 15,162 16,887 16,819
Interruptible 118,527 123,888 107,435
Transportation 1,680,321 2,081,989 2,298,097
- ----------------------------------------------------- -------------------- --------------------- ----------------------
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Average revenue per customer:
Residential $ 887 $ 701 $ 581
Commercial firm 4,281 3,214 2,595
Industrial firm 13,414 9,721 7,546
Interruptible 86,431 53,275 34,827
Transportation 105,179 123,846 127,350
- ----------------------------------------------------- -------------------- --------------------- ----------------------
Average revenue per therm (cents):
Residential 98.4 72.0 58.3
Commercial firm 91.7 65.1 51.0
Industrial firm 88.5 57.6 44.9
Interruptible 72.9 43.0 32.4
Average sales to gas customers 93.3 66.2 52.9
Transportation 6.3 5.9 5.5
- ----------------------------------------------------- -------------------- --------------------- ----------------------
ENERGY CONSERVATION
Beginning in December 2000, PSE began providing Personal Energy ManagementTM consumption information to all classes of
customers. Customers are able to monitor their energy usage during the day and shift their usage to low-demand off-peak periods. This
program helps to minimize energy purchases at peak times when electric energy is most costly. Overall, this program has reduced
consumption by customers.
PSE offers programs designed to help new and existing customers use energy efficiently. The primary emphasis is to provide
information and technical services to enable customers to make energy-efficient choices with respect to building design, equipment
and building systems, appliance purchases and operating practices.
Since May 1997, PSE has recovered electric energy conservation expenditures through a tariff rider mechanism. The rider
mechanism allows PSE to defer the conservation expenditures and amortize them to expense as PSE concurrently collects the
conservation expenditures in rates over a one-year period. As a result of the rider, there is no effect on earnings per share.
Since 1995, PSE has been authorized by the Washington Commission to defer gas energy conservation expenditures and recover them
through a tariff tracker mechanism. The tracker mechanism allows PSE to defer conservation expenditures and recover them in rates
over the subsequent year. The tracker mechanism also allows PSE to recover an Allowance for Funds Used to Conserve Energy (AFUCE) on
any outstanding balance that is not being recovered in rates.
ENVIRONMENT
Puget Energy's operations are subject to environmental regulation by federal, state and local authorities. Due to the inherent
uncertainties surrounding the development of federal and state environmental and energy laws and regulations, Puget Energy cannot
determine the impact such laws may have on its existing and future facilities. (See Note 17 to the Consolidated Financial Statements
for further discussion of environmental sites.)
FEDERAL CLEAN AIR ACT AMENDMENTS OF 1990
PSE has an ownership interest in coal-fired, steam-electric generating plants at Colstrip, Montana, which are subject to the
federal Clean Air Act Amendments of 1990 (CAAA) and other regulatory requirements.
The Colstrip Projects met the sulfur dioxide limits of the CAAA in Phase I (1995). All four units at the Colstrip Project,
operated by PPL Global, LLC, meet Phase II emission limits. PSE owns combustion turbine units, most of which are capable of being
fueled by natural gas or oil. The nature of these units provides operational flexibility in meeting air emission standards.
There is no assurance that in the future environmental regulations affecting sulfur dioxide or nitrogen oxide emissions may not
be further restricted, or that restrictions on emissions of carbon dioxide or other combustion byproducts may not be imposed.
FEDERAL ENDANGERED SPECIES ACT
Since the 1991 listings, one more species of salmon has been listed and two more have been proposed which may further influence
operations. Upper Columbia River Steelhead was listed by National Marine Fisheries Service in August 1997. Anticipating the Steelhead
listing, the Mid-Columbia PUDs initiated consultation with the federal and state agencies, Native American tribes and
non-governmental organizations to secure operational protection through a long-term settlement and habitat conservation plan which
includes fish protection and enhancement measurement for the next 50 years. The negotiations have concluded among the Chelan and
Douglas County PUDs and various fishery agencies, and final agreement is subject to a National Environmental Policy Act review and
power purchaser approval. Generally, the agreement obligates the PUDs to achieve certain levels of passage efficiency for downstream
migrants at their hydroelectric facilities and to fund certain habitat conservation measures. Grant County PUD has yet to reach
agreement on these issues.
The proposed listing of the Snake River Sockeye salmon as an endangered species,
of Puget Sound Chinook salmon and spring Chinook salmon for the upper Columbia River were approved in
March 1999. The listing of spring Chinook salmon for the upper Columbia River should not result in markedly differing conditions for
operations from previous listings in the area. However, Puget Sound has not experienced Endangered Species Act listing to date, and
listing of Puget Sound Chinook salmon is causing a number of changes to operations of governmental agencies and private entities in
the region, including PSE. These changes may adversely affect hydro plant operations and permit issuance for facilities construction,
and increase costs for process and facilities. Because PSE relies substantially less on hydroelectric energy from the Puget Sound
area than from the Mid-Columbia River and because the impact on PSE operations in the Puget Sound area is not likely to impair
significant generating resources, the impact of listing for Puget Sound Chinook salmon and Bull Trout should be proportionately less
than the Columbia River listings. PSE is actively engaging the federal agencies to address Endangered Species Act issues for PSE's
generating plants. The consultation with the federal agencies is ongoing.
EXECUTIVE OFFICERS OF THE REGISTRANTS
The executive officers of Puget Energy as of March 8, 2002, are listed below. For their business experience during the past
five years, please refer to the table below regarding Puget Sound Energy's executive officers. Officers of Puget Energy are elected
for one-year terms.
Name Age Offices
- --------------------------- -------- --------------------------------------------------------------------------------
S. P. Reynolds 54 President and Chief Executive Officer since January 2002. Director since
January 2002.
J. W. Eldredge 51 Corporate Secretary and Chief Accounting Officer since April 1999.
D. E. Gaines 44 Vice President Finance and Treasurer since March 2002.
S. A. McKeon 55 Senior Vice President Finance and Legal (Chief Financial Officer) since March
2002; Vice President and General Counsel, 1999 - 2002.
The executive officers of Puget Sound Energy as of March 8, 2002, are listed below along with their business experience during the past five years. Officers of Puget Sound Energy are elected for one-year terms.
Name Age Offices
- --------------------------- -------- --------------------------------------------------------------------------------
S. P. Reynolds 54 President and Chief Executive Officer since January 2002; President and
Chief Executive Officer of Reynolds Energy International, 1998 - 2002; Chief
Executive Officer of PG&E Gas Transmission Texas, 1997 - 1998; President and
Chief Executive Officer of Pacific Gas Transmission Company, 1987 - 1998.
Director since January 2002.
J. W. Eldredge 51 Vice President, Corporate Secretary, Controller and Chief Accounting Officer
since May 2001; Corporate Secretary, Controller, and Chief Accounting
Officer, 1993 - 2001.
D. E. Gaines 44 Vice President Finance and Treasurer since March 2002; Vice President and Treasurer
2001 - 2002; Treasurer, 1994 - 2001. Mr. Gaines is the brother of W. A. Gaines,
Vice President Energy Supply.
W. A. Gaines 46 Vice President Energy Supply since February 1997; Manager Power Management,
1996 - 1997. Mr. Gaines is the brother of D. E. Gaines, Vice President and
Treasurer.
D. A. Graham 61 Vice President Human Resources since April 1998; Director Human Resources,
1989 - 1998.
P. J. Gullekson 55 Vice President Customer Services since March 2000; Director of Customer
Service, 1998 - 2000; Manager Customer Service, 1997 - 1998.
K. J. Harris 37 Vice President Regulatory Affairs since March 2002; Director Load Resource
Strategies and Associate General Counsel, 2001 - 2002; Associate General Counsel,
1990 - 2001. For more than four years prior to that time, she was an attorney
with the law firm of Perkins Coie LLP.
T. J. Hogan 50 Senior Vice President External Affairs since March 2002; Vice President External
Affairs, 2000 - 2002; Vice President Systems Operations, 1997 - 2000.
S. A. McKeon 55 Senior Vice President Finance and Legal (Chief Financial Officer) since
March 2002; Vice President and General Counsel, 1997 - 2002.
S. McLain 45 Vice President Operations - Delivery since June 1999; Vice President
Corporate Performance, 1997 - 1999; Director Planning and Work Practices,
1997.
J. M. Ryan 40 Vice President Energy Portfolio Management since December 2001; Managing
Director of North American Marketing of TransAlta USA, 2001; Managing
Director Origination of Merchant Energy Group of the Americas, Inc., 1997 -
2001.
G. B. Swofford 60 Senior Vice President and Chief Operating Officer since March 2002; Vice President
and Chief Operating Officer - Delivery, 1999 - 2002; Vice President Customer
Operations, 1997 - 1999.
P. M. Wiegand 49 Vice President Risk Management and Strategic Planning since September 2000;
Director of Budgets and Performance Management, 1999 - 2000; Director of
Information Technology, 1997 - 1999.
The principal electric generating plants and underground gas storage facilities owned by PSE are described under Item 1 - Business - Electric Utility Operations and Gas Utility Operations. PSE owns its transmission and distribution facilities and various other properties. Substantially all properties of PSE are subject to the liens of PSE's Mortgage Indentures.
See "Litigation" in Note 17 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Puget Energy's common stock, the only class of common equity of Puget Energy, is traded on the New York Stock Exchange under
the symbol PSD. As of December 31, 2001, there were approximately 48,700 holders of record of Puget Energy's common stock. The outstanding shares
of PSE's common stock, the only class of common equity of PSE, are held by Puget Energy and are not traded.
The following table shows the market price range of, and dividends paid on, Puget Energy's common stock during the periods
indicated in 2001, and PSE's common stock during the periods indicated in 2000. Puget Energy and PSE have paid dividends on common
stock each year since 1943 when such stock first became publicly held.
2001 2000
- ------------------------- ------------------------- ----------------- ------------------------- -----------------
Price Range Dividends Price Range Dividends
Quarter Ended High Low Paid High Low Paid
- ------------------------- ------------ ------------ ----------------- ------------ ------------ -----------------
March 31 $27.75 $20.63 $.46 $24 1/8 $18 15/16 $.46
June 30 26.24 22.54 .46 24 13/16 21 5/16 .46
September 30 26.95 20.50 .46 26 3/16 21 7/8 .46
December 31 23.11 18.51 .46 28 23 1/8 .46
Dividends on Puget Energy's common stock will depend primarily on the dividends and other distributions that PSE and other
subsidiaries will pay to Puget Energy and the capital requirements of Puget Energy and its subsidiaries.
PSE's payment of common stock dividends to Puget Energy is restricted by provisions of certain covenants applicable to
preferred stock and long-term debt contained in PSE's Articles of Incorporation and electric and gas mortgage indentures. Under the
most restrictive covenants, earnings reinvested in the business unrestricted as to payment of cash dividends were approximately
$191.0 million at December 31, 2001. If PSE is not granted interim rate relief from the Washington Commission, PSE's ability to pay
dividends to Puget Energy would be adversely impacted. (See Note 7 to the Consolidated Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
The following tables show selected financial data. Puget Energy became the holding company for PSE on January 1, 2001 pursuant to a plan of exchange in which each share of PSE common stock was exchanged on a one-for-one basis for Puget Energy common stock.
Puget Energy
Summary of Operations
(Dollars in thousands except per share data)
Year ended December 31 2001 2000 1999 1998 1997
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
Operating revenue $ 3,373,991 $ 3,441,672 $ 2,067,944 $ 1,923,856 $ 1,681,528
Operating income 297,121 363,872 307,816 295,098 210,638
Income before cumulative effect of
accounting change 121,588 193,831 185,567 169,612 125,698
Income for common stock from
continuing operations 98,426 184,837 174,502 156,609 108,363
Basic and diluted earnings
per common share from
continuing operations (Note 1 to 1.14 2.16 2.06 1.85 1.28
the financial statements)
Dividends per common share 1.84 1.84 1.84 1.84 1.78
Book value per common share 15.66 16.61 16.24 16.00 16.06
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
Total assets at year-end $5,546,977 $ 5,556,669 $ 5,145,606 $ 4,709,687 $ 4,493,306
Long-term obligations 2,127,054 2,170,797 1,783,139 1,475,106 1,412,153
Redeemable preferred stock 50,662 58,162 65,662 73,162 78,134
Corporation obligated, mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures
of the corporation 300,000 100,000 100,000 100,000 100,000
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
Puget Sound Energy
Summary of Operations
(Dollars in thousands)
Year ended December 31 2001 2000 1999 1998 1997
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
Operating revenue $ 3,200,205 $ 3,441,672 $ 2,067,944 $ 1,923,856 $ 1,681,528
Operating income 288,480 363,872 307,816 295,098 210,638
Income before cumulative effect of
accounting change 119,130 193,831 185,567 169,612 125,698
Income for common stock from
continuing operations 95,968 184,837 174,502 156,609 108,363
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
Total assets at year-end $ 5,317,750 $ 5,556,669 $ 5,145,606 $ 4,709,687 $ 4,493,306
Long-term obligations 2,053,815 2,170,797 1,783,139 1,475,106 1,412,153
Redeemable preferred stock 50,662 58,162 65,662 73,162 78,134
Corporation obligated, mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures
of the corporation 300,000 100,000 100,000 100,000 100,000
- ---------------------------------------- --------------- --------------- ---------------- ---------------- ----------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. The discussion contains forward-looking statements that involve risks and uncertainties, such as Puget Energy's and PSE's objectives, expectations and intentions. Puget Energy's and PSE's actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Forward-Looking Statements” included elsewhere in this report. Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “projects,” “will likely result,” “will continue” and similar expressions are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, neither Puget Energy nor PSE undertakes an obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in Puget Energy's and PSE's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect Puget Energy's and PSE's business, prospects and results of operations.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income in 2001 was $106.8 million on operating revenues of $3.4 billion, compared to $193.8 million on operating revenues
of $3.4 billion in 2000 and $185.6 million on operating revenues of $2.1 billion in 1999. Income for common stock was $98.4 million
in 2001, compared to $184.8 million in 2000 and $174.5 million in 1999.
Basic and diluted earnings per share in 2001 were $1.14 on 86.4 million weighted average common shares outstanding compared to
$2.16 on 85.4 million weighted average common shares outstanding in 2000 and $2.06 on 84.6 million weighted average common shares
outstanding in 1999.
Net income in 2001 was negatively impacted by a decrease in utility net income of $124.6 million from 2000 due primarily to
decreased electric margins. Net income in 2001 was positively impacted by an increase in non-utility net income of $37.6 million from
2000 which includes net gains of approximately $8.0 million or $0.09 per share from non-utility operations. The $0.09 per share
included gains from the sale of the assets of ConneXt, net of ConneXt's operating loss of approximately $0.01 per share.
Total kilowatt-hour energy sales to retail consumers in 2001 were 19.9 billion compared with 21.9 billion in 2000 and 21.4
billion in 1999. Kilowatt-hour sales to wholesale customers were 7.5 billion in 2001, 15.1 billion in 2000 and 11.7 billion in 1999.
Kilowatt-hours transported to transportation customers under a new tariff established in 2001 were 308 million in 2001. Kilowatt-hours
transported to transportation customers under a terminated pilot program were 164 thousand in 2000 and 48 million in 1999.
Total gas sales to retail consumers in 2001 were 850.4 million therms compared with 890.5 million therms in 2000 and 872.0
million therms in 1999. Total gas sales to transportation customers in 2001 were 188.2 million therms compared with 204.0 million
therms in 2000 and 236.7 million therms in 1999.
Results of Operation of Puget Energy
Increase (Decrease) Over Preceding Year
Years Ended December 31 2001 2000
(Dollars in Millions)
------------------------------------------------------------ ------------------ -------------------
Operating revenue changes:
General rate increases $ 12.5 $ 16.9
BPA residential purchase and sale agreement 11.2 (3.3)
Electric sales to other utilities and marketers (227.9) 932.6
Electric revenue sold at index rates to retail customers (82.4) 184.9
Electric revenue sold to conservation trust 4.4 8.4
Electric conservation incentive credit (19.5) --
Electric load and other (117.3) 74.2
Gas revenue 202.7 126.8
InfrastruX revenue 128.8 45.0
Other revenue 19.8 (11.8)
------------------------------------------------------------ ------------------- ------------------
Total operating revenue change (67.7) 1,373.7
------------------------------------------------------------ ------------------- ------------------
Operating expense changes:
Energy costs:
Purchased electricity (360.5) 986.5
Residential exchange credit (34.8) (2.0)
Purchased gas 204.5 112.9
Electric generation fuel 98.4 123.6
FAS-133 unrealized gain (11.2) --
Utility operations and maintenance:
Production operations and maintenance 2.8 8.4
Personal energy management 11.1 1.4
Other utility operations and maintenance 11.8 (10.4)
InfrastruX operations and maintenance 106.6 41.4
Other operations and maintenance (10.5) (8.0)
Depreciation and amortization 21.0 20.8
Conservation amortization (0.3) (1.0)
Taxes other than federal income taxes 11.2 23.1
Federal income taxes (51.0) 21.0
------------------------------------------------------------ ------------------- ------------------
Total operating expense change (0.9) 1,317.7
------------------------------------------------------------ ------------------- ------------------
Other income change (net of tax) 9.5 (23.0)
Interest charges 15.0 24.7
FAS-133 transition adjustment loss (net of tax) 14.7 --
------------------------------------------------------------ ------------------ -------------------
Net income change $ (87.0) $ 8.3
------------------------------------------------------------ ------------------- ------------------
The following information pertains to the changes outlined in the table above:
OPERATING REVENUES - ELECTRIC
Electric operating revenues increased $12.5 million and $16.9 million in 2001 and 2000, respectively, when compared to the
prior years due to overall average 0.9% and 1.2% general rate increases effective January 1, 2001 and January 1, 2000.
Sales to other utilities and marketers decreased $227.9 million in 2001 compared to an increase of $932.6 million in 2000
compared to the prior years due primarily to volatility in wholesale power prices.
Electric revenues in 2001 decreased due to decreased prices and kilowatt-hours sold related to electric energy sales to other
utilities and marketers and sales to customers whose rates were tied to a market index. These customers can choose another supplier
or self-generate their energy needs. Several index rate customers have switched to transportation rate tariffs beginning in July 2001
as allowed by a Washington Commission order dated April 5, 2001 authorizing the establishment of a transportation tariff. On June 19,
2001, FERC implemented price controls on wholesale electricity in the western states. Several factors have contributed to the
dramatic decline in wholesale electric prices by the end of the second quarter of 2001 and, therefore, have greatly diminished the
value of PSE’s excess electric energy during that period and into the foreseeable future. PSE and other western utilities filed an
appeal asking FERC to review its June 19, 2001 order and make modifications to the price controls to stabilize wholesale prices in
California and prevent the energy problems from spreading to other states. On December 19, 2001, FERC issued an order on
clarification and rehearing addressing, in part, the Company’s petition for rehearing on the June 19, 2001 order. The Company and
other entities have sought further rehearing and clarification of the December 19, 2001 order. PSE continues to operate without an
electric rate adjustment mechanism.
Electric revenues were reduced by approximately $19.5 million in 2001 related to a customer conservation incentive credit
which was approved by the Washington Commission on April 25, 2001. The conservation incentive credit was to reduce customers’ bills
by $0.05 per kWh for each kWh reduction in excess of 10% from the same billing period in the prior year through December 31, 2001. On
November 7, 2001, the Washington Commission approved PSE’s request to terminate the conservation incentive credit program effective
November 8, 2001.
On April 25, 2001, the Washington Commission approved “time-of-day” rates for approximately 300,000 residential electric
customers for the period May 1, 2001 through September 30, 2001. On September 26, 2001, the Washington Commission authorized the
extension of the “time-of-day” rates pilot program for residential customers through May 31, 2002 to allow approximately 20,000
business customers to participate in a “time-of-day” rates program from October 1, 2001 through September 30, 2002. In the order, if
the cumulative revenues collected under “time-of-day” tariffs during the beginning through the end of the programs exceed the
revenues that would have been collected under the original tariffs, PSE must defer any overcollection and refund it to participating
customers. Through December 31, 2001, revenues billed under the “time-of-day” tariff have been slightly less than original tariffs
by an immaterial amount, thus no deferred liability was established at December 31, 2001. Personal Energy ManagementTM consumption
information is available to all classes of customers. Customers are able to monitor their energy usage and shift usage to low-demand
off-peak periods. This program reduces the demand for peak power generation.
Revenues from electric customers in 2001 and 2000 were reduced by a Residential and Farm Energy Exchange credit tariff in
place since October 1, 1995. Under the rate plan approved by the Washington Commission in its merger order, PSE reflected in
customers' bills the level of Residential Exchange benefits in place at the time of the merger with Washington Energy Company in
1997. On January 29, 1997, PSE and Bonneville Power Administration (BPA) signed an agreement under which PSE received payments from
BPA of approximately $235 million over an approximate five-year period that ended June 2001. These payments were recorded as a
reduction of purchased electricity expenses. As a result of lower usage by residential and farm customers in 2001, the residential
and farm exchange credit decreased by $11.2 million as compared to 2000 and increased in 2000 by $3.3 million as compared to 1999.
On June 13, 2001, the Washington Commission approved an amended Residential Purchase and Sale Agreement between PSE and BPA,
under which PSE's residential and small farm customers would receive benefits of federal power. Completion of this agreement enables
PSE to continue to provide, and in fact increase, effective January 1, 2002, the Residential and Farm Energy Exchange credit to
residential and small farm customers. The amended settlement agreement provides that PSE will receive for its residential and small
farm customers (a) cash payment benefits during the period July 1, 2001 through September 30, 2006 and (b) benefits in the form of
power or cash payments during the period October 1, 2006 through September 30, 2011. Any such benefits may vary, depending on the
outcome of regulatory and legal proceedings and reviews. For example a number of parties are challenging in the Ninth Circuit Court
of Appeals BPA's authority to enter into or perform the amended Residential Purchase and Sale Agreement between PSE and BPA. For
calendar 2001, the benefits of the Residential and Farm Energy Exchange credited to customers was $103.1 million as compared to an
offsetting reduction in Purchased Electricity Expense of $75.9 million. PSE expects payments from BPA (recorded as a reduction in
Purchased Electricity Expense) in the amount of $127.3 million for the period January 2002 through September 2002 and $702.2 million
for the period October 2002 through September 2006. Eligible residential and small farm customers will receive credits to their
bills in the same amount. On October 17, 2001, the Public Counsel Section of the Washington State Attorney General's Office filed a
complaint with the Washington Commission alleging that PSE has violated the Washington Commission's 1997 merger order. The Public Counsel's complaint
is that PSE's residential and small farm customers should receive both the reduction in rates equal to the residential exchange
credit in place prior to July 1, 2001, and in addition, the benefits of the amended agreement for residential and small farm
benefits received from BPA. If Public Counsel's position were upheld, PSE's electric revenues for the last six months of 2001 would
be reduced by approximately $51.1 million. While PSE believes this complaint is without merit, PSE is unable to predict the outcome
of this proceeding. A decision in the proceeding is expected in 2002.
PSE operates within the western wholesale market and has made sales into the California energy market. During the first
quarter of 2001, PSE received partial payments for sales made in the fourth quarter of 2000. At December 31, 2000, PSE's receivables
from the California Independent System Operator (CAISO) and other counter-parties, net of reserves, were $41.8 million. At December
31, 2001, such receivables, net of reserves, were approximately $26.6 million.
In 2001 and 2000, PSE collected and remitted to two grantor trusts, $31.0 million and $35.4 million, respectively,
as a result of PSE's sale of future electric revenues associated with $237.7 million of its investment in conservation assets in its electric
general rate tariff. The impact of the sale of revenue, was offset by reductions in conservation amortization and interest expenses. The
principal amounts owed by the trusts to its bondholders were $31.8 million and $61.9 million at December 31, 2001 and 2000, respectively.
On April 15, 2001, the Washington Commission issued an order allowing PSE's large
industrial customers whose rates were linked to a market index to choose their supplier of electricity or to self-generate.
If an industrial customer chooses an alternate supplier, PSE will provide the transportation of electricity to the customer's
premises and charge that customer for the service.
To meet customer demand, PSE's power supply portfolio includes net purchases of power under long-term supply contracts.
However, depending principally upon streamflow available for hydroelectric generation and weather effects on customer demand, from
time to time, PSE may have surplus power available for sale to wholesale customers. PSE manages its core energy portfolio through
short and intermediate-term purchases, sales, arbitrage and other risk management techniques. PSE also operates its combustion
turbine plants located in Western Washington when it is cost-effective to do so. During the first nine months of 2001, PSE has
operated its combustion turbine plants extensively to meet retail load requirements. PSE's Risk Management Committee oversees energy
price risk matters.
OPERATING REVENUES - GAS
Regulated gas utility revenues in 2001 increased by $202.7 million from the prior year. Total gas volumes, including
transported gas, decreased 5.1% in 2001 from 2000. The primary reason for the increase in gas sales was the higher natural gas prices
which are passed through to customers in the Purchased Gas Adjustment (PGA). Gas rates to all sales customers increased by an average
of 30.2% on August 1, 2000 and 26.4% on January 12, 2001, offset by an 8.9% decrease in gas rates under the PGA effective September
1, 2001. Higher priced firm gas sales comprised a larger percentage of total therm sales in 2001 compared to 2000 which also
contributed to increased revenues. Utility gas margin (the difference between gas revenues and gas purchases) decreased by $17.0
million, or 7.6%, in 2001 over 2000.
Regulated gas utility sales revenue in 2000 increased by $126.8 million from the prior year on a 2.1% increase in gas volumes
sold. Total gas volumes, including transported gas, decreased 1.3% in 2000 from 1999.
OTHER REVENUES
InfrastruX total operating revenues increased $128.8 million in 2001 compared to 2000 from the acquisitions made in the third
quarter of 2000 and throughout 2001. PSE's other revenues increased $19.8 million in 2001 compared to 2000 primarily due to increased
revenues at PSE's real estate investment and development subsidiary, Puget Western, Inc. Other revenues decreased $11.8 million in
2000 compared to 1999 due primarily to decreased revenues at Puget Western, Inc. and the sale of a wholly-owned subsidiary, Homeguard
Security Services, Inc. in 1999.
OPERATING EXPENSES
Purchased electricity expenses decreased $360.5 million in 2001 when compared to 2000 and increased $986.5 million in 2000
when compared to 1999. The decrease in 2001 was due primarily to lower volumes and significantly lower prices for non-firm power
purchases from other utilities and marketers due to declining prices in the West Coast power market beginning in the second half of
2001. The increase in 2000 as compared to 1999 was due primarily to greater volumes and significantly higher prices for non-firm
power purchases from other utilities and marketers during the last seven months of 2000 due to increasing prices in the West Coast
power market.
Residential exchange credits associated with the Residential Purchase and Sale Agreement with BPA increased $34.8 million in
2001 when compared to 2000, due to the terms set out in the 1997 Residential Exchange Termination Agreement and the 2001 Residential
Purchase and Sale Agreement between PSE and BPA discussed in Operating Revenues - Electric. Beginning July 2001, all residential
exchange credits are passed through to eligible residential and small farm customers by a corresponding reduction in revenues.
Purchased gas expenses increased $204.5 million in 2001 compared to 2000 primarily due to the impact of increased gas costs,
which are passed through to customers through the PGA mechanism, offset by a 5.1% decrease in sales volumes. Purchased gas expenses
increased $112.9 million in 2000 compared to 1999 due to the impact of increased gas costs, which are passed through to customers
through the PGA mechanism and a 2.1% increase in sales volumes. The PGA allows PSE to recover expected increases in gas costs. PSE
defers, as a receivable, any gas costs that exceed the amount in PGA rates and accrues interest under the PGA. The balance of the PGA
receivable was $37.2 million and $96.1 million for December 31, 2001 and 2000, respectively.
Electric generation fuel expense increased $98.4 million in 2001 compared to 2000, compared to an increase of $123.6 million in
2000 compared to1999, as a result of increased generation and higher fuel costs at combustion turbine facilities. These facilities
operated at much higher levels in 2001 compared to the same period in 2000 due to adverse hydroelectric conditions.
Financial Accounting Standards Board Statement No. 133 (Statement No. 133) was adopted on January 1, 2001. During 2001, an
increase to current earnings of approximately $11.2 million pre-tax ($7.3 million after-tax) was recognized for unrealized gains
associated with electric derivative transactions and a $14.7 million after-tax transition adjustment loss was recorded during 2001
resulting from recognizing the cumulative effect of this change in accounting principle. (For further discussion see Note 18).
Production operations and maintenance costs increased $2.8 million in 2001 compared to 2000 due primarily to an approximately $2.1
million increase in lease costs associated with the new Fredonia 3 and 4 units, offset by reduced operating costs resulting from the
sale of the Centralia generating station in May 2000, and a net cost of $2.9 million after estimated insurance recovery to repair the
PSE-owned Fredonia combustion turbine unit #1, which was out of service from February 21, 2001 through May 14, 2001. PSE has received
partial payments of $7.7 million associated with an amended $12.6 million insurance claim and is awaiting payment on the remainder.
Production operations and maintenance costs increased $8.4 million in 2000 compared to 1999 due to increased energy production and
maintenance work at company-owned combustion turbine plants, inventory write-downs at Colstrip and 12 full months of Encogen
generating station costs versus 2 months in 1999.
PSE's Personal Energy Management™ energy-efficiency program costs increased $11.1 million in 2001, reflecting a full year of
implementation compared to 2000. PSE began providing Personal Energy Management™ billing information to electric customers in
December 2000 which resulted in a $1.4 million increase in costs in 2000 compared to 1999. The Personal Energy ManagementTM program
helps to minimize energy purchases at peak times when electric energy is most costly.
Other utility operations and maintenance costs increased $11.8 million in 2001 compared to 2000 due primarily to repair costs
associated with storm and earthquake damage in 2001, increased meter reading expenses associated with providing Personal Energy
ManagementTM, and a one-time insurance recovery received in 2000. Other utility operations and maintenance costs decreased $10.4
million in 2000 compared to 1999 due primarily to high 1999 costs related to Year 2000 remediation expenses in 1999 not incurred in
2000 and the reduction in 2000 of electric service restoration costs that followed a number of storms which occurred in early 1999.
InfrastruX operation and maintenance expenses increased $106.6 million in 2001 compared to 2000 due to its acquisitions
beginning in 2000. PSE's other operations and maintenance expenses decreased $10.5 million in 2001 compared to 2000 primarily due to
a decrease in operating expenses at ConneXt, the assets of which were sold in the third quarter of 2001. Other operations and
maintenance expenses decreased $8.0 million in 2000 compared to 1999 primarily due to a decrease in operating expenses at ConneXt and
from the sale of Homeguard Security Services, Inc. in 1999.
Depreciation and amortization expenses increased $21.0 million in 2001 compared to 2000 due to the effects of new plant placed
into service during 2001, including ConsumerLinX, a customer information and billing system, which was placed into service in phases
through late 2000 and early 2001. Depreciation and amortization expense increased $20.8 million in 2000 compared to 1999 due
primarily to the effects of new plant placed into service during 2000.
Taxes other than federal income taxes increased $11.2 million in 2001 compared to 2000 and $23.1 million in 2000 compared to
1999 due primarily to increases in municipal taxes and state excise taxes that are revenue based. Federal income taxes decreased by
$51.0 million in 2001 compared to 2000, and increased $21.0 million in 2000 compared to 1999 primarily due to changes in pre-tax
operating income for the periods.
OTHER INCOME
Other income, net of federal income tax, increased $9.5 million in 2001 compared to 2000 due primarily to $11.8 million of
reserves established in 2000 for a write-down to the fair values of certain assets held for sale by Hydro Energy Development Corp. to
their net realizable values not recurring in 2001, $4.8 million of other income realized by Puget Western, Inc. on investments in
2000 not recurring in 2001, $7.4 million of increase in other income of ConneXt primarily from sales of assets in 2001, offset by
reductions in other income in 2001 for additional amortization of goodwill from acquisitions by InfrastruX, officer incentive
compensation accruals, and decreased other interest and dividend income. Other income, net of federal income tax, decreased $23.0
million in 2000 compared to 1999 due primarily to an after-tax gain in 1999 of $12.3 million on the sale of Cabot common
stock in the second quarter of 1999, and an after-tax gain of $3.6 million related to the sale and
assignment of certain non-core assets and supply transportation contracts in 1999. The decrease is also related to the establishment
in 2000 of an after-tax reserve of $11.8 million for a write-down to the fair values of certain assets held for sale by Hydro Energy
Development Corp. to their net realizable values. The decrease in 2000 was partially offset by the after-tax gain of approximately
$1.6 million related to the sale of the Centralia generating plant.
INTEREST CHARGES
Interest charges, which consist of interest and amortization on long-term debt and other interest, increased $15.0 million in
2001 compared to 2000 as a result of the issuance of $25 million 7.61% Senior Medium-Term Notes, Series B, in September 2000, the
issuance of $260 million 7.69% Senior Medium-Term Notes, Series C, in November 2000, and the issuance of $200 million 8.4% Trust
Preferred Securities in May 2001. In addition, InfrastruX borrowings increased interest charges by $3.5 million in 2001 compared to
2000. Other interest expense decreased $16.9 million compared to 2000 as a result of lower weighted average interest rates and lower
average daily short-term borrowings.
Interest charges increased $24.7 million in 2000 compared to 1999 as a result of the issuance of $225 million 7.96% Senior
Medium-Term Notes, Series B, in February 2000, the issuance of $25 million 7.61% Senior Medium-Term Notes, Series B, in September
2000, and the issuance of $260 million 7.69% Senior Medium-Term Notes, Series C, in November 2000. These increases were partially
offset by the repayment of $132 million in Secured Medium-Term Notes since September 1999 and $105.6 million of Encogen debt in
February 2000. Other interest expense increased $9.1 million compared to 1999 as a result of higher weighted average interest rates
and higher average daily short-term borrowings.
CAPITAL RESOURCES AND LIQUIDITY
Capital Requirements
Contractual Obligations and Commercial Commitments
Puget Energy. The following are Puget Energy's aggregate consolidated (including PSE) contractual and commercial commitments
as of December 31, 2001:
Payments Due Per Period
Puget Energy ------------------------------------------------------
Contractual Obligations Total 2002 2003-2004 2005-2006 2007 and
(in millions) Thereafter
- ---------------------------------------------- ------------- ----------- ------------- ------------- --------------
Long-term debt $2,246.6 $119.5 $243.7 $112.0 $1,771.4
Short-term debt 348.6 348.6 -- -- --
Trust preferred securities (1) 300.0 -- -- -- 300.0
Preferred dividends (2) 1.1 1.1 -- -- --
Service contract obligations 215.3 19.3 40.5 43.2 112.3
Capital lease obligations 3.2 1.2 1.4 0.6 -
Non-cancelable operating leases 59.7 17.5 26.4 10.6 5.2
Fredonia combustion turbines lease (3) 77.3 4.9 9.5 9.1 53.8
Energy purchase obligations 4,721.1 533.8 983.0 842.7 2,361.6
Financial hedge obligations 56.3 8.1 16.7 17.6 13.9
------------- ----------- ------------- ------------- --------------
Total contractual cash obligations $8,029.2 $1,054.0 $1,321.2 $1,035.8 $4,618.2
Amount of Commitment
Expiration Per Period
-------------------------------------------------------
Commercial Commitments Total 2002 2003-2004 2005-2006 2007 and
(in millions) Thereafter
- ---------------------------------------------- ----------- --------- ------------- -------------- ----------------
Guarantees (4) $71.5 -- $71.5 -- --
Lines of credit – available (5) 125.4 9.6 115.8
----------- --------- ------------- -------------- ----------------
Total commercial commitments $196.9 $9.6 $187.3 -- --
______________
Puget Sound Energy. The following are PSE's aggregate contractual and commercial commitments as of December 31, 2001:
Payments Due Per Period
Puget Sound Energy -------------------------------------------------------
Contractual Obligations Total 2002 2003-2004 2005-2006 2007 and
(in Millions) Thereafter
- ---------------------------------------------- ------------- ----------- ------------- ------------- ---------------
Long-term debt $2,170.9 $117.0 $170.5 $112.0 $1,771.4
Short-term debt 338.2 338.2 -- -- --
Trust preferred securities (1) 300.0 -- -- -- 300.0
Preferred dividends (2) 1.1 1.1 -- -- --
Service contract obligations 215.3 19.3 40.5 43.2 112.3
Non-cancelable operating leases 46.5 13.0 20.2 8.2 5.1
Fredonia combustion turbines lease (3) 77.3 4.9 9.5 9.1 53.8
Energy purchase obligations 4,721.1 533.8 983.0 842.7 2,361.6
Financial hedge obligations 56.3 8.1 16.7 17.6 13.9
------------- ----------- ------------- ------------- ---------------
Total contractual cash obligations $7,926.7 $1,035.4 $1,240.4 $1,032.8 $4,618.1
Amount of Commitment
Puget Sound Energy Expiration Per Period
-------------------------------------------------------
Commercial Commitments Total 2002 2003-2004 2005-2006 2007 and
(in Millions) Thereafter
- ---------------------------------------------- ----------- ---------- -------------- -------------- --------------
Lines of credit – available (4) $36.8 -- $36.8 -- --
______________
PSE has sold a stream of future electric revenues associated with $237.7 million of its
investment in conservation assets in its electric general rate tariff to two grantor trusts. As a result of this sale, PSE collects these
revenues from its electric customers and remits them to the trusts. During 2001, PSE collected and remitted $31.0 million to the trusts.
Additional principle amounts expected to be collected on behalf of the trusts are $31.8 million at December 31, 2001.
UTILITY CONSTRUCTION PROGRAM
Current utility construction expenditures for generation, transmission and distribution are designed to meet continuing
customer growth and to improve efficiencies of PSE’s energy delivery systems. Construction expenditures, excluding equity Allowance
for Funds Used During Construction (AFUDC), were $247.4 million in 2001. PSE expects construction expenditures will be approximately
$227 million in 2002. PSE has not projected the level of construction expenditures for periods beyond 2002 as such amounts will be
dependent upon the outcomes of PSE’s interim and general rate case filings described below. Construction expenditure estimates are
subject to periodic review and adjustment in light of changing economic, regulatory, environmental and conservation factors.
OTHER ADDITIONS
Other property, plant and equipment additions were $5.2 million in 2001. Puget Energy expects InfrastruX’s capital additions
to be $11.5 million in 2002. InfrastruX will continue to acquire companies related to utility infrastructure services with their
available line of credit and cash.
CAPITAL RESOURCES
CASH FROM OPERATIONS
Cash generated from operations (net of dividends and AFUDC) totaled $468.2 million for the three-year period 1999-2001, and
provided 53.0% of the $883.9 million of utility construction expenditures (net of AFUDC) other capital
expenditure requirements for that period. Internal cash generation (net of dividends and AFUDC) provided 61.5% of total capital
expenditure requirements in 2001, 57.5% in 2000 and 43.0% in 1999.
If PSE’s requested interim and general rate increases are denied, cash from operations (net of dividends and AFUDC) during 2002
is projected to be approximately 82.3% of estimated construction expenditures (excluding AFUDC) and other capital expenditure
requirements. Assuming PSE's requested interim and general rate increases are approved in full, cash from operations (net of
dividends and AFUDC) during 2002 would be approximately 136.7% of estimated utility construction expenditures (excluding AFUDC) and
other capital expenditure requirements during 2002. Puget Energy and PSE expect to continue financing the utility construction
program and other capital expenditure requirements with internally generated funds and externally financed capital.
FINANCING PROGRAM
Financing utility construction requirements and operational needs is dependent upon the cost and availability of external funds
through capital markets and from financial institutions. Access to funds is dependent upon factors such as general economic
conditions, regulatory authorizations and policies, and Puget Energy's and PSE's credit ratings.
RESTRICTIVE COVENANTS
In determining the type and amount of future financing, PSE may be limited by restrictions contained in its electric and gas
mortgage indentures, articles of incorporation and certain loan agreements. Under the most restrictive tests, at December 31, 2001,
PSE could issue:
CREDIT RATINGS
Neither Puget Energy nor PSE has any rating downgrade triggers that would accelerate the maturity dates of their debt.
However, a downgrade in the senior secured credit ratings could adversely affect the companies' ability to renew existing, or obtain
access to new, credit facilities and could increase the cost of such facilities. For example, under PSE's revolving credit facility,
the spreads over the index and commitment fee increase as PSE's secured long term debt ratings decline. A downgrade in commercial
paper ratings could preclude PSE's ability to issue commercial paper under its current programs. In addition, any downgrade below
investment grade of the senior secured debt could allow counterparties in the wholesale electric, wholesale gas and financial
derivative markets to require PSE to post a letter of credit or other collateral, make cash prepayments, obtain a guarantee agreement
or provide other mutually agreeable security.
On October 8, 2001, Standard & Poor’s lowered its long-term ratings on Puget Energy and PSE following the Washington
Commission’s order of October 4, 2001 denying PSE’s request of August 21, 2001 for a power cost recovery mechanism and interim
electric rate relief. On October 30, 2001, Standard & Poor’s further downgraded its long-term ratings of Puget Energy and PSE
following the Washington Commission’s order of October 24, 2001, denying PSE’s petition that the Washington Commission reconsider
their October 4, 2001 decision.
On October 9, 2001, Moody’s Investors Service placed the rating of Puget Energy and PSE under review for possible downgrade
following the Washington Commission’s order of October 4, 2001. On October 26, 2001, Moody’s issued a report stating it was
continuing their review for possible downgrade of its long-term ratings of Puget Energy and PSE until the Washington Commission acted
on PSE’s December 3, 2001 filing for interim electric rate relief.
The current ratings of Puget Energy and Puget Sound Energy, as of February 28, 2002, are:
Puget Energy Standard & Poor’s Ratings Moody’s Ratings
Corporate credit rating BBB- Baa3
Senior secured debt BBB- *
Puget Sound Energy
Corporate credit rating BBB- Baa2
Senior secured debt BBB Baa1
Shelf debt senior secured BBB *
Senior unsecured BB+ Baa2
Preferred stock BB Ba1
Commercial paper A-3 P-2
Subordinate * Baa3
_______________
* No rating provided.
SHELF REGISTRATIONS
In October 2000, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a
delayed or continuous basis, of up to $500 million principal amount of senior notes secured by a pledge of PSE's first mortgage
bonds, unsecured debentures or trust preferred securities. On November 9, 2000, PSE issued $260 million principal amount of 7.69%
Senior Medium-Term Notes, Series C, due February 1, 2011. On May 24, 2001, PSE issued $200 million principal amount of 8.4% trust
preferred securities due June 30, 2041. On January 16, 2002, PSE issued $40 million principal amount of 6.25% Senior Medium-Term
Notes, Series C, due January 16, 2004, which completed the shelf registration.
In February 2002, Puget Energy and PSE filed a shelf registration statement with the Securities and Exchange Commission for the
offering, on a delayed or continuous basis, of up to $500 million principal amount of:
As of February 28, 2002, no securities had been issued under this shelf registration statement.
SHORT–TERM BORROWINGS AND COMMERCIAL PAPER
PSE’s short-term borrowings from banks and the sale of commercial paper are used to provide working capital for the utility
construction program. At December 31, 2001, PSE had available $375 million in lines of credit with various banks, which provide
credit support for outstanding commercial paper of $123.2 million and $215 million of outstanding short-term borrowing, effectively
reducing the available borrowing capacity under these lines of credit to $36.8 million.
In June 2001, InfrastruX signed a credit agreement with several banks to provide up to $150 million in financing. Puget Energy
is the guarantor of the line of credit. In addition, InfrastruX’s subsidiaries have $20.5 million in lines of credits with various
banks. Short-term borrowings available for InfrastruX are used to fund capital requirements of InfrastruX and its subsidiaries. On
December 31, 2001, InfrastruX and its subsidiaries had outstanding loans of $81.9 million, effectively reducing the available
borrowing capacity under these lines of credit to $88.6 million.
STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
Puget Energy has a stock purchase and dividend reinvestment plan pursuant to which existing shareholders and residents of the
state of Washington may invest cash and cash dividends in shares of Puget Energy's common stock. Since new shares of common stock
may be purchased directly from Puget Energy, Puget Energy may receive funds for general corporate purposes through the program.
Puget Energy has registered 5,000,000 shares of common stock for sale pursuant to the plan in 2001. In 2001 and 2000, Puget Energy issued
1,119,568 shares and 981,549 shares, respectively, resulting in proceeds of $25.6 million and $23.1 million. At December 31, 2001,
3,880,432 shares remained available for issuance under the plan.
GENERAL AND INTERIM RATE PROCEEDINGS
On November 26, 2001, PSE filed both an electric and gas general rate increase request with the Washington Commission. The
request is for a $228.3 million increase in electric revenues and a $85.9 million increase in base natural gas revenues. By statute,
the general rate case proceedings can take up to 11 months from the time of the filing.
On December 3, 2001, PSE filed petitions for an interim electric rate increase with the Washington Commission. The interim
filing is comprised of two parts: a request for deferral of projected underrecovered power costs for the period January 1 through
February 28, 2002 (approximately $66.4 million) and a surcharge to rates to collect in rates projected underrecovered power costs for
the period March 1 through October 31, 2002 (approximately $104.3 million) and the deferred amount.
On December 20, 2001, the Washington Commission authorized PSE to defer excess power costs for the period January 1, 2002
through March 31, 2002. PSE projects the excess power costs for the period will be approximately $89.2 million. The final
accounting order issued by the Washington Commission on December 28, 2001 stated that the deferred costs would be examined in the
context of PSE's interim and general rate case. PSE will bear the burden of proof to show such costs were prudently incurred and
that deferred costs should be recovered in customer rates. PSE presently anticipates the Washington Commission will act on PSE's
interim request to approve the surcharge to electric rates before March 31, 2002. On February 11, 2002, PSE filed rebuttal testimony
revising the collection period for the $170.7 million interim request as follows: collection of $136.2 million over the period March
15, 2002 through October 31, 2002 with the remaining deferral of $34.5 million collected over the period November 1, 2002 through
October 31, 2003.
Neither PSE nor Puget Energy can predict the outcome of the interim and general rate cases. Denial by the Washington
Commission, in whole or in substantial part, of PSE's petitions for the interim electric rate increase and the general electric
and gas rate increases, would have a material adverse impact on cash flows and earnings. In particular, absent an adequate interim
electric rate increase:
If rate relief is not granted and Puget Energy and PSE are unable to issue additional securities to finance operations, construction programs and other capital expenditures, the companies will fund operations and capital requirements through 2002 by taking extraordinary cash conservation measures. These measures may include:
RATE MATTERS – ELECTRIC
The order approving the Merger, issued by the Washington Commission on February 5, 1997, contained a rate plan designed to
provide a five-year period of rate certainty for customers and to provide PSE with an opportunity to achieve a reasonable
return on investment. General electric tariff rates were stipulated to increase annually between 1.0% and 1.5% depending on rate
class on January 1 of 1998 through 2001. PSE has had no electric rate adjustment mechanism during the rate stability
period to adjust for changes in electric energy supply costs or fuel costs. These variances may now significantly influence
earnings. The rate stabilization period ended on December 31, 2001.
RATE MATTERS – GAS
As a result of sharp increases in gas costs during 2000, PSE filed two PGA and deferral
amortization filings with the Washington Commission which were approved. The PGA filings allow PSE to recover expected increases in
annual gas costs and deferral amortization filings allow PSE to recover prior period gas cost undercollections.
As a result, gas rates to all sales customers increased by an average of 30.2% on August 1, 2000, and 26.4% again on January 12,
2001. Subsequent declines in gas costs led to PSE obtaining approval of another PGA and deferral amortization filing in 2001
resulting in an average 8.9% reduction in gas sales rates on September 1, 2001. (See Note 1 to the Consolidated Financial Statements
for a description of the PGA mechanism.)
OTHER
In the second quarter of 2000, PSE sold all of its redeemable 6% convertible preferred stock of Cabot for
$51.4 million. There was no significant gain or loss on the transaction.
On July 25, 2001, FERC ordered an evidentiary hearing to determine what refunds
California energy buyers are due for purchases in the spot markets operated by the CAISO
or the California Power Exchange Corporation covering the period October 2, 2000 through June 20, 2001. The presiding Administrative
Law Judge in this proceeding has set trial schedules during 2002 after which the presiding Administrative Law Judge is expected to
issue his finding of fact and record on the matter in August 2002. PSE entered into transactions that may be subject to refund in
this proceeding and is unable to predict the outcome of this FERC proceeding or any judicial proceeding arising therefrom.
On July 25, 2001, FERC also established a separate preliminary evidentiary proceeding for the purpose of exploring whether
there have been excessive charges for spot market sales in the Pacific Northwest for the period December 25, 2000 through June 20,
2001. The presiding Administrative Law Judge in the Pacific Northwest proceeding has issued a recommendation that refunds with
respect to such charges during such period were not warranted. FERC is reviewing this recommendation. PSE made transactions that
may be subject to refund in this proceeding. PSE is unable to predict the outcomes of this FERC proceeding or any judicial
proceeding arising therefrom.
In March 1998, PSE entered into an agreement with Schlumberger North America (Schlumberger) (formerly known as CellNet Data
Services Inc.) under which PSE would lend Schlumberger up to $35 million in the form of multiple draws so that Schlumberger could
finance an Automated Meter Reading (AMR) network system to be deployed in PSE's service territory. In September 1999, PSE announced
it was expanding its AMR network system from 800,000 meters to 1,325,000 meters and as a result increased the authorized loan amount
to $72 million. As of December 31, 2000, the outstanding loan balance was $51.9 million. In August 2001, Schlumberger paid off
its outstanding loan balance of $64.1 million.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires that management
apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and
liabilities in the financial statements. The following areas represent those that management believes are particularly important to
the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain:
FERC ACCOUNTING
Puget Energy’s regulated subsidiary, PSE, prepares its financial statements in accordance with generally accepted accounting
principles and in conformity with the FERC’s uniform system of accounts. The Washington Commission
also requires PSE to use FERC’s uniform system of accounts.
COST BASIS REGULATION
Puget Energy’s regulated subsidiary, PSE, is subject to regulation by the Washington Commission and FERC. The rates that are
charged by PSE to its customers are based upon cost basis regulation reviewed and approved by these regulatory commissions. Under
the authority of these commissions, PSE has recorded certain regulatory assets and liabilities in the amount of $637.9 million as of
December 31, 2001. If PSE’s rates were no longer based upon cost basis or the probability of future collection in rates, regulation,
the assets and liabilities would be written off to earnings.
DERIVATIVES
Puget Energy uses derivative financial instruments primarily to manage its commodity price
risks. Derivative financial instruments are accounted for under Statement No. 133 –
“Accounting for Derivative Instruments and Hedging Activities”, as amended by Statement No. 138. Accounting for derivatives
continues to evolve through guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting Standards Board.
To the extent that changes by the DIG modify current guidance, including the normal purchases and normal sales determination, the
accounting treatment for derivatives may change.
To manage its utilization of generation supply, Puget Energy enters into contracts to
purchase or sell electricity and gas. These contracts are considered derivatives under Statement No. 133 unless a
determination is made that they qualify for normal purchases and normal sales exclusion. If the exclusion applies, those contracts are
not marked-to-market and are not reflected in the financial statements until delivery occurs.
The availability of the normal purchases and normal sales exclusion to specific contracts is based on a determination that excess
generation is available for a forward sale and similarly a determination that at certain times generation supply will be insufficient
to serve load. This determination is based on internal models that forecast customer demand and generation supply. The models include
assumptions regarding customer load growth rates, which are influenced by the economy, weather and the impact of customer choice, and
generating unit availability. The critical assumptions used in the determination of normal purchases and normal sales are consistent
with assumptions used in the general planning process.
Energy contracts that are considered derivatives may be eligible for designation as cash flow hedges. If a contract is designated
as a cash flow hedge, the change in its market value is generally deferred as a component of other comprehensive income until the
transaction it is hedging is completed. Conversely, the change in the market value of derivatives not designated as cash flow hedges
is recorded in current period earnings.
When external quoted market prices are not available for derivative contracts, Puget uses a
valuation model which uses volatility assumptions relating to future energy prices based on specific energy markets and utilizes externally
available forward market price curves.
DEFINED PENSION PLAN
Puget Energy has a defined benefit plan covering substantially all employees of PSE. For 2001, 2000 and 1999 pension income of
$15.4 million, $12.9 million and $3.5 million, respectively, has been recorded in the financial statements. Changes in market values
of stocks or interest rates will affect the amount of income that Puget Energy can record in its financial statements in future
years. As the market values of stocks decline, it is anticipated that the amount of pension income will be reduced.
During 2002, PSE will be transitioning 481 service jobs that had previously been held by PSE employees to outside service
providers. Under Statement of Financial Accounting Standards No. 88 “Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits,” PSE will be recognizing a curtailment gain of approximately $0.7 million.
CALIFORNIA INDEPENDENT SYSTEM OPERATOR RESERVE
PSE operates within the western wholesale market and has made sales into the California energy market. During the first
quarter of 2001, PSE received partial payments for sales made in the fourth quarter of 2000. At December 31, 2000, PSE's receivables
from the CAISO and other counter-parties, net of reserves, were $41.8 million. At December
31, 2001, such receivables, net of reserves, were approximately $26.6 million. The Company made the reserve based upon estimated credit quality
and collection from the CAISO at December 31, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” became effective
and as a result, Puget Energy will cease amortization of goodwill. During 2001, Puget Energy had approximately $2.4 million of
amortization. In lieu of the amortization, Puget Energy will perform an initial impairment review of goodwill and an annual
impairment review thereafter. The initial review will be completed during the first half of 2002 and it is anticipated that Puget
Energy will not record an impairment charge upon completion of the initial impairment review.
Effective January 1, 2003, Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligation” will
become effective for Puget Energy. Statement No. 143 will require Puget Energy to record the fair value of liabilities associated
with an asset retirement obligation in the period in which the obligation is incurred. Puget Energy is determining its retirement
obligations and will record on January 1, 2003 an initial liability as a capitalized cost as part of the asset’s carrying value and
expense the retirement obligation over the asset’s useful life. The impact of this statement has not been determined.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Puget Energy is exposed to market risks, including changes in commodity prices and
interest rates.
COMMODITY PRICE RISK
Puget Energy's energy related businesses are exposed to risks related to changes in commodity prices. As part of its business,
Puget Energy markets power to wholesale customers by entering into contracts to purchase or supply electric energy or natural gas at
specified delivery points and at specified future delivery dates. Puget Energy's energy risk management function manages Puget
Energy's core electric and gas supply portfolios.
Puget Energy manages its energy supply portfolio to achieve three primary objectives:
The portfolio is subject to major sources of variability (e.g., hydro generation, temperature-sensitive retail sales, and
market prices for gas and power supplies). At certain times, these sources of variability can mitigate portfolio imbalances; at other
times they can exacerbate portfolio imbalances.
Hedging strategies for Puget Energy's energy supply portfolio interact with portfolio optimization activities. Some hedges can
be implemented in ways that retain Puget Energy'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. PSE may use forward delivery agreements, swaps and option contracts for the
purpose of hedging commodity price risk. Some of these contracts are considered derivatives under Statement No. 133 unless a determination is made that they qualify for
normal purchase and normal sales exclusion. If the exclusion applies, those contracts are not marked-to-market and are not reflected
in the financial statement until delivery occurs. During fiscal year 2000, unrealized changes in the market value of these derivatives were
deferred and recognized upon settlement along with the underlying hedged transaction. Effective January 1, 2001, pursuant to
Statement No. 133, which requires that all derivative instruments be recorded on the balance sheet at their fair value, changes in
the fair value of Puget Energy's derivatives will be recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as qualifying hedge under the statement and, if it is, the type of hedge
transaction. Puget Energy does not consider its current operations to meet the definition of trading activities as described by the
Emerging Issues Task Force of the Financial Accounting Standards Issue No. 98-10, "Accounting for Contracts involved in Energy
Trading and Risk Management Activities".
At December 31, 2001, Puget Energy had an after-tax net liability of approximately $27.1 million of energy contracts designated
as qualifying cash flow hedges and a corresponding amount in other comprehensive income. Puget Energy also had energy contracts that
were marked-to-market through current earnings for 2001 of $7.5 million after-tax which includes $14.7 million for the cumulative
effect of the accounting change in the first quarter. A hypothetical 10% increase in the market prices of natural gas and electricity
prices would increase the fair value of qualifying cash flow hedges by approximately $4.7 million after-tax and would reduce current
earnings for those contracts marked-to-market in earnings by $2.5 million after-tax. In addition, PSE believes its current rate
design, including its Optional Large Power Sales Rate, various special contracts and the PGA mechanism mitigate a portion of this
risk.
Market risk is managed subject to parameters established by the Board of Directors. A Risk Management Committee separate from
the units that manage these risks monitors compliance with PSE's policies and procedures. In addition, the Audit Committee of PSE's
Board of Directors has oversight of the Risk Management Committee.
The fair value of energy contracts that are recorded in the balance sheet of Puget Energy are comprised of the following (net
of tax):
Puget Energy
Derivative Contracts (in millions)
Fair value of contracts outstanding at transition date of January 1, 2001 $276.6
Contracts realized or otherwise settled during 2001 (112.2)
Changes in fair values of derivatives (199.8)
-------
Fair value of contracts outstanding at December 31, 2001 $(35.4)
Fair Value of Contracts with Settlement during Year
Source of Fair Value 2003 - 2005 - 2007 and Total fair
(In Millions) 2002 2004 2006 Thereafter value
- ----------------------------------------------------------------------------------------------------------
Prices based on models and other
valuation methods $(45.2) $3.6 $4.1 $2.1 $(35.4)
INTEREST RATE RISK
Puget Energy believes interest rate risk of Puget Energy primarily relates to the use of short-term debt instruments and new
long-term debt financing needed to fund capital requirements. Puget Energy manages its interest rate risk through the issuance of
mostly fixed-rate debt of various maturities. Puget Energy 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. Puget Energy may enter into swap instruments to manage the interest
rate risk associated with these debts. Puget Energy did not have any swap instruments outstanding as of December 31, 2001. The
carrying amounts and fair values of Puget Energy's fixed-rate debt instruments are:
2001 2001 2000 2000
Carrying Fair Carrying Fair
(In Millions) Amount Value Amount Value
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
Financial Liabilities:
Short-term debt $ 348.6 $ 348.6 $ 378.3 $ 378.3
Long-term debt 2,246.7 2,131.2 2,189.8 2,183.0
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
The information required by Part III with respect to Puget Energy is incorporated herein by reference to Puget Energy's proxy statement for its 2002 Annual Meeting of Shareholders (Commission File No. 1-16305). Reference is also made to the information regarding Puget Energy's executive officers set forth in Part I of this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information required by this item with respect to PSE is incorporated herein by reference to the material under "Election of Directors" and "Security Ownership of Directors and Executive Officers--Section 16(a) Beneficial Ownership Reporting Compliance" in Puget Energy's proxy statement for its 2002 Annual Meeting of Shareholders (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report. Reference is also made to the information regarding Puget Sound Energy's executive officers set forth in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to PSE is incorporated herein by reference to the material under "Structure and Compensation of Board of Directors--Director Compensation," "Executive Compensation" and "Employment Contracts, Termination of Employment and Change-In-Control Arrangements" in Puget Energy's proxy statement for its 2002 Annual Meeting of Shareholders (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2001, all of the issued and outstanding shares of Puget Sound Energy's common stock were held beneficially and of record by Puget Energy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item with respect to Puget Sound Energy is incorporated herein by reference, to the material under "Certain Transactions" in Puget Energy's proxy statement for its 2002 Annual Meeting of Shareholders, (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PUGET ENERGY, INC. | PUGET SOUND ENERGY, INC. | |
|---|---|---|
| Stephen P. Reynolds |
Stephen P. Reynolds |
|
| Stephen P. Reynolds President and Chief Executive Officer Date: March 7, 2002 |
Stephen P. Reynolds President and Chief Executive Officer Date: March 7, 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of each registrant and in the capacities and on the dates indicated.
| SIGNATURE |
TITLE (PUGET ENERGY AND PSE UNLESS OTHERWISE NOTED) |
DATE |
|
/s/ Douglas P. Beighle
(Douglas P. Beighle) |
Chairman of the Board |
March 7, 2002 |
|
/s/ Stephen P. Reynolds
(Stephen P. Reynolds) |
President, Chief Executive Officer and Director |
|
|
/s/ Stephen A. McKeon
(Stephen A. McKeon) |
Senior Vice President Finance and Legal (Chief Financial Officer) |
|
|
/s/ James W. Eldredge
(James W. Eldredge) |
Corporate Secretary and Chief Accounting Officer |
|
|
/s/ Charles W. Bingham
(Charles W. Bingham) |
Director |
|
|
/s/ Phyllis J. Campbell
(Phyllis J. Campbell) |
Director |
|
|
/s/ Craig W. Cole
(Craig W. Cole) |
Director |
|
|
/s/ Robert L. Dryden
(Robert L. Dryden) |
Director |
|
| /s/ John D. Durbin
(John D. Durbin) |
Director |
|
|
/s/ Tomio Moriguchi
(Tomio Moriguchi) |
Director |
|
|
/s/ Kenneth P. Mortimer
(Kenneth P. Mortimer) |
Director |
|
|
/s/ Sally G. Narodick
(Sally G. Narodick) |
Director |
REPORT OF MANAGEMENT
PUGET ENERGY, INC.
and
PUGET SOUND ENERGY, INC.
The accompanying consolidated financial statements of Puget Energy, Inc. and Puget Sound Energy, Inc. have been prepared under
the direction of management, which is responsible for their integrity and objectivity. The statements have been prepared in
accordance with generally accepted accounting principles and include amounts based on judgments and estimates by management where
necessary. Management also prepared the other information in the Annual Report on Form 10-K and is responsible for its accuracy and
consistency with the financial statements.
Puget Energy and Puget Sound Energy maintain a system of internal control which, in management's opinion, provides reasonable
assurance that assets are properly safeguarded and transactions are executed in accordance with management's authorization and
properly recorded to produce reliable financial records and reports. The system of internal control provides for appropriate division
of responsibility and is documented by written policy and updated as necessary. Puget Sound Energy's internal audit staff assesses
the effectiveness and adequacy of the internal controls on a regular basis and recommends improvements when appropriate. Management
considers the internal auditor's and independent auditor's recommendations concerning Puget Energy's and Puget Sound Energy's
internal controls and takes steps to implement those that they believe are appropriate in the circumstances.
In addition, PricewaterhouseCoopers LLP, the independent accountants, have performed audit procedures deemed appropriate to
obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Board of Directors pursues its oversight role for the financial statements through the audit committee, which is composed
solely of outside Directors. The audit committee meets regularly with management, the internal auditors and the independent auditors,
jointly and separately, to review management's process of implementation and maintenance of internal accounting controls and auditing
and financial reporting matters. The internal and independent auditors have unrestricted access to the audit committee.
/s/ Stephen P. Reynolds /s/ Stephen A. McKeon /s/ James W. Eldredge
- ------------------------------------------- ----------------------------------- -------------------------------------
Stephen P. Reynolds Stephen A. McKeon James W. Eldredge
President and Chief Executive Officer Senior Vice President Finance and Corporate Secretary and
Legal (Chief Financial Officer) Chief Accounting Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Puget Energy, Inc.:
In our opinion, the consolidated financial statements on page 44 of this Annual Report on Form 10-K present fairly, in
all material respects, the financial position of Puget Energy, Inc. (formerly Puget Sound Energy, Inc.) and its subsidiaries at
December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed on page 84 of the document presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 18 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of
accounting for derivative instruments and hedging activities as required by Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
Seattle, Washington
February 8, 2002
To the Shareholder of Puget Sound Energy, Inc.:
In our opinion, the consolidated financial statements listed on page 44 of this Annual Report on Form 10-K present fairly, in
all material respects, the financial position of Puget Sound Energy, Inc. and its subsidiaries at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule listed on page 84 of the document presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 18 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of
accounting for derivative instruments and hedging activities as required by Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
Seattle, Washington
February 8, 2002
Consolidated Financial Statements, Financial Statement Schedule Covered by the Foregoing Report of Independent Accountants
and Exhibits
Consolidated Financial Statements:
PUGET ENERGY:
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Capitalization, December 31, 2001 and 2000
Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
PUGET SOUND ENERGY:
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Capitalization, December 31, 2001 and 2000
Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Combined Puget Energy and Puget Sound Energy Notes to Consolidated Financial Statements
Schedule:
All other schedules have been omitted because of the absence of the conditions under which they are required, or because the information required is included in the financial statements or the notes thereto.
Financial statements of PSE's subsidiaries are not filed herewith inasmuch as the assets, revenues, earnings and earnings reinvested in the business of the subsidiaries are not material in relation to those of PSE.
Exhibits:
Puget Energy Consolidated Statements of
INCOME
(dollars in thousands, except per share amounts)
For Years Ended December 31 2001 2000 1999
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Operating revenues:
Electric $ 2,352,658 $ 2,771,695 $ 1,558,012
Gas 815,071 612,311 485,488
Other 206,262 57,666 24,444
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Total operating revenues 3,373,991 3,441,672 2,067,944
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Operating expenses:
Energy costs:
Purchased electricity 1,406,107 1,766,625 780,162
Residential exchange (75,864) (41,000) (39,000)
Purchased gas 537,431 332,927 220,009
Fuel 281,405 182,978 59,439
FAS-133 unrealized gain (11,182) -- --
Utility operations and maintenance 265,789 240,094 240,645
Other operations and maintenance 156,731 60,612 27,179
Depreciation and amortization 217,540 196,513 175,710
Conservation amortization 6,493 6,830 7,841
Taxes other than federal income taxes 214,414 203,230 180,141
Federal income taxes 78,006 128,991 108,002
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Total operating expenses 3,076,870 3,077,800 1,760,128
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Operating income 297,121 363,872 307,816
Other income 14,526 5,061 28,135
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Income before interest charges 311,647 368,933 335,951
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Interest charges:
AFUDC (4,446) (9,303) (10,582)
Interest expense 194,505 184,405 160,966
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Total interest charges 190,059 175,102 150,384
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Net income before cumulative effect of accounting change 121,588 193,831 185,567
FAS-133 transition adjustment loss (net of tax) 14,749 -- --
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Net income 106,839 193,831 185,567
Less preferred stock dividends accrual 8,413 8,994 11,065
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Income for common stock $ 98,426 $ 184,837 $ 174,502
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Common shares outstanding weighted average 86,445 85,411 84,613
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
Basic and diluted earnings per common share before
cumulative effect of accounting change $ 1.31 $ 2.16 $ 2.06
Basic and diluted for cumulative effect of accounting change
(0.17) -- --
- ---------------------------------------------------------------- --------------------- ------------------ -----------------
Basic and diluted earnings per common share $ 1.14 $ 2.16 $ 2.06
- ---------------------------------------------------------------- -------------------- ------------------- ------------------
The accompanying notes are an integral part of the consolidated financial statements.
Puget Energy Consolidated Balance Sheets
ASSETS
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Utility plant:
Electric plant $ 4,167,920 $ 4,054,551
Gas plant 1,551,439 1,459,488
Common plant 362,670 351,051
Less: Accumulated depreciation and amortization (2,194,048) (2,026,681)
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Net utility plant 3,887,981 3,838,409
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Other property and investments:
Investment in Bonneville Exchange Power Contract 54,663 58,189
Goodwill, net 96,925
45,655
Other 165,661 188,453
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total other property and investments 317,249 292,297
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Current assets:
Cash 92,356 36,383
Accounts receivable, net of allowance for doubtful accounts 279,321 343,108
Unbilled revenues 147,008 211,784
Purchased gas receivable 37,228 96,050
Materials and supplies, at average cost 90,333 99,001
Current portion of FAS-133 unrealized gain 3,315 --
Prepayments and other 11,277 11,607
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total current assets 660,838 797,933
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Other long-term assets:
Regulatory asset for deferred income taxes 193,016 207,350
Regulatory asset for PURPA buyout costs 244,635 243,071
FAS-133 unrealized gain 3,317 --
Other 239,941 177,609
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total other long-term assets 680,909 628,030
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total assets $ 5,546,977 $ 5,556,669
================================================================== ============================ ============================
The accompanying notes are an integral part of the consolidated financial statements.
Puget Energy Consolidated Balance Sheets
CAPITALIZATION AND LIABILITIES
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------ ------------------------- ------------------------
Capitalization:
(See Consolidated Statements of Capitalization):
Common equity $ 1,362,724 $ 1,426,640
Preferred stock not subject to mandatory redemption 60,000 60,000
Preferred stock subject to mandatory redemption 50,662 58,162
Corporation obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation 300,000 100,000
Long-term debt 2,127,054 2,170,797
- ------------------------------------------------------------------ ------------------------- ------------------------
Total capitalization 3,900,440 3,815,599
- ------------------------------------------------------------------ ------------------------- ------------------------
Current liabilities:
Accounts payable 167,426 410,619
Short-term debt 348,577 378,316
Current maturities of long-term debt 119,523 19,000
Accrued expenses:
Taxes 70,708 103,996
Salaries and wages 14,746 17,445
Interest 42,505 43,955
Current portion of FAS-133 unrealized loss 35,145 --
Other 46,178 26,685
- ------------------------------------------------------------------ ------------------------- ------------------------
Total current liabilities 844,808 1,000,016
- ------------------------------------------------------------------ ------------------------- ------------------------
Deferred income taxes 605,315 608,185
- ------------------------------------------------------------------ ------------------------- ------------------------
FAS-133 unrealized loss 75 --
- ------------------------------------------------------------------ ------------------------- ------------------------
Other deferred credits 196,339 132,869
- ------------------------------------------------------------------ ------------------------- ------------------------
Commitments and contingencies -- --
- ------------------------------------------------------------------ ------------------------- ------------------------
Total capitalization and liabilities $ 5,546,977 $ 5,556,669
================================================================== ========================= ========================
The accompanying notes are an integral part of the consolidated financial statements.
Puget Energy Consolidated Statements of
CAPITALIZATION
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Common equity:
Common stock $0.01 par value, 250,000,000 shares authorized,
87,023,210 shares outstanding at December 31, 2001 and $10
stated value, 150,000,000 shares authorized, 85,903,791 $ 870 $ 859,038
shares outstanding at December 31, 2000.
Additional paid-in capital 1,358,946 470,179
Earnings reinvested in the business 32,229 92,673
Accumulated other comprehensive income (loss) - net (29,321) 4,750
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total common equity 1,362,724 1,426,640
- ------------------------------------------------------------------------------------- ---------------- ---------------
Preferred stock not subject to mandatory
redemption - cumulative - $25 par value: *
7.45% series II - 2,400,000 shares authorized and outstanding 60,000 60,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total preferred stock not subject to mandatory redemption 60,000 60,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Preferred stock subject to mandatory redemption - cumulative
$100 par value: *
4.84% series - 150,000 shares authorized,
14,808 shares outstanding 1,481 1,481
4.70% series - 150,000 shares authorized,
4,311 shares outstanding 431 431
7.75% series - 750,000 shares authorized, 487,500 and 562,500
shares outstanding 48,750 56,250
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total preferred stock subject to mandatory redemption 50,662 58,162
- ------------------------------------------------------------------------------------- ---------------- ---------------
Corporation obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation 300,000 100,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Long-term debt:
First mortgage bonds and senior notes 2,009,000 2,028,000
Pollution control revenue bonds:
Revenue refunding 1991 series, due 2021 50,900 50,900
Revenue refunding 1992 series, due 2022 87,500 87,500
Revenue refunding 1993 series, due 2020 23,460 23,460
Other notes 75,762 --
Unamortized discount - net of premium (45) (63)
Long-term debt due within one year (119,523) (19,000)
- ------------------------------------------------------------------------------------- --------------- ----------------
Total long-term debt excluding current maturities 2,127,054 2,170,797
- ------------------------------------------------------------------------------------- --------------- ----------------
Total capitalization $ 3,900,440 $ 3,815,599
- ------------------------------------------------------------------------------------- --------------- ----------------
* Puget Energy has 50,000,000 shares authorized for $0.01 par value preferred stock. PSE has 13,000,000 shares
authorized for $25 par value preferred stock and 3,000,000 shares authorized for $100 par value preferred stock.
The accompanying notes are an integral part of the consolidated financial statements.
Puget Energy Consolidated Statements of
EARNINGS REINVESTED
(dollars in thousands, except per share amounts)
For Years Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------- --------------- --------------- --------------
Balance at beginning of year $ 92,673 $ 66,019 $ 47,548
Net income 106,839 193,831 185,567
- ------------------------------------------------------------------------- --------------- --------------- ---------------
Total 199,512 259,850 233,115
- ------------------------------------------------------------------------- --------------- --------------- ---------------
Deductions:
Dividends declared:
Preferred stock:
Adjustable rate series B -- -- 38
$1.86 per share on 7.45% series II 4,470 4,470 4,470
$2.13 per share on 8.50% series III -- -- 1,700
$4.84 per share on 4.84% series 72 72 72
$4.70 per share on 4.70% series 20 20 20
$7.75 per share on 7.75% series 3,923 4,505 5,086
Common stock 158,798 156,929 155,591
Loss on preferred stock redemptions -- 1,181 119
- ------------------------------------------------------------------------- --------------- --------------- --------------
Total deductions 167,283 167,177 167,096
- ------------------------------------------------------------------------- --------------- --------------- --------------
Balance at end of year $ 32,229 $ 92,673 $ 66,019
- ------------------------------------------------------------------------- --------------- --------------- --------------
Dividends declared per common share $ 1.84 $ 1.84 $ 1.84
- ------------------------------------------------------------------------- --------------- --------------- --------------
Puget Energy Consolidated Statements of
COMPREHENSIVE INCOME
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------- ------------ -------------- ---------------
Net income $106,839 $ 193,831 $ 185,567
- --------------------------------------------------------------------------- ------------ -------------- ---------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale securities (1,823) (938) 12,330
Reclassification adjustment for gains on available for sale (5) (3,160) (12,284)
securities included in net income
Minimum pension liability adjustment (5,148) -- --
FAS-133 transition adjustment 286,928 -- --
FAS-133 unrealized losses during period (131,420) -- --
Reversal of FAS-133 unrealized gains settled during period (182,603) -- --
- --------------------------------------------------------------------------- -------------- ------------ ---------------
Other comprehensive income (loss) (34,071) (4,098) 46
- --------------------------------------------------------------------------- -------------- ------------ ---------------
Comprehensive income $ 72,768 $ 189,733 $ 185,613
- --------------------------------------------------------------------------- ------------ ------------- ----------------
The accompanying notes are an integral part of the consolidated financial statements.
Puget Energy Consolidated Statements of
CASH FLOWS
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- ---------------------------------------------------------------------------- -------------- -------------- ---------------
Operating activities:
Net income $ 106,839 $ 193,831 $ 185,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 217,540 196,513 175,710
Deferred federal income taxes and tax credits - net 9,056 (7,446) 21,133
Deferred state income taxes - net 2,408 -- --
Gain from sale of investment in Cabot common stock -- -- (18,899)
Gain from sale of investment in Homeguard Security Services -- -- (11,659)
Gain from sale of securities -- (6,476) --
Other (including conservation amortization) 189 (7,276) (3,708)
Cash received from contract initiation 16,870 -- --
PURPA buyout costs -- -- (12,000)
Change in certain current assets and liabilities (54,614) (48,863) (25,446)
- ------------------------------------------------------------------------------ ------------ -------------- ---------------
Net cash provided by operating activities 298,288 320,283 310,698
- ------------------------------------------------------------------------------ ------------ -------------- ---------------
Investing activities:
Construction expenditures - excluding equity AFUDC (247,435) (296,480) (330,976)
Additions to other property, plant and equipment (5,193) -- --
Energy conservation expenditures (15,591) (6,931) (5,583)
Proceeds from sale of investment in Cabot common stock -- -- 37,353
Proceeds from sale of investment in Cabot preferred stock -- 51,463 --
Proceeds from sale of Homeguard Security Services -- -- 13,399
Proceeds from sale of Centralia plant -- 37,449 --
Proceeds from sale of securities -- 6,757 --
Purchase of Encogen -- -- (55,000)
Investments by InfrastruX (75,591) (85,506) --
Repayment from/(loans to) Schlumberger 51,948 (20,874) (31,075)
Other (16,446) (14,138) 9,001
- ---------------------------------------------------------------------------- --------------- --------------- --------------
Net cash used by investing activities (308,308) (328,260) (362,881)
- ---------------------------------------------------------------------------- --------------- --------------- --------------
Financing activities:
Increase (decrease) in short-term debt - net (32,406) (226,395) 153,807
Dividends paid (141,709) (142,886) (160,067)
Issuance of common stock -- -- 1,136
Issuance of trust preferred stock 200,000 -- --
Redemption of preferred stock (7,500) (7,503) (42,575)
Issuance of bonds and long term debt 70,250 510,000 250,000
Redemption of bonds and notes (19,000) (150,980) (110,370)
Other (3,642) (3,583) (2,257)
- ------------------------------------------------------------------------------ ------------ ---------------- -------------
Net cash provided (used) by financing activities 65,993 (21,347) 89,674
- ------------------------------------------------------------------------------ ------------ ---------------- -------------
Increase (decrease) in cash from net income 55,973 (29,324) 37,491
Cash at beginning of year 36,383 65,707 28,216
- ---------------------------------------------------------------------------- -------------- -------------- ---------------
Cash at end of year $ 92,356 $ 36,383 $ 65,707
- ---------------------------------------------------------------------------- -------------- -------------- ---------------
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Statements of
INCOME
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Operating revenues:
Electric $ 2,352,658 $ 2,771,695 $ 1,558,012
Gas 815,071 612,311 485,488
Other 32,476 57,666 24,444
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Total operating revenues 3,200,205 3,441,672 2,067,944
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Operating expenses:
Energy costs:
Purchased electricity 1,406,107 1,766,625 780,162
Residential exchange (75,864) (41,000) (39,000)
Purchased gas 537,431 332,927 220,009
Fuel 281,405 182,978 59,439
FAS-133 unrealized gain (11,182) -- --
Utility operations and maintenance 265,789 240,094 240,645
Other operations and maintenance 8,546 60,612 27,179
Depreciation and amortization 208,720 196,513 175,710
Conservation amortization 6,493 6,830 7,841
Taxes other than federal income taxes 208,597 203,230 180,141
Federal income taxes 75,683 128,991 108,002
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Total operating expenses 2,911,725 3,077,800 1,760,128
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Operating income 288,480 363,872 307,816
Other income 17,053 5,061 28,135
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Income before interest charges 305,533 368,933 335,951
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Interest charges:
AFUDC (4,446) (9,303) (10,582)
Interest expense 190,849 184,405 160,966
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Total interest charges 186,403 175,102 150,384
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Net income before cumulative effect of accounting change 119,130 193,831 185,567
FAS-133 transition adjustment loss (net of tax) 14,749 -- --
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Net income 104,381 193,831 185,567
Less preferred stock dividends accrual 8,413 8,994 11,065
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
Income for common stock $ 95,968 $ 184,837 $ 174,502
- ---------------------------------------------------------------- ------------------- -------------------- ------------------
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Balance Sheets
ASSETS
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Utility plant:
Electric plant $ 4,167,920 $ 4,054,551
Gas plant 1,551,439 1,459,488
Common plant 362,670 351,051
Less: Accumulated depreciation and amortization (2,194,048) (2,026,681)
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Net utility plant 3,887,981 3,838,409
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Other property and investments:
Investment in Bonneville Exchange Power Contract 54,663 58,189
Goodwill, net -- 45,655
Other 95,867 188,453
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total other property and investments 150,530 292,297
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Current assets:
Cash 82,708 36,383
Accounts receivable, net of allowance for doubtful accounts 235,348 343,108
Unbilled revenues 147,008 211,784
Purchased gas receivable 37,228 96,050
Materials and supplies, at average cost 85,318 99,001
Current portion of FAS-133 unrealized gain 3,315 --
Prepayments and other 7,405 11,607
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total current assets 598,330 797,933
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Other long-term assets:
Regulatory asset for deferred income taxes 193,016 207,350
Regulatory asset for PURPA buyout costs 244,635 243,071
FAS-133 unrealized gain 3,317 --
Other 239,941 177,609
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total other long-term assets 680,909 628,030
- ------------------------------------------------------------------ ---------------------------- ----------------------------
Total assets $ 5,317,750 $ 5,556,669
================================================================== ============================ ============================
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Balance Sheets
CAPITALIZATION AND LIABILITIES
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------ ------------------------- ------------------------
Capitalization:
(See Consolidated Statements of Capitalization):
Common equity $ 1,267,654 $ 1,426,640
Preferred stock not subject to mandatory redemption 60,000 60,000
Preferred stock subject to mandatory redemption 50,662 58,162
Corporation obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation 300,000 100,000
Long-term debt 2,053,815 2,170,797
- ------------------------------------------------------------------ ------------------------- ------------------------
Total capitalization 3,732,131 3,815,599
- ------------------------------------------------------------------ ------------------------- ------------------------
Current liabilities:
Accounts payable 154,600 410,619
Short-term debt 338,168 378,316
Current maturities of long-term debt 117,000 19,000
Accrued expenses:
Taxes 70,210 103,996
Salaries and wages 14,746 17,445
Interest 42,505 43,955
Current portion of FAS-133 unrealized loss 35,145 --
Other 25,178 26,685
- ------------------------------------------------------------------ ------------------------- ------------------------
Total current liabilities 797,552 1,000,016
- ------------------------------------------------------------------ ------------------------- ------------------------
Deferred income taxes 601,001 608,185
- ------------------------------------------------------------------ ------------------------- ------------------------
FAS-133 unrealized loss 75 --
- ------------------------------------------------------------------ ------------------------- ------------------------
Other deferred credits 186,991 132,869
- ------------------------------------------------------------------ ------------------------- ------------------------
Commitments and contingencies -- --
- ------------------------------------------------------------------ ------------------------- ------------------------
Total capitalization and liabilities $ 5,317,750 $ 5,556,669
================================================================== ========================= ========================
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Statements of
CAPITALIZATION
(dollars in thousands)
At December 31 2001 2000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Common equity:
Common stock ($10 stated value) - 150,000,000 shares
authorized, 85,903,791 shares outstanding $ 859,038 $ 859,038
Additional paid-in capital 382,592 470,179
Earnings reinvested in the business 55,345 92,673
Accumulated other comprehensive income (loss) - net (29,321) 4,750
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total common equity 1,267,654 1,426,640
- ------------------------------------------------------------------------------------- ---------------- ---------------
Preferred stock not subject to mandatory
redemption - cumulative - $25 par value:*
7.45% series II - 2,400,000 shares authorized and outstanding 60,000 60,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total preferred stock not subject to mandatory redemption 60,000 60,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Preferred stock subject to mandatory redemption - cumulative
$100 par value:*
4.84% series - 150,000 shares authorized,
14,808 shares outstanding 1,481 1,481
4.70% series - 150,000 shares authorized,
4,311 shares outstanding 431 431
7.75% series - 750,000 shares authorized 487,500 and 562,500
shares outstanding 48,750 56,250
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total preferred stock subject to mandatory redemption 50,662 58,162
- ------------------------------------------------------------------------------------- ---------------- ---------------
Corporation obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation 300,000 100,000
- ------------------------------------------------------------------------------------- ---------------- ---------------
Long-term debt:
First mortgage bonds and senior notes 2,009,000 2,028,000
Pollution control revenue bonds:
Revenue refunding 1991 series, due 2021 50,900 50,900
Revenue refunding 1992 series, due 2022 87,500 87,500
Revenue refunding 1993 series, due 2020 23,460 23,460
Unamortized discount - net of premium (45) (63)
Long-term debt due within one year (117,000) (19,000)
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total long-term debt excluding current maturities 2,053,815 2,170,797
- ------------------------------------------------------------------------------------- ---------------- ---------------
Total capitalization $ 3,732,131 $ 3,815,599
- ------------------------------------------------------------------------------------- ---------------- ---------------
* 13,000,000 shares authorized for $25 par value preferred stock and 3,000,000 shares authorized for $100 par value preferred stock.
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Statements of
EARNINGS REINVESTED
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------- --------------- --------------- --------------
Balance at beginning of year $ 92,673 $ 66,019 $ 47,548
Net income 104,381 193,831 185,567
- ------------------------------------------------------------------------- --------------- --------------- --------------
Total 197,054 259,850 233,115
- ------------------------------------------------------------------------- --------------- --------------- --------------
Deductions:
Dividends declared:
Preferred stock:
Adjustable rate series B -- -- 38
$1.86 per share on 7.45% series II 4,470 4,470 4,470
$2.13 per share on 8.50% series III -- -- 1,700
$4.84 per share on 4.84% series 72 72 72
$4.70 per share on 4.70% series 20 20 20
$7.75 per share on 7.75% series 3,923 4,505 5,086
Common stock 133,224 156,929 155,591
Loss on preferred stock redemptions -- 1,181 119
- ------------------------------------------------------------------------- --------------- --------------- --------------
Total deductions 141,709 167,177 167,096
- ------------------------------------------------------------------------- --------------- --------------- --------------
Balance at end of year $ 55,345 $ 92,673 $ 66,019
- ------------------------------------------------------------------------- --------------- --------------- --------------
Puget Sound Energy Consolidated Statements of
COMPREHENSIVE INCOME
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- -------------------------------------------------------------------------- ------------- -------------- ---------------
Net income $ 104,381 $ 193,831 $ 185,567
- -------------------------------------------------------------------------- ------------- -------------- ---------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale securities (1,823) (938) 12,330
Reclassification adjustment for gains on available for sale (5) (3,160) (12,284)
securities included in net income
Minimum pension liability adjustment (5,148) -- --
FAS-133 transition adjustment 286,928 -- --
FAS-133 unrealized losses during period (131,420) -- --
Reversal of FAS-133 unrealized gains settled during period (182,603) -- --
- -------------------------------------------------------------------------- -------------- ------------- ---------------
Other comprehensive income (loss) (34,071) (4,098) 46
- -------------------------------------------------------------------------- -------------- ------------- ---------------
Comprehensive income $ 70,310 $ 189,733 $ 185,613
- -------------------------------------------------------------------------- ------------- -------------- ---------------
The accompanying notes are an integral part of the consolidated financial statements.
Puget Sound Energy Consolidated Statements of
CASH FLOWS
(dollars in thousands)
For Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------- ------------- -------------- -------------
Operating activities:
Net income $ 104,381 $ 193,831 $ 185,567
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 208,720 196,513 175,710
Deferred federal income taxes and tax credits - net 7,151 (7,446) 21,133
Gain from sale of investment in Cabot common stock -- -- (18,899)
Gain from sale of investment in Homeguard Security Services -- -- (11,659)
Gain from sale of securities -- (6,476) --
Other (including conservation amortization) 7,029 (7,276) (3,708)
Cash received from contract initiation 16,870 -- --
PURPA buyout costs -- -- (12,000)
Change in certain current assets and liabilities (59,539) (48,863) (25,446)
- --------------------------------------------------------------------------------- ------------- -------------- -------------
Net cash provided by operating activities 284,612 320,283 310,698
- --------------------------------------------------------------------------------- ------------- -------------- -------------
Investing activities:
Construction expenditures - excluding equity AFUDC (247,435) (296,480) (330,976)
Energy conservation expenditures (15,591) (6,931) (5,583)
Proceeds from sale of investment in Cabot common stock -- -- 37,353
Proceeds from sale of investment in Cabot preferred stock -- 51,463 --
Proceeds from sale of Homeguard Security Services -- -- 13,399
Proceeds from sale of Centralia plant -- 37,449 --
Proceeds from sale of securities -- 6,757 --
Purchase of Encogen -- -- (55,000)
Investment by InfrastruX -- (85,506) --
Repayment from/(loans to) Schlumberger 51,948 (20,874) (31,075)
Other (16,446) (14,138) 9,001
- --------------------------------------------------------------------------------- --------------- ------------- -------------
Net cash used by investing activities (227,524) (328,260) (362,881)
- --------------------------------------------------------------------------------- --------------- ------------- -------------
Financing activities:
Increase (decrease) in short-term debt - net (38,845) (226,395) 153,807
Dividends paid (141,709) (142,886) (160,067)
Issuance of common stock -- -- 1,136
Issuance of trust preferred stock 200,000 -- --
Redemption of preferred stock (7,500) (7,503) (42,575)
Issuance of bonds -- 510,000 250,000
Redemption of bonds and notes (19,000) (150,980) (110,370)
Other (3,709) (3,583) (2,257)
- --------------------------------------------------------------------------------- --------------- ------------- ------------
Net cash provided (used) by financing activities (10,763) (21,347) 89,674
- --------------------------------------------------------------------------------- --------------- ------------- ------------
Increase (decrease) in cash from net income 46,325 (29,324) 37,491
Cash at beginning of year 36,383 65,707 28,216
- --------------------------------------------------------------------------------- ------------- -------------- -------------
Cash at end of year $ 82,708 $ 36,383 $ 65,707
- --------------------------------------------------------------------------------- ------------- -------------- -------------
The accompanying notes are an integral part of the consolidated financial statements.
NOTES
To Consolidated Financial Statements of Puget Energy and Puget Sound Energy
NOTE 1.
Summary of Significant Accounting Policies
BASIS OF PRESENTATION
On January 1, 2001, Puget Sound Energy, Inc. (PSE) reorganized into a holding company structure. This reorganization resulted in
the creation of a new holding company, Puget Energy, Inc. (Puget Energy). Puget Energy was incorporated in the State of Washington
and all of its operations are conducted through its subsidiaries. Puget Energy and PSE are collectively referred to herein as “the
Company”.
Puget Energy is a public utility holding company under the Public Utility Holding Company Act of 1935 but is exempt from
regulation under such Act. In addition to its ownership of PSE, Puget Energy also owns InfrastruX Group, Inc. (InfrastruX), a
Washington corporation.
Pursuant to the reorganization, Puget Energy became the owner of all PSE’s outstanding common stock. Holders of PSE’s existing
common stock exchanged their stock on a one-for-one basis for common stock of Puget Energy.
Additionally, PSE transferred its ownership in InfrastruX to Puget Energy through a capital dividend for the net book value of PSE’s
investment in InfrastruX of $86.0 million.
The consolidated financial statements include the accounts of Puget Energy and all its subsidiaries and PSE and its
subsidiaries. Significant intercompany transactions have been eliminated. Certain reclassifications have been made to the prior year's
financial statements to conform to the current year's presentation with no material effect on consolidated net income, total assets
or common equity.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
UTILITY PLANT
The costs of additions to utility plant, including renewals and betterments, are capitalized at original cost. Costs include
indirect costs such as engineering, supervision, certain taxes and pension and other employee benefits, and an allowance for funds
used during construction. Replacements of minor items of property are included in maintenance expense. The original cost of operating
property together with removal cost, less salvage, is charged to accumulated depreciation when the property is retired and removed
from service.
NON-UTILITY PROPERTY, PLANT AND EQUIPMENT
The costs of other property, plant and equipment are stated at cost in Other Property and Investments. Expenditures for
refurbishment and improvements that significantly add to productive capacity or extend useful life of an asset are capitalized.
Replacement of minor items is expensed, on a current basis. Gains and losses on assets sold or retired are reflected in earnings.
ACCOUNTING FOR THE IMPAIRMENT OF LONG–LIVED ASSETS
The Company prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 121 (Statement
No. 121), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Statement No 121
establishes accounting standards for determining if long-lived assets are impaired and how losses, if any, should be recognized. The
Company believes that the net cash flows are sufficient to cover the carrying value of the assets.
REGULATORY ASSETS AND AGREEMENTS
The Company accounts for its regulated operations in accordance with Statement of Financial Accounting Standards No. 71,
“Accounting for the Effects of Certain Types of Regulation” (Statement No. 71). Statement No. 71 requires the Company to defer
certain costs that would otherwise be charged to expense, if it is probable that future rates will permit recovery of such costs.
Accounting under Statement No. 71 is appropriate as long as: rates are established by or subject to approval by independent,
third-party regulators; rates are designed to recover the specific enterprise's cost-of-service; and in view of demand for service,
it is reasonable to assume that rates set at levels that will recover costs can be charged to and collected from customers. In
applying Statement No. 71, the Company must give consideration to changes in the level of demand or competition during the cost
recovery period. In accordance with Statement No. 71, the Company capitalizes certain costs in accordance with regulatory authority
whereby those costs will be expensed and recovered in future periods.
Net regulatory assets and liabilities at December 31, 2001 and 2000, included the following:
(Dollars in Millions) 2001 2000 - ------------------------------------------------------------------ -------------------- -------------------- Deferred income taxes $ 193.0 $ 207.4 PURPA electric energy supply contract buyout costs 244.6 243.1 Investment in BEP Exchange Contract 54.7 58.1 Unamortized energy conservation charges 15.2 6.3 Storm damage costs - electric 26.6 30.1 Purchased gas receivable 37.2 96.1 Deferred AFUDC 28.5 26.8 Various other costs 62.1 56.2 Deferred gains on property sales (17.3) (17.9) Various other liabilities (6.7) (13.0) - ------------------------------------------------------------------ -------------------- -------------------- Net regulatory assets and liabilities $ 637.9 $ 693.2 - ------------------------------------------------------------------ -------------------- --------------------
If the Company, at some point in the future, determines that all or a portion of the utility operations no longer meet the
criteria for continued application of Statement No. 71, the Company would be required to adopt the provisions of Statement of
Financial Accounting Standards No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement
No. 71" (Statement No. 101). Adoption of Statement No. 101 would require the Company to write off the regulatory assets and
liabilities related to those operations not meeting Statement No. 71 requirements. Discontinuation of Statement No. 71 could have a
material impact on the Company's financial statements.
The Company, in prior years, incurred costs associated with its 5% interest in a now-terminated nuclear generating project
(identified herein as Investment in Bonneville Exchange Power (BEP)). Under terms of a settlement agreement with the Bonneville Power
Administration (BPA), which settled claims of the Company relating to construction delays associated with that project, the Company
is receiving power from the federal power system resources marketed by BPA. Approximately two-thirds of the Company's investment in
BEP is included in rate base and amortized on a straight-line basis over the life of the settlement agreement (amortization is included in
purchased and interchanged power). The remainder of the Company's investment was recovered in rates over the ten years ended December
31, 1999, without a return during the recovery period (the related amortization is included in Depreciation and Amortization,
pursuant to a FERC accounting order).
The Company has regulatory assets of approximately $244.6 million related to the buyout of purchased power and gas sales
contracts of two non-utility generation projects. Washington Commission accounting orders have approved payments pursuant to these
contracts for deferral and collection in rates over the remaining life of the energy supply contracts. Under terms of the orders, the
Company is allowed to accrue as an additional regulatory asset certain carrying costs of the deferred balances.
OPERATING REVENUES
Operating utility revenues are recorded on the basis of service rendered, which includes estimated unbilled revenue.
Non-utility subsidiaries recognize revenue when services are performed or upon the sale of assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts is calculated based upon historical write-offs as compared to operating revenues. The Company
has also provided for a reserve on sales transactions related to the California Independent System Operator and counterparties based
upon probability of collection. Puget Energy's allowance for doubtful accounts for 2001 and 2000 was $47.0 million and $43.0 million,
respectively. PSE's allowance for doubtful accounts for 2001 and 2000 was $45.2 million and $43.0 million, respectively.
ENERGY CONSERVATION
The Company offers programs designed to help new and existing customers use energy efficiently. The primary emphasis is to
provide information and technical services to enable customers to make energy-efficient choices with respect to building design,
equipment and building systems, appliance purchases and operating practices.
Since May 1997, the Company has recovered electric energy conservation expenditures through a tariff rider mechanism. The rider
mechanism allows the Company to defer the conservation expenditures and amortize them to expense as PSE concurrently collects the
conservation expenditures in rates over a one-year period. As a result of the rider, there is no effect on earnings per share.
Since 1995, the Company has been authorized by the Washington Commission to defer gas energy conservation expenditures and
recover them through a tariff tracker mechanism. The tracker mechanism allows the Company to defer conservation expenditures and
recover them in rates over the subsequent year. The tracker mechanism also allows the Company to recover an Allowance for Funds Used
to Conserve Energy (AFUCE) on any outstanding balance that is not being recovered in rates.
SELF–INSURANCE
The Company currently has no insurance coverage for storm damage and is self-insured for a portion of the risk associated with
comprehensive liability, industrial accidents and catastrophic property losses. With approval of the Washington Commission, the
Company is able to defer for collection in future rates certain uninsured storm damage costs associated with major storms.
DEPRECIATION AND AMORTIZATION
For financial statement purposes, the Company provides for depreciation on a straight-line basis. Amortization is also on a
straight-line basis and is comprised of software, small tools and office equipment. The depreciation of automobiles, trucks,
power-operated equipment and tools is allocated to asset and expense accounts based on usage. The annual depreciation provision
stated as a percent of average original cost of depreciable electric utility plant was 3.0% in 2001, 2.9% in 2000 and 3.0% 1999;
depreciable gas utility plant was 3.5% in 2001, 3.3% in 2000 and 3.4% in 1999; and depreciable common utility plant was 3.1% in 2001,
1.9% in 2000 and 2.3% in 1999. Depreciation on other property, plant and equipment is calculated primarily on a straight-line basis
over the useful lives of the assets ranging from 3 to 50 years.
FEDERAL INCOME TAXES
The Company normalizes, with the approval of the Washington Commission, certain items. Deferred taxes have been determined
under Statement of Financial Accounting Standards No. 109. Investment tax credits are deferred and amortized based on the average
useful life of the related property in accordance with regulatory and income tax requirements. (See Note 13).
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of both the debt and equity funds used to finance
utility plant additions during the construction period. The amount of AFUDC recorded in each accounting period varies depending
principally upon the level of construction work in progress and the AFUDC rate used. AFUDC is capitalized as a part of the cost of
utility plant and is credited as a non-cash item to other income and interest charges currently. Cash inflow related to AFUDC does
not occur until these charges are reflected in rates.
The AFUDC rate allowed by the Washington Commission for gas utility plant additions was 9.15% in 2001, 2000 and 1999. The
allowed AFUDC rate on electric utility plant was 8.94% during the same period. To the extent amounts calculated using this rate
exceed the AFUDC calculated rate using the Federal Energy Regulatory Commission (FERC) formula, the Company capitalizes the excess as
a deferred asset, crediting miscellaneous income. The amounts included in income were $2.7 million for 2001, $2.8 million for 2000
and $4.3 million for 1999. The deferred asset is being amortized over the average useful life of Puget Energy's non-project utility
plant.
RATE ADJUSTMENT MECHANISM
The Company does not have an electric power cost or fuel adjustment mechanism to adjust for changes in energy and fuel costs or
variances in hydro and weather conditions.
The differences between the actual cost of the Company's gas supplies and gas transportation contracts and that currently
allowed by the Washington Commission are deferred and recovered or repaid through the purchased gas adjustment (PGA) mechanism.
On June 25, 1998, the Company received approval from the Washington Commission to begin a new performance-based mechanism for
strengthening its gas-supply purchasing and gas-storage practices. The PGA Incentive Mechanism, which encourages competitive gas
purchasing and management of pipeline and storage capacity, was effective for the period July 1, 1998 through October 31, 2001.
Incentive gains and losses from the program were shared between customers and shareholders. After the first $0.5 million, which was
allocated to customers, gains and (losses) were shared 40%/60% between the Company and customers up to $26.5 million and 33%/67%
thereafter. Gains or losses were determined relative to a weighted average index which was reflective of PSE's gas supply and
transportation contract costs. The Company's share of incentive gains and (losses) under the PGA Incentive Mechanism in 2001, 2000
and 1999 was approximately $(3.9) million, $7.5 million and $7.2 million, respectively, while customers received approximately $(6.2)
million, $11.7 million and $11.3 million in benefits, respectively.
OFF–SYSTEM SALES AND CAPACITY RELEASE
The Company sells excess gas supplies, enters into gas supply exchanges with third parties outside of its distribution area and
releases to third parties excess interstate gas pipeline capacity and gas storage rights on a short-term basis. The Company contracts
for firm gas supplies and holds firm transportation and storage capacity sufficient to meet the expected peak winter demand for gas
for space heating by its firm customers. Due to the variability in weather and other factors, however, the Company holds contractual
rights to gas supplies and transportation and storage capacity in excess of its immediate requirements to serve firm customers on its
distribution system for much of the year which, therefore, are available for third-party gas sales, exchanges and capacity releases.
The proceeds, net of transactional costs, from such activities are accounted for as reductions in the cost of purchased gas and
passed on to customers through the PGA mechanism, with no direct impact on net income. As a result, the Company does not reflect
sales revenue or associated cost of sales for these transactions in its income statement.
ENERGY RISK MANAGEMENT
The Company's energy related businesses are exposed to risks related to changes in commodity prices. As part of its business, the
Company markets power to wholesale customers by entering into contracts to purchase or supply electric energy or natural gas at
specified delivery points and at specified future delivery dates. The Company's energy risk management function manages the Company's
core electric and gas supply portfolios.
The Company manages its energy supply portfolio to achieve three primary objectives:
The Company enters into physical and financial instruments for the purpose of hedging commodity price risk. Gains or losses on
these derivatives are accounted for pursuant to Financial Accounting Standards Board Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by Statement No. 138. (See Note 18 for further discussion.) The Company has
established policies and procedures to manage these risks. A Risk Management Committee separate from the units that create these
risks monitors compliance with policies and procedures. In addition, the Audit Committee of the Company's Board of Directors has
oversight of the Risk Management Committee.
ACCOUNTING FOR DERIVATIVES
On January 1, 2001, Puget Energy adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by Statement No. 138. Statement No. 133 requires that all contracts considered to be derivative instruments be recorded on
the balance sheet at their fair value. Certain contracts that would otherwise be considered derivatives are exempt from this
Statement if they qualify for a normal purchase and normal sale exception. The Company enters into both physical and financial
contracts to manage its energy resource portfolio. The majority of these contracts qualify for the normal purchase and normal sale
exception. However, certain of these contracts are derivatives and pursuant to Statement No. 133 are reported at their fair value in the
balance sheet. Changes in their fair value are reported in earnings unless they meet specific hedge accounting criteria, in which
case changes in their fair market value are recorded in comprehensive income until the time when the transaction that they are
hedging is recorded as income. The Company designates derivative instruments as a qualifying cash flow hedge if the change in the
fair value of the derivative is highly effective at offsetting the changes in the fair value of an asset, liability or a forecasted
transaction. To the extent that a portion of a derivative designated as a hedge is ineffective, changes in the fair value of the
ineffective portion of that derivative are recognized currently in earnings. Finally, changes in the market value of derivative
transactions related to obtaining gas for the Company's retail gas business are deferred as regulatory assets or liabilities as a
result of the Company's Purchased Gas Adjustment mechanism and recorded in earnings as the transactions are executed.
OTHER
Debt premium, discount and expenses are amortized over the life of the related debt. The premiums and costs associated with
reacquired debt are deferred and amortized over the life of the related new issuance, in accordance with ratemaking treatment.
GOODWILL AND INTANGIBLES (PUGET ENERGY ONLY)
Goodwill and intangibles are amortized on a straight-line basis over the expected periods to be benefited, up to 30 years, for
all acquisitions prior to July 2001. For those acquisitions occurring subsequent to June 30, 2001, there is no amortization of
goodwill. The goodwill and intangibles are the result of InfrastruX acquiring companies during 2000 and 2001. Puget Energy assesses
the recoverability by determining whether the amortization of the goodwill and intangibles balance over its remaining life can be
recovered through discounted future operating cash flows of the acquired operation.
EARNINGS PER COMMON SHARE (PUGET ENERGY ONLY)
Basic earnings per common share have been computed based on weighted average common shares outstanding of 86,445,000,
85,411,000 and 84,613,000 for 2001, 2000 and 1999, respectively. Diluted earnings per common share have been computed based on
weighted average common shares outstanding of 86,703,000, 85,690,000 and 84,847,000 for 2001, 2000 and 1999 respectively, which
include the dilutive effect of securities related to employee stock-based compensation plans.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement No. 141 - "Business Combinations" (Statement No. 141).
Statement No. 141 establishes accounting and reporting standards for business combinations and requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of accounting. While this statement may result in
additional disclosures for material acquisitions, it will not impact the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement No. 142 - "Goodwill and Other Intangible Assets"
(Statement No. 142). Statement No. 142 establishes accounting and reporting standards for goodwill and other intangible assets for
fiscal years beginning after December 15, 2001 recognized in the Company's financial statements after this date. Certain provisions
of Statement No. 142 will be applied to goodwill and other intangible assets acquired after June 30, 2001. Upon adoption of Statement
No. 142, the Company will discontinue amortizing goodwill and, instead, perform impairment tests to determine if goodwill should be
written down. The Company does not expect any impairment at this time.
In August 2001, the Financial Accounting Standards Board issued Statement No. 143 - "Accounting for Asset Retirement
Obligations" (Statement No. 143). Statement No. 143 requires companies to record the fair value of a liability for an asset
retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the company will
capitalize the cost as part of the asset's carrying amount and expense the retirement obligation over the asset's useful life. The
adoption of this statement is for fiscal years beginning after June 15, 2002, although earlier adoption is encouraged. The Company
is in the process of determining the impacts of this statement.
In October 2001, the Financial Accounting Standards Board issued Statement No. 144 - "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement No. 144). Statement No. 144 supersedes the Financial Accounting Standards Board's
Statement No. 121 - "Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to Be Disposed Of" and APB 30 - "Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Trasactions". Statement No.
144 establishes a single accounting method for valuation of long-lived assets to be disposed of by sale. Statement No. 144 is effective
for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have an impact on the Company's
financial position or results of operations.
NOTE 2.
Utility and Non-Utility Plant
Utility plant at December 31, 2001 and 2000 included the following:
(Dollars in Thousands) 2001 2000
December 31
- ---------------------------------------------------------------------- ----------------------- -----------------------
Electric, gas and common utility plant classified by Prescribed accounts at original cost:
Distribution plant $ 3,736,590 $ 3,177,277
Production plant 1,117,099 1,097,953
Transmission plant 361,662 694,053
General plant 376,119 375,457
Construction work in progress 123,307 164,221
Plant acquisition adjustment 76,623 76,623
Intangible plant (including capitalized software) 255,619 243,904
Underground storage 21,872 22,570
Plant held for future use 8,331 8,225
Other 4,807 4,807
Less accumulated provision for depreciation 2,194,048 2,026,681
- ---------------------------------------------------------------------- ----------------------- -----------------------
Net utility plant $ 3,887,981 $ 3,838,409
- ---------------------------------------------------------------------- ----------------------- -----------------------
On March 6, 2000, the Washington Commission authorized PSE to sell its 7% ownership interest in the coal-fired Centralia
Electric Generating plant located in southwest Washington State. On May 4, 2000, the plant was sold to TECWA Power, Inc. Of the
resulting pre-tax gain, $21 million was allocated to customers and $2.5 million to the Company in accordance with the order.
As a result of PSE's review of its transmission system and by applying FERC order 888, PSE determined that all but one of its
115 KV and below transmission facilities should be reclassified as distribution facilities. These facilities serve local loads and
rarely, if ever, serve to transfer power to other markets. In April 2001, the Washington Commission issued Docket No. UE-010010
allowing PSE to reclassify those transmission facilities. As a result, PSE reclassified assets with a book value of approximately
$346 million from transmission plant to distribution plant.
Non-utility plant at December 31, 2001 and 2000 included the following:
(Dollars in Thousands) 2001 2000
December 31
- ---------------------------------------------------------------------- ----------------------- -----------------------
Non-utility plant $58,832 $19,064
Intangible plant 1,047 1,063
Less accumulated depreciation and amortization 10,971 2,202
- ---------------------------------------------------------------------- ----------------------- -----------------------
Net non-utility plant $48,908 $17,925
- ---------------------------------------------------------------------- ----------------------- -----------------------
NOTE 3.
Capital Stock
The Company Puget Energy
---------------------------------------------- ---------------------
Preferred Stock Common Stock
---------------------------------------------- ---------------------
Not Subject to Subject to
Mandatory Redemption Mandatory
Redemption Par Value
$25 Par Value $100 Par Value $0.01
- --------------------------------------------------- ----------------------- ------------------- ------------------------
Shares outstanding January 1, 1999 3,803,006 731,619 84,560,561
- --------------------------------------------------- ----------------------- ------------------- ------------------------
Issued to shareholders under the Stock Purchase
and Dividend Reinvestment Plan:
1999 -- -- 361,944
2000 -- -- 981,549
2001 -- -- 1,119,568
- --------------------------------------------------- ----------------------- ------------------- ------------------------
Acquired for sinking fund:
1999 -- (75,000) --
2000 -- (75,000) --
2001 -- (75,000) --
- --------------------------------------------------- ----------------------- ------------------- ------------------------
Called for redemption or reacquired and
canceled:
1999 (1,403,006) -- --
2000 -- -- --
2001 -- -- --
- --------------------------------------------------- ----------------------- ------------------- ------------------------
Fractional share redemptions in connection with
merger exchange:
1999 -- -- (100)
2000 -- -- (163)
2001 -- -- (149)
- --------------------------------------------------- ---------------------- -------------------- ------------------------
Shares outstanding December 31, 2001 2,400,000 506,619 87,023,210
- --------------------------------------------------- ---------------------- -------------------- ------------------------
See "Consolidated Statements of Capitalization" for details on specific series.
On October 23, 2000, the Board of Directors declared a dividend of one preferred share purchase right (a Right) for each
outstanding common share of Puget Energy. The dividend was paid on December 29, 2000 to shareholders of record on that date. The
Rights will become exercisable only if a person or group acquires 10% or more of Puget Energy's outstanding common stock or
announces a tender offer which, if consummated, would result in ownership by a person or group of 10% or more of the
outstanding common stock. Each right will entitle the holder to purchase from Puget Energy one one-hundredth of a share of preferred
stock with economic terms similar to that of one share of Puget Energy's common stock at a purchase price of $65, subject to
adjustments. The Rights expire on December 21, 2010, unless earlier redeemed or exchanged by Puget Energy.
The weighted average dividend rate for the Adjustable Rate Cumulative Preferred Stock (ARPS), Series B ($25 par value) was
4.23% for 1999. The Company redeemed 203,006 shares of the remaining ARPS Series B on February 2, 1999 at $25 par plus accrued
dividends through February 2, 1999. The Company redeemed 1,200,000 shares of the remaining 8.50% Series Preferred at par plus
accrued dividends on September 1, 1999. The 7.45% Series Preferred may be redeemed at par on or after November 1, 2003.
NOTE 4.
Preferred Stock Subject to Mandatory Redemption
The Company is required to deposit funds annually in a sinking fund sufficient to redeem the following number of shares of each
series of preferred stock at $100 per share plus accrued dividends: 4.70% Series and 4.84% Series, 3,000 shares each and 7.75%
Series, 37,500 shares. All previous sinking fund requirements have been satisfied. At December 31, 2001, there were 43,689 shares of
the 4.70% Series and 27,192 shares of the 4.84% Series acquired by the Company and available for future sinking fund requirements.
Upon involuntary liquidation, all preferred shares are entitled to their par value plus accrued dividends.
The preferred stock subject to mandatory redemption may also be redeemed by the Company at the following redemption prices per
share plus accrued dividends: 4.70% Series, $101 and 4.84% Series, $102. The 7.75% Series may be redeemed by the Company, subject to
certain restrictions, at $103.10 per share plus accrued dividends through February 15, 2002, and at per share amounts which decline
annually to a price of $100 after February 15, 2007.
NOTE 5.
Company-Obligated, Mandatorily Redeemable Preferred Securities
In 1997 and 2001, the Company formed Puget Sound Energy Capital Trust I and Puget Sound Energy Capital Trust II, respectively,
for the sole purpose of issuing and selling common and preferred securities (Trust Securities). The proceeds from the sale of Trust
Securities were used to purchase Junior Subordinated Debentures (Debentures) from the Company. The Debentures are the sole assets of
the Trusts and the Company owns all common securities of the Trusts.
The Debentures of Trust I and Trust II have an interest rate of 8.231% and 8.40%, respectively, and a stated maturity date of
June 1, 2027 and June 30, 2041, respectively. The Trust Securities are subject to mandatory redemption at par on the stated maturity
date of the Debentures. The Trust Securities in the Capital Trust I may be redeemed earlier, under certain conditions, at the option
of the Company. The Capital Trust II Securities may be redeemed at any time on or after June 30, 2006 at par, under certain
conditions, at the option of the Company. Dividends relating to preferred securities are included in interest expense.
NOTE 6.
Additional Paid-in Capital
The changes in Additional Paid-in Capital are as follows:
Puget Energy (Dollars in Thousands) 2001 2000 1999 - -------------------------------------------------------------- ------------------ ----------------- ----------------- Balance at beginning of year $ 470,179 $ 454,982 $ 450,724 Excess of proceeds over stated values of common stock issued 25,551 13,295 4,198 Change in par value of common stock 858,179 -- -- Retained earnings adjustment for preferred redemption -- 1,181 150 Issue costs and other expenses (463) (309) (90) Issuance of preferred and common stock of subsidiary 5,500 1,030 -- - -------------------------------------------------------------- ------------------ ----------------- ----------------- Balance at end of year $ 1,358,946 $ 470,179 $ 454,982 - -------------------------------------------------------------- ------------------ ----------------- ----------------- Puget Sound Energy (Dollars in Thousands) 2001 2000 1999 - -------------------------------------------------------------- ------------------ ----------------- ----------------- Balance at beginning of year $ 470,179 $ 454,982 $ 450,724 Excess of proceeds over stated values of common stock issued 13,295 4,198 Retained earnings adjustment for preferred redemption -- 1,181 150 Issue costs and other expenses (2) (309) (90) Issuance of preferred stock of subsidiary -- 1,030 -- Return of capital to Puget Energy (87,585) -- -- - -------------------------------------------------------------- ----------------- ------------------ ----------------- Balance at end of year $ 382,592 $ 470,179 $ 454,982 - -------------------------------------------------------------- ----------------- ------------------ -----------------
On January 1, 2001 PSE reorganized into a holding company structure. As a result, PSE
transferred its ownership in InfrastruX through a capital dividend. Puget Energy was provided a return of capital in the amount of $86.0
million. In addition, PSE transferred as a return of capital, $0.6 million for prepaid SEC fees and plus $1.0 million of preferred stock
issued by InfrastruX to other parties. InfrastruX’s revenue was $45.0 million, net loss was $0.5 million and total
assets were $106.5 million for the year ended December 31, 2000.
NOTE 7.
Earnings Reinvested in the Business
The payment of dividends on
common stock is restricted by provisions of certain covenants applicable to
preferred stock and long-term debt contained in the Company’s Articles of
Incorporation and Mortgage Indentures. Under the most restrictive covenants of
PSE, earnings reinvested in the business unrestricted as to payment of cash
dividends were approximately $191 million at December 31, 2001. If PSE is not
granted interim rate relief from the Washington Commission, PSE’s ability
to pay dividends to Puget Energy and, therefore, Puget Energy’s ability to
pay dividends on its common stock, would be adversely impacted.
NOTE 8.
Long-Term Debt
First Mortgage Bonds and Senior Notes
At December 31 (dollars in thousands)
Series Due 2001 2000 Series Due 2001 2000
8.51% 2001 $ -- $7,000 7.04% 2007 $5,000 $5,000
8.52% 2001 -- 3,000 8.40% 2007 10,000 10,000
8.54% 2001 -- 8,000 6.51% 2008 1,000 1,000
8.55% 2001 -- 1,000 6.53% 2008 3,500 3,500
7.07% 2002 27,000 27,000 7.61% 2008 25,000 25,000
7.15% 2002 5,000 5,000 6.46% 2009 150,000 150,000
7.53% 2002 10,000 10,000 6.61% 2009 3,000 3,000
7.625% 2002 25,000 25,000 6.62% 2009 5,000 5,000
7.85% 2002 30,000 30,000 7.12% 2010 7,000 7,000
7.91% 2002 20,000 20,000 7.96% 2010 225,000 225,000
6.20% 2003 3,000 3,000 7.69% 2011 260,000 260,000
6.23% 2003 1,500 1,500 8.20% 2012 30,000 30,000
6.24% 2003 1,500 1,500 8.59% 2012 5,000 5,000
6.30% 2003 20,000 20,000 6.83% 2013 3,000 3,000
6.31% 2003 5,000 5,000 6.90% 2013 10,000 10,000
6.40% 2003 11,000 11,000 7.35% 2015 10,000 10,000
7.02% 2003 30,000 30,000 7.36% 2015 2,000 2,000
6.07% 2004 10,000 10,000 6.74% 2018 200,000 200,000
6.10% 2004 8,500 8,500 9.57% 2020 25,000 25,000
7.70% 2004 50,000 50,000 8.25% 2022 25,000 25,000
7.80% 2004 30,000 30,000 8.39% 2022 7,000 7,000
6.92% 2005 11,000 11,000 8.40% 2022 3,000 3,000
6.93% 2005 20,000 20,000 7.19% 2023 3,000 3,000
6.58% 2006 10,000 10,000 7.35% 2024 55,000 55,000
8.06% 2006 46,000 46,000 7.15% 2025 15,000 15,000
8.14% 2006 25,000 25,000 7.20% 2025 2,000 2,000
7.02% 2007 20,000 20,000 7.02% 2027 300,000 300,000
7.75% 2007 100,000 100,000 7.00% 2029 100,000 100,000
------------- --------------
Total $2,009,000 $2,028,000
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. 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.
In October 2000, 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,
Subordinated Debentures or Trust Preferred Securities. On November 9, 2000, the Company issued $260 million principal amount of 7.69%
Senior Medium-Term Notes, Series C. The Notes are due February 1, 2011. On May 24, 2001, the Company issued $200 million principal
amount of 8.40% Trust Preferred Securities due June 30, 2041. On January 16, 2002, the Company issued $40 million principal amount
of 6.25% Senior Medium-Term Notes, Series C, due January 16, 2004, which completed the shelf registration.
In February 2002, 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 of any combination of common stock of Puget Energy, principal amount of
Senior Notes secured by a pledge of First Mortgage Bonds, Unsecured Debentures or Trust Preferred Securities.
Substantially all utility properties owned by the Company are subject to the lien of the Company's electric and gas mortgage
indentures. To issue additional first mortgage bonds under these indentures, PSE's earnings available for interest must be at least
twice the annual interest charges on outstanding first mortgage bonds. At December 31, 2001, the earnings available for interest were
2.39 times the annual interest charges.
POLLUTION CONTROL BONDS
The Company has outstanding three series of Pollution Control Bonds. Amounts outstanding were borrowed from the City of Forsyth,
Montana (the City). The City obtained the funds from the sale of Customized Pollution Control Refunding Bonds issued to finance
pollution control facilities at Colstrip Units 3 and 4.
Each series of bonds is collateralized by a pledge of PSE's First Mortgage Bonds, the terms of which match those of the Pollution
Control Bonds. No payment is due with respect to the related series of First Mortgage Bonds so long as payment is made on the
Pollution Control Bonds.
(At December 31; Dollars in Thousands)
Series Due 2001 2000
------------------------------- ------------------- -------------------------- -----------------------
1993 Series - 5.875% 2020 $23,460 $23,460
1991 Series - 7.05% 2021 27,500 27,500
1991 Series - 7.25% 2021 23,400 23,400
1992 Series - 6.80% 2022 87,500 87,500
------------------------------- ------------------- -------------------------- -----------------------
Total $161,860 $161,860
------------------------------- ------------------- -------------------------- -----------------------
LONG TERM REVOLVING CREDIT FACILITY (PUGET ENERGY ONLY)
In June 2001, InfrastruX and its subsidiaries signed credit agreements with several banks for up to $170.5 million which
expire in 2004. Under the InfrastruX credit agreement, Puget Energy is the guarantor of $150 million of the line of credit.
InfrastruX has borrowed $81.9 million at a weighted average interest rate of 3.37%, leaving a balance of $88.6 million available under the lines
of credit at December 31, 2001.
LONG–TERM DEBT MATURITIES
The principal amounts of long-term debt maturities for the next five years and thereafter are
as follows:
Puget Energy
(Dollars in Thousands) 2002 2003 2004 2005 2006 Thereafter
Maturities of:
Long-term debt $ 119,523 $72,000 $ 171,739 $ 31,000 $ 81,000 $1,771,360
Puget Sound Energy
(Dollars in Thousands) 2002 2003 2004 2005 2006 Thereafter
Maturities of:
Long-term debt $ 117,000 $72,000 $ 98,500 $ 31,000 $ 81,000 $1,771,360
NOTE 9
Short-Term Debt and Other Financing Arrangements
At December 31, 2001, PSE had short-term borrowing arrangements which included a $375 million line of credit with thirteen
banks which expires on February 13, 2003. The agreement provides PSE with the ability to borrow at different interest rate options
and includes variable fee levels. The options are: (1) the higher of the prime rate or the Federal Funds rate plus .50% or (2) the
Eurodollar rate plus .25%. The current availability fee is .08% per annum on the unused loan commitment.
In addition, PSE has agreements with several banks to borrow on an uncommitted, as available basis at money-market rates
quoted by the banks. There are no costs, other than interest, for these arrangements. PSE also uses commercial paper to fund its
short-term borrowing requirements.
(Dollars in Thousands)
- ------------------------------------------------------------ ------------------ ----------------- ------------------
At December 31 2001 2000 1999
Short-term borrowings outstanding:
Commercial paper notes $ 123,168 $ 204,019 $ 105,712
Bank line of credit borrowings 215,000 -- --
Uncommitted bank borrowings -- 171,750 499,000
Notes Payable -- 170 --
Puget Energy bank line of credit borrowings 10,409 2,377 --
Weighted average interest rate 2.72% 7.33% 6.59%
Puget Energy revolving credit facility(1) 170,500 12,000 --
Credit availability(2) 375,000 375,000 375,000
1 The revolving credit facility requires InfrastruX
and its subsidiaries to maintain certain financial covenants, including
requirements to maintain certain levels of net worth and debt coverage. The
agreement also places certain restrictions on expenditures, other indebtedness
and executive compensation.
2 Provides liquidity support for PSE’s outstanding commercial paper and borrowing from credit
line banks in the amount of $338.2 million, $204.0 million and $105.7 million
for 2001, 2000 and 1999, respectively, effectively reducing the available
borrowing capacity under these credit lines to $36.8 million, $171.0 million
and $269.3 million, respectively.
The Company has, on occasion, entered into interest rate swap agreements to reduce the impact of changes in interest rates on
portions of its floating-rate debt. There were no such agreements outstanding at December 31, 2001.
NOTE 10.
Estimated Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December
31, 2001 and 2000:
2001 2001 2000 2000
Carrying Fair Carrying Fair
(Dollars in Millions) Amount Value Amount Value
------------------------------------------- ---------------- ------------ -------------- ---------------
Financial assets:
Cash $ 92.3 $ 92.3 $ 36.4 $ 36.4
Equity securities(1) 12.8 12.8 7.5 7.5
Notes receivable 40.0 40.0 86.0 86.0
Energy derivatives 6.6 6.6 -- --
Financial liabilities:
Short-term debt 348.6 348.6 378.3 378.3
Preferred stock subject to
mandatory redemption 50.7 49.3 58.2 58.5
Corporation obligated, mandatorily
redeemable preferred securities of
subsidiary trust holding solely
junior subordinated debentures of
the corporation 300.0 301.8 100.0 102.4
Long-term debt(2) 2,246.7 2,131.2 2,189.8 2,183.0
Energy derivatives 35.2 35.2 -- --
1 The 2001 carrying amount includes an adjustment of $4.5 million to report the
available-for-sale securities at market value. This amount (or unrealized gain)
has been included as a component of other comprehensive income net of deferred
taxes of $1.6 million.
2 PSE’s carrying and fair value of long-term debt
for 2001 was $2,170.9 million and $2,055.4 million, respectively.
The fair value of outstanding bonds including current maturities is estimated based
on quoted market prices.
The preferred stock subject to mandatory redemption and corporation obligated, mandatorily
redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the
corporation is estimated based on dealer quotes.
The carrying value of short-term debt and notes receivable are considered to be a
reasonable estimate of fair value. The carrying amount of cash, which includes temporary investments with original maturities of three
months or less, is also considered to be a reasonable estimate of fair value.
Derivative instruments have been used by the Company on a limited basis and are recorded at
fair value. The Company has a policy that financial derivatives are to be used only to mitigate business risk and not for speculative
purposes.
NOTE 11.
Supplementary Income Statement Information
Puget Energy PSE Puget Energy and PSE
(Dollars in Thousands) 2001 2001 2000 1999
- --------------------------------------------- ---------------- ----------------- -------------- -------------
Taxes other than federal:
Real estate and personal property $ 41,858 $ 41,588 $ 47,357 $ 48,036
State business 85,335 84,735 83,485 70,047
Municipal and occupational 71,819 71,819 65,155 52,739
Other 35,263 30,316 30,905 19,445
- --------------------------------------------- ---------------- ----------------- -------------- -------------
Total taxes other than federal $ 234,275 $ 228,458 $ 226,902 $ 190,267
- --------------------------------------------- ---------------- ----------------- -------------- -------------
Charged to:
Operating expense $ 214,414 $ 208,597 $ 203,230 $ 180,141
Other accounts, including
construction work in progress 19,861 19,861 23,672 10,126
- --------------------------------------------- ---------------- ----------------- -------------- -------------
Total taxes other than federal $ 234,275 $ 228,458 $ 226,902 $ 190,267
- --------------------------------------------- ---------------- ----------------- -------------- -------------
Advertising, research and development expenses and amortization of intangibles are not significant. Puget Energy pays a royalty
for the exclusive right of a product produced by Dow Chemical.
NOTE 12.
Leases
The Company treats all leases for PSE as operating leases for ratemaking purposes as
required by the Washington Commission. Certain leases contain purchase options, renewal and escalation provisions.
Operating and capital lease payments net of sublease receipts were:
(Dollars in thousands) Puget Energy PSE
At December 31 Operating Capital Operating
2001 $25,373 $1,966 $20,135
2000 18,239 653 18,239
1999 16,859 -- 16,859
Payments received, for the sublease of properties were approximately $2.5 million, $2.4 million, and $2.3 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
Future minimum lease payments for noncancelable leases net of sublease receipts are:
(Dollars in thousands) Puget Energy PSE
At December 31 Operating Capital Operating
2002 $17,529 $1,198 $13,026
2003 14,861 924 11,375
2004 11,496 497 8,793
2005 5,946 251 4,186
2006 4,667 354 3,999
Thereafter 5,210 -- 5,121
----------------------------------- ------------------ -------------- ---------------------
Total minimum lease payments $59,709 $3,224 $46,500
----------------------------------- ------------------ -------------- ---------------------
Future minimum sublease receipts for noncancelable subleases are $2.0 million for 2002,
and $1.2 million for 2003.
NOTE 13.
Federal Income Taxes
The details of federal income taxes (FIT) are as follows:
Puget Energy PSE Puget Energy and PSE
(Dollars in Thousands) 2001 2001 2000 1999
- ---------------------------------------------------------- --------------- ---------------- -------------- --------------
Charged to operating expense:
Current $ 58,749 $ 58,331 $ 128,138 $ 93,354
Deferred - net 19,945 18,040 1,557 15,373
Deferred investment tax credits (688) (688) (704) (725)
- ---------------------------------------------------- --------------------- ---------------- -------------- --------------
Total FIT charged to operations 78,006 75,683 128,991 108,002
- ---------------------------------------------------- --------------------- ---------------- -------------- --------------
Charged to miscellaneous income:
Current 6,272 6,272 7,843 (503)
Deferred - net (2,259) (2,259) (10,150) 4,574
- ---------------------------------------------------- -------------------- ----------------- ---------------- ------------
Total FIT charged to miscellaneous income 4,013 4,013 (2,307) 4,071
- ---------------------------------------------------- -------------------- ----------------- ---------------- ------------
- ---------------------------------------------------- ---------------------- ---------------- ------------- -------------
Cumulative effect of accounting change (7,942) (7,942) -- --
- ---------------------------------------------------- ---------------------- ---------------- ------------- -------------
- ---------------------------------------------------- -------------------- ----------------- -------------- --------------
Total FIT $ 74,077 $ 71,754 $ 126,684 $ 112,073
- ---------------------------------------------------- -------------------- ----------------- -------------- --------------
The following is a reconciliation of the difference between the amount of FIT computed by multiplying pre-tax book income by the statutory tax rate and the amount of FIT in the Consolidated Statements of Income for the Company:
Puget Energy PSE Puget Energy and PSE
(Dollars in Thousands) 2001 2001 2000 1999
- ----------------------------------------------- ----------------- ---------------- ------------------ ------------------
FIT at the statutory rate $ 63,321 $ 61,648 $ 112,180 $ 104,174
- ----------------------------------------------- ----------------- ---------------- ------------------ ------------------
Increase (decrease):
Depreciation expense deducted in the
financial statements in excess of tax
depreciation, net of depreciation
treated as a temporary difference 11,726 11,726 10,807 8,678
AFUDC included in income in the financial
statements but excluded from taxable income (2,126) (2,126) (3,274) (4,345)
Accelerated benefit on early retirement
of depreciable assets (319) (319) (834) (812)
Investment tax credit amortization (689) (689) (704) (725)
Energy conservation expenditures - net 6,859 6,859 10,634 13,434
Other - net (4,695) (5,345) (2,125) (8,331)
- ----------------------------------------------- ----------------- ---------------- ------------------ ------------------
Total FIT $ 74,077 $ 71,754 $126,684 $ 112,073
- ----------------------------------------------- ----------------- ---------------- ------------------ ------------------
Effective tax rate 40.9% 40.7% 39.5% 37.7%
- ----------------------------------------------- ----------------- ---------------- ------------------ ------------------
The following are the principal components of FIT as reported:
Puget Energy PSE Puget Energy and PSE
(Dollars in Thousands) 2001 2001 2000 1999
- ------------------------------------------------------- ---------------- -------------- --------------- ----------------
Current FIT $ 65,021 $ 64,603 $ 135,981 $ 92,851
- ------------------------------------------------------- ---------------- -------------- --------------- ----------------
Deferred FIT:
Conservation tax settlement 963 963 1,776 2,927
Deferred FAS-133 (4,028) (4,028) -- --
Cabot preferred stock sale -- -- (10,635) --
Deferred taxes related to insurance reserves (1,225) (1,225) (384) (1,225)
Reversal of Statement No. 90 present
value adjustments -- -- -- 92
Residential Purchase and Sale Agreement - net 3,390 3,390 2,226 --
Normalized tax benefits of the
accelerated cost recovery system 11,423 11,423 10,931 14,452
Energy conservation program (1,337) (1,337) (1,666) (983)
Environmental remediation 1,326 1,326 721 947
WNP 3 tax settlement (1,126) (1,126) (1,126) (826)
Merger costs -- -- -- 409
Demand charges (98) (98) (79) 14
Deferred revenue (5,904) (5,904) -- --
Allowance for doubtful accounts -- -- (13,821) --
Other 6,360 4,455 3,464 4,140
- ------------------------------------------------------- ---------------- -------------- --------------- ----------------
Total deferred FIT 9,744 7,839 (8,593) 19,947
- ------------------------------------------------------- ---------------- -------------- ---------------- ---------------
Deferred investment tax credits -
net of amortization (688) (688) (704) (725)
- ------------------------------------------------------- ---------------- -------------- --------------- ----------------
Total FIT $ 74,077 $ 71,754 $ 126,684 $ 112,073
- ------------------------------------------------------- ---------------- -------------- --------------- ----------------
The Company's deferred tax liability at December 31, 2001 and 2000 is comprised of amounts related to the following types of temporary differences:
(Dollars in Thousands) Puget Energy PSE Puget Energy
and PSE
2001 2001 2000
--------------------------------------------- -------------------------- ------------------ -------------------
Utility plant $ 570,982 $ 570,982 $571,772
Energy conservation charges 23,782 23,782 31,212
Contributions in aid of construction (36,044) (36,044) (37,275)
Bonneville Exchange Power 17,897 17,897 20,258
Cabot gas contract purchase 4,477 4,477 4,533
Deferred revenue (5,904) (5,904) --
Other 30,125 25,811 17,685
--------------------------------------------- -------------------------- ------------------ -------------------
Total $ 605,315 $ 601,001 $ 608,185
--------------------------------------------- -------------------------- ------------------ -------------------
Puget Energy's totals of $605.3 million and $608.2 million for 2001 and 2000 consist of deferred tax liabilities of $713.8
million and $706.8 million net of deferred tax assets of $108.5 million and $98.6 million, respectively.
PSE's totals of $601.0 million and $608.2 million for 2001 and 2000 consist of deferred tax liabilities of $707.4 million and
$706.8 million net of deferred tax assets of $106.4 million and $98.6 million, respectively.
Deferred tax amounts shown above result from temporary differences for tax and financial statement purposes. Deferred tax
provisions are not recorded in the income statement for certain temporary differences between tax and financial statement purposes
because they are not allowed for ratemaking purposes.
PSE calculates its deferred tax assets and liabilities under Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (Statement No. 109). Statement No. 109 requires recording deferred tax balances, at the currently enacted tax rate,
for all temporary differences between the book and tax bases of assets and liabilities, including temporary differences for which no
deferred taxes had been previously provided because of use of flow-through tax accounting for ratemaking purposes. Because of prior
and expected future ratemaking treatment for temporary differences for which flow-through tax accounting has been utilized, a
regulatory asset for income taxes recoverable through future rates related to those differences has also been established. At
December 31, 2001, the balance of this asset is $193.0 million.
NOTE 14.
Retirement Benefits
The Company has a defined benefit pension plan covering substantially all of its utility employees. Benefits are a function of
both age and salary. Additionally, Puget Energy maintains a non-qualified supplemental retirement plan for officers and certain
director-level employees.
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired
employees. These benefits are provided principally through an insurance company whose premiums are based on the benefits paid during
the year.
(Dollars in Thousands) Pension Benefits Other Benefits
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $366,482 $ 349,160 $ 27,568 $ 26,003
Service cost 9,862 9,005 243 224
Interest cost 26,734 25,500 2,022 1,965
Amendments(1) 3,984 77 -- --
Actuarial loss 15,417 4,058 1,101 1,187
Benefits paid (22,018) (21,318) (1,819) (1,811)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $400,461 $ 366,482 $ 29,115 $ 27,568
- ---------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 496,468 $ 524,827 $ 15,661 $ 14,738
Actual return on plan assets (32,025) (8,151) 595 910
Employer contribution 1,087 1,110 1,541 1,824
Benefits paid (22,018) (21,318) (1,819) (1,811)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 443,512 $ 496,468 $15,978 $ 15,661
- ---------------------------------------------------------------------------------------------------------------------
Funded status $ 43,051 $ 129,986 $ (13,137) $ (11,907)
Unrecognized actuarial gain (27,035) (128,268) (1,944) (3,506)
Unrecognized prior service cost 20,250 19,333 (361) (395)
Unrecognized net initial (asset)/obligation (3,873) (5,103) 6,894 7,521
- ----------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 32,393 $ 15,948 $ (8,548) $ (8,287)
- ----------------------------------------------------------------------------------------------------------------------
Amounts recognized on statement of
financial position consist of:
Prepaid benefit cost $ 54,335 $ 34,326 $ (8,548) $ (8,287)
Accrued benefit liability (37,002) (25,861) -- --
Intangible asset 9,912 7,483 -- --
Accumulated other comprehensive income 5,148 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 32,393 $ 15,948 $ (8,548) $ (8,287)
- ---------------------------------------------------------------------------------------------------------------------
1In 2001, the Company had $4.0 million in plan amendments due to the addition of new plans, changes in employment contracts and the addition of three new entrants to the plan.
In accounting for pension and other benefits costs under the plans, the following weighted average actuarial assumptions were used:
Pension Benefits Other Benefits
2001 2000 1999 2001 2000 1999
- ---------------------------------------- ----------- ----------- -------------- - ---------- ------------ ------------
Discount rate 7.25% 7.5% 7.5% 7.25% 7.5% 7.5%
Return on plan assets 9.50% 9.75% 9.75% 6-8.25% 6-8.5% 6-8.5%
Rate of compensation increase 5.0% 5.0% 5.0% -- -- --
Medical trend rate -- -- -- 6.5% 7.0% 7.0%
- ---------------------------------------- ----------- ----------- -------------- - ---------- ------------ ------------
Pension Benefits Other Benefits
(Dollars in Thousands) 2001 2000 1999 2001 2000 1999
- ---------------------------------------- ----------- ------------ ------------- - --------- ------------- ------------
Components of net periodic benefit cost:
Service cost $ 9,862 $9,005 $9,259 $ 243 $224 $245
Interest cost 26,734 25,500 24,180 2,022 1,965 1,868
Expected return on plan assets (46,222) (42,280) (37,310) (947) (892) (857)
Amortization of prior service cost 2,960 2,884 3,330 (34) (34) (34)
Recognized net actuarial gain (7,570) (6,851) (3,117) (109) (195) (145)
Amortization of transition
(asset)/obligation (1,230) (1,230) (1,230) 627 627 627
Special recognition of prior service costs 108 77 462 -- -- --
- --------------------------------------- -------------- ----------- ------------- -- ---------- ---------- -----------
Net pension benefit cost (15,358) (12,895) (4,426) 1,802 1,695 1,704
Regulatory adjustment -- -- 932 -- -- --
- --------------------------------------- -------------- ------------- ----------- -- ---------- ---------- -----------
Net periodic benefit cost $ (15,358) $( 12,895) $ (3,494) $ 1,802 $ 1,695 $ 1,704
- --------------------------------------- -------------- ------------- ----------- -- ---------- ---------- -----------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets were $42.6 million, $37.0 million, and $0, respectively, as of December 31,
2001.
The assumed medical inflation rate is 6.5% in 2001 decreasing to 6.0% in 2003 and thereafter. A 1% change in the assumed
medical inflation rate would have the following effects:
2001 2000
1% 1% 1% 1%
(Dollars in Thousands) increase decrease increase decrease
- ----------------------------------------------------------------------------------------------------------------------
Effect on service and interest cost components $ 625 $ (558) $ 661 $ (583)
Effect on post retirement benefit obligation 47 (42) 49 (42)
During 2002, PSE will be transitioning 481 service jobs that had previously been held by PSE employees to outside service
providers. Under Statement of Financial Accounting Standards No. 88 "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," the Company will be recognizing a net curtailment gain of approximately
$0.7 million.
NOTE 15.
Employee Investment Plans and Employee Stock Purchase Plan
The Company has qualified Employee Investment Plans under which employee salary deferrals and after-tax contributions are used to
purchase several different investment fund options.
Puget Energy's contributions to the Employee Investment Plans were $8.0 million, $7.2 million and $7.1 million for the years
2001, 2000 and 1999, respectively.
PSE's contributions to the Employee Investment Plan were $6.8 million, $7.2 million, and $7.1 million for the years 2001, 2000
and 1999, respectively. The shareholders have authorized the issuance of up to 2,000,000 shares of common stock under the PSE plan,
of which 959,142 were issued through December 31, 2001. The Employee Investment Plan eligibility requirements are set forth in the
plan documents.
The Company also has an Employee Stock Purchase Plan which was approved by shareholders on May 19, 1997, and commenced July 1,
1997, under which options are granted to eligible employees who elect to participate in the plan on January 1st and July 1st of each
year. Participants are allowed to exercise those options six months later to the extent of payroll deductions or cash payments
accumulated during that six-month period. The option price under the plan during 2001 was 85% of either the fair market value of the
common stock at the grant date or the fair market value at the exercise date, whichever is less. The Company's contributions to the
Plan were $168,645, $301,610 and $88,900 for 2001, 2000 and 1999, respectively.
On February 1, 1998, the Company granted 50 performance shares to 2,800 eligible employees in recognition of their efforts to
implement the Company's strategies. On February 1, 2000, those performance shares and dividend equivalents were converted to common
stock. Total cost of the performance share grant program was $4.1 million, which was recognized as an accounting expense over the
two-year vesting period.
NOTE 16.
Other Investments
In May 1994, the Company merged its oil and gas exploration and production subsidiary, Washington Energy Resources
Company, with a wholly-owned subsidiary of Cabot Oil and Gas Corporation (Cabot) in a tax-free exchange in which the Company
received common and preferred stock of Cabot. The investment in Cabot stock was classified as available-for-sale. In May 1999, PSE
sold the 2,133,000 shares of Cabot common stock and recorded an after-tax gain of $12.3 million. At the time of the common stock
sale, the fair value of the stock was $37.4 million and an unrealized gain of $12.3 million, net of tax, was included as a component
of other comprehensive income. The $12.3 million unrealized gain on the sale was reclassified out of accumulated other comprehensive
income at the time of the sale. In May 2000, the Company sold all of its 1,134,000 shares of 6% convertible redeemable preferred
stock in Cabot 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. As a result of these two transactions, the Company no longer holds any securities
of Cabot.
In March 1998, the Company entered into an agreement with Schlumberger North America (Schlumberger) (formerly known as CellNet
Data Services Inc.), under which the Company would lend Schlumberger up to $35 million in the form of multiple draws so that
Schlumberger could finance an Automated Meter Reading (AMR) network system to be deployed in the Company's service territory. In
September 1999, the Company announced it was expanding its AMR network system from 800,000 meters to 1,325,000 meters and as a result
increased the authorized loan amount to $72 million. As of December 31, 2000, the outstanding loan balance was $51.9 million. In August
2001, Schlumberger paid off its outstanding loan balance of $64.1 million.
NOTE 17.
Commitments and Contingencies
COMMITMENTS – ELECTRIC
For the twelve months ended December 31, 2001, approximately 14.8% of the Company's energy output was obtained at an average cost
of approximately 17.98 mills per kWh through long-term contracts with several of the Washington public utility districts (PUDs)
owning hydro-electric projects on the Columbia River.
The purchase of power from the Columbia River projects is generally on a "cost-of-service" basis under which the Company pays a
proportionate share of the annual cost of each project in direct proportion to the amount of power annually purchased by the Company
from such project. Such payments are not contingent upon the projects being operable. These projects are financed through
substantially level debt service payments, and their annual costs should not vary significantly over the term of the contracts unless
additional financing is required to meet the costs of major maintenance, repairs or replacements or license requirements. The
Company's share of the costs and the output of the projects is subject to reduction due to various withdrawal rights of the PUDs and
others over the lives of the contracts.
As of December 31, 2001, the Company was entitled to purchase portions of the power output of the PUDs' projects as set forth in
the following tabulation:
Bonds Company's Annual Amount
Outstanding Purchasable (Approximate)
------------------------------------------------
Contract (1) License (2) 12/31/01 (3) % of Megawatt Costs (4)
Project Exp. Date Exp. Date (Millions) Output Capacity (Millions)
- ------------------------- --------------- -------------- ----------------- ---------------- ----------------- --------------
Rock Island
Original units 2012 2029 $ 84.6 50.0 } 496 $39.0
Additional units 2012 2029 331.2 95.0 -- --
Rocky Reach 2011 2006 363.8 38.9 505 23.0
Wells 2018 2012 170.2 31.3 261 9.6
Priest Rapids 2005 2005 162.2 8.0 72 2.4
Wanapum 2009 2005 159.8 10.8 98 3.7
- ------------------------- --------------- -------------- ----------------- ---------------- ----------------- --------------
Total $1,271.8 1,432 $77.7
- ------------------------- --------------- -------------- ----------------- ---------------- ----------------- --------------
1
The Company, on December 28, 2001, signed a contract offer for new contracts for
the Priest Rapids and Wanapum Developments. Under terms of these contracts,
the Company will continue to obtain capacity and energy for the term of any new
license to be obtained by Grant County PUD for these Developments. The terms and conditions of these contracts are being finalized.
2
The Company is unable to predict whether the licenses under the Federal Power
Act will be renewed to the current licensees. The FERC has issued orders for the
Rocky Reach, Wells and Priest Rapids/Wanapum projects under Section 22 of the
Federal Power Act, which affirm Puget Energy’s contractual rights to
receive power under existing terms and conditions even if a new licensee is
granted a license prior to expiration of the contract term.
3
The contracts for purchases initially were generally coextensive with the term
of the PUD bonds associated with the project. Under the terms of some financings
and refinancings, however, long-term bonds were sold to finance certain assets
whose estimated useful lives extend beyond the expiration date of the power
sales contracts. Of the total outstanding bonds sold for each project, the
percentage of principal amount of bonds which mature beyond the contract
expiration date are: 40.5% at Rock Island; 52.0% at Rocky Reach; 88.3% at Priest Rapids; 61.6% at Wanapum; and 5.5% at Wells.
4
The components of 2001 costs associated with the interest portion of debt
service are: Rock Island, $25.2 million for all units; Rocky Reach, $7.7
million; Wells, $2.7 million; Priest Rapids, $0.7 million; and Wanapum, $0.9
million.
The Company's estimated payments for power purchases from the Columbia River projects are $87.0 million for 2002, $85.4
million for 2003, $88.1 million for 2004, $87.8 million for 2005, $83.0 million for 2006 and in the aggregate, $533.0 million
thereafter through 2018.
The Company also has numerous long-term firm purchased power contracts with other utilities in the region. The Company is
generally not obligated to make payments under these contracts unless power is delivered. The Company's estimated payments for firm
power purchases from other utilities, excluding the Columbia River projects, are $135.0 million for 2002, $124.0 million for 2003,
$77.0 million for 2004, $68.0 million for 2005, $69.0 million for 2006 and in the aggregate, $392.0 million thereafter through 2037.
These contracts have varying terms and may include escalation and termination provisions.
As required by the federal Public Utility Regulatory Policies Act (PURPA), PSE entered into long-term firm purchased power
contracts with non-utility generators. The Company purchases the net electrical output of four significant projects at fixed and
annually escalating prices, which were intended to approximate the Company's avoided cost of new generation projected at the time
these agreements were made. The Company's estimated payments under these three contracts are $209.0 million for 2002, $208.0 million
for 2003, $222.0 million for 2004, $225.0 million for 2005, $231.0 million for 2006 and in the aggregate, $1.3 billion thereafter
through 2012.
The following table summarizes The Company's obligations for future power purchases:
2007 &
There-
(In Millions) 2002 2003 2004 2005 2006 after Total
- ------------------------------- ----------- ------------- ------------ ------------ ------------ ----------- -----------
Columbia River Projects $ 87 $ 85 $ 88 $ 88 $ 83 $ 533 $ 964
Other utilities 135 124 77 68 69 392 865
Non-Utility Generators 209 208 222 225 231 1,259 2,354
- ------------------------------- ----------- ------------- ------------ ------------ ------------ ----------- -----------
Total $ 431 $ 417 $ 387 $ 381 $ 383 $ 2,184 $ 4,183
- ------------------------------- ----------- ------------- ------------ ------------ ------------ ----------- -----------
Total purchased power contracts provided the Company with approximately 11.9 million, 15.1 million and 16.1 million MWH of firm
energy at a cost of approximately $496.3 million, $506.5 million and $487.4 million for the years 2001, 2000 and 1999, respectively.
As part of its electric operations and in connection with the 1997 restructuring of the Tenaska Power Purchase Agreement, PSE
is obligated to deliver to Tenaska up to 48,000 MMBtu per day of natural gas for operation of Tenaska's cogeneration facility. This
obligation continues for the remaining term of the agreement, provided that no deliveries are required during the month of May. The
price paid by Tenaska for this gas is reflective of the daily price of gas at the United States/Canada border near Sumas, Washington.
The following table indicates the Company's percentage ownership and the extent of the Company's investment in jointly-owned
generating plants in service at December 31, 2001:
Company's Share
------------------------------------------------
Energy Company's Plant in Service Accumulated
Source (Fuel) Ownership Share (%) At Cost (Millions) Depreciation (Millions)
Project
- ------------------------- ---------------- ------------------------ --------------------- --------------------------
Colstrip 1 and 2 Coal 50% $ 195 $ 122
Colstrip 3 and 4 Coal 25% 459 217
Financing for a participant's ownership share in the projects is provided for by such participant. The Company's share of
related operating and maintenance expenses is included in corresponding accounts in the Consolidated Statements of Income.
On May 5, 2000, the Company sold its 7% interest in the 1,340-megawatt 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 was 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. The final
true-up of the gain was collected through PSE's conservation rider.
As part of its electric operations and in connection with the 1999 buy-out of the Cabot gas supply contract, PSE is obligated
to deliver to Encogen up to 21,800 MMBtu per day of natural gas for operation of the Encogen cogeneration facility. This obligation
continues for the remaining term of the original Cabot agreement. The Company entered into a financial arrangement to hedge a portion
of future gas supply costs associated with this obligation, 10,000 MMBtu per day for the remaining term of the agreement. The Company
has a maximum financial obligation under this hedge agreement of $8.1 million in 2002, $8.2 million in 2003, $8.5 million in 2004,
$8.7 million in 2005, $8.9 million in 2006 and $13.9 million thereafter. Depending on actual market prices, these costs will be
partially, or perhaps entirely, offset by floating price payments received under the hedge arrangement. Encogen has two gas supply
agreements that comprise 40% of the plant's requirements with remaining terms of 6.5 years. The obligations under these contracts are
$12.8 million in 2002, $13.5 million in 2003, $14.2 million in 2004, $14.9 million in 2005, $15.6 million in 2006 and $25.0 million
in the aggregate thereafter.
GAS SUPPLY
The Company has also entered into various firm supply, transportation and storage service contracts in order to assure adequate
availability of gas supply for its firm customers. Many of these contracts, which have remaining terms from less than one year to 22
years, provide that the Company must pay a fixed demand charge each month, regardless of actual usage. Certain of PSE's firm gas
supply agreements also obligate the Company to purchase a minimum annual quantity at market-based contract prices. Generally, if the
minimum volumes are not purchased and taken during the year, the Company is obligated to either: 1) pay a monthly or annual gas
inventory charge calculated as a percentage of the then-current contract commodity price times the minimum quantity not taken; or 2)
pay for gas not taken. Alternatively, under some of the contracts, the supplier may exercise a right to reduce its subsequent
obligation to provide firm gas to the Company. The Company incurred demand charges in 2001 for firm gas supply, firm transportation
service and firm storage and peaking service of $29.6 million, $50.0 million and $7.7 million, respectively.
The following tables summarize the Company’s obligations for future demand charges through the primary terms of its existing
contracts and the minimum annual take requirements under the gas supply agreements. The quantified obligations are based on current
contract prices and FERC authorized rates, which are subject to change.
Demand Charge Obligations
2007 &
There-
(In Millions) 2002 2003 2004 2005 2006 after Total
- -------------------------------------- ----------- ------------ ----------- ----------- ------------ ------------- --------------
Firm gas supply $ 28.7 $ 22.9 $ 12.2 $ 0.6 $ 0.6 $ 3.1 $ 68.1
Firm transportation service 52.1 52.1 46.0 15.8 15.8 86.0 267.8
Firm storage service 9.2 9.2 8.9 7.7 7.7 63.5 106.2
- -------------------------------------- ----------- ------------ ----------- ----------- ------------ ------------- --------------
Total $ 90.0 $ 84.2 $ 67.1 $ 24.1 $ 24.1 $ 152.6 $ 442.1
- -------------------------------------- ----------- ------------ ----------- ----------- ------------ ------------- --------------
Minimum Annual Take Obligations
2007 &
There-
(In thousands of therms) 2002 2003 2004 2005 2006 after Total
- -------------------------------------- ----------- ------------ ----------- ----------- ------------ ------------- --------------
Firm gas supply 753,515 449,427 219,898 680 -- -- 1,423,520
The Company believes that all demand charges will be recoverable in rates charged to its customers. Further, pursuant to
implementation of FERC Order No. 636, the Company has the right to resell or release to others any of its unutilized gas supply or
transportation and storage capacity.
The Company does not anticipate any difficulty in achieving the minimum annual take obligations shown, as such volumes
represent less than 74% of expected annual sales for 2002 and less than 43% of expected sales in subsequent years.
The Company's current firm gas supply contracts obligate the suppliers to provide, in the aggregate, annual volumes up to those
shown below:
Maximum Supply Available under Current Firm Supply Contracts
2007 &
There-
(In thousands of therms) 2002 2003 2004 2005 2006 after Total
- -------------------------------------- ----------- ------------ ----------- ----------- ------------ ------------- --------------
Firm gas supply 861,731 497,438 249,572 6,680 6,000 30,033 1,651,454
Washington Energy Gas Marketing Company (WEGM), a wholly-owned subsidiary, held firm transportation rights to transport natural
gas through various pipelines from Alberta, Canada to the northern border of Idaho, as well as certain gas storage rights in Alberta
and Washington state. During 2001 and 2000, WEGM assigned all of the rights and obligations with the transportation and storage
services to various third parties. WEGM’s reserve for future losses associated with the remaining contractual obligations in 2001,
2000 and 1999 was approximately $0.1 million, $1.7 million and $1.8 million, respectively.
SERVICE CONTRACT
On August 30, 2001, PSE and Alliance Data Systems Corp. announced a contract under which Alliance Data will provide data
processing and billing services for PSE. In providing services to PSE under the 10-year agreement, Alliance Data will use
ConsumerLinX software, PSE's customer-information software developed by its ConneXt subsidiary. Alliance Data acquired the assets of
ConneXt, including the exclusive use of the ConsumerLinX software for 5 years with an option for renewal. Alliance Data will offer ConsumerLinX as part of its
integrated, single-source customer relationship management solution for large-scale, regulated utility clients. The obligations under
the contract are $19.3 million in 2002, $19.9 million in 2003, $20.6 million in 2004, $21.2 million in 2005, $21.9 million in 2006
and $112.3 million in the aggregate thereafter.
SURETY BOND
The Company has a self-insurance surety bond in the amount of $6.6 million guaranteeing compliance with the Industrial
Insurance Act (workers' compensation) and nine self-insurer's pension bonds totaling $1.5 million.
CONTINGENCIES
The Company is subject to environmental regulation by federal, state and local authorities. The Company has been named a
Potentially Responsible Party by the Environmental Protection Agency (EPA) at several contaminated sites and manufactured gas plant
sites. PSE has implemented an ongoing program to test, replace and remediate certain underground storage tanks as required by federal
and state laws and this process is nearing completion. Remediation and testing of Company vehicle service facilities and storage
yards is also continuing.
During 1992, the Washington Commission issued orders regarding the treatment of costs incurred by the Company for certain sites
under its environmental remediation program. The orders authorize the Company to accumulate and defer prudently incurred cleanup
costs paid to third parties for recovery in rates established in future rate proceedings. The Company believes a significant portion
of its past and future environmental remediation costs are recoverable from either insurance companies, third parties or under the
Washington Commission's order.
The information presented here as it relates to estimates of future liability is as of
December 31, 2001.
ELECTRIC SITES
The Company has expended approximately $17.5 million related to the remediation activities covered by the Washington
Commission's order and has accrued approximately $1.5 million as a liability for future remediation costs for these and other
remediation activities. To date, the Company has recovered approximately $16.5 million from insurance carriers.
GAS SITES
Several former WNG or predecessor companies manufactured gas plant sites are currently undergoing investigation,
remediation activities or monitoring actions relating to environmental contamination. Legal and remediation activities incurred to
date total approximately $68.9 million and approximately $21.2 million has been accrued for future remediation costs for these and
other remediation sites. To date, the Company has recovered approximately $57.7 million from insurance carriers and other third
parties.
Based on all known facts and analyses, the Company believes it is not likely that the identified environmental liabilities will
result in a material adverse impact on the Company's financial position, operating results or cash flow trends.
LITIGATION
In October of 2001 the Public Counsel Section of the Washington State Attorney General's Office filed a complaint with the
Washington Commission regarding the Residential and Farm Energy Exchange credit under which residential
and small farm customers receive benefits of federal power. The Washington Commission approved an amended agreement between PSE and Bonneville
Power Administration (BPA) in June of 2001. Public Counsel contends that the Company's customers should receive the benefits of the
agreement that was in place prior to July 1, 2001, as well as the benefits of the amended agreement. The Company is receiving
payments from BPA for amounts under the amended agreement only so if Public Counsel's position were upheld, the Company's electric
revenues for the last six months of 2001 would be reduced by approximately $51.1 million. The Company believes the complaint is
without merit but is unable to predict the outcome of the proceeding. A decision in the proceeding is expected in 2002.
Other contingencies, arising out of the normal course of the Company's business, exist at December 31, 2001. The ultimate
resolution of these issues is not expected to have a material adverse impact on the financial condition, results of operations or
liquidity of the Company.
NOTE 18.
Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001, Puget Energy adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by Statement No. 138. Statement No. 133 requires that all contracts considered to be derivative instruments be recorded on
the balance sheet at their fair value. The Company enters into both physical and financial contracts to manage its energy resource
portfolio including forward physical and financial contracts, option contracts and swaps. The majority of these contracts qualify for
the normal purchase and normal sale exception.
On January 1, 2001, the Company recognized the cumulative effect of adopting Statement No. 133 by recording a liability and an
offsetting after-tax decrease to current earnings of approximately $14.7 million for the fair of value electric derivatives that did not
meet hedge criteria. The Company also recorded an asset and an offsetting increase to other comprehensive income of approximately
$286.9 million for the fair value of derivative instruments which did meet hedge criteria on the implementation date.
During the year ended December 31, 2001 the Company recorded an additional net increase to current earnings of approximately
$11.2 million pre-tax ($7.2 million after-tax) to record the change in market value of outstanding derivative instruments not meeting cash
flow hedge criteria. When the underlying contracts giving rise to the income statement losses are fulfilled over the next 12 months, the
liabilities (included in other property and investments and current liabilities on the balance sheets) established under Statement No. 133
will be reversed.
At October 15, 2001, the Company had recorded a deferred liability of approximately $26.9 million after-tax for financial gas
contracts to be used for electric production contracts that until October 15, 2001 were previously designated as qualifying
cash flow hedges. Changes in the market values of these contracts subsequent to their de-designation as hedges of $7.8 million ($5.1
million after-tax) have been recorded as a charge to earnings. However, the net changes in the market value of these contracts from their
inception until October 15, 2001 of $26.9 million will continue to be recorded as a reduction of other comprehensive income and will be
charged to earnings upon the settlement of the underlying transactions being hedged. The Company anticipates this amount will reverse
during 2002 when the Company will report a decrease to the deferred liability and an increase to other comprehensive income for this
reversal. These estimates are based upon the forward market prices for energy at December 31, 2001.
During 2001, the Financial Accounting Standards Board's Derivative Implementation Group for Statement No. 133 issued guidance
under Issue C16 - "Applying the Normal Purchases and Normal Sales Exception to Contracts that Combine a Forward Contract and a
Purchased Option Contract". Issue C16 indicates that fuel supply contracts that combine a forward contract and a purchased option
cannot qualify for the normal purchase and normal sales exception because of the optionality regarding the quantity of fuel to be
delivered under the contract. Issue C16 is effective April 1, 2002 for PSE. As a result, these contracts will be required to be
marked-to-market through earnings. The Company will be reviewing its fuel supply contracts to determine which contracts will no longer qualify
as normal purchase and normal sales contracts.
NOTE 19.
Supplemental Quarterly Financial Data (Unaudited)
The following unaudited amounts, in the opinion of the Company, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations for the interim periods. Quarterly amounts vary during
the year due to the seasonal nature of the utility business.
Puget Energy
(Unaudited; dollars in thousands except per-share amounts)
- -------------------------------------- ------------- ------------- ------------- ------------ ----------- -----------
Second
2001 Quarter First Second Restatement Restated Third Fourth
- -------------------------------------- ------------- ------------- ------------- ------------ ----------- -----------
Operating revenues $1,119,864 $ 935,419 $ -- $935,419 $619,670 $699,038
Operating income 130,541 71,578 (5,507) 66,071 45,756 54,754
Other income 1,941 1,568 -- 1,568 7,892 3,123
Net income 72,298 24,972 (5,507) 19,465 6,809 8,266
Basic earnings per common share $0.815 $ 0.265 $ (0.064) $ 0.201 $ 0.055 $ 0.071
Diluted earnings per common share $0.812 $ 0.264 $ (0.063) $ 0.201 $ 0.054 $ 0.071
(Unaudited; dollars in thousands except per-share amounts)
- ----------------------------------------- ----------------- ------------------- ---------------- ----------------
2000 Quarter First Second Third Fourth
- ----------------------------------------- ----------------- ------------------- ---------------- ----------------
Operating revenues $ 647,223 $ 538,801 $ 978,981 $ 1,276,667
Operating income 115,885 63,119 57,598 127,270
Other income 4,390 6,878 5,273 (11,480)
Net income 78,192 27,369 18,995 69,275
Basic earnings per common share $ 0.892 $ 0.295 $ 0.196 $ 0.782
Diluted earnings per common share $ 0.890 $ 0.294 $ 0.196 $ 0.779
Puget Sound Energy
(Unaudited; dollars in thousands)
- -------------------------------------- ------------- ------------- ------------- ------------ ----------- -----------
Second
2001 Quarter First Second Restatement Restated Third Fourth
- -------------------------------------- ------------- ------------- ------------- ------------ ----------- -----------
Operating revenues $1,091,324 $ 889,950 $ -- $889,950 $566,899 $652,032
Operating income 130,111 67,136 (5,507) 61,629 42,360 54,383
Other income 2,843 2,485 -- 2,485 8,885 2,839
Net income 72,879 22,782 (5,507) 17,275 5,474 8,754
(Unaudited; dollars in thousands)
- ----------------------------------------- ----------------- ------------------- ---------------- ----------------
2000 Quarter First Second Third Fourth
- ----------------------------------------- ----------------- ------------------- ---------------- ----------------
Operating revenues $ 647,223 $ 538,801 $ 978,981 $ 1,276,667
Operating income 115,885 63,119 57,598 127,270
Other income 4,390 6,878 5,273 (11,480)
Net income 78,192 27,369 18,995 69,275
In October 2001, the Company filed a Form 10-Q/A to restate the quarterly consolidated financial statements of Puget Energy and PSE for the quarter and six months ended June 30, 2001. The restatement relates to the accounting treatment of certain purchase gas financial contracts. The contracts, entered into as a part of the Company's plan to secure fixed price gas supplies for winter electric generation purposes, were not matched with purchase of physical gas as of June 30, 2001. As a result, under Statement No. 133, the financial gas purchase contracts do not qualify as hedge instruments at June 30, 2001. Therefore, the change in market value of these contracts should have been recorded in operating income for the quarter ended June 30, 2001, but were not reflected in that manner in the Company's initial filing as of June 30, 2001.
Note 20.
Consolidated Statement of Cash Flows
For purposes of the Statement of Cash Flows, the Company considers all temporary investments to be cash equivalents. These
temporary cash investments are securities held for cash management purposes, having maturities of three months or less. The net
change in current assets and current liabilities for purposes of the Statement of Cash Flows excludes short-term debt and current
maturities of long-term debt. At December 31, 2001, 2000 and 1999, book overdrafts of $3.1 million, $0.3 million and $22.2 million, respectively
were included in accounts payable. Non-cash transactions in 2001, 2000 and 1999 included the issuance of $25.6, $23.1 million and
$7.8 million, respectively of common stock for Puget Energy's Dividend Reinvestment Plan and the assumption in 1999 of $109.0 million in long-term
debt as part of the purchase of the Encogen partnership which was paid off in 2000.
The following provides additional information concerning cash flow activities:
- ------------------------------------------------------------ ------------------ -------------- --------------------------------
Puget Energy PSE
Year Ended December 31 (dollars in thousands) 2001 2001 Puget Energy and PSE
2000 1999
- ------------------------------------------------------------ ------------------ -------------- --------------- ----------------
Changes in certain current assets and current
liabilities,
net of effects of acquisitions by InfrastruX:
Accounts receivable $82,799 $ 83,617 $ (130,088) $ (23,382)
Unbilled revenue 64,776 64,776 (90,480) 5,437
Materials and supplies 10,611 8,460 (29,760) (10,707)
Prepayments and other 4,251 5,822 (1,742) (1,832)
FAS 133 unrealized gain (3,315) (3,315) -- --
Purchased gas receivable 58,822 58,822 (62,350) (28,208)
Accounts payable (254,944) (247,931) 232,402 15,077
FAS 133 unrealized loss 35,145 35,145 -- --
Accrued expenses and other (52,759) (64,935) 33,155 18,169
- ------------------------------------------------------------ ------------------ --------------- -------------- -----------------
Net change in certain current assets
and current liabilities $(54,614) $(59,539) $ (48,863) $ (25,446)
- ------------------------------------------------------------ ------------------ --------------- -------------- -----------------
Cash payments:
Interest (net of capitalized interest) $ 191,004 $ 187,347 $ 176,895 $ 153,093
Income taxes 87,470 87,020 114,100 99,959
- ------------------------------------------------------------ ------------------ --------------- -------------- -----------------
NOTE 21.
Acquisitions
During 2000, InfrastruX Group Inc. (InfrastruX), a wholly-owned subsidiary of Puget Energy, acquired two utility
infrastructure construction companies for a total price of $87.7 million. During 2001, InfrastruX acquired six additional companies
for a total price of $83.6 million. All purchases have been funded in the form of cash and preferred and common stock.
These companies provide utility infrastructure services such as: installing, replacing and restoring underground cables and pipes
for utilities and telecommunication providers; pipeline construction, maintenance and rehabilitation services for the natural gas and
petroleum industries, including directional drilling and vacuum excavation; and distribution-oriented overhead electric construction
services to electric utilities and cooperatives. In February 2002, InfrastruX acquired another utility infrastructure company, which
provides design and electrical construction and maintenance.
The acquisitions have been accounted for using the purchase method of accounting and, accordingly, the operating results of these
companies have been included in Puget Energy's consolidated financial statements since their acquisition dates. Goodwill representing
the excess of cost over the net tangible and identifiable intangible assets of the business was approximately $99.7 million at
December 31, 2001. During 2001, goodwill was amortized on a straight-line basis using a 30-year life except for goodwill on
acquisitions occurring after June 30, 2001, which is not amortized per Statement of Financial Accounting Standards No. 142 -
"Goodwill and Other Intangible Assets" (Statement No. 142). With the implementation of Statement No. 142 in January 2002, Puget
Energy will discontinue amortizing all goodwill and, instead, perform impairment tests to determine if goodwill should be
written-down. Goodwill amortization for 2001 and 2000 was approximately $2.4 million and $0.3 million, respectively. The total amount
of intangibles assigned at December 31, 2001 and 2000 was $23.9 million and $21.1 million, respectively, as shown below.
2001 2000
Intangibles Weighted Avg Intangibles Weighted Avg
Assigned Amount Amort Period (Yrs) Assigned Amount Amort Period (Yrs)
------------------------------------------- -------------------------------------------
Covenant not to compete $ 2,768,250 0.58 $ -- 0.00
In process R&D 260,000 0.00 260,000 0.00
Workforce 3,400,000 0.71 3,400,000 0.81
Customer relationships 3,250,000 1.36 3,250,000 1.54
Developed technology 14,190,000 11.89 14,190,000 13.45
------------------------------------------- -------------------------------------------
Total $23,868,250 14.54 $21,100,000 15.80
The pro forma combined revenues, net income, and earnings per common share of Puget Energy presented below give effect to the acquisitions as if they had occurred on January 1, 2000. These results are not necessarily indicative of the results of operations that would have occurred had the acquisitions of these companies been consummated for the period for which they are being given effect.
(Thousands, except per share amounts)
(Unaudited)
For the twelve months ended December 31, 2001 2000
Operating revenues $ 3,414,755 $ 3,659,790
Net income 99,413 195,415
Basic earnings per common share $ 1.15 $ 2.29
Diluted earnings per common share $ 1.15 $ 2.28
NOTE 22.
Segment Information
Puget Energy operates in
primarily two business segments: the Regulated Utility Operations, or PSE, and
Utility Support, or InfrastruX, which was incorporated in the year 2000. Puget
Energy’s regulated utility operation generates, purchases and sells
electricity and purchases, transports and sells natural gas. The service
territory of PSE covers approximately 6,000 square miles in Washington state. InfrastruX specializes in contracting services to other gas and
electric utilities primarily in the Mid-West, Texas and the Eastern United States.
The other principal non-utility line of business, which is a PSE subsidiary, is a real estate investment and development
company. Reconciling items between segments is not material.
The assets of ConneXt, the development and marketing of customer information and billing system software segment, were sold
during the third quarter of 2001. The third quarter results of 2001 include $8.0 million after-tax gain related to the ConneXt
sale. Reconciling items between segments is not material.
Financial data for business segments are as follows:
(dollars in thousands) Regulated Puget Energy
- ----------------------------------------------
2001 Utility Other InfrastruX Total
- ------------------------------------------------------------------------------------------------------------------------
Revenues $ 3,167,729 $ 32,476 $ 173,786 $ 3,373,991
Depreciation and amortization 208,705 15 8,820 217,540
Federal income tax 66,773 8,877 2,356 78,006
Operating income 273,752 14,667 8,702 297,121
Interest charges, net of AFUDC 186,403 -- 3,656 190,059
Net income 80,150 24,171 2,518 106,839
Total assets 5,178,601 139,251 229,125 5,546,977
Construction expenditures - excluding equity AFUDC 247,435 -- -- 247,435
Additions to other property, plant and equipment -- -- 5,193 5,193
- ------------------------------------------------------------------------------------------------------------------------
Regulated Puget Energy
2000 Utility Other InfrastruX Total
- ------------------------------------------------------------------------------------------------------------------------
Revenues $ 3,384,006 12,667 $ 44,999 $ 3,441,672
Depreciation and amortization 194,228 17 2,268 196,513
Federal income tax 130,430 (1,854) 415 128,991
Operating income 363,559 (552) 865 363,872
Interest charges, net of AFUDC 174,914 -- 188 175,102
Net income 204,720 (10,346) (543) 193,831
Total assets 5,339,669 110,480 106,520 5,556,669
Construction expenditures - excluding equity AFUDC 296,480 -- -- 296,480
- ------------------------------------------------------------------------------------------------------------------------
Regulated Puget Energy
1999 Utility Other Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 2,043,500 $ 24,444 $ 2,067,944
Depreciation and amortization 175,610 100 175,710
Federal income tax 110,026 (2,024) 108,002
Operating income 309,006 (1,190) 307,816
Interest charges, net of AFUDC 150,384 -- 150,384
Net income 174,914 10,653 185,567
Total assets 4,999,020 146,586 5,145,606
Construction expenditures - excluding equity AFUDC 330,976 -- 330,976
- -------------------------------------------------------------------------------------------------------
NOTE 23.
Impairment of Long-Lived Assets
In the fourth quarter of 2000 Hydro Energy Development Corp., a wholly-owned subsidiary of PSE, recorded an after-tax loss of
approximately $11.8 million in Other Income of the non-regulated business segment. The loss provision represents the difference
between the carrying value of 13 small hydroelectric generating projects Hydro Energy Development Corp. was seeking approval to
develop in western Washington state and management's estimate of their net realizable value. Federal and state regulatory agencies
that have jurisdiction over the construction and operation of the proposed projects have made it increasingly difficult to complete
and operate the projects in an economic manner. Hydro Energy Development Corp. owns and operates a 3.7 MWH hydroelectric project
located in western Washington state.
Schedule II.
Valuation and Qualifying Accounts and Reserves
Additions
Balance at Charged to Balance
Beginning Costs and at End
(Dollars in Thousands) of Period Expenses Deductions of Period
- -------------------------------------------------- ------------------ ---------------- ------------------ ----------------
Puget Energy
Year Ended December 31, 2001
- --------------------------------------------------
Accounts deducted from assets
on balance sheet:
Allowance for doubtful accounts receivable $ 1,538 $ 13,458 $ 9,508 $ 5,488
Reserve on wholesale sales 41,488 -- -- 41,488
Gas transportation contracts reserve 1,657 32 1,550 139
- -------------------------------------------------- ------------------ ---------------- ------------------ ----------------
Puget Sound Energy
Year Ended December 31, 2001
- --------------------------------------------------
Accounts deducted from assets
on balance sheet:
Allowance for doubtful accounts receivable $ 1,538 $ 11,636 $ 9,508 $ 3,666
Reserve on wholesale sales 41,488 -- -- 41,488
Gas transportation contracts reserve 1,657 32 1,550 139
- ---------------------------------------------------- ---------------- ---------------- ------------------ ----------------
Puget Energy and Puget Sound Energy
- -------------------------------------------------- ------------------ ---------------- ------------------ ----------------
Year Ended December 31, 2000
- --------------------------------------------------
Accounts deducted from assets
on balance sheet:
Allowance for doubtful accounts receivable $ 1,503 $ 7,552 $ 7,517 $1,538
Reserve on wholesale sales -- 41,488 -- 41,488
Gas transportation contracts reserve 1,780 660 783 1,657
- -------------------------------------------------- ------------------ ---------------- ------------------ ----------------
Year Ended December 31, 1999
- --------------------------------------------------
Accounts deducted from assets
on balance sheet:
Allowance for doubtful accounts receivable $ 1,020 $ 6,885 $ 6,402 $ 1,503
Gas transportation contracts reserve 4,611 5,598 8,429 1,780
Certain of the following exhibits are filed herewith. Certain other of the following exhibits have heretofore been filed with
the Securities and Commission and are incorporated herein by reference.
3(i).1 Restated Articles of Incorporation
of Puget Energy (Incorporated by reference to Exhibit 99.2, Puget Energy's
Current Report on Form 8-K filed January 2, 2001, Commission File No. 333-77491).
3(i).2 Restated Articles of Incorporation
of PSE (included as Annex F to the Joint Proxy Statement/Prospectus filed
February 1, 1996, Registration No. 333-617).
3(ii).1 Bylaws of Puget Energy (incorporated
by reference to Exhibit 3.2 to the Registration Statement on Form S-4 of Puget Energy (No. 333-77491)).
3(ii).2 Restated Bylaws of PSE (Exhibit 3 to
PSE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Commission File No. 1-4393).
4.1 Fortieth through Seventy-eighth
Supplemental Indentures defining the rights of the holders of PSE's First Mortgage Bonds (Exhibit
2-d to Registration No. 2-60200; Exhibit 4-c to Registration No. 2-13347; Exhibits 2-e through and including 2-k to Registration No.
2-60200; Exhibit 4-h to Registration No. 2-17465; Exhibits 2-l, 2-m and 2-n to Registration No. 2-60200; Exhibits 2-m to Registration
No. 2-37645; Exhibit 2-o through and including 2-s to Registration No. 2-60200; Exhibit 5-b to Registration No. 2-62883; Exhibit 2-h
to Registration No. 2-65831; Exhibit (4)-j-1 to Registration No. 2-72061; Exhibit (4)-a to Registration No. 2-91516; Exhibit (4)-b to
Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393; Exhibits (4)-b and (4)-c to
Registration No. 33-45916; Exhibit (4)-c to Registration No. 33-50788; Exhibit (4)-a to Registration No. 33-53056; Exhibit 4.3 to
Registration No. 33-63278; Exhibit 4.25 to Registration No. 333-41181; Exhibit 4.27 to Current Report on Form 8-K dated March 5,
1999; and Exhibit 4.2 to Current Report on Form 8-K dated November 2, 2000).
4.2 Indenture defining the rights of the
holders of PSE's senior notes (incorporated herein by reference to Exhibit 4-a
to PSE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, Commission File No. 1-4393).
4.3 First Supplemental Indenture defining
the rights of the holders of PSE's Senior Notes, Series A (incorporated herein by reference to Exhibit 4-b to PSE's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, Commission File No. 1-4393).
4.4 Second Supplemental Indenture defining
the rights of the holders of PSE's Senior Notes, Series B (incorporated herein be reference to Exhibit 4.6 to PSE's Current Report on
Form 8-K, dated March 5, 1999, Commission File No. 1-4393).
4.5 Third Supplemental Indenture defining
the rights of the holders of PSE's Senior Notes, Series C (incorporated
herein by reference to Exhibit 4.1 to PSE's Current Report on Form 8-K, dated November 2, 2000, Commission File No. 1-4393).
4.6 Rights Agreement dated as of December 21,
2000 between Puget Energy and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 2.1 to PSE's
Registration Statement on Form 8-A, dated January 2, 2001, Commission File No. 1-16305).
4.7 Indenture between PSE and the First
National Bank of Chicago dated June 6, 1997 (incorporated herein by reference to Exhibit 4.1 of PSE's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 1-4393).
4.8 Amended and Restated Declaration of Trust
between Puget Sound Energy Capital Trust and the First National Bank of Chicago dated June 6, 1997 (incorporated herein by reference
to Exhibit 4.2 of PSE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Commission File No. 1-4393).
4.9 Series A Capital Securities Guarantee
Agreement between PSE and the First National Bank of Chicago dated June 6, 1997 (incorporated herein by reference to Exhibit 4.3 of PSE's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, Commission File No. 1-4393).
4.10 Pledge Agreement dated August 1, 1991
between PSE and The First National Bank of Chicago, as Trustee (Exhibit (4)-j to Registration No. 33-45916).
4.11 Loan Agreement dated August 1, 1991
between the City of Forsyth, Rosebud County, Montana and PSE (Exhibit (4)-k to Registration No. 33-45916).
4.12 Pledge Agreement dated as of March 1,
1992 by and between PSE and Chemical Bank relating to a series of first
mortgage bonds (Exhibit 4.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 1-4393).
4.13 Pledge Agreement, dated as of April 1,
1993, by and between PSE and The First National Bank of Chicago, relating to a series of first mortgage bonds. (Exhibit 4.16 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 1-4393).
4.14 Indenture of First Mortgage dated as of
April 1, 1957 (Exhibit 4-B, Registration No. 2-14307).
4.15 First Supplemental Indenture dated as of
October 1, 1959 (Exhibit 4-D to Registration No. 2-17876).
4.16 Sixth Supplemental Indenture dated as of
August 1, 1966 (Exhibit to Form 8-K for month of August 1966, File No. 0-951).
4.17 Seventh Supplemental Indenture dated as
of February 1, 1967 (Exhibit 4-M, Registration No. 2-27038).
4.18 Sixteenth Supplemental Indenture dated as
of June 1, 1977 (Exhibit 6-05 to Registration No. 2-60352).
4.19 Seventeenth Supplemental Indenture dated
as of August 9, 1978 (Exhibit 5-K.18 to Registration No. 2-64428).
4.20 Twenty-second Supplemental Indenture
dated as of July 15, 1986 (Exhibit 4-B.20 to Form 10-K for the year ended September 30, 1986, File No. 0-951).
4.21 Twenty-seventh Supplemental Indenture
dated as of September 1, 1990 (Exhibit 4-B.20, Form 10-K for the year ended September 30, 1998, File No. 10-951).
4.22 Twenty-eighth Supplemental Indenture
dated as of July 31, 1991 (Exhibit 4-A, Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
4.23 Twenty-ninth Supplemental Indenture dated
as of June 1, 1993 (Exhibit 4-A to Registration No. 33-49599).
4.24 Thirtieth Supplemental Indenture dated as
of August 15, 1995 (incorporated herein by reference to Exhibit 4-A of Washington Natural Gas Company's S-3 Registration Statement,
Registration No. 33-61859).
4.25 Statement of Relative Rights and
Preferences for the 7 3/4% Series Preferred Stock Cumulative, $100 Par Value. (Exhibit 1.6 to
Registration Statement on Form 8-A filed February 14, 1994, Commission File No. 1-4393).
4.26 Unsecured Debt
Indenture between Puget Sound Energy and Bank One Trust Company, N.A. dated as
of May 18, 2001 defining the rights of the holders of Puget Sound Energy’s
unsecured debentures (incorporated herein by reference to Exhibit 4.3 to Puget
Sound Energy’s Current Report on Form 8-K, filed May 22, 2001, Commission
File No. 1-4393).
4.27 First Supplemental
Indenture to the Unsecured Debt Indenture dated as of May 18, 2001 defining
the rights of 8.40% Subordinated Deferrable Interest Debentures due June 30,
2041 (incorporated herein by reference to Exhibit 4.4 to Puget Sound
Energy’s Current Report on Form 8-K, filed May 22, 2001, Commission File
No. 1-4393).
4.28 Amended and Restated
Declaration of Trust of Puget Sound Energy Trust II dated as of May 18, 2001
(incorporated herein by reference to Exhibit 4.2 to Puget Sound Energy’s
Current Report on Form 8-K, filed May 22, 2001, Commission File No. 1-4393).
4.29 Preferred Securities Guarantee Agreement, dated May 18, 2001 between Puget
Sound Energy and Bank One Trust Company, N.A. for the benefit of the holders of
the trust preferred securities of the Puget Sound Energy Trust II (incorporated
herein by reference to Exhibit 4.5 to Puget Sound Energy’s Current Report
on Form 8-K, filed May 22, 2001, Commission File No. 1-4393).
10.1 Assignment
and Agreement dated as of August 13, 1964 between Public Utility District No.
1 of Chelan County, Washington and PSE, relating to the Rock Island Project
(Exhibit 13-b to Registration No. 2-24262).
10.2 First Amendment dated as of October 4,
1961 to Power Sales Contract between Public Utility District No. 1 of
Chelan County, Washington and PSE, relating to the Rocky Reach Project (Exhibit 13-d to Registration No. 2-24252).
10.3 Assignment and Agreement dated as of
August 13, 1964 between Public Utility District No. 1 of Chelan County,
Washington and PSE, relating to the Rocky Reach Project (Exhibit 13-e to Registration No. 2-24252).
10.4 Assignment and Agreement dated as of
August 13, 1964 between Public Utility District No. 2 of Grant County,
Washington and PSE, relating to the Priest Rapids Development (Exhibit 13-j to Registration No. 2-24252).
10.5 Assignment and Agreement dated as of
August 13, 1964 between Public Utility District
No. 2 of Grant County, Washington and PSE, relating to the Wanapum Development (Exhibit 13-n to Registration No. 2-24252).
10.6 First Amendment dated February 9, 1965
to Power Sales Contract between Public Utility
District No. 1 of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-p to Registration No. 2-24252).
10.7 First Amendment executed as of February
9, 1965 to Reserved Share Power Sales Contract between Public Utility
District No. 1 of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-r to Registration No. 2-24252).
10.8 Assignment and Agreement dated as of
August 13, 1964 between Public Utility District No. 1 of Douglas County,
Washington and PSE, relating to the Wells Development (Exhibit 13-u to Registration No. 2-24252).
10.9 Pacific Northwest Coordination Agreement
executed as of September 15, 1964 among the United States of America, PSE
and most of the other major electrical utilities in the Pacific Northwest (Exhibit 13-gg to Registration No. 2-24252).
10.10 Contract dated November 14, 1957
between Public Utility District No. 1 of Chelan County, Washington and PSE,
relating to the Rocky Reach Project (Exhibit 4-1-a to Registration No. 2-13979).
10.11 Power Sales Contract dated as of
November 14, 1957 between Public Utility District No. 1 of Chelan County,
Washington and PSE, relating to the Rocky Reach Project (Exhibit 4-c-1 to Registration No. 2-13979).
10.12 Power Sales Contract dated May 21, 1956
between Public Utility District No. 2 of Grant County, Washington and PSE,
relating to the Priest Rapids Project (Exhibit 4-d to Registration No. 2-13347).
10.13 First Amendment to Power Sales Contract
dated as of August 5, 1958 between PSE and Public Utility District No. 2 of
Grant County, Washington, relating to the Priest Rapids Development (Exhibit 13-h to Registration No. 2-15618).
10.14 Power Sales Contract dated June 22, 1959
between Public Utility District No. 2 of Grant County, Washington and PSE,
relating to the Wanapum Development (Exhibit 13-j to Registration No. 2-15618).
10.15 Reserve Share Power Sales Contract
dated June 22, 1959 between Public Utility District No. 2 of Grant County,
Washington and PSE, relating to the Priest Rapids Project (Exhibit 13-k to Registration No. 2-15618).
10.16 Agreement to Amend Power Sales Contracts
dated July 30, 1963 between Public Utility District No. 2 of Grant County,
Washington and PSE, relating to the Wanapum Development (Exhibit 13-1 to Registration No. 2-21824).
10.17 Power Sales Contract executed as of
September 18, 1963 between Public Utility District No. 1 of Douglas County,
Washington and PSE, relating to the Wells Development (Exhibit 13-r to Registration No. 2-21824).
10.18 Reserved Share Power Sales Contract
executed as of September 18, 1963 between Public Utility District No. 1 of
Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-s to Registration No. 2-21824).
10.19 Construction and Ownership Agreement
dated as of July 30, 1971 between The Montana Power Company and PSE (Exhibit
5-b to Registration No. 2-45702).
10.20 Operation and Maintenance Agreement dated
as of July 30, 1971 between The Montana Power Company and PSE (Exhibit
5-c to Registration No. 2-45702).
10.21 Coal Supply Agreement dated as of July
30, 1971 among The Montana Power Company, PSE and Western Energy Company
(Exhibit 5-d to Registration No. 2-45702).
10.22 Contract dated June 19, 1974, between
PSE and P.U.D No. 1 of Chelan County (Exhibit D to Form 8-K dated July 5, 1974).
10.23 Exchange Agreement executed August 13,
1964 between the United States of America, Columbia Storage Power Exchange
and PSE, relating to Canadian Entitlement (Exhibit 13-ff to Registration No. 2-24252).
10.24 Loan Agreement dated as of December 1,
1980 and related documents pertaining to Whitehorn turbine construction trust
financing (Exhibit 10.52 to Annual Report on Form 10-K for the fiscal year ended December 31, 1980, Commission File No. 1-4393).
10.25 Letter Agreement dated March 31, 1980,
between PSE and Manufacturers Hanover Leasing Corporation (Exhibit b-8 to
Registration No. 2-68498).
10.26 Coal Transportation Agreement dated as of
July 10, 1981 (Exhibit 20-a to Quarterly Report on Form 10-Q for the quarter ended September 30, 1981, Commission File No. 1-4393).
10.27 Settlement Agreement and Covenant Not to
Sue executed by the United States Department of Energy acting by and through the Bonneville Power Administration and PSE dated
September 17, 1985 (Exhibit (10)-49 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
10.28 Agreement to Dismiss Claims and Covenant
Not to Sue dated September 17, 1985 between Washington Public Power Supply
System (Energy Northwest) and PSE (Exhibit (10)-50 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985,
Commission File No. 1-4393).
10.29 Irrevocable Offer of Washington Public
Power Supply System (Energy Northwest) Nuclear Project No. 3 Capability for
Acquisition executed by PSE dated September 17, 1985 (Exhibit A of Exhibit (10)-50 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1985, Commission File No. 1-4393).
10.30 Settlement Exchange Agreement
(Bonneville Exchange Power Contract) executed by the United States of America
Department of Energy acting by and through the Bonneville Power Administration and PSE dated September 17, 1985 (Exhibit B of
Exhibit (10)-50 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
10.31 Settlement Agreement and Covenant Not to
Sue between PSE and Northern Wasco County People's Utility District dated October 16, 1985 (Exhibit (10)-53 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
10.32 Settlement Agreement and Covenant Not to
Sue between PSE and Tillamook People's Utility District dated October 16,
1985 (Exhibit (10)-54 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
10.33 Settlement Agreement and Covenant Not to
Sue between PSE and Clatskanie People's Utility District, dated September
30, 1985 (Exhibit (10)-55 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
10.34 Stipulation and Settlement Agreement
between PSE and Muckleshoot Tribe of the Muckleshoot Indian Reservation, dated October 31, 1986 (Exhibit (10)-55 to Annual Report on Form
10-K for the fiscal year ended December 31, 1986, Commission File No. 1-4393).
10.35 Transmission Agreement dated April 17,
1981 between the Bonneville Power Administration and PSE (Colstrip Project)
(Exhibit (10)-55 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.36 Transmission Agreement dated April 17,
1981 between the Bonneville Power Administration and Montana Intertie Users (Colstrip Project) (Exhibit (10)-56 to Annual Report on Form
10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.37 Ownership and Operation Agreement
dated as of May 6, 1981 between PSE and other Owners of the Colstrip Project (Colstrip 3 and 4) (Exhibit (10)-57 to Annual Report on
Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.38 Colstrip Project Transmission Agreement
dated as of May 6, 1981 between PSE and Owners of the Colstrip Project
(Exhibit (10)-58 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.39 Common Facilities Agreement dated as of
May 6, 1981 between PSE and Owners of Colstrip 1 and 2, and 3 and 4
(Exhibit (10)-59 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.40 Agreement for the Purchase of Power
dated as of October 29, 1984 between South Fork II, Inc. and PSE (Weeks Falls Hydro-electric Project) (Exhibit (10)-60 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.41 Agreement for the Purchase of Power
dated as of October 29, 1984 between South Fork Resources, Inc. and PSE (Twin Falls Hydro-electric Project) (Exhibit (10)-61 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.42 Agreement for Firm Purchase Power dated
as of January 4, 1988 between the City of Spokane, Washington and PSE (Spokane Waste Combustion Project) (Exhibit (10)-62 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.43 Agreement for Evaluating, Planning and
Licensing dated as of February 21, 1985 and Agreement for Purchase of Power
dated as of February 21, 1985 between Pacific Hydropower Associates and PSE (Koma Kulshan Hydro-electric Project) (Exhibit (10)-63 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.44 Amendment dated as of June 1, 1968, to
Power Sales Contract between Public Utility District No. 1 of Chelan County, Washington and PSE (Rocky Reach Project) (Exhibit (10)-66
to Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No. 1-4393).
10.45 Transmission Agreement dated as of
December 30, 1987 between the Bonneville Power Administration and PSE (Rock Island Project) (Exhibit (10)-74 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1988, Commission File No. 1-4393).
10.46 Agreement for Purchase and Sale of Firm
Capacity and Energy between The Washington Water Power Company and PSE dated as of January 1, 1988 (Exhibit (10)-1 to Quarterly Report on
Form 10-Q for the quarter ended March 31, 1988, Commission File No. 1-4393).
10.47 Amendment dated as of August 10, 1988 to
Agreement for Firm Purchase Power dated as of January 4, 1988 between the City of Spokane, Washington and PSE (Spokane Waste Combustion
Project) (Exhibit (10)-76 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988, Commission File No. 1-4393).
10.48 Agreement for Firm Power Purchase dated
October 24, 1988 between Northern Wasco People's Utility District and PSE
(The Dalles Dam North Fishway) (Exhibit (10)-77 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988, Commission
File No. 1-4393).
10.49 Agreement for the Purchase of Power dated
as of October 27, 1988 between Pacific Power & Light Company (PacifiCorp)
and PSE (Exhibit (10)-78 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988, Commission File No. 1-4393).
10.50 Agreement for Sale and Exchange of
Firm Power dated as of November 23, 1988 between the Bonneville Power Administration and PSE (Exhibit (10)-79 to Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, Commission File No. 1-4393).
10.51 Agreement for Firm Power Purchase dated
as of February 24, 1989 between Sumas Energy, Inc. and PSE (Exhibit (10)-1
to Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, Commission File No. 1-4393).
10.52 Settlement Agreement dated as of April
27, 1989 between Public Utility District No. 1 of Douglas County,
Washington, Portland General Electric Company (Enron), PacifiCorp, The Washington Water Power Company (Avista) and PSE (Exhibit
(10)-1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, Commission File No. 1-4393).
10.53 Agreement for Firm Power Purchase
(Thermal Project) dated as of June 29, 1989 between San Juan Energy Company and
PSE (Exhibit (10)-2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, Commission File No. 1-4393).
10.54 Agreement for Verification of Transfer,
Assignment and Assumption dated as of September 15, 1989 between San Juan Energy Company, March Point Cogeneration Company and PSE
(Exhibit (10)-3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, Commission File No. 1-4393).
10.55 Power Sales Agreement between The Montana
Power Company and PSE dated as of October 1, 1989 (Exhibit (10)-4 to
Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, Commission File No. 1-4393).
10.56 Conservation Power Sales Agreement dated
as of December 11, 1989 between Public Utility District No. 1 of Snohomish County and PSE (Exhibit (10)-87 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, Commission File No. 1-4393).
10.57 Amendment No. 1 to the Colstrip Project
Transmission Agreement dated as of February 14, 1990 among the Montana Power
Company, The Washington Water Power Company (Avista), Portland General Electric Company (Enron), PacifiCorp and PSE (Exhibit (10)-91
to Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-4393).
10.58 Amendment No. 1 to the Fifteen-Year Power
Sales Agreement dated as of April 18, 1990 between PacifiCorp and PSE
(Exhibit (10)-93 to Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-4393).
10.59 Settlement Agreement dated as of October
1, 1990 among Public Utility District No. 1 of Douglas County, Washington,
PSE, Pacific Power and Light Company (PacifiCorp), The Washington Water Power Company (Avista), Portland General Electric Company
(Enron), the Washington Department of Fisheries, the Washington Department of Wildlife, the Oregon Department of Fish and Wildlife,
the National Marine Fisheries Service, the U.S. Fish and Wildlife Service, the Confederated Tribes and Bands of the Yakima Indian
Nation, the Confederated Tribes of the Umatilla Reservation, and the Confederated Tribes of the Colville Reservation (Exhibit (10)-95
to Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-4393).
10.60 Agreement for Firm Power Purchase
(Thermal Project) dated December 27, 1990 among March Point Cogeneration Company,
a California general partnership comprising San Juan Energy Company, a California corporation; Texas-Anacortes Cogeneration Company,
a Delaware corporation; and PSE (Exhibit (10)-4 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, Commission
File No. 1-4393).
10.61 Agreement for Firm Power Purchase dated
March 20, 1991 between Tenaska Washington, Inc., a Delaware corporation, and
PSE (Exhibit (10)-1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Commission File No. 1-4393).
10.62 Letter Agreement dated April 25, 1991
between Sumas Energy, Inc. and PSE, to amend the Agreement for Firm Power Purchase dated as of February 24, 1989 (Exhibit (10)-2 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Commission File No. 1-4393).
10.63 Amendment dated June 7, 1991 to Letter
Agreement dated April 25, 1991 between Sumas Energy, Inc. and PSE (Exhibit
(10)-3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Commission File No. 1-4393).
10.64 Amendatory Agreement No. 3 dated August
1, 1991 to the Pacific Northwest Coordination Agreement executed September
15, 1964 among the United States of America, PSE and most of the other major electrical utilities in the Pacific Northwest (Exhibit
(10)-4 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Commission File No. 1-4393).
10.65 Agreement between the 40 parties to the
Western Systems Power Pool (PSE being one party) dated July 27, 1991
(Exhibit (10)-2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 1-4393).
10.66 Memorandum of Understanding between
PSE and the Bonneville Power Administration dated September 18, 1991 (Exhibit
(10)-3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 1-4393).
10.67 Amendment of Seasonal Exchange
Agreement, dated December 4, 1991 between Pacific Gas and Electric Company and PSE
(Exhibit (10)-107 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File No. 1-4393).
10.68 Capacity and Energy Exchange Agreement,
dated as of October 4, 1991 between Pacific Gas and Electric Company and PSE
(Exhibit (10)-108 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File No. 1-4393).
10.69 Intertie and Network Transmission
Agreement, dated as of October 4, 1991 between Bonneville Power Administration and
PSE (Exhibit (10)-109 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File No. 1-4393).
10.70 Amendment to Agreement for Firm Power
Purchase dated as of September 30, 1991 between Sumas Energy, Inc. and PSE
(Exhibit (10)-112 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File No. 1-4393).
10.71 Letter Agreement dated October 12, 1992
between Tenaska Washington Partners, L.P. and PSE regarding clarification of
issues under the Agreement for Firm Power Purchase (Exhibit (10)-121 to Annual Report on Form 10-K for the fiscal year ended December
31, 1992, Commission File No. 1-4393).
10.72 Consent and Agreement dated October 12,
1992 between PSE and The Chase Manhattan Bank, N.A., as agent (Exhibit
(10)-122 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File No. 1-4393).
10.73 General Transmission Agreement dated as
of December 1, 1994 between the Bonneville Power Administration and PSE (BPA
Contract No. DE-MS79-94BP93947) (Exhibit 10.115 to Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission
File No. 1-4393).
10.74 PNW AC Intertie Capacity Ownership
Agreement dated as of October 11, 1994 between the Bonneville Power Administration
and PSE (BPA Contract No. DE-MS79-94BP94521) (Exhibit 10.116 to Annual Report on Form 10-K for the fiscal year ended December 31,
1994, Commission File No. 1-4393).
10.75 Power Exchange Agreement dated as of
September 27, 1995 between British Columbia Power Exchange Corporation and PSE
(Exhibit 10.117 to Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-4393).
10.76 Contract with W. S. Weaver dated October
18, 1996 (Exhibit 10.118 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, Commission File No. 1-4393).
10.77 Contract with G. B. Swofford, Senior
Vice President Customer Operations, dated October 18, 1996 (Exhibit 10.120 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 1-4393).
10.78 Service Agreement dated April 14, 1993
between Questar Pipeline Corporation and Washington Natural Gas Company for
FSS-1 firm storage service at Clay Basin (Exhibit 10-B Form 10-K for the year ended September 30, 1994, File No. 11271).
10.79 Service Agreement dated November 1,
1989 with Northwest Pipeline Corporation covering liquefaction storage gas
service filed under cover of Form SE dated December 27, 1989.
10.80 Firm Transportation Service Agreement
dated October 1, 1990 between Northwest Pipeline Corporation and Washington
Natural Gas Company (Exhibit 10-D to Form 10-K for the year ended September 30, 1994, File No. 11271).
10.81 Gas Transportation Service Contract
dated June 29, 1990 between Washington Natural Gas Company and Northwest
Pipeline Corporation (Exhibit 4-A to Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
10.82 Gas Transportation Service Contract
dated July 31, 1991 between Washington Natural Gas Company and Northwest
Pipeline Corporation (Exhibit 4-A to Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
10.83 Amendment to Gas Transportation Service
Contract dated July 31, 1991 between Washington Natural Gas Company and
Northwest Pipeline Corporation (Exhibit 10-E.2 to Form 10-K for the year ended September 30, 1995, File No. 11271).
10.84 Gas Transportation Service Contract
dated July 15, 1994 between Washington Natural Gas Company and Northwest
Pipeline Corporation (Exhibit 10-E.3 to Form 10-K for the year ended September 30, 1995, File No. 11271).
10.85 Amendment to Gas Transportation Service
Contract dated August 15, 1994 between Washington Natural Gas Company and
Northwest Pipeline Corporation (Exhibit 10-E.4 to Form 10-K for the year ended September 30, 1995, File No. 11271).
10.86 Firm Transportation Service Agreement
dated March 1, 1992 between Northwest Pipeline Corporation and Washington
Natural Gas Company (Exhibit 10-O to Form 10-K for the year ended September 30, 1994, File No. 1-11271).
10.87 Firm Transportation Service Agreement
dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Jackson Prairie (Exhibit 10-P to Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10.88 Firm Transportation Service Agreement
dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Jackson Prairie (Exhibit 10-Q to Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10.89 Firm Transportation Service Agreement
dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Plymouth, LNG (Exhibit 10-R to Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10.90 Service Agreement dated July 9, 1991
with Northwest Pipeline Corporation for SGS-2F Storage Service filed under
cover of Form SE dated December 23, 1991 (Exhibit 10-S to Form 10-K for the year ended September 30, 1994, File No. 1-11271).
10.91 Firm Transportation Agreement dated
October 27, 1993 between Pacific Gas Transmission Company and Washington Natural
Gas Company for firm transportation service from Kingsgate (Exhibit 10-T to Form 10-K for the year ended September 30, 1994, File No.
1-11271).
10.92 Firm Storage Service Agreement and
Amendment dated April 30, 1991 between Questar Pipeline Company and Washington
Natural Gas Company for firm storage service at Clay Basin filed under cover of Form SE dated December 23, 1991.
10.93 Change in control agreement with T. J.
Hogan dated August 17, 1995 (Exhibit 10.152 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, Commission File No. 1-4393).
10.94 Employment agreement with S. A. McKeon,
Vice President and General Counsel, dated May 27, 1997 (Exhibit 10.152 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Commission File No. 1-4393).
10.95 Employment agreement with R. L. Hawley
dated March 16, 1998 (Exhibit 10.153 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Commission File No. 1-4393).
10.96 Puget Energy, Inc. Nonemployee
Director Stock Plan. (incorporated herein by reference to Exhibit 99.1 to Puget
Energy's Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated January 2, 2001, Commission File No. 333-41157-99).
10.97 Puget Energy, Inc. Employee Stock
Purchase Plan. (incorporated herein by reference to Exhibit 99.1 to Puget Energy’s
Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated January 2, 2001, Commission File No. 333-41113-99).
10.98 1995 Long-Term Incentive Compensation
Plan. (Exhibit 10.108 to Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, Commission File No. 1-4393 and 1-16305).
10.99 1995 Long-Term Incentive Compensation
Plan (incorporated herein by reference to Exhibit 99.1 to Puget Energy’s
Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated January 2, 2001, Commission File No. 333-61851-99).
10.100 Credit Agreement dated December 18,
1996 among PSE and various banks named therein, Bank of America NW, NA. as
Administrative Agent. (Exhibit 10.110 to Annual Report on Form 10-K for the fiscal year ended December 31, 2000, Commission File No.
1-4393 and 1-16305).
10.101 Supplemental agreement of the October
1996 employment contract with W.S. Weaver, President and Chief Executive
Officer, dated November 14, 2000. (Exhibit 10.111 to Annual Report on Form 10-K for the fiscal year ended December 31, 2000,
Commission File No. 1-4393 and 1-16305).
*10.102 Retention Agreement with R.L. Hawley
dated July 1, 2001.
*10.103 Retention Agreement with S.A. McKeon,
Vice President & General Counsel, dated July 1, 2001.
*10.104 Employment agreement with S.P.
Reynolds, Chief Executive Officer and President, dated January 7, 2002.
10.105 Credit Agreement dated June 29, 2001,
among InfrastruX Group, Inc. and various Banks named therein, BankOne, NA as Administrative Agent. (Exhibit 10-1, Form 10-Q for the quarterly
period ended June 30, 2001, Commission File No. 1-4393 and 1-16305).
*12-1 Statement setting forth computation of
ratios of earnings to fixed charges (1997 through 2001).
*12-2 Statement setting forth computation of
ratios of earnings to fixed charges of Puget Sound Energy (1997 through 2001).
*21.1 Subsidiaries of Puget Energy.
*21.2 Subsidiaries of PSE.
*23.1 Consent of PricewaterhouseCoopers LLP.
*99.1 Puget Energy proxy statement for 2002
Annual Meeting of Shareholders (Commission File No. 1-16305).
_________________________________
*Filed herewith.