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Puget Energy Reports Second Quarter 2008 Financial Results

Posted on: Monday, 4 August 2008, 18:00 CDT

Puget Energy (NYSE:PSD) today reported net income of $33.7 million, or 26 cents per diluted share, for the second quarter 2008 compared to $38.6 million, or 33 cents per share, in the second quarter 2007. Net income from Puget Energy's regulated electric and gas utility subsidiary, Puget Sound Energy (PSE), was $39.1 million, or 30 cents per share, in the second quarter 2008, compared to $38.4 million, or 33 cents per share, in the second quarter 2007.

"Our financial results at June 30 met our expectations. The current challenging environment of rising energy costs and operating expenses impacted our results. For example, average natural gas prices at the Sumas trading hub increased to $10.39 per MMBTU in the second quarter of 2008 compared to $6.68 in the same period a year ago, and depreciation expense continues to increase with delivery system investments," said Stephen P. Reynolds, chairman, president and CEO of Puget Energy and PSE. "Despite these challenges, we are maintaining our focus on additions and upgrades to PSE's distribution systems to improve service and reliability to our customer base in the dynamic Puget Sound region.

"Our focus in 2008 is also on the completion of the proposed merger with a consortium of long-term infrastructure investors. The merger will provide us partners who are able and willing to meet PSE's significant capital needs to deliver energy that is safe, reliable, reasonably priced and environmentally responsible."

Higher retail electric and natural gas sales volumes driven by cooler than normal temperatures in the Puget Sound region favorably impacted PSE's revenue for the second quarter 2008. However, the favorable impact of these sales was offset by increased power costs due to a decline in hydroelectric energy supplies, higher costs related to fuel supply for electric generating facilities and a rise in purchased power prices. PSE's financial results in the second quarter of 2008 also reflect higher utility operating and maintenance costs and increased depreciation expense as a result of new utility capital investments.

Puget Energy Second Quarter 2008 Summaries:

The following tables provide a summary of Puget Energy's financial results for the second quarter of 2008 compared to the same quarter a year ago.

Table 1: Puget Energy Second Quarter Earnings Summary Net Income (Loss) in millions of dollars 2008 2007 ---------------------------------------------------------------------- PSE $ 39.1 $ 38.4 Puget Energy merger transaction expenses and other (5.4) 0.2 ---------------------------------------------------------------------- Puget Energy $ 33.7 $ 38.6 ====================================================================== Earnings per Diluted Share (EPS) ---------------------------------------------------------------------- PSE $ 0.30 $ 0.33 Puget Energy merger transaction expenses and other (0.04) -- ---------------------------------------------------------------------- Puget Energy $ 0.26 $ 0.33 ====================================================================== Diluted common shares outstanding (millions) 130.0 117.2

Table 2: Puget Energy Second Quarter 2008 vs. Second Quarter Cents 2007 per EPS Reconciliation diluted share ---------------------------------------------------------------------- Puget Energy's second quarter 2007 earnings from PSE $ 0.33 Increase in natural gas margin 0.04 Decrease in state property tax expense 0.03 Higher other income and lower other expenses 0.02 Change in unrealized FAS-133 gains/(losses) on energy supply contracts 0.02 Increase in utility operations and maintenance expense (0.09) Credit to depreciation and amortization related to Goldendale deferral in 2007 (0.03) Increase in utility depreciation and amortization expense in 2008, excluding the 2007 Goldendale deferral (0.02) Impact of a higher number of common shares outstanding in 2008 (0.03) Other variances and rounding, net 0.03 ---------------------------------------------------------------------- Puget Energy's second quarter 2008 earnings from PSE $ 0.30 ---------------------------------------------------------------------- Puget Energy's second quarter merger transaction expenses and other (0.04) ---------------------------------------------------------------------- Puget Energy's earnings for the second quarter 2008 $ 0.26 ======================================================================

Puget Sound Energy (PSE) Second Quarter 2008 Highlights:

Key components of PSE's second quarter 2008 financial performance are highlighted below. All amounts are pre-tax unless otherwise noted.

-- As of June 30, 2008, PSE provided service to 1,063,500 electric customers and 737,400 natural gas customers, representing a 1.5 percent and 2.3 percent increase, respectively, in the last 12 months. -- Retail electric and natural gas sales volumes increased by 4.9 percent and 16.9 percent, respectively, reflecting customer growth and colder than average temperatures in the Pacific Northwest during the second quarter of 2008 compared to 2007. The number of heating degree days for the Puget Sound region during the second quarter 2008 was 17 percent higher than historic averages compared to 5.9 percent lower in the second quarter 2007. -- The 16.9 percent rise in natural gas sales volumes driven by customer growth and colder temperatures in the second quarter of 2008 resulted in an increase in natural gas margin of $8.4 million, over prior year levels. Natural gas margin represents natural gas sales to retail and transportation customers, net of revenue-based taxes, less the cost of purchasing and transporting natural gas. -- The rise in electric margin that would have resulted from the 4.9 percent increase in retail electric sales volumes was offset by higher power costs. Electric margin decreased by $0.9 million in the second quarter 2008 compared to 2007. Contributing to the higher power costs was a 6.8 percent decline in hydroelectric energy supplies from company-owned facilities and long-term power supply contracts, as well as higher market prices for purchased power. Market prices for natural gas were also higher during the period and contributed to the rise in power costs from PSE's natural gas generating facilities, which were operated at increased levels. In the second quarter of 2008, PSE customer electric usage generated by natural gas generating facilities was 4.7 percent as compared to 2.7 percent in 2007. The overall increase in power costs during the second quarter of 2008 was partially mitigated by a 17.8 percent increase in output from PSE's wind-powered electric generating facilities. Electric margin represents electric sales, net of revenue-based taxes, to retail and transportation customers less the cost of generating, purchasing and wheeling electricity. -- Utility operations and maintenance expense in the second quarter 2008 increased by $17.5 million over prior year levels, reflecting higher costs related to operations and maintenance of PSE's electric generating facilities, planned and unplanned utility infrastructure maintenance and customer service. -- Depreciation and amortization expense in the second quarter 2008 increased by $10.5 million over prior year levels, including the $5.9 million benefit from the 2007 deferral of the Goldendale Generating Facility (Goldendale), described below. Excluding the 2007 Goldendale deferral, depreciation and amortization expense increased $4.6 million in 2008 compared to prior year levels reflecting additional utility plant placed in service over the last 12 months. PSE's 2007 results reflect the benefit of deferral of certain ownership and operating costs totaling $5.9 million related to Goldendale, purchased in February 2007. A regulatory asset was established (following regulatory approval) to record the deferral, and a corresponding credit is reflected in the financial statements as a reduction to depreciation and amortization expense. Deferral of such costs ceased, effective Sept. 1, 2007, when PSE began to recover Goldendale ownership and operating costs in its electric customer rates. Recovery of Goldendale deferred amounts, including carrying charges, were included in the company's pending general rate case (GRC) proceeding, filed in December 2007. -- Property tax expense decreased by $5 million during the second quarter of 2008 compared to the prior year due to a true-up of accrued property tax expense for calendar year 2007. Actual tax billings received in 2008 were lower than estimated due primarily to lower levy rates assessed on PSE's property values. -- Other income net of other expenses increased $3.8 million due to the net effect of a higher equity component of AFUDC (capitalization of carrying costs on utility capital projects) and decreases in expenses related to share-based compensation and regulatory penalties. -- In the second quarter of 2008, PSE recorded an unrealized SFAS-133 pre-tax gain of $2.4 million compared to an unrealized pre-tax loss of $1.5 million in the second quarter 2007. These unrealized gains/losses are the result of mark-to-market changes on long-term electric energy contracts or electric generation fuel supply contracts not qualifying for hedge accounting treatment under SFAS-133. Unrealized gains and losses recorded under SFAS-133 will reverse in the future as electric energy and fuel contracts are fulfilled and actual costs incurred. -- The average number of diluted common shares outstanding during the second quarter of 2008 increased by 11 percent to 130 million from 117.2 million during the second quarter of 2007. The increase was primarily the result of a sale of 12.5 million shares of newly issued Puget Energy common stock on Dec. 3, 2007, to a group of long-term infrastructure investors. The net proceeds of $293.3 million from this transaction were invested in PSE as additional equity to fund capital expenditures, debt redemption and working capital. PSE's equity ratio at June 30, 2008, was 47.1 percent.

Year-to-date June 30, 2008 Summary

Key components of PSE's year-to-date June 30, 2008, financial performance are summarized below. All amounts are pre-tax unless otherwise noted.

For the six months ended June 30, 2008, Puget Energy's net income was $113.5 million, or 87 cents per diluted share, compared to net income of $117.7 million, or $1 per diluted share, for the same period in 2007. During the six months ended June 30, 2008, Puget Energy incurred $7 million in costs related to the proposed merger announced on Oct. 26, 2007.

PSE's net income for the six months ended June 30, 2008, was $120 million, or 92 cents per diluted share, compared to net income of $117.1 million, or $1 per diluted share, for the same period in 2007. PSE's net income for the six months ended June 30, 2008, was positively impacted by increased electric and gas margins of $24.5 million and $20.9 million, respectively, driven by higher energy sales volumes resulting from cooler temperatures (relative to historic averages) and customer growth. Additional utility plant placed into service resulted in a $16.2 million increase in depreciation and amortization for the six months ended June 30, 2008, which negatively impacted PSE's net income for the period. An increase in utility operations and maintenance expense of $31.5 million, which includes a $10.5 million charge related to the settlement of a lawsuit, also negatively impacted PSE's net income for the six months ending June 30, 2008.

Merger

The consummation of the merger is subject to certain closing conditions, including regulatory approval from the Washington Utilities and Transportation Commission (UTC). A joint application was filed with the UTC on Dec. 17, 2007, by PSE and the investor consortium seeking approval of the merger. On July 21, 2008, PSE and the investor consortium reached a settlement to resolve all issues with several of the parties involved in the merger proceeding before the UTC. The UTC must still review the multi-party settlement stipulation and issue its decision on the merger request.

PSE and the investor consortium filed a Hart-Scott-Rodino application and received early termination of the waiting period effective Aug. 1, 2008. The merger transaction is expected to close during the second half of 2008 once all closing conditions have been met, including completion of reviews by the Committee on Foreign Investment in the United States, the Federal Communications Commission, and, as discussed above, the UTC.

Form 10-Q Quarterly Report for the Second Quarter of 2008

Puget Energy will file its Form 10-Q for the second quarter 2008 with the Securities and Exchange Commission (SEC) by Aug. 11, 2008, a copy of which will be available through the SEC's Web site at www.sec.gov or at www.pugetenergy.com. Investors are encouraged to read the financial statements and disclosures that will be contained in the Form 10-Q filing.

About Puget Energy

Puget Energy (NYSE:PSD) is the parent company of Puget Sound Energy (PSE), a regulated utility providing electric and natural gas service primarily to the growing Puget Sound region of Western Washington.

About Puget Sound Energy

Washington state's oldest and largest energy utility, with a 6,000-square-mile service area stretching across 11 counties, Puget Sound Energy serves more than 1 million electric customers and 737,000 natural gas customers, primarily in Western Washington. PSE, a subsidiary of Puget Energy (NYSE:PSD), meets the energy needs of its growing customer base through incremental, cost-effective energy conservation, low-cost procurement of sustainable energy resources, and far-sighted investment in the energy-delivery infrastructure. PSE employees are dedicated to providing great customer service to deliver energy that is safe, reliable, reasonably priced, and environmentally responsible. For more information, visit PSE.com.

CAUTIONARY STATEMENT: Certain statements contained in this news release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, among which include PSE's plans relating to utility plant additions and expenses, and factors that could impact Puget Energy's earnings. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect actual results include, among others, governmental policies and regulatory actions, including those of the Washington Utilities and Transportation Commission, and weather conditions. More information about these and other factors that potentially could affect the company's financial results is included in Puget Energy's and PSE's most recent annual report on Form 10-K, quarterly report on Form 10-Q and in their other public filings filed with the Securities and Exchange Commission. Except as required by law, Puget Energy and PSE undertake no obligation to update any forward-looking statements.

PUGET ENERGY -- SUMMARY INCOME STATEMENT ---------------------------------------------------------------------- (In thousands, except per-share amounts) Unaudited Unaudited Three months ended Six months ended 06/30(1) 06/30(1) ------------------- ----------------------- 2008 2007 2008 2007 ------------------- ----------------------- Operating revenues Electric $478,038 $435,261 $1,084,172 $ 962,880 Gas 233,840 225,175 677,077 692,184 Non-utility operating revenue 526 702 2,088 9,979 --------- --------- ----------- ----------- Total operating revenues 712,404 661,138 1,763,337 1,665,043 --------- --------- ----------- ----------- Operating expenses Purchased electricity 198,886 172,757 471,718 454,849 Electric generation fuel 32,687 23,726 79,701 49,784 Residential exchange (20,298) (17,562) (20,305) (52,040) Purchased gas 137,718 139,055 413,913 449,702 Unrealized net (gain) on derivative instruments (2,364) 1,536 (2,277) (4,246) Utility operations & maintenance 116,449 98,935 228,613 197,106 Non-utility expense and other 1,597 2,768 2,062 4,898 Merger expenses 5,738 --- 7,049 --- Depreciation & amortization 76,322 65,832 151,688 135,441 Conservation amortization 15,525 8,749 28,891 19,078 Taxes other than income taxes 63,674 63,294 157,947 150,363 --------- --------- ----------- ----------- Total operating expenses 625,934 559,090 1,519,000 1,404,935 --------- --------- ----------- ----------- Operating income 86,470 102,048 244,337 260,108 Other income (deductions): Other income 8,073 6,223 14,917 10,987 Other expense (841) (2,829) (1,817) (3,861) Interest Charges: AFUDC 1,782 2,943 4,211 5,361 Interest expense (48,543) (52,192) (99,591) (103,453) --------- --------- ----------- ----------- Income from continuing operations before income taxes 46,941 56,193 162,057 169,142 Income taxes 13,287 17,593 48,590 51,480 --------- --------- ----------- ----------- Net Income from continuing operations 33,654 38,600 113,467 117,662 Income from discontinued operations, net of tax --- 12 --- 12 --------- --------- ----------- ----------- Net Income $ 33,654 $ 38,612 $ 113,467 $ 117,674 ========= ========= =========== =========== Common shares outstanding 129,417 116,659 129,427 116,567 Diluted shares outstanding 129,967 117,158 129,862 117,115 --------- --------- ----------- ----------- Basic earnings per common share before discontinued operations $ 0.26 $ 0.33 $ 0.88 $ 1.01 Basic earnings from discontinued operations --- --- --- --- --------- --------- ----------- ----------- Basic earnings per common share $ 0.26 $ 0.33 $ 0.88 $ 1.01 ========= ========= =========== =========== Diluted earnings per common share before discontinued operations $ 0.26 $ 0.33 $ 0.87 $ 1.00 Diluted earnings from discontinued operations --- --- --- --- --------- --------- ----------- ----------- Diluted earnings per common share(2) $ 0.26 $ 0.33 $ 0.87 $ 1.00 ========= ========= =========== =========== (1) Partial-year results may not accurately predict full-year performance, as earnings are significantly affected by weather. (2) Diluted earnings per common share include the dilutive effect of securities related to employee compensation plans.

PUGET SOUND ENERGY -- UTILITY OPERATING DATA ---------------------------------------------------------------------- Three months ended Six months ended 06/30 06/30 ------------------------------------------------- 2008 2007 2008 2007 ----------------------- ------------------------- Energy sales revenues ($ in thousands; unaudited) Electricity Residential $ 237,095 $ 199,419 $ 583,658 $ 491,446 Commercial 189,483 173,493 401,447 372,986 Industrial 26,075 25,133 53,562 52,258 Other retail sales, including change in unbilled (20,738) (7,979) (32,333) (31,561) ----------- ----------- ------------ ------------ Subtotal, retail sales 431,915 390,066 1,006,334 885,129 Transportation, including change in unbilled 1,358 2,437 2,876 4,778 Sales to other utilities & marketers 24,415 27,078 42,443 46,279 Other(1) 20,350 15,680 32,519 26,694 ----------- ----------- ------------ ------------ Total electricity sales 478,038 435,261 1,084,172 962,880 ----------- ----------- ------------ ------------ Gas Residential 144,335 134,940 438,543 435,806 Commercial 72,100 72,402 199,950 207,935 Industrial 9,699 10,222 22,464 32,486 ----------- ----------- ------------ ------------ Subtotal, retail sales 226,134 217,564 660,957 676,227 Transportation 3,434 3,194 7,195 6,781 Other 4,272 4,417 8,925 9,176 ----------- ----------- ------------ ------------ Total gas sales 233,840 225,175 677,077 692,184 ----------- ----------- ------------ ------------ Total energy sales revenues $ 711,878 $ 660,436 $ 1,761,249 $ 1,655,064 -------------------------------------------- ------------------------- Energy sales volumes (unaudited) Electricity (in mWh) Residential 2,670,685 2,431,968 6,285,832 5,984,930 Commercial 2,294,053 2,210,127 4,771,386 4,630,616 Industrial 332,031 338,625 661,769 679,017 Other, including change in unbilled (244,984) (165,284) (371,944) (430,363) ----------- ----------- ------------ ------------ Subtotal, retail sales 5,051,785 4,815,436 11,347,043 10,864,200 Transportation, including change in unbilled 518,560 529,683 1,030,943 1,049,430 Sales to other utilities & marketers 635,369 638,284 880,026 1,055,007 ----------- ----------- ------------ ------------ Total mWh 6,205,714 5,983,403 13,258,012 12,968,637 Gas (in 000's of therms) Residential 112,525 90,691 357,914 310,554 Commercial 66,503 56,934 186,018 166,555 Industrial 9,412 8,295 21,217 27,176 Transportation 52,951 50,596 116,297 109,376 ----------- ----------- ------------ ------------ Total gas volumes 241,391 206,516 681,446 613,661 -------------------------------------------- ------------------------- Margins(2) ($ in thousands; unaudited) Electric $ 205,616 $ 206,491 $ 427,851 $ 403,354 Gas 69,225 60,845 192,220 171,304 -------------------------------------------- ------------------------- Weather (unaudited) Actual heating degree days 1,039 836 3,107 2,803 Normal heating degree days(3) 888 888 2,851 2,830 -------------------------------------------- ------------------------- Customers served at June 30 (4) (unaudited) Electricity Residential 939,123 925,329 Commercial 117,365 115,725 Industrial 3,742 3,775 Other 3,233 2,943 Transportation 18 18 ----------- ----------- Total electricity customers 1,063,481 1,047,790 Gas Residential 680,877 665,958 Commercial 53,794 52,392 Industrial 2,612 2,640 Transportation 129 123 ----------- ----------- Total gas customers 737,412 721,113 (1)Includes sales of non-core gas supplies. (2)Electric margin is electric sales to retail and transportation customers less the cost of generating and purchasing electric energy sold to customers, including transmission costs, to bring electric energy to PSE's service territory. Gas margin is gas sales to retail and transportation customers less the cost of gas purchased, including gas transportation costs, to bring gas to PSE's service territory. (3)Seattle-Tacoma Airport statistics reported by NOAA which are based on a 30-year average, 1971-2000. Heating degree days measure how far the daily average temperature falls below 65 degrees. Heating degree days in 2008 are adjusted for leap year by adding the heating degree day for February 28th. (4)Customers represents average served at month end.

Source: Business Wire

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