UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20172018
OR
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from ________ to ________
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Commission File Number | Exact name of registrant as specified in its charter, state of incorporation, address of principal executive offices, telephone number | I.R.S. Employer Identification Number |
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1-16305 | PUGET ENERGY, INC. A Washington Corporation 10885 NE 4th Street, Suite 1200 Bellevue, Washington 98004-5591 (425) 454-6363 | 91-1969407 |
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1-4393 | PUGET SOUND ENERGY, INC. A Washington Corporation 10885 NE 4th Street, Suite 1200 Bellevue, Washington 98004-5591 (425) 454-6363 | 91-0374630 |
Indicate by check mark whether the registrants: (1) have 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) have been subject to such filing requirements for the past 90 days.
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Puget Energy, Inc. | Yes | /X/ | No | / / | | Puget Sound Energy, Inc. | Yes | /X/ | No | / / |
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate websites, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Puget Energy, Inc. | Yes | /X/ | No | / / | | Puget Sound Energy, Inc. | Yes | /X/ | No | / / |
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Puget Energy, Inc. | Large accelerated filer | / / | Accelerated filer | / / | Non-accelerated filer | /X/ | Smaller reporting company | / / | Emerging growth company | / / |
Puget Sound Energy, Inc. | Large accelerated filer | / / | Accelerated filer | / / | Non-accelerated filer | /X/ | Smaller reporting company | / / | Emerging growth company | / / |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. / /
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Puget Energy, Inc. | Yes | / / | No | /X/ | | Puget Sound Energy, Inc. | Yes | / / | No | /X/ |
All of the outstanding shares of voting stock of Puget Energy, Inc. are held by Puget Equico LLC, an indirect wholly-owned subsidiary of Puget Holdings LLC. All of the outstanding shares of voting stock of Puget Sound Energy, Inc. are held by Puget Energy, Inc.
Table of Contents
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DEFINITIONS
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ARO | Asset Retirement and Environmental Obligations |
ASU | Accounting Standards Update |
ASC | Accounting Standards Codification |
EBITDA | Earnings Before Interest, Tax, Depreciation and Amortization |
EIM | Energy Imbalance Market |
ERF | Expedited Rate Filing |
FASB | Financial Accounting Standards Board |
GAAP | U.S. Generally Accepted Accounting Principles |
GRC | General Rate Case |
ISDA | International Swaps and Derivatives Association |
LIBOR | London Interbank Offered Rate |
LNG | Liquefied Natural Gas |
MMBtu | One Million British Thermal Units |
MWh | Megawatt Hour (one MWh equals one thousand kWh) |
NAESB | North American Energy Standards Board |
NPNS | Normal Purchase Normal Sale |
PCA | Power Cost Adjustment |
PCORC | Power Cost Only Rate Case |
PGA | Purchased Gas Adjustment |
PTC | Production Tax Credit |
PSE | Puget Sound Energy, Inc. |
Puget Energy | Puget Energy, Inc. |
Puget Holdings | Puget Holdings, LLC |
Puget LNG | Puget Liquid Natural Gas |
REP | Residential Exchange Program |
SERP | Supplemental Executive Retirement Plan |
TCJA | Tax Cuts and Jobs Act |
Washington Commission | Washington Utilities and Transportation Commission |
WSPP | WSPP, Inc. |
FILING FORMAT
This report on Form 10-Q is a Quarterly Report filed separately by two registrants, Puget Energy, Inc. (Puget Energy) and Puget Sound Energy, Inc. (PSE). Any references in this report to “the Company” are to Puget Energy and PSE collectively.
FORWARD-LOOKING STATEMENTS
Puget Energy and PSE include the following cautionary statements in this Form 10-Q 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 and assumptions of future events or performance. Words or phrases such as “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “future,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “should,” “will likely result,” “will continue” or similar expressions are intended to identify certain of these forward-looking statements and may be included in discussion of, among other things, our anticipated operating or financial performance, business plans and prospects, planned capital expenditures and other future expectations. In particular, these include statements relating to future actions, business plans and prospects, future performance expenses, the outcome of contingencies, such as legal proceedings, government regulation and financial results.
Forward-looking statements reflect current expectations and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed. 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 risks that could cause actual results or outcomes for Puget Energy and PSE to differ materially from past results and those discussed in the forward-looking statements include:
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● | Governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission (FERC) and the Washington Utilities and Transportation Commission (Washington Commission), that may affect our ability to recover costs and earn a reasonable return, including but not limited to disallowance or delays in the recovery of capital investments and operating costs and discretion over allowed return on investment; |
● | Changes in, adoption of and compliance with laws and regulations, including decisions and policies concerning the environment, climate change, greenhouse gas or other emissions or by products of electric generation (including coal ash or other substances), natural resources, and fish and wildlife (including the Endangered Species Act) as well as the risk of litigation arising from such matters, whether involving public or private claimants or regulatory investigative or enforcement measures; |
● | Changes in tax law, related regulations or differing interpretation, including as a result of the TCJA, or enforcement of applicable law by the Internal Revenue Service (IRS) or other taxing jurisdiction; and PSE's ability to recover costs in a timely manner arising from such changes; |
● | Inability to realize deferred tax assets and use production tax credits (PTCs) due to insufficient future taxable income; |
● | Accidents or natural disasters, such as hurricanes, windstorms, earthquakes, floods, fires and landslides, and other acts of God, terrorism, asset-based or cyber-based attacks, pandemic or similar significant events, which can interrupt service and lead to lost revenue, cause temporary supply disruptions and/or price spikes in the cost of fuel and raw materials and impose extraordinary costs; |
● | Commodity price risks associated with procuring natural gas and power in wholesale markets from creditworthy counterparties; |
● | Wholesale market disruption, which may result in a deterioration of market liquidity, increase the risk of counterparty default, affect the regulatory and legislative process in unpredictable ways, negatively affect wholesale energy prices and/or impede PSE's ability to manage its energy portfolio risks and procure energy supply, affect the availability and access to capital and credit markets and/or impact delivery of energy to PSE from its suppliers; |
● | Financial difficulties of other energy companies and related events, which may affect the regulatory and legislative process in unpredictable ways, adversely affect the availability of and access to capital and credit markets and/or impact delivery of energy to PSE from its suppliers; |
● | The effect of wholesale market structures (including, but not limited to, regional market designs or transmission organizations) or other related federal initiatives; |
● | PSE electric or natural gas distribution system failure, blackouts or large curtailments of transmission systems (whether PSE's or others'), or failure of the interstate natural gas pipeline delivering to PSE's system, all of which can affect PSE's ability to deliver power or natural gas to its customers and generating facilities; |
● | Electric plant generation and transmission system outages, which can have an adverse impact on PSE's expenses with respect to repair costs, added costs to replace energy or higher costs associated with dispatching a more expensive generation resource; |
● | The ability to restart generation following a regional transmission disruption; |
● | The ability of a natural gas or electric plant to operate as intended; |
● | Changes in climate or weather conditions in the Pacific Northwest, which could have effects on customer usage and PSE's revenue and expenses; |
● | Regional or national weather, which could impact PSE's ability to procure adequate supplies of natural gas, fuel or purchased power to serve its customers and the cost of procuring such supplies; |
● | Variable hydrological conditions, which can impact streamflow and PSE's ability to generate electricity from hydroelectric facilities; |
● | Variable wind conditions, which can impact PSE's ability to generate electricity from wind facilities; |
● | The ability to renew contracts for electric and natural gas supply and the price of renewal; |
● | Industrial, commercial and residential growth and demographic patterns in the service territories of PSE; |
● | General economic conditions in the Pacific Northwest, which may impact customer consumption or affect PSE's accounts receivable; |
● | The loss of significant customers, changes in the business of significant customers or the condemnation of PSE's facilities as a result of municipalization or other government action or negotiated settlement, which may result in changes in demand for PSE's services; |
● | The failure of information systems or the failure to secure information system data, which may impact the operations and cost of PSE's customer service, generation, distribution and transmission; |
● | Opposition and social activism that may hinder PSE's ability to perform work or construct infrastructure; |
● | Capital market conditions, including changes in the availability of capital and interest rate fluctuations; |
● | Employee workforce factors, including strikes, work stoppages, availability of qualified employees or the loss of a key executive; |
● | The ability to obtain insurance coverage, the availability of insurance for certain specific losses, and the cost of such insurance; |
● | The ability to maintain effective internal controls over financial reporting and operational processes; |
● | Changes in Puget Energy's or PSE's credit ratings, which may have an adverse impact on the availability and cost of capital for Puget Energy or PSE generally; and |
● | Deteriorating values of the equity, fixed income and other markets which could significantly impact the value of investments of PSE's retirement plan, post-retirement medical benefit plan trusts and the funding of obligations thereunder. |
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, the Company undertakes 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. For further information, see Item 1A, “Risk Factors” in the Company's most recent Annual Report on Form 10-K.10-K for the year ended December 31, 2017.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Operating revenue: | | | | | | | | | | | | | | |
Electric | $ | 529,807 |
| | $ | 497,152 |
| | $ | 1,198,792 |
| | $ | 1,127,343 |
| $ | 501,510 |
| | $ | 529,807 |
| | $ | 1,201,196 |
| | $ | 1,198,792 |
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Natural gas | 180,105 |
| | 163,443 |
| | 580,169 |
| | 486,851 |
| 160,196 |
| | 180,105 |
| | 490,480 |
| | 580,169 |
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Other | 9,855 |
| | 7,574 |
| | 18,038 |
| | 16,672 |
| 10,146 |
| | 9,855 |
| | 18,184 |
| | 18,038 |
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Total operating revenue | 719,767 |
| | 668,169 |
| | 1,796,999 |
| | 1,630,866 |
| 671,852 |
| | 719,767 |
| | 1,709,860 |
| | 1,796,999 |
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Operating expenses: | |
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Energy costs: | |
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Purchased electricity | 129,799 |
| | 118,551 |
| | 309,381 |
| | 261,448 |
| 129,114 |
| | 129,799 |
| | 283,320 |
| | 309,381 |
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Electric generation fuel | 34,163 |
| | 40,930 |
| | 85,473 |
| | 95,123 |
| 29,750 |
| | 34,163 |
| | 72,173 |
| | 85,473 |
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Residential exchange | (15,121 | ) | | (13,376 | ) | | (38,568 | ) | | (33,516 | ) | (16,091 | ) | | (15,121 | ) | | (40,035 | ) | | (38,568 | ) |
Purchased natural gas | 63,183 |
| | 48,273 |
| | 215,984 |
| | 171,376 |
| 53,872 |
| | 63,183 |
| | 181,487 |
| | 215,984 |
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Unrealized (gain) loss on derivative instruments, net | 3,834 |
| | (46,724 | ) | | 23,121 |
| | (63,546 | ) | (6,911 | ) | | 3,834 |
| | (7,907 | ) | | 23,121 |
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Utility operations and maintenance | 145,555 |
| | 138,018 |
| | 297,618 |
| | 284,008 |
| 140,131 |
| | 145,555 |
| | 300,655 |
| | 297,618 |
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Non-utility expense and other | 6,144 |
| | 5,179 |
| | 11,339 |
| | 10,814 |
| 8,419 |
| | 6,144 |
| | 21,249 |
| | 11,339 |
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Depreciation and amortization | 119,457 |
| | 111,273 |
| | 234,710 |
| | 218,787 |
| 152,105 |
| | 119,457 |
| | 336,617 |
| | 234,710 |
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Conservation amortization | 25,691 |
| | 22,540 |
| | 60,453 |
| | 55,751 |
| 24,025 |
| | 25,691 |
| | 60,888 |
| | 60,453 |
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Taxes other than income taxes | 77,032 |
| | 67,871 |
| | 195,731 |
| | 170,163 |
| 73,347 |
| | 77,032 |
| | 184,535 |
| | 195,731 |
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Total operating expenses | 589,737 |
| | 492,535 |
| | 1,395,242 |
| | 1,170,408 |
| 587,761 |
| | 589,737 |
| | 1,392,982 |
| | 1,395,242 |
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Operating income (loss) | 130,030 |
| | 175,634 |
| | 401,757 |
| | 460,458 |
| 84,091 |
| | 130,030 |
| | 316,878 |
| | 401,757 |
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Other income (expense): | |
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Other income | 6,263 |
| | 7,078 |
| | 12,223 |
| | 13,053 |
| 8,116 |
| | 6,263 |
| | 21,573 |
| | 12,223 |
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Other expense | (2,042 | ) | | (2,122 | ) | | (3,257 | ) | | (3,462 | ) | (2,330 | ) | | (2,042 | ) | | (4,428 | ) | | (3,257 | ) |
Non-hedged interest rate swap (expense) income | — |
| | (359 | ) | | 28 |
| | (1,213 | ) | — |
| | — |
| | — |
| | 28 |
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Interest charges: | |
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AFUDC | 2,555 |
| | 2,603 |
| | 4,730 |
| | 4,962 |
| 3,318 |
| | 2,555 |
| | 6,201 |
| | 4,730 |
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Interest expense | (88,409 | ) | | (88,676 | ) | | (176,991 | ) | | (177,489 | ) | (86,084 | ) | | (88,409 | ) | | (174,410 | ) | | (176,991 | ) |
Income (loss) before income taxes | 48,397 |
| | 94,158 |
| | 238,490 |
| | 296,309 |
| 7,111 |
| | 48,397 |
| | 165,814 |
| | 238,490 |
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Income tax (benefit) expense | 13,122 |
| | 29,605 |
| | 75,665 |
| | 90,570 |
| 3,469 |
| | 13,122 |
| | 15,272 |
| | 75,665 |
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Net income (loss) | $ | 35,275 |
| | $ | 64,553 |
| | $ | 162,825 |
| | $ | 205,739 |
| $ | 3,642 |
| | $ | 35,275 |
| | $ | 150,542 |
| | $ | 162,825 |
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The accompanying notes are an integral part of the financial statements.
PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) | $ | 35,275 |
| | $ | 64,553 |
| | $ | 162,825 |
| | $ | 205,739 |
| $ | 3,642 |
| | $ | 35,275 |
| | $ | 150,542 |
| | 162,825 |
|
Other comprehensive income (loss): | |
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Net unrealized gain (loss) from pension and post-retirement plans, net of tax of $(115), $(100), $359, and $(200), respectively | (214 | ) | | (185 | ) | | 666 |
| | (371 | ) | |
Net unrealized gain (loss) from pension and post-retirement plans, net of tax of $60, $(115), $120, and $359, respectively | | 227 |
| | (214 | ) | | 453 |
| | 666 |
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Reclassification of stranded taxes to retained earnings due to tax reform | | — |
| | — |
| | (5,230 | ) | | — |
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Other comprehensive income (loss) | (214 | ) | | (185 | ) | | 666 |
| | (371 | ) | 227 |
| | (214 | ) | | (4,777 | ) | | 666 |
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Comprehensive income (loss) | $ | 35,061 |
| | $ | 64,368 |
| | $ | 163,491 |
| | $ | 205,368 |
| $ | 3,869 |
| | $ | 35,061 |
| | $ | 145,765 |
| | $ | 163,491 |
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The accompanying notes are an integral part of the financial statements.
PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
ASSETS | PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
ASSETS | PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
ASSETS |
| | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
Utility plant (at original cost, including construction work in progress of $505,334 and $420,278, respectively): | | | | |
Utility plant (at original cost, including construction work in progress of $637,322 and $495,937, respectively): | | | | |
Electric plant | $ | 7,824,350 |
| | $ | 7,673,772 |
| $ | 8,305,168 |
| | $ | 8,135,847 |
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Natural gas plant | 3,178,998 |
| | 3,051,586 |
| 3,444,954 |
| | 3,307,545 |
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Common plant | 673,542 |
| | 594,994 |
| 905,018 |
| | 811,815 |
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Less: Accumulated depreciation and amortization | (2,321,677 | ) | | (2,161,796 | ) | (2,623,659 | ) | | (2,428,524 | ) |
Net utility plant | 9,355,213 |
| | 9,158,556 |
| 10,031,481 |
| | 9,826,683 |
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Other property and investments: | |
| | |
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Goodwill | 1,656,513 |
| | 1,656,513 |
| 1,656,513 |
| | 1,656,513 |
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Other property and investments | 146,316 |
| | 106,418 |
| 222,170 |
| | 182,355 |
|
Total other property and investments | 1,802,829 |
| | 1,762,931 |
| 1,878,683 |
| | 1,838,868 |
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Current assets: | |
| | |
| |
| | |
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Cash and cash equivalents | 7,805 |
| | 28,878 |
| 8,117 |
| | 26,616 |
|
Restricted cash | 12,048 |
| | 12,418 |
| 10,083 |
| | 10,145 |
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Accounts receivable, net of allowance for doubtful accounts of $9,977 and $9,798, respectively | 251,304 |
| | 329,375 |
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Accounts receivable, net of allowance for doubtful accounts of $10,716 and $8,901, respectively | | 218,306 |
| | 341,110 |
|
Unbilled revenue | 115,945 |
| | 234,053 |
| 123,214 |
| | 222,186 |
|
Purchased gas adjustment receivable | — |
| | 2,785 |
| |
Materials and supplies, at average cost | 100,772 |
| | 106,378 |
| 112,913 |
| | 107,003 |
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Fuel and natural gas inventory, at average cost | 55,598 |
| | 58,181 |
| 51,084 |
| | 49,908 |
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Unrealized gain on derivative instruments | 16,078 |
| | 54,341 |
| 19,872 |
| | 22,247 |
|
Prepaid expense and other | 29,146 |
| | 43,046 |
| 23,418 |
| | 21,996 |
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Power contract acquisition adjustment gain | 15,544 |
| | 33,413 |
| 8,480 |
| | 12,207 |
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Total current assets | 604,240 |
| | 902,868 |
| 575,487 |
| | 813,418 |
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Other long-term and regulatory assets: | |
| | |
| |
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Regulatory asset for deferred income taxes | 71,598 |
| | 72,038 |
| |
Power cost adjustment mechanism | 4,505 |
| | 4,531 |
| 4,651 |
| | 4,576 |
|
Regulatory assets related to power contracts | 20,737 |
| | 22,613 |
| 17,754 |
| | 19,454 |
|
Other regulatory assets | 1,004,297 |
| | 1,034,348 |
| 818,081 |
| | 948,532 |
|
Unrealized gain on derivative instruments | 4,505 |
| | 8,738 |
| 3,589 |
| | 2,158 |
|
Power contract acquisition adjustment gain | 168,040 |
| | 241,648 |
| 159,168 |
| | 162,711 |
|
Other | 62,589 |
| | 58,109 |
| 84,159 |
| | 74,389 |
|
Total other long-term and regulatory assets | 1,336,271 |
| | 1,442,025 |
| 1,087,402 |
| | 1,211,820 |
|
Total assets | $ | 13,098,553 |
| | $ | 13,266,380 |
| $ | 13,573,053 |
| | $ | 13,690,789 |
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The accompanying notes are an integral part of the financial statements.
PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
CAPITALIZATION AND LIABILITIES | PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
CAPITALIZATION AND LIABILITIES | PUGET ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
CAPITALIZATION AND LIABILITIES |
| | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
Capitalization: | | | | | | |
Common shareholder’s equity: | | | | | | |
Common stock $0.01 par value, 1,000 shares authorized, 200 shares outstanding | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
Additional paid-in capital | 3,308,957 |
| | 3,308,957 |
| 3,308,957 |
| | 3,308,957 |
|
Retained earnings | 576,161 |
| | 413,468 |
| 565,600 |
| | 465,355 |
|
Accumulated other comprehensive income (loss), net of tax | (33,046 | ) | | (33,712 | ) | (29,059 | ) | | (24,282 | ) |
Total common shareholder’s equity | 3,852,072 |
| | 3,688,713 |
| 3,845,498 |
| | 3,750,030 |
|
Long-term debt: | |
| | |
| |
| | |
|
First mortgage bonds and senior notes | 3,162,000 |
| | 3,362,000 |
| 3,764,412 |
| | 3,164,412 |
|
Pollution control bonds | 161,860 |
| | 161,860 |
| 161,860 |
| | 161,860 |
|
Junior subordinated notes | 250,000 |
| | 250,000 |
| — |
| | 250,000 |
|
Long-term debt | 1,860,554 |
| | 1,812,480 |
| 1,939,551 |
| | 1,902,600 |
|
Debt discount, issuance costs and other | (227,766 | ) | | (234,679 | ) | (220,632 | ) | | (220,943 | ) |
Total long-term debt | 5,206,648 |
| | 5,351,661 |
| 5,645,191 |
| | 5,257,929 |
|
Total capitalization | 9,058,720 |
| | 9,040,374 |
| 9,490,689 |
| | 9,007,959 |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable | 245,171 |
| | 317,043 |
| 308,305 |
| | 359,586 |
|
Short-term debt | 5,000 |
| | 245,763 |
| 28,000 |
| | 329,463 |
|
Current maturities of long-term debt | 202,412 |
| | 2,412 |
| — |
| | 200,000 |
|
Purchased gas adjustment payable | 10,980 |
| | — |
| 38,645 |
| | 16,051 |
|
Accrued expenses: | |
| | |
| |
| | |
|
Taxes | 102,132 |
| | 111,428 |
| 104,092 |
| | 117,948 |
|
Salaries and wages | 39,245 |
| | 49,749 |
| 42,180 |
| | 53,220 |
|
Interest | 74,046 |
| | 73,610 |
| 69,564 |
| | 73,564 |
|
Unrealized loss on derivative instruments | 44,031 |
| | 44,310 |
| 49,776 |
| | 64,859 |
|
Power contract acquisition adjustment loss | 2,983 |
| | 3,159 |
| 2,585 |
| | 2,762 |
|
Other | 87,756 |
| | 71,996 |
| 93,900 |
| | 80,206 |
|
Total current liabilities | 813,756 |
| | 919,470 |
| 737,047 |
| | 1,297,659 |
|
Other long-term and regulatory liabilities: | |
| | |
| |
| | |
|
Deferred income taxes | 1,646,515 |
| | 1,570,931 |
| 774,195 |
| | 746,868 |
|
Unrealized loss on derivative instruments | 18,237 |
| | 16,261 |
| 15,123 |
| | 21,235 |
|
Regulatory liabilities | 620,950 |
| | 654,622 |
| 743,766 |
| | 731,587 |
|
Regulatory liability for deferred income taxes | | 994,987 |
| | 1,011,626 |
|
Regulatory liabilities related to power contracts | 183,583 |
| | 275,061 |
| 167,647 |
| | 174,918 |
|
Power contract acquisition adjustment loss | 17,754 |
| | 19,454 |
| 15,169 |
| | 16,693 |
|
Other deferred credits | 739,038 |
| | 770,207 |
| 634,430 |
| | 682,244 |
|
Total other long-term and regulatory liabilities | 3,226,077 |
| | 3,306,536 |
| 3,345,317 |
| | 3,385,171 |
|
Commitments and contingencies (Note 8) |
|
| |
|
|
|
| |
|
|
Total capitalization and liabilities | $ | 13,098,553 |
| | $ | 13,266,380 |
| $ | 13,573,053 |
| | $ | 13,690,789 |
|
The accompanying notes are an integral part of the financial statements.
PUGET ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) | PUGET ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) | PUGET ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) |
| | Six Months Ended June 30, | Six Months Ended June 30, |
| 2017 | | 2016 | 2018 | | 2017 |
Operating activities: | | | | | | |
Net income (loss) | $ | 162,825 |
| | $ | 205,739 |
| $ | 150,542 |
| | $ | 162,825 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | 234,710 |
| | 218,787 |
| 336,617 |
| | 234,710 |
|
Conservation amortization | 60,453 |
| | 55,751 |
| 60,888 |
| | 60,453 |
|
Deferred income taxes and tax credits, net | 75,665 |
| | 90,018 |
| 10,567 |
| | 75,665 |
|
Net unrealized (gain) loss on derivative instruments | 22,980 |
| | (65,414 | ) | (7,907 | ) | | 22,980 |
|
AFUDC – equity | (6,766 | ) | | (7,048 | ) | (7,146 | ) | | (6,766 | ) |
Production tax credit monetization | | (51,181 | ) | | — |
|
Other non-cash | | 7,377 |
| | 8,283 |
|
Funding of pension liability | (18,000 | ) | | (9,000 | ) | (9,000 | ) | | (18,000 | ) |
Regulatory assets and liabilities | (44,731 | ) | | (120,615 | ) | 4,591 |
| | (46,101 | ) |
Other long-term assets and liabilities | 11,194 |
| | 14,519 |
| (12,611 | ) | | 4,281 |
|
Change in certain current assets and liabilities: | |
| | | |
| | |
Accounts receivable and unbilled revenue | 196,179 |
| | 184,595 |
| 220,207 |
| | 196,179 |
|
Materials and supplies | 5,606 |
| | (18,594 | ) | (5,910 | ) | | 5,606 |
|
Fuel and natural gas inventory | 2,473 |
| | 4,974 |
| (1,176 | ) | | 2,473 |
|
Prepayments and other | 13,900 |
| | (2,738 | ) | (1,422 | ) | | 13,900 |
|
Purchased gas adjustment | 13,765 |
| | (1,027 | ) | 22,594 |
| | 13,765 |
|
Accounts payable | (49,478 | ) | | (64,132 | ) | (47,040 | ) | | (49,478 | ) |
Taxes payable | (9,296 | ) | | (13,230 | ) | (13,856 | ) | | (9,296 | ) |
Other | (5,809 | ) | | 4,650 |
| (16,937 | ) | | (5,809 | ) |
Net cash provided by (used in) operating activities | 665,670 |
| | 477,235 |
| 639,197 |
| | 665,670 |
|
Investing activities: | |
| | |
| |
| | |
|
Construction expenditures – excluding equity AFUDC | (496,652 | ) | | (303,834 | ) | (490,623 | ) | | (496,652 | ) |
Restricted cash | 370 |
| | (2,179 | ) | |
Other | (6,642 | ) | | (4,851 | ) | 1,956 |
| | (6,642 | ) |
Net cash provided by (used in) investing activities | (502,924 | ) | | (310,864 | ) | (488,667 | ) | | (503,294 | ) |
Financing activities: | |
| | |
| |
| | |
|
Change in short-term debt, net | (240,763 | ) | | (123,004 | ) | (301,463 | ) | | (240,763 | ) |
Dividends paid | (132 | ) | | (74,268 | ) | (55,525 | ) | | (132 | ) |
Proceeds from long-term debt and bonds issued | 48,073 |
| | — |
| 631,701 |
| | 48,073 |
|
Redemption of bonds and notes | | (450,000 | ) | | — |
|
Other | 9,003 |
| | 7,426 |
| 6,196 |
| | 9,003 |
|
Net cash provided by (used in) financing activities | (183,819 | ) | | (189,846 | ) | (169,091 | ) | | (183,819 | ) |
Net increase (decrease) in cash and cash equivalents | (21,073 | ) | | (23,475 | ) | |
Cash and cash equivalents at beginning of period | 28,878 |
| | 42,494 |
| |
Cash and cash equivalents at end of period | $ | 7,805 |
| | $ | 19,019 |
| |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | (18,561 | ) | | (21,443 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | | 36,761 |
| | 41,296 |
|
Cash, cash equivalents, and restricted cash at end of period | | $ | 18,200 |
| | $ | 19,853 |
|
Supplemental cash flow information: | |
| | |
| |
| | |
|
Cash payments for interest (net of capitalized interest) | $ | 163,228 |
| | $ | 164,310 |
| $ | 164,823 |
| | $ | 163,228 |
|
Cash payments (refunds) for income taxes | — |
| | — |
| 5,169 |
| | — |
|
Non-cash financing and investing activities: | | | | | | |
Accounts payable for capital expenditures eliminated from cash flows | $ | 54,419 |
| | $ | 47,151 |
| $ | 97,614 |
| | $ | 54,419 |
|
The accompanying notes are an integral part of the financial statements.
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Operating revenue: | | | | | | | | | | | | | | |
Electric | $ | 529,807 |
| | $ | 497,152 |
| | $ | 1,198,792 |
| | $ | 1,127,343 |
| $ | 501,510 |
| | $ | 529,807 |
| | $ | 1,201,196 |
| | $ | 1,198,792 |
|
Natural gas | 180,105 |
| | 163,443 |
| | 580,169 |
| | 486,851 |
| 160,196 |
| | 180,105 |
| | 490,480 |
| | 580,169 |
|
Other | 9,855 |
| | 7,574 |
| | 18,038 |
| | 16,672 |
| 10,146 |
| | 9,855 |
| | 18,184 |
| | 18,038 |
|
Total operating revenue | 719,767 |
| | 668,169 |
| | 1,796,999 |
| | 1,630,866 |
| 671,852 |
| | 719,767 |
| | 1,709,860 |
| | 1,796,999 |
|
Operating expenses: | |
| | |
| | | | | |
| | |
| | | | |
Energy costs: | |
| | |
| | | | | |
| | |
| | | | |
Purchased electricity | 129,799 |
| | 118,551 |
| | 309,381 |
| | 261,448 |
| 129,114 |
| | 129,799 |
| | 283,320 |
| | 309,381 |
|
Electric generation fuel | 34,163 |
| | 40,930 |
| | 85,473 |
| | 95,123 |
| 29,750 |
| | 34,163 |
| | 72,173 |
| | 85,473 |
|
Residential exchange | (15,121 | ) | | (13,376 | ) | | (38,568 | ) | | (33,516 | ) | (16,091 | ) | | (15,121 | ) | | (40,035 | ) | | (38,568 | ) |
Purchased natural gas | 63,183 |
| | 48,273 |
| | 215,984 |
| | 171,376 |
| 53,872 |
| | 63,183 |
| | 181,487 |
| | 215,984 |
|
Unrealized (gain) loss on derivative instruments, net | 3,834 |
| | (46,724 | ) | | 23,121 |
| | (63,546 | ) | (6,911 | ) | | 3,834 |
| | (7,907 | ) | | 23,121 |
|
Utility operations and maintenance | 145,555 |
| | 138,018 |
| | 297,618 |
| | 284,008 |
| 140,131 |
| | 145,555 |
| | 300,655 |
| | 297,618 |
|
Non-utility expense and other | 9,374 |
| | 8,822 |
| | 17,865 |
| | 17,856 |
| 10,834 |
| | 9,374 |
| | 20,614 |
| | 17,865 |
|
Depreciation and amortization | 119,457 |
| | 111,273 |
| | 234,710 |
| | 218,787 |
| 152,080 |
| | 119,457 |
| | 336,570 |
| | 234,710 |
|
Conservation amortization | 25,691 |
| | 22,540 |
| | 60,453 |
| | 55,751 |
| 24,025 |
| | 25,691 |
| | 60,888 |
| | 60,453 |
|
Taxes other than income taxes | 77,032 |
| | 67,871 |
| | 195,731 |
| | 170,163 |
| 73,347 |
| | 77,032 |
| | 184,535 |
| | 195,731 |
|
Total operating expenses | 592,967 |
| | 496,178 |
| | 1,401,768 |
| | 1,177,450 |
| 590,151 |
| | 592,967 |
| | 1,392,300 |
| | 1,401,768 |
|
Operating income (loss) | 126,800 |
| | 171,991 |
| | 395,231 |
| | 453,416 |
| 81,701 |
| | 126,800 |
| | 317,560 |
| | 395,231 |
|
Other income (expense): | |
| | |
| | | | | |
| | |
| | | |
|
|
Other income | 6,126 |
| | 7,077 |
| | 12,086 |
| | 13,052 |
| 8,113 |
| | 6,126 |
| | 15,756 |
| | 12,086 |
|
Other expense | (2,042 | ) | | (2,122 | ) | | (3,257 | ) | | (3,462 | ) | (2,330 | ) | | (2,042 | ) | | (4,428 | ) | | (3,257 | ) |
Interest charges: | |
| | |
| | | | | |
| | |
| | | |
|
|
AFUDC | 2,555 |
| | 2,603 |
| | 4,730 |
| | 4,962 |
| 3,318 |
| | 2,555 |
| | 6,201 |
| | 4,730 |
|
Interest expense | (59,991 | ) | | (60,647 | ) | | (120,453 | ) | | (121,422 | ) | (57,020 | ) | | (59,991 | ) | | (116,575 | ) | | (120,453 | ) |
Income (loss) before income taxes | 73,448 |
| | 118,902 |
| | 288,337 |
| | 346,546 |
| 33,782 |
| | 73,448 |
| | 218,514 |
| | 288,337 |
|
Income tax (benefit) expense | 22,794 |
| | 38,002 |
| | 94,591 |
| | 109,140 |
| 7,004 |
| | 22,794 |
| | 28,696 |
| | 94,591 |
|
Net income (loss) | $ | 50,654 |
| | $ | 80,900 |
| | $ | 193,746 |
| | $ | 237,406 |
| $ | 26,778 |
| | $ | 50,654 |
| | $ | 189,818 |
| | $ | 193,746 |
|
The accompanying notes are an integral part of the financial statements.
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) | $ | 50,654 |
| | $ | 80,900 |
| | $ | 193,746 |
| | $ | 237,406 |
| $ | 26,778 |
| | $ | 50,654 |
| | $ | 189,818 |
| | $ | 193,746 |
|
Other comprehensive income (loss): | |
| | |
| | |
| | |
| |
| | |
| | | | |
Net unrealized gain (loss) from pension and post-retirement plans, net of tax of $1,143, $1,260, $2,875, and $2,520, respectively | 2,123 |
| | 2,340 |
| | 5,339 |
| | 4,680 |
| |
Amortization of treasury interest rate swaps to earnings, net of tax of $43, $43, $86, and $86, respectively | 79 |
| | 79 |
| | 158 |
| | 158 |
| |
Net unrealized gain (loss) from pension and post-retirement plans, net of tax of $761, $1,143, $1,522, and $2,875, respectively | | 2,863 |
| | 2,123 |
| | 5,727 |
| | 5,339 |
|
Amortization of treasury interest rate swaps to earnings, net of tax of $26, $43, $51, and $86, respectively | | 96 |
| | 79 |
| | 192 |
| | 158 |
|
Reclassification of stranded taxes to retained earnings due to tax reform | | — |
| | — |
| | (27,333 | ) | | — |
|
Other comprehensive income (loss) | 2,202 |
| | 2,419 |
| | 5,497 |
| | 4,838 |
| 2,959 |
| | 2,202 |
| | (21,414 | ) | | 5,497 |
|
Comprehensive income (loss) | $ | 52,856 |
| | $ | 83,319 |
| | $ | 199,243 |
| | $ | 242,244 |
| $ | 29,737 |
| | $ | 52,856 |
| | $ | 168,404 |
| | $ | 199,243 |
|
The accompanying notes are an integral part of the financial statements.
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
| | | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
Utility plant (at original cost, including construction work in progress of $505,334 and $420,278, respectively): | | | | |
Utility plant (at original cost, including construction work in progress of $637,322 and $495,937, respectively): | | | | |
Electric plant | $ | 9,952,520 |
| | $ | 9,813,169 |
| $ | 10,389,267 |
| | $ | 10,232,771 |
|
Natural gas plant | 3,764,503 |
| | 3,640,271 |
| 4,018,260 |
| | 3,882,733 |
|
Common plant | 711,266 |
| | 632,718 |
| 935,706 |
| | 843,145 |
|
Less: Accumulated depreciation and amortization | (5,073,076 | ) | | (4,927,602 | ) | (5,311,752 | ) | | (5,131,966 | ) |
Net utility plant | 9,355,213 |
| | 9,158,556 |
| 10,031,481 |
| | 9,826,683 |
|
Other property and investments: | |
| | |
| |
| | |
|
Other property and investments | 78,928 |
| | 77,960 |
| 77,109 |
| | 76,350 |
|
Total other property and investments | 78,928 |
| | 77,960 |
| 77,109 |
| | 76,350 |
|
Current assets: | |
| | |
| |
| | |
|
Cash and cash equivalents | 7,452 |
| | 28,481 |
| 7,104 |
| | 25,864 |
|
Restricted cash | 12,048 |
| | 12,418 |
| 10,083 |
| | 10,145 |
|
Accounts receivable, net of allowance for doubtful accounts of $9,977 and $9,798, respectively | 257,745 |
| | 344,964 |
| |
Accounts receivable, net of allowance for doubtful accounts of $10,716 and $8,901, respectively | | 224,901 |
| | 343,546 |
|
Unbilled revenue | 115,945 |
| | 234,053 |
| 123,214 |
| | 222,186 |
|
Purchased gas adjustment receivable | — |
| | 2,785 |
| |
Materials and supplies, at average cost | 100,772 |
| | 106,378 |
| 112,913 |
| | 107,003 |
|
Fuel and natural gas inventory, at average cost | 54,378 |
| | 56,851 |
| 49,761 |
| | 48,585 |
|
Unrealized gain on derivative instruments | 16,078 |
| | 54,341 |
| 19,872 |
| | 22,247 |
|
Prepaid expense and other | 29,146 |
| | 43,046 |
| 23,418 |
| | 21,996 |
|
Total current assets | 593,564 |
| | 883,317 |
| 571,266 |
| | 801,572 |
|
Other long-term and regulatory assets: | |
| | |
| |
| | |
|
Regulatory asset for deferred income taxes | 71,085 |
| | 71,517 |
| |
Power cost adjustment mechanism | 4,505 |
| | 4,531 |
| 4,651 |
| | 4,576 |
|
Other regulatory assets | 1,004,303 |
| | 1,034,352 |
| 818,081 |
| | 948,540 |
|
Unrealized gain on derivative instruments | 4,505 |
| | 8,738 |
| 3,589 |
| | 2,158 |
|
Other | 62,589 |
| | 58,109 |
| 81,862 |
| | 71,827 |
|
Total other long-term and regulatory assets | 1,146,987 |
| | 1,177,247 |
| 908,183 |
| | 1,027,101 |
|
Total assets | $ | 11,174,692 |
| | $ | 11,297,080 |
| $ | 11,588,039 |
| | $ | 11,731,706 |
|
The accompanying notes are an integral part of the financial statements.
PUGET SOUND ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
| | | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
Capitalization: | | | | | | |
Common shareholder’s equity: | | | | | | |
Common stock $0.01 par value, 150,000,000 shares authorized, 85,903,791 shares outstanding | $ | 859 |
| | $ | 859 |
| $ | 859 |
| | $ | 859 |
|
Additional paid-in capital | 3,275,105 |
| | 3,275,105 |
| 3,275,105 |
| | 3,275,105 |
|
Retained earnings | 501,967 |
| | 359,795 |
| 566,758 |
| | 452,066 |
|
Accumulated other comprehensive income (loss), net of tax | (140,014 | ) | | (145,511 | ) | (148,320 | ) | | (126,906 | ) |
Total common shareholder’s equity | 3,637,917 |
| | 3,490,248 |
| 3,694,402 |
| | 3,601,124 |
|
Long-term debt: | |
| | |
| |
| | |
|
First mortgage bonds and senior notes | 3,162,000 |
| | 3,362,000 |
| 3,764,412 |
| | 3,164,412 |
|
Pollution control bonds | 161,860 |
| | 161,860 |
| 161,860 |
| | 161,860 |
|
Junior subordinated notes | 250,000 |
| | 250,000 |
| — |
| | 250,000 |
|
Debt discount, issuance costs and other | (27,669 | ) | | (28,974 | ) | (31,230 | ) | | (26,361 | ) |
Total long-term debt | 3,546,191 |
| | 3,744,886 |
| 3,895,042 |
| | 3,549,911 |
|
Total capitalization | 7,184,108 |
| | 7,235,134 |
| 7,589,444 |
| | 7,151,035 |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable | 245,171 |
| | 317,043 |
| 308,304 |
| | 359,585 |
|
Short-term debt | 5,000 |
| | 245,763 |
| 28,000 |
| | 329,463 |
|
Current maturities of long-term debt | 202,412 |
| | 2,412 |
| — |
| | 200,000 |
|
Purchased gas adjustment payable | 10,980 |
| | — |
| 38,645 |
| | 16,051 |
|
Accrued expenses: | |
| | |
| |
| | |
|
Taxes | 102,132 |
| | 111,428 |
| 104,092 |
| | 117,063 |
|
Salaries and wages | 39,245 |
| | 49,749 |
| 42,180 |
| | 53,220 |
|
Interest | 48,232 |
| | 48,087 |
| 43,672 |
| | 47,837 |
|
Unrealized loss on derivative instruments | 44,031 |
| | 44,170 |
| 49,776 |
| | 64,859 |
|
Other | 87,756 |
| | 71,996 |
| 93,900 |
| | 80,206 |
|
Total current liabilities | 784,959 |
| | 890,648 |
| 708,569 |
| | 1,268,284 |
|
Other long-term and regulatory liabilities: | |
| | |
| |
| | |
|
Deferred income taxes | 1,829,508 |
| | 1,732,390 |
| 906,226 |
| | 869,473 |
|
Unrealized loss on derivative instruments | 18,237 |
| | 16,261 |
| 15,123 |
| | 21,235 |
|
Regulatory liabilities | 619,736 |
| | 653,296 |
| 742,443 |
| | 730,273 |
|
Regulatory liability for deferred income taxes | | 995,599 |
| | 1,012,260 |
|
Other deferred credits | 738,144 |
| | 769,351 |
| 630,635 |
| | 679,146 |
|
Total other long-term and regulatory liabilities | 3,205,625 |
| | 3,171,298 |
| 3,290,026 |
| | 3,312,387 |
|
Commitments and contingencies (Note 8) |
|
| |
|
|
|
| |
|
|
Total capitalization and liabilities | $ | 11,174,692 |
| | $ | 11,297,080 |
| $ | 11,588,039 |
| | $ | 11,731,706 |
|
The accompanying notes are an integral part of the financial statements.
PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2017 | | 2016 | 2018 | | 2017 |
Operating activities: | | | | | | |
Net income (loss) | $ | 193,746 |
| | $ | 237,406 |
| $ | 189,818 |
| | $ | 193,746 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | 234,710 |
| | 218,787 |
| 336,570 |
| | 234,710 |
|
Conservation amortization | 60,453 |
| | 55,751 |
| 60,888 |
| | 60,453 |
|
Deferred income taxes and tax credits, net | 94,590 |
| | 108,589 |
| 18,519 |
| | 94,590 |
|
Net unrealized (gain) loss on derivative instruments | 23,121 |
| | (63,546 | ) | (7,907 | ) | | 23,121 |
|
AFUDC – equity | (6,766 | ) | | (7,048 | ) | (7,146 | ) | | (6,766 | ) |
Production tax credit monetization | | (51,181 | ) | | — |
|
Other non-cash | | 2,197 |
| | 2,675 |
|
Funding of pension liability | (18,000 | ) | | (9,000 | ) | (9,000 | ) | | (18,000 | ) |
Regulatory assets and liabilities | (44,731 | ) | | (120,615 | ) | 4,591 |
| | (46,101 | ) |
Other long-term assets and liabilities | (13,202 | ) | | 16,820 |
| (5,956 | ) | | (14,507 | ) |
Change in certain current assets and liabilities: | |
| | | |
| | |
Accounts receivable and unbilled revenue | 205,327 |
| | 184,700 |
| 216,047 |
| | 205,327 |
|
Materials and supplies | 5,606 |
| | (18,594 | ) | (5,910 | ) | | 5,606 |
|
Fuel and natural gas inventory | 2,473 |
| | 4,974 |
| (1,176 | ) | | 2,473 |
|
Prepayments and other | 13,900 |
| | (2,738 | ) | (1,422 | ) | | 13,900 |
|
Purchased gas adjustment | 13,765 |
| | (1,027 | ) | 22,594 |
| | 13,765 |
|
Accounts payable | (49,478 | ) | | (64,132 | ) | (47,040 | ) | | (49,478 | ) |
Taxes payable | (9,296 | ) | | (13,230 | ) | (12,971 | ) | | (9,296 | ) |
Other | (6,542 | ) | | 1,567 |
| (17,100 | ) | | (6,542 | ) |
Net cash provided by (used in) operating activities | 699,676 |
| | 528,664 |
| 684,415 |
| | 699,676 |
|
Investing activities: | |
| | |
| |
| | |
|
Construction expenditures – excluding equity AFUDC | (431,536 | ) | | (303,834 | ) | (452,220 | ) | | (431,536 | ) |
Restricted cash | 370 |
| | (2,179 | ) | |
Other | (6,205 | ) | | (1,707 | ) | 1,956 |
| | (6,205 | ) |
Net cash provided by (used in) investing activities | (437,371 | ) | | (307,720 | ) | (450,264 | ) | | (437,741 | ) |
Financing activities: | |
| | |
| |
| | |
|
Change in short-term debt, net | (240,763 | ) | | (123,004 | ) | (301,463 | ) | | (240,763 | ) |
Dividends paid | (51,574 | ) | | (128,674 | ) | (102,456 | ) | | (51,574 | ) |
Long-term bonds and notes issued | | 594,750 |
| | — |
|
Redemption of bonds and notes | | (450,000 | ) | | — |
|
Other | 9,003 |
| | 7,456 |
| 6,196 |
| | 9,003 |
|
Net cash provided by (used in) financing activities | (283,334 | ) | | (244,222 | ) | (252,973 | ) | | (283,334 | ) |
Net increase (decrease) in cash and cash equivalents | (21,029 | ) | | (23,278 | ) | |
Cash and cash equivalents at beginning of period | 28,481 |
| | 41,856 |
| |
Cash and cash equivalents at end of period | $ | 7,452 |
| | $ | 18,578 |
| |
Net increase (decrease) in cash, cash equivalents, and restricted cash | | (18,822 | ) | | (21,399 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | | 36,009 |
| | 40,899 |
|
Cash, cash equivalents, and restricted cash at end of period | | $ | 17,187 |
| | $ | 19,500 |
|
Supplemental cash flow information: | |
| | |
| |
| | |
|
Cash payments for interest (net of capitalized interest) | $ | 112,801 |
| | $ | 113,438 |
| $ | 112,354 |
| | $ | 112,801 |
|
Cash payments (refunds) for income taxes | — |
| | — |
| $ | 9,631 |
| | $ | — |
|
Non-cash financing and investing activities: | | | | | | |
Accounts payable for capital expenditures eliminated from cash flows | $ | 54,419 |
| | $ | 47,151 |
| $ | 97,614 |
| | $ | 54,419 |
|
The accompanying notes are an integral part of the financial statements.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(1) | Summary of Consolidation Policy |
Basis of Presentation
Puget Energy is an energy services holding company that owns Puget Sound Energy (PSE). PSE is a public utility incorporated in the state of Washington that furnishes electric and natural gas services in a territory covering approximately 6,000 square miles, primarily in the Puget Sound region. Puget Energy also has a wholly-owned non-regulated subsidiary, named Puget LNG, LLC (Puget LNG). Puget LNG was formed on November 29, 2016, and, which has the sole purpose of owning, developing and financing the non-regulated activity of the Tacoma LNG facility, currently under construction. PSE and Puget LNG are considered related parties with similar ownership by Puget Energy. Therefore, capital and operating costs that occur under PSE and are allocated to Puget LNG are related party transactions by nature. As of June 30, 2017,2018, Puget LNG has incurred $65.2$145.5 million in construction work in progress and operating costs related to Puget LNG’s portion of the Tacoma LNG facility.
In 2009, Puget Holdings LLC (Puget Holdings), owned by a consortium of long-term infrastructure investors, completed its merger with Puget Energy (the merger). As a result of the merger, all of Puget Energy’s common stock is indirectly owned by Puget Holdings. The acquisition of Puget Energy was accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805), as of the date of the merger. ASC 805 requires the acquirer to recognize and measure identifiable assets acquired and liabilities assumed at fair value as of the merger date.
The consolidated financial statements of Puget Energy reflect the accounts of Puget Energy and its subsidiaries. PSE’s consolidated financial statements include the accounts of PSE and its subsidiary. Puget Energy and PSE are collectively referred to herein as “the Company.”Company”. The consolidated financial statements are presented after elimination of all significant intercompany items and transactions. PSE’s consolidated financial statements continue to be accounted for on a historical basis and PSE’s financial statements do not include any ASCAccounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805) purchase accounting adjustments. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Non-Utility Property, Plant and Equipment
For PSE, the costs of other property, plant and equipment are stated at historical cost. Expenditures for refurbishment and improvements that significantly add to productive capacity or extend useful life of an asset are capitalized. Replacements of minor items are expensed on a current basis. Gains and losses on assets sold or retired, which were previously recorded in utility plant, are apportioned between regulatory assets/liabilities and earnings. However, gains and losses on assets sold or retired, not previously recorded in utility plant, are reflected in earnings.Tacoma LNG Facility
The Tacoma LNG facility willis intended to provide peak-shaving services to PSE’s natural gas customers, andcustomers. By storing surplus natural gas, PSE is able to meet the requirements of peak consumption. LNG will also provide LNG as fuel to transportation customers, particularly in the marine market. The Tacoma LNG facilityOn January 24, 2018, the Puget Sound Clean Air Agency determined a Supplemental Environmental Impact Statement is expectednecessary in order to rule on the air quality permit for the facility. As a result of requiring a Supplemental Environmental Impact Statement, the Company's construction schedule may be operational in 2019.impacted depending on the Puget Sound Clean Air Agency's timing and decision on the air quality permit. If delayed, the construction schedule and costs may be adversely impacted. Pursuant to an order by the Washington Commission’s order, Puget LNGCommission, PSE will be allocated approximately 43.0% of common capital and operating costs, consistent with the regulated portion of the Tacoma LNG facility. The remaining 57.0% of thecommon capital and operating costs of the Tacoma LNG facility and PSE will be allocated the remaining 43.0% of the capital and operating costs.to Puget LNG.
For Puget Energy, the $65.1$144.7 million in construction work in progress related to Puget LNG’s portion of the Tacoma LNG facility is reported in the “Other property and investments” financial statement line item. For PSE, the construction work in progress of $57.4$113.4 million related to PSE’s portion of the Tacoma LNG facility is reported in the “Utility plant - Natural gas plant” line item, as PSE is a regulated entity.
(2) New Accounting Pronouncements
Recently Adopted Accounting Guidance
Income Taxes
In March 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". The staff of the U.S. Securities and Exchange Commission (SEC) recognized the complexity of reflecting the impacts of the Tax Cuts Job Act (TCJA), and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (SAB 118), which clarifies accounting for income taxes under Accounting Standards Codification (ASC) 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analysis and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (i) a company is complete with its accounting for certain effects of tax reform, (ii) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (iii) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The Company has completed the required analysis and accounting for substantially all the effects of the TCJA's enactment and has made a reasonable estimate as to the other effects and has reflected the measurement and accounting
of the effects in the consolidated financial statements. The items reflected as provisional amounts include tax depreciation and amortization and other book to tax differences. The Company has accounted for these items based on its interpretation of the TCJA. Further interpretive guidance on the TCJA from the IRS, U.S. Treasury Department, or the Joint Committee on Taxation may require adjustments to the Company's accounting. In accordance with SAB 118, adjustments, if any, will be recorded in 2018. At December 31, 2017, the Company did not identify any effects of the TCJA for which they were not able to either complete the required analysis or make a reasonable estimate. Additionally, PSE filed an accounting petition on December 29, 2017 requesting deferred accounting treatment for impacts of tax reform. For additional information, see Note 7, "Regulation and Rates" to the consolidated financial statements included in Item 1 of this report.
Stranded Tax Effects in AOCI
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this update allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users.
This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in any interim period for reporting periods for which financial statements have not yet been issued. The Company early adopted ASU 2018-02 as of January 1, 2018 with a reclassification from accumulated other comprehensive income to retained earnings in the amount of a $5.2 million increase for Puget Energy related to pension and post-retirement plans and a $27.3 million increase for PSE, comprised of $26.2 million related to pension and post-retirement plans, and $1.1 million related to interest rate swaps.
Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments require that an employer report the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The line item used in the income statement to present the other components of net benefit cost must be disclosed. Additionally, the service cost component of net benefit cost is the only eligible cost for capitalization.
This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted ASU 2017-07 during the first quarter of fiscal year 2018 by applying the amendments related to income statement activity retrospectively, and balance sheet activity prospectively. For additional information, see Note 6, "Retirement Benefits" to the consolidated financial statements included in Item 1 of this report.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments". The amendments in ASU 2016-15 provide guidance for eight specific cash flow issues that include (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distribution received from equity method investees, (vii) beneficial interest in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle.
This update is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for all entities upon issuance. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company adopted ASU 2016-15 as of January 1, 2018 with the standard only impacting the classification of debt extinguishment costs as financing outflows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash". The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has adopted ASU 2016-18 as of January 1, 2018 by moving the presentation of restricted cash in the statement of cash flows to net cash flows of total cash, cash equivalents, and restricted cash. Amounts included in restricted cash primarily represent funds required to be set aside for contractual obligations related to transmission and generation facilities.
The following tables provide a reconciliation of cash, cash equivalents and restricted cash reported within the statements of cash flows:
|
| | | | | | | |
Puget Energy | Six Months Ended June 30, |
(Dollars in Thousands) | 2018 | | 2017 |
Cash and cash equivalents | $ | 8,117 |
| | $ | 7,805 |
|
Restricted cash | 10,083 |
| | 12,048 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 18,200 |
| | $ | 19,853 |
|
|
| | | | | | | |
Puget Sound Energy | Six Months Ended June 30, |
(Dollars in Thousands) | 2018 | | 2017 |
Cash and cash equivalents | $ | 7,104 |
| | $ | 7,452 |
|
Restricted cash | 10,083 |
| | 12,048 |
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 17,187 |
| | $ | 19,500 |
|
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASUAccounting Standards Update (ASU) 2014-09 and the related amendments outline a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Accounting Standards Update (ASU)ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.
In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", deferring the effective date for ASU 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In addition to the FASB's deferral decision, FASB provided reporting entities with an option to early adopt ASU 2014-09 using the original effective date.
The Company plans to adopt ASU 2014-09 duringimplemented the first quarter of fiscal year 2018 by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings, effective January 1, 2018. The Company initiated2018 using the modified retrospective method of adoption. As a steering committee and project team to evaluate the impactresult of this standard, update any policies and procedures that may be affected, and implement the new revenue recognition guidance. After a substantial evaluationimplementation of this standard, the Company does not anticipate significant impactsmade no cumulative adjustments to its resultsrevenue for contracts with customers open as of operations or on itsJanuary 1, 2018. For the three and six months ended June 30, 2018, the Company's revenue was 93.3% and 93.1% comprised of contracts with customers from rate-regulated sales of electricity and natural gas to retail customers where revenue is recognized over time as delivered. Pursuant to the new standard, the Company has added enhanced quantitative and qualitative disclosure for revenue from contracts with customers and revenue outside the scope of the standard, in Note 3, "Revenue" to the consolidated financial statements. The Company is still waiting on the resolutionstatements included in Item 1 of certain industry implementation issues to determine the full impact. The Company is anticipating additional future disclosures related to the implementation of the new standard.this report.
Accounting Standards Issued but Not Yet Adopted
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". The FASB issued this ASU to increase transparency and comparability among organizations by recognizing right-of-use (ROU) lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The income statement recognition is similar to existing lease accounting and is based on lease classification. Under the new guidance, lessor accounting is largely unchanged.
In January 2018, the FASB issued ASU 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842". In connection with the FASB’s transition support efforts, the amendments in this update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 upon adoption. Land easements (also commonly referred to as rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose. The Company plans to elect this practical expedient, and will evaluate new and modified land easements as of the first quarter of fiscal year 2019.
This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier adoption is permitted for all entities upon issuance. Reporting entities must
apply a modified retrospective approach for the adoption of the new standard. The Company plans towill adopt ASU 2016-02 during the first quarter of fiscal year 2019. At this time,2019 and expects the Company is still evaluatingadoption of the impact this standard will result in recognition of right-of-use assets and liabilities that have not previously been recorded, which will have a material impact on itsthe consolidated financial statements.balance sheets.
(3) Revenue
The following table presents disaggregated revenue from contracts with customers, and other revenue by major source: |
| | | | | | | |
Puget Energy and Puget Sound Energy | |
(Dollars in Thousands) | Three Months Ended June 30, | | Six Months Ended June 30, |
Revenue from contracts with customers: | 2018 | | 2018 |
Electric retail | $ | 468,378 |
| | $ | 1,099,184 |
|
Natural gas retail | 158,544 |
| | 492,578 |
|
Other | 38,930 |
| | 81,364 |
|
Total revenue from contracts with customers | 665,852 |
| | 1,673,126 |
|
Alternative revenue programs | (8,815 | ) | | (23,897 | ) |
Other non-customer revenue | 14,815 |
| | 60,631 |
|
Total operating revenue | $ | 671,852 |
| | $ | 1,709,860 |
|
Revenue at PSE is recognized when performance obligations under the terms of a Business
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definitioncontract or tariff with our customers are satisfied. Performance obligations are satisfied generally through performance of a Business". These amendments clarify the definitionPSE's obligation over time or with transfer of a business. The amendments affect all companiescontrol of electric power, natural gas, and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intendedrevenue from contracts with customers. Revenue is measured as the amount of consideration expected to help companiesbe received in exchange for transferring goods and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals)services.
Electric and Natural Gas Retail Revenue
Electric and natural gas retail revenue consists of assets or businesses.
This amendment is effective for fiscal years beginning after December 15, 2017.tariff based sales of electricity and natural gas to PSE's customers. For tariff contracts, PSE has elected the portfolio approach practical expedient model to apply the revenue from contracts with customers to groups of contracts. The Company plansdetermined that the portfolio approach will not differ from considering each contract or performance obligation separately. Electric and natural gas tariff contracts include the performance obligation of standing ready to adopt ASU 2017-01 duringperform electric and natural gas services. The electricity and natural gas the first quarter of fiscal year 2018customer chooses to consume is considered an option and is inrecognized over time using the processoutput method when the customer simultaneously consumes the electricity or natural gas. PSE has elected the right to invoice practical expedient for unbilled retail revenue, as the obligation of evaluatingstanding ready to perform electric service and for the potential impacts, if any,consumption of this new guidanceelectricity and natural gas at market value implies a right to consideration for performance completed to date. The Company believes that tariff prices approved by the Washington Utility and Transportation Commission (Washington Commission) represent stand-alone selling prices for the performance obligations under ASC 606. PSE collects Washington State excise taxes (which are a component of general retail customer rates) and municipal taxes and presents the taxes on its financial statements.a gross basis, as PSE is the taxpayer for those excise and municipal taxes.
Other IncomeRevenue from Contracts with Customers
In February 2017,Other revenue from contracts with customers is primarily comprised of electric transmission, natural gas transportation, biogas, and wholesale revenue sold on an intra-month basis.
Electric Transmission and Natural Gas Transportation
Transmission and transportation tariff contracts include the FASB issued ASU 2017-05, "Other Income - Gainsperformance obligation to transmit and Losses fromtransport electricity or natural gas. Transfer of control and recognition of revenue occurs over time as the Derecognitioncustomer simultaneously receives the transmission and transportation services. Measurement of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets". The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term, "in substance nonfinancial asset". The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it.
This amendment is effective for fiscal years beginning after December 15, 2017. The Company plans to adopt ASU 2017-05 during the first quarter of fiscal year 2018 and is in the process of evaluating the potential impacts, if any,satisfaction of this new guidanceperformance obligation is determined using the output method. Similar to retail revenue, the Company utilizes the right to invoice practical expedient as PSE’s right to consideration is tied directly to the value of power and gas transmitted and transported each month. The price is based on its financial statements.
Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". The amendments requiretariff rates that an employer report the service cost component in the same line items as other compensation costs arising from services renderedwere approved by the pertinent employees duringWashington Commission or the period. The other components of net benefit cost are requiredFederal Energy Regulatory Commission (FERC) and, therefore, corresponds directly to be presented in the income statement separately fromvalue to the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the income statementcustomer for performance completed to present the other components of net benefit cost must be disclosed.
This amendment is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company plans to adopt ASU 2017-07 during the first quarter of fiscal year 2018 and is in the process of evaluating the potential impacts, if any, of this new guidance on its financial statements.date.
Biogas
Biogas is a renewable natural gas fuel that PSE purchases and sells along with the renewable green attributes derived from the renewable natural gas. Biogas contracts include the performance obligations of biogas and renewable credit delivery upon PSE receiving produced biogas from its supplier. Transfer of control and recognition of revenue occurs at a point in time as biogas is considered a storable commodity and may not be consumed as it is delivered.
Wholesale Revenue
Wholesale revenue at PSE includes sales of electric power and non-core natural gas to other utilities or marketers. Wholesale revenue contracts include the performance obligation of physical electric power or natural gas. There are typically no added fixed or variable amounts on top of the established rate for power or natural gas and contracts always have a stated, fixed quantity of power or natural gas delivered. Transfer of control and recognition of revenue occurs at a point in time when the customer takes physical possession of electric power or natural gas. Non-core gas consists of natural gas supply in excess of natural gas used for generation, sold to third parties to mitigate the costs of firm transportation and storage capacity for its core natural gas customers. PSE reports non-core gas sold net of costs as PSE does not take control of the natural gas but is merely an agent within the market that connects a seller to a purchaser.
Other Revenue
In accordance with ASC 606, PSE excludes revenue not collected from contracts with customers, as well as revenue that falls under other accounting guidance.
| |
(3) | Accounting for Derivative Instruments and Hedging Activities |
(4) Accounting for Derivative Instruments and Hedging Activities
PSE employs various energy portfolio optimization strategies but is not in the business of assuming risk for the purpose of realizing speculative trading revenue. The nature of serving regulated electric customers with its portfolio of owned and contracted electric generation resources exposes PSE and its customers to some volumetric and commodity price risks within the sharing mechanism of the power cost adjustment (PCA). Therefore, wholesale market transactions and PSE's related hedging strategies are focused on reducing costs and risks where feasible, thus reducing volatility of costs in the portfolio. In order to manage its exposure to the variability in future cash flows for forecasted energy transactions, PSE utilizes a programmatic hedging strategy which extends out three years. PSE's hedging strategy includes a risk-responsive component for the core natural gas portfolio, which utilizes quantitative risk-based measures with defined objectives to balance both portfolio risk and hedge costs. PSE's energy risk portfolio management function monitors and manages these risks using analytical models and tools. In order to manage risks effectively, PSE enters into forward physical electric and natural gas purchase and sale agreements, fixed-for-floating swap contracts, and commodity call/put options. Currently, the Company does not apply cash flow hedge accounting and therefore records all mark-to-market gains or losses through earnings.
The Company manages its interest rate risk through the issuance of mostly fixed-rate debt with varied maturities. The Company utilizes internal cash from operations, borrowings under its commercial paper program and its credit facilities to meet short-term funding needs. The Company may enter into swap instruments or other financial hedge instruments to manage the interest rate risk associated with these debts. As of June 30, 2017, the Company did not have any outstanding interest rate swap instruments.
The following table presents the volumes, fair values and locationsclassification of the Company's derivative instruments recorded on the balance sheets:
| | Puget Energy and Puget Sound Energy | | | | | | | | | | | | | | | | | |
| At June 30, 2017 | | At December 31, 2016 | At June 30, 2018 | | At December 31, 2017 |
(Dollars in Thousands) | Volumes | | Assets1 | | Liabilities2 | | Volumes | | Assets1 | | Liabilities2 | Volumes | | Assets1 | | Liabilities2 | | Volumes | | Assets1 | | Liabilities2 |
Interest rate swap derivatives3 | $ | — |
| | $ | — |
| | $ | — |
| | $450 million | | $ | — |
| | $ | 141 |
| |
Electric portfolio derivatives | * | | 12,246 |
| | 40,235 |
| | * | | 36,460 |
| | 41,329 |
| * | | $ | 10,889 |
| | $ | 38,642 |
| | * | | $ | 13,391 |
| | $ | 49,050 |
|
Natural gas derivatives (MMBtus)4 | 310.6 million | | 8,337 |
| | 22,033 |
| | 336.4 million | | 26,619 |
| | 19,101 |
| |
Natural gas derivatives (MMBtus)3 | | 299.2 million | | 12,572 |
| | 26,257 |
| | 332.1 million | | 11,014 |
| | 37,044 |
|
Total derivative contracts | ** | | $ | 20,583 |
| | $ | 62,268 |
| | ** | | $ | 63,079 |
| | $ | 60,571 |
| | | $ | 23,461 |
| | $ | 64,899 |
| | | | $ | 24,405 |
| | $ | 86,094 |
|
Current | ** | | $ | 16,078 |
| | $ | 44,031 |
| | ** | | $ | 54,341 |
| | $ | 44,310 |
| | | $ | 19,872 |
| | $ | 49,776 |
| | $ | 22,247 |
| | $ | 64,859 |
|
Long-term | ** | | 4,505 |
| | 18,237 |
| | ** | | 8,738 |
| | 16,261 |
| | 3,589 |
| | 15,123 |
| | 2,158 |
| | 21,235 |
|
Total derivative contracts | ** | | $ | 20,583 |
| | $ | 62,268 |
| | ** | | $ | 63,079 |
| | $ | 60,571 |
| | $ | 23,461 |
| | $ | 64,899 |
| | $ | 24,405 |
| | $ | 86,094 |
|
_______________
| |
1 | Balance sheet locations:classification: Current and Long-term Unrealized gain on derivative instruments. |
| |
2 | Balance sheet locations:classification: Current and Long-term Unrealized loss on derivative instruments. |
| |
3 | Interest rate swap contracts are only held at Puget Energy, and matured January 2017. |
| |
4
| All fair value adjustments on derivatives relating to the natural gas business have been deferred in accordance with ASC 980, “Regulated Operations,” due to the purchased gas adjustment (PGA) mechanism. The net derivative asset or liability and offsetting regulatory liability or asset are related to contracts used to economically hedge the cost of physical gas purchased to serve natural gas customers. |
| |
* | Electric portfolio derivatives consist of electric generation fuel of 180.0172.5 million One Million British Thermal Units (MMBtu) and purchased electricity of 1.93.7 million Megawatt Hours (MWhs) at June 30, 2017,2018, and 186.8166.8 million MMBtus and 3.62.9 million MWhs at December 31, 2016. |
| |
** | Not meaningful and/or applicable.2017. |
It is the Company's policy to record all derivative transactions on a gross basis at the contract level without offsetting assets or liabilities. The Company generally enters into transactions using the following master agreements: WSPP, Inc. (WSPP) agreements, which standardize physical power contracts; International Swaps and Derivatives Association (ISDA) agreements, which standardize financial natural gas and electric contracts; and North American Energy Standards Board (NAESB) agreements, which standardize physical natural gas contracts. The Company believes that such agreements reduce credit risk exposure because such agreements provide for the netting and offsetting of monthly payments as well as the right of set-off in the event of counterparty default. The set-off provision can be used as a final settlement of accounts which extinguishes the mutual debts owed between
the parties in exchange for a new net amount. For further details regarding the fair value of derivative instruments, see Note 4,5, "Fair Value Measurements"Measurements," to the consolidated financial statements.statements included in Item 1 of this report.
The following tables present the potential effect of netting arrangements, including rights of set-off associated with the Company's derivative assets and liabilities:
| | Puget Energy and Puget Sound Energy | Puget Energy and Puget Sound Energy | | | | | | | Puget Energy and Puget Sound Energy | | | | | | | | |
| At June 30, 2017 | At June 30, 2018 |
| Gross Amount Recognized in the Statement of Financial Position1 | | Gross Amounts Offset in the Statement of Financial Position | | Net of Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | | Gross Amount Recognized in the Statement of Financial Position1 | | Gross Amounts Offset in the Statement of Financial Position | | Net of Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | |
(Dollars in Thousands) | | Commodity Contracts | Cash Collateral Received/Posted | | Net Amount | | Commodity Contracts | | Cash Collateral Received/Posted | | Net Amount |
Assets: | | | | | | | | | | | | | | | | | | | | |
Energy derivative contracts | $ | 20,583 |
| | $ | — |
| | $ | 20,583 |
| | $ | (16,452 | ) | $ | — |
| | $ | 4,131 |
| $ | 23,461 |
| | $ | — |
| | $ | 23,461 |
| | $ | (17,120 | ) | | $ | — |
| | $ | 6,341 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Energy derivative contracts | 62,268 |
| | — |
| | 62,268 |
| | (16,452 | ) | (154 | ) | | 45,662 |
| 64,899 |
| | — |
| | 64,899 |
| | (17,120 | ) | | (1,220 | ) | | 46,559 |
|
| | Puget Energy and Puget Sound Energy | Puget Energy and Puget Sound Energy | | | | | | | Puget Energy and Puget Sound Energy | | | | | | | | |
| At December 31, 2016 | At December 31, 2017 |
| Gross Amount Recognized in the Statement of Financial Position1 | | Gross Amounts Offset in the Statement of Financial Position | | Net of Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | | Gross Amount Recognized in the Statement of Financial Position1 | | Gross Amounts Offset in the Statement of Financial Position | | Net of Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | |
(Dollars in Thousands) | | Commodity Contracts | Cash Collateral Received/Posted | | Net Amount | | Commodity Contracts | | Cash Collateral Received/Posted | | Net Amount |
Assets: | | | | | | | | | | | | | | | | | | | | |
Energy derivative contracts | $ | 63,079 |
| | $ | — |
| | $ | 63,079 |
| | $ | (42,858 | ) | $ | — |
| | $ | 20,221 |
| $ | 24,405 |
| | $ | — |
| | $ | 24,405 |
| | $ | (17,940 | ) | | $ | — |
| | $ | 6,465 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Energy derivative contracts | 60,430 |
| | — |
| | 60,430 |
| | (42,858 | ) | — |
| | 17,572 |
| 86,094 |
| | — |
| | 86,094 |
| | (17,940 | ) | | (353 | ) | | 67,801 |
|
Interest rate swaps2 | 141 |
| | — |
| | 141 |
| | — |
| — |
| | 141 |
| |
_______________
| |
1 | All derivative contract deals are executed under ISDA, NAESB and WSPP master netting agreements with right of set-off. |
| |
2
| Interest rate swap contracts are only held at Puget Energy, and matured January 2017. |
The following table presents the effect and locationsclassification of the realized and unrealized gains (losses) of the Company's derivatives recorded on the statements of income:
| | Puget Energy and Puget Sound Energy | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in Thousands) | Location | 2017 | | 2016 | | 2017 | | 2016 | Classification | 2018 | | 2017 | | 2018 | | 2017 |
Interest rate contracts1: | | | | | | | | | | | | | | | | |
| Non-hedged interest rate swap (expense) income | $ | — |
| | $ | (359 | ) | | $ | 28 |
| | $ | (1,213 | ) | Non-hedged interest rate swap (expense) income | $ | — |
| | $ | — |
| | $ | — |
| | $ | 28 |
|
Gas for Power Derivatives: | | | | |
| | | | | | | | |
| | | | |
Unrealized | Unrealized gain (loss) on derivative instruments, net | (5,746 | ) | | 45,317 |
| | (21,882 | ) | | 50,830 |
| Unrealized gain (loss) on derivative instruments, net | 5,357 |
| | (5,746 | ) | | 7,669 |
| | (21,882 | ) |
Realized | Electric generation fuel | (2,822 | ) | | (12,327 | ) | | (8,020 | ) | | (33,010 | ) | Electric generation fuel | (4,417 | ) | | (2,822 | ) | | (12,093 | ) | | (8,020 | ) |
Power Derivatives: | | | | | | | | | | | | | | | | |
Unrealized | Unrealized gain (loss) on derivative instruments, net | 1,912 |
| | 1,407 |
| | (1,239 | ) | | 12,716 |
| Unrealized gain (loss) on derivative instruments, net | 1,554 |
| | 1,912 |
| | 238 |
| | (1,239 | ) |
Realized | Purchased electricity | (3,923 | ) | | (3,576 | ) | | (10,078 | ) | | (14,795 | ) | Purchased electricity | (2,836 | ) | | (3,923 | ) | | (5,225 | ) | | (10,078 | ) |
Total gain (loss) recognized in income on derivatives | | $ | (10,579 | ) | | $ | 30,462 |
| | $ | (41,191 | ) | | $ | 14,528 |
| | $ | (342 | ) | | $ | (10,579 | ) | | $ | (9,411 | ) | | $ | (41,191 | ) |
_______________
1 Interest rate swap contracts are onlywere held at Puget Energy, and matured January 2017.
.
The Company is exposed to credit risk primarily through buying and selling electricity and natural gas to serve its customers. Credit risk is the potential loss resulting from a counterparty's non-performance under an agreement. The Company manages credit risk with policies and procedures for, among other things, counterparty credit analysis, exposure measurement, and exposure monitoring and mitigation.
The Company monitors counterparties for significant swings in credit default swap rates, credit rating changes by external rating agencies, ownership changes or financial distress. Where deemed appropriate, the Company may request collateral or other security from its counterparties to mitigate potential credit default losses. Criteria employed in this decision include, among other things, the perceived creditworthiness of the counterparty and the expected credit exposure.
It is possible that volatility in energy commodity prices could cause the Company to have material credit risk exposure with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the Company could suffer a material financial loss. However, as of June 30, 2017,2018, approximately 97.7%94.6% of the Company's energy portfolio exposure, excluding normal purchase normal sale (NPNS) transactions, was with counterparties that are rated at least investment grade by rating agencies and 2.3%5.4% are either rated below investment grade or not rated by rating agencies. The Company assesses credit risk internally for counterparties that are not rated by the major rating agencies.
The Company computes credit reserves at a master agreement level by counterparty. The Company considers external credit ratings and market factors in the determination of reserves, such as credit default swaps and bond spreads. The Company recognizes that external ratings may not always reflect how a market participant perceives a counterparty's risk of default. The Company uses both default factors published by Standard & Poor's and factors derived through analysis of market risk which reflect the application of an industry standard recovery rate. The Company selects a default factor by counterparty at an aggregate master agreement level based on a weighted average default tenor for that counterparty's deals. The default tenor is determined by weighting the fair value and contract tenors for all deals for each counterparty to derive an average value. The default factor used is dependent upon whether the counterparty is in a net asset or a net liability position after applying the master agreement levels.
The Company applies the counterparty's default factor to compute credit reserves for counterparties that are in a net asset position. The Company calculates a non-performance risk on its derivative liabilities by using its estimated incremental borrowing rate over the risk-free rate. Credit reserves are netted against the unrealized gain (loss) positions. As of June 30, 2017,2018, the Company was in a net liability position with the majority of its counterparties, so the default factors of counterparties did not have a significant impact on reserves for the period. The majority of the Company's derivative contracts are with financial institutions and other utilities operating within the Western Electricity Coordinating Council. In March 2017, PSE began transactingalso transacts power futures contracts on the Intercontinental Exchange (ICE) platform. Execution of these contracts on ICEplatform, which requires the daily posting of margin calls as collateral through a futures and clearing agent. As of June 30, 2017,2018, PSE had cash posted as collateral of $0.5$3.7 million related to contracts executed on this platform. As additional contracts are executed on this exchange, the amount of collateral to be posted will increase, subject to PSE’s established limit. PSE also has a $1.0$1.0 million letter of credit posted as collateral as a condition of transacting on a physical energy exchange
and clearing house in Canada. PSE did not trigger any
collateral requirements with any of its counterparties during the six months ended June 30, 2017 nor were any of PSE's counterparties required to post collateral resulting from credit rating downgrades.downgrades during the six months ended June 30, 2018.
The following table below presents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position and the overall contractual contingent liability positions foramount of additional collateral the Company's derivative activity at June 30, 2017:Company could be required to post:
| | Puget Energy and Puget Sound Energy | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Thousands) | At June 30, 2017 | | At December 31, 2016 | At June 30, 2018 | | At December 31, 2017 |
| Fair Value1 | | Posted | | Contingent | | Fair Value1 | | Posted | | Contingent | Fair Value1 | | Posted | | Contingent | | Fair Value1 | | Posted | | Contingent |
Contingent Feature | Liability | | Collateral | | Collateral | | Liability | | Collateral | | Collateral | Liability | | Collateral | | Collateral | | Liability | | Collateral | | Collateral |
Credit rating2 | $ | 7,076 |
| | $ | — |
| | $ | 7,076 |
| | $ | 4,894 |
| | $ | — |
| | $ | 4,894 |
| $ | 1,356 |
| | $ | — |
| | $ | 1,356 |
| | $ | 3,187 |
| | $ | — |
| | $ | 3,187 |
|
Requested credit for adequate assurance | 24,407 |
| | — |
| | — |
| | 7,427 |
| | — |
| | — |
| 25,805 |
| | — |
| | — |
| | 37,374 |
| | — |
| | — |
|
Forward value of contract3 | 171 |
| | 530 |
| | — |
| | 507 |
| | — |
| | — |
| 1,220 |
| | 3,691 |
| | — |
| | 353 |
| | 2,639 |
| | — |
|
Total | $ | 31,654 |
| | $ | 530 |
| | $ | 7,076 |
| | $ | 12,828 |
| | $ | — |
| | $ | 4,894 |
| $ | 28,381 |
| | $ | 3,691 |
| | $ | 1,356 |
| | $ | 40,914 |
| | $ | 2,639 |
| | $ | 3,187 |
|
_______________
| |
1 | Represents the derivative fair value of contracts with contingent features for counterparties in net derivative liability positions. Excludes NPNS, accounts payable and accounts receivable. |
| |
2 | Failure by PSE to maintain an investment grade credit rating from each of the major credit rating agencies provides counterparties a contractual right to demand collateral. |
| |
3 | Collateral requirements may vary, based on changes in the forward value of underlying transactions relative to contractually defined collateral thresholds. |
| |
(4)(5) | Fair Value Measurements |
ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy categorizes the inputs into three levels with the highest priority given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority given to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities. Equity securities that are also classified as cash equivalents are considered Level 1 if there are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards and options.
Level 3 - Pricing inputs include significant inputs that have little or no observability as of the reporting date. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
Financial assets and liabilities measured at fair value are classified in their entirety in the appropriate fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy. The Company primarily determines fair value measurements classified as Level 2 or Level 3 using a combination of the income and market valuation approaches. The process of determining the fair values is the responsibility of the derivative accounting department which reports to the Controller and Principal Accounting Officer. Inputs used to estimate the fair value of forwards, swaps and options include market-price curves, contract terms and prices, credit-risk adjustments, and discount factors. Additionally, for options, the Black-Scholes option valuation model and implied market volatility curves are used. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs as substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments. On a daily
basis, the Company obtains quoted forward prices for the electric and natural gas markets from an independent external pricing service.
The Company considers its electric and natural gas contracts as Level 2 derivative instruments as such contracts are commonly traded as over-the-counter forwards with indirectly observable price quotes. However, certain energy derivative instruments with maturity dates falling outside the range of observable price quotes are classified as Level 3 in the fair value hierarchy. Management's assessment is based on the trading activity in real-time and forward electric and natural gas markets. Each quarter, the Company confirms the validity of pricing-service quoted prices used to value Level 2 commodity contracts with the actual prices of commodity contracts entered into during the most recent quarter.
Assets and Liabilities with Estimated Fair Value
The carrying values of cash and cash equivalents, restricted cash, and short-term debt as reported on the balance sheet are reasonable estimates of their fair value due to the short termshort-term nature of these instruments and are classified as Level 1 in the fair value hierarchy. The carrying value of other investments totaling $50.2$49.1 million and $49.1$48.5 million at June 30, 20172018 and December 31, 2016,2017, respectively, are included in other"Other property and investmentsinvestments" on the balance sheet. These values are also reasonable estimates of their fair value and classified as Level 2 in the fair value hierarchy as they are valued based on market rates for similar transactions.
The fair value of the junior subordinated and long-term notes was estimated using the discounted cash flow method with the U.S. Treasury yields and the Company's credit spreads as inputs, interpolating to the maturity date of each issue. The carrying values and estimated fair values were as follows:
| | Puget Energy | | At June 30, 2017 | | At December 31, 2016 | | At June 30, 2018 | | At December 31, 2017 |
(Dollars in Thousands) | Level | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Level | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Liabilities: | | | | | | | | | | | | | | | | |
Junior subordinated notes | 2 | $ | 250,000 |
| | $ | 236,977 |
| | $ | 250,000 |
| | $ | 210,261 |
| 2 | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | 238,935 |
|
Long-term debt (fixed-rate), net of discount1 | 2 | 5,098,506 |
| | 6,444,404 |
| | 5,091,593 |
| | 6,337,287 |
| 2 | 5,505,640 |
| | 6,483,719 |
| | 5,105,329 |
| | 6,520,515 |
|
Long-term debt (variable-rate) | 2 | 60,554 |
| | 60,554 |
| | 12,480 |
| | 12,480 |
| 2 | 139,551 |
| | 139,551 |
| | 102,600 |
| | 102,600 |
|
Total liabilities | | $ | 5,409,060 |
| | $ | 6,741,935 |
| | $ | 5,354,073 |
| | $ | 6,560,028 |
| | $ | 5,645,191 |
| | $ | 6,623,270 |
| | $ | 5,457,929 |
| | $ | 6,862,050 |
|
| | Puget Sound Energy | | At June 30, 2017 | | At December 31, 2016 | | At June 30, 2018 | | At December 31, 2017 |
(Dollars in Thousands) | Level | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Level | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Liabilities: | | | | | | | | | | | | | | | | |
Junior subordinated notes | 2 | $ | 250,000 |
| | $ | 236,977 |
| | $ | 250,000 |
| | $ | 210,261 |
| 2 | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | 238,935 |
|
Long-term debt (fixed-rate), net of discount2 | 2 | 3,498,603 |
| | 4,465,055 |
| | 3,497,298 |
| | 4,360,783 |
| 2 | 3,895,042 |
| | 4,598,167 |
| | 3,499,911 |
| | 4,550,130 |
|
Total liabilities | | $ | 3,748,603 |
| | $ | 4,702,032 |
| | $ | 3,747,298 |
| | $ | 4,571,044 |
| | $ | 3,895,042 |
| | $ | 4,598,167 |
| | $ | 3,749,911 |
| | $ | 4,789,065 |
|
_______________
| |
1 | The carrying value includes debt issuances costs of $30.4$26.6 million and $33.0$27.9 million for June 30, 20172018 and December 31, 2016,2017, respectively, which are not included in fair value. |
| |
2 | The carrying value includes debt issuances costs of $25.9$24.2 million and $27.2$24.6 million for June 30, 20172018 and December 31, 2016,2017, respectively, which are not included in fair value. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company's financial assets and liabilities by level, within the fair value hierarchy, that were accounted for at fair value on a recurring basis:
| | Puget Energy and | Fair Value | | Fair Value | Fair Value | | Fair Value |
Puget Sound Energy | At June 30, 2017 | | At December 31, 2016 | At June 30, 2018 | | At December 31, 2017 |
(Dollars in Thousands) | Level 2 | | Level 3 | | Total | | Level 2 | | Level 3 | | Total | Level 2 | | Level 3 | | Total | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Electric derivative instruments | $ | 7,793 |
| | $ | 4,453 |
| | $ | 12,246 |
| | $ | 30,666 |
| | $ | 5,794 |
| | $ | 36,460 |
| $ | 7,229 |
| | $ | 3,660 |
| | $ | 10,889 |
| | $ | 9,866 |
| | $ | 3,525 |
| | $ | 13,391 |
|
Natural gas derivative instruments | 4,737 |
| | 3,600 |
| | 8,337 |
| | 23,316 |
| | 3,303 |
| | 26,619 |
| 6,510 |
| | 6,062 |
| | 12,572 |
| | 6,973 |
| | 4,041 |
| | 11,014 |
|
Total assets | $ | 12,530 |
| | $ | 8,053 |
| | $ | 20,583 |
| | $ | 53,982 |
| | $ | 9,097 |
| | $ | 63,079 |
| $ | 13,739 |
| | $ | 9,722 |
| | $ | 23,461 |
| | $ | 16,839 |
| | $ | 7,566 |
| | $ | 24,405 |
|
Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Interest rate derivative instruments1 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 141 |
| | $ | — |
| | $ | 141 |
| |
Electric derivative instruments | 36,425 |
| | 3,810 |
| | 40,235 |
| | 36,507 |
| | 4,822 |
| | 41,329 |
| $ | 36,991 |
| | $ | 1,651 |
| | $ | 38,642 |
| | $ | 46,623 |
| | $ | 2,427 |
| | $ | 49,050 |
|
Natural gas derivative instruments | 19,889 |
| | 2,144 |
| | 22,033 |
| | 16,423 |
| | 2,678 |
| | 19,101 |
| 24,144 |
| | 2,113 |
| | 26,257 |
| | 34,926 |
| | 2,118 |
| | 37,044 |
|
Total liabilities | $ | 56,314 |
| | $ | 5,954 |
| | $ | 62,268 |
| | $ | 53,071 |
| | $ | 7,500 |
| | $ | 60,571 |
| $ | 61,135 |
| | $ | 3,764 |
| | $ | 64,899 |
| | $ | 81,549 |
| | $ | 4,545 |
| | $ | 86,094 |
|
_______________
| |
1
| Interest rate derivative instruments are only held at Puget Energy, and matured January 2017. |
The following table presents the Company's reconciliation of the changes in the fair value of Level 3 derivatives in the fair value hierarchy:
| | Puget Energy and Puget Sound Energy | Three Months Ended June 30, | Three Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | 2018 | | 2017 |
Level 3 Roll-Forward Net Asset/(Liability) | Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total | Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total |
Balance at beginning of period | $ | 3,788 |
| | $ | 1,752 |
| | $ | 5,540 |
| | $ | 1,602 |
| | $ | (1,622 | ) | | $ | (20 | ) | $ | 1,186 |
| | $ | 5,096 |
| | $ | 6,282 |
| | $ | 3,788 |
| | $ | 1,752 |
| | $ | 5,540 |
|
Changes during period: | | | | | | | | | | | | | | | | | | | | | | |
Realized and unrealized energy derivatives: | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings1 | 339 |
| | — |
| | 339 |
| | (1,954 | ) | | — |
| | (1,954 | ) | 366 |
| | — |
| | 366 |
| | 339 |
| | — |
| | 339 |
|
Included in regulatory assets / liabilities | — |
| | 1,124 |
| | 1,124 |
| | — |
| | 1,562 |
| | 1,562 |
| — |
| | 354 |
| | 354 |
| | — |
| | 1,124 |
| | 1,124 |
|
Settlements | (2,508 | ) | | (1,974 | ) | | (4,482 | ) | | (494 | ) | | (879 | ) | | (1,373 | ) | (151 | ) | | (1,800 | ) | | (1,951 | ) | | (2,508 | ) | | (1,974 | ) | | (4,482 | ) |
Transferred into Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transferred out of Level 3 | (976 | ) | | 554 |
| | (422 | ) | | (2,216 | ) | | 455 |
| | (1,761 | ) | 608 |
| | 299 |
| | 907 |
| | (976 | ) | | 554 |
| | (422 | ) |
Balance at end of period | $ | 643 |
| | $ | 1,456 |
| | $ | 2,099 |
| | $ | (3,062 | ) | | $ | (484 | ) | | $ | (3,546 | ) | $ | 2,009 |
| | $ | 3,949 |
| | $ | 5,958 |
| | $ | 643 |
| | $ | 1,456 |
| | $ | 2,099 |
|
The following table presents the Company's reconciliation of the changes in the fair value of Level 3 derivatives in the fair value hierarchy:
| | Puget Energy and Puget Sound Energy | Six Months Ended June 30, | Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | 2018 | | 2017 |
Level 3 Roll-Forward Net Asset/(Liability) | Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total | Electric | | Natural Gas | | Total | | Electric | | Natural Gas | | Total |
Balance at beginning of period | $ | 972 |
| | $ | 625 |
| | $ | 1,597 |
| | $ | (7,345 | ) | | $ | (2,383 | ) | | $ | (9,728 | ) | $ | 1,098 |
| | $ | 1,923 |
| | $ | 3,021 |
| | $ | 972 |
| | $ | 625 |
| | $ | 1,597 |
|
Changes during period: | | | | | | | | | | | | | | | | | | | | | | |
Realized and unrealized energy derivatives: | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings2 | 1,045 |
| | — |
| | 1,045 |
| | 2,654 |
| | — |
| | 2,654 |
| 1,985 |
| | — |
| | 1,985 |
| | 1,045 |
| | — |
| | 1,045 |
|
Included in regulatory assets / liabilities | — |
| | 3,582 |
| | 3,582 |
| | — |
| | 3,082 |
| | 3,082 |
| — |
| | 5,329 |
| | 5,329 |
| | — |
| | 3,582 |
| | 3,582 |
|
Settlements | (3,838 | ) | | (3,304 | ) | | (7,142 | ) | | (554 | ) | | (1,816 | ) | | (2,370 | ) | (654 | ) | | (3,602 | ) | | (4,256 | ) | | (3,838 | ) | | (3,304 | ) | | (7,142 | ) |
Transferred into Level 3 | 2,191 |
| | (553 | ) | | 1,638 |
| | (2,080 | ) | | — |
| | (2,080 | ) | (1,837 | ) | | — |
| | (1,837 | ) | | 2,191 |
| | (553 | ) | | 1,638 |
|
Transferred out of Level 3 | 273 |
| | 1,106 |
| | 1,379 |
| | 4,263 |
| | 633 |
| | 4,896 |
| 1,417 |
| | 299 |
| | 1,716 |
| | 273 |
| | 1,106 |
| | 1,379 |
|
Balance at end of period | $ | 643 |
| | $ | 1,456 |
| | $ | 2,099 |
| | $ | (3,062 | ) | | $ | (484 | ) | | $ | (3,546 | ) | $ | 2,009 |
| | $ | 3,949 |
| | $ | 5,958 |
| | $ | 643 |
| | $ | 1,456 |
| | $ | 2,099 |
|
______________
| |
1 | Income Statement locations: Unrealized (gain) loss on derivative instruments, net. Amounts include unrealized gains (losses) on derivatives still held in position as of the reporting date for electric derivatives of $0.5$0.7 million and $(2.5)$0.5 million for the three months ended June 30, 20172018 and 2016, respectively2017., respectively. |
| |
2 | Income Statement locations: Unrealized (gain) loss on derivative instruments, net. Amounts include unrealized gains (losses) on derivatives still held in position as of the reporting date for electric derivatives of $0.7$1.7 million and $3.1$0.7 million for the six months ended June 30, 20172018 and 2016,2017, respectively. |
Realized gains and losses on energy derivatives for Level 3 recurring items are included in energy costs in the Company's consolidated statements of income under purchased electricity, electric generation fuel or purchased natural gas when settled. Unrealized gains and losses on energy derivatives for Level 3 recurring items are included in net unrealized (gain) loss on derivative instruments in the Company's consolidated statements of income.
In order to determine which assets and liabilities are classified as Level 3, the Company receives market data from its independent external pricing service defining the tenor of observable market quotes. To the extent any of the Company's commodity contracts extend beyond what is considered observable, as defined by its independent pricing service, the contracts are classified as Level 3. The actual tenor of what the independent pricing service defines as observable is subject to change depending on market conditions. Therefore, as the market changes, the same contract may be designated Level 3 one month and Level 2 the next and vice versa. The changes of fair value classification into or out of Level 3 are recognized each month and reported in the Level 3 Roll-Forward tables. The Company did not have any transfers between Level 1 and Level 2 during the reported periods. The Company does periodically transact at locations or market price points that are illiquid or for which no prices are available from the independent pricing service. In such circumstances, the Company uses a more liquid price point and performs a 15-month regression against the illiquid locations to serve as a proxy for forward market prices. Such transactions are classified as Level 3. The Company does not use internally developed models to make adjustments to significant unobservable pricing inputs. The only significant unobservable input into the fair value measurement of the Company's Level 3 assets and liabilities is the forward price for electric and natural gas contracts.
The following table presents the forward price ranges for the Company's Level 3 commodity contracts as of June 30, 20172018:
| | Puget Energy and Puget Sound Energy | Fair Value | | Range | | Fair Value | | Range | | |
(Dollars in Thousands) | Assets1 | | Liabilities1 | | Valuation Technique | | Unobservable Input | | Low | | High | | Weighted Average | Assets1 | | Liabilities1 | | Valuation Technique | | Unobservable Input | | Low | | High | | Weighted Average |
Electric | $ | 4,453 |
| | $ | 3,810 |
| | Discounted cash flow | | Power prices | | $13.00 per MWh | | $32.65 per MWh | | $24.41 per MWh | $ | 3,660 |
| | $ | 1,651 |
| | Discounted cash flow | | Power prices (per MWh) | | $ | 20.97 |
| | $ | 40.25 |
| | $ | 26.52 |
|
Natural gas | $ | 3,600 |
| | $ | 2,144 |
| | Discounted cash flow | | Natural gas prices | | $1.47 per MMBtu | | $3.14 per MMBtu | | $2.41 per MMBtu | $ | 6,062 |
| | $ | 2,113 |
| | Discounted cash flow | | Natural gas prices (per MMBtu) | | $ | 1.74 |
| | $ | 2.73 |
| | $ | 2.14 |
|
_______________
| |
1 | The valuation techniques, unobservable inputs and ranges are the same for asset and liability positions. |
The following table presents the forward price ranges for the Company's Level 3 commodity contracts as of December 31, 2016:2017:
| | Puget Energy and Puget Sound Energy | Fair Value | | Range | | Fair Value | | Range | | |
(Dollars in Thousands) | Assets1 | | Liabilities1 | | Valuation Technique | | Unobservable Input | | Low | | High | | Weighted Average | Assets1 | | Liabilities1 | | Valuation Technique | | Unobservable Input | | Low | | High | | Weighted Average |
Electric | $ | 5,794 |
| | $ | 4,822 |
| | Discounted cash flow | | Power prices | | $11.86 per MWh | | $33.52 per MWh | | $27.61 per MWh | $ | 3,525 |
| | $ | 2,427 |
| | Discounted cash flow | | Power prices (per MWh) | | $ | 7.02 |
| | $ | 28.94 |
| | $ | 18.61 |
|
Natural gas | $ | 3,303 |
| | $ | 2,678 |
| | Discounted cash flow | | Natural gas prices | | $2.00 per MMBtu | | $3.24 per MMBtu | | $2.42 per MMBtu | $ | 4,041 |
| | $ | 2,118 |
| | Discounted cash flow | | Natural gas prices (per MMBtu) | | $ | 1.22 |
| | $ | 2.80 |
| | $ | 1.54 |
|
_______________
| |
1 | The valuation techniques, unobservable inputs and ranges are the same for asset and liability positions. |
The significant unobservable inputs listed above would have a direct impact on the fair values of the above instruments if they were adjusted. Consequently, significant increases or decreases in the forward prices of electricity or natural gas in isolation would result in a significantly higher or lower fair value for Level 3 assets and liabilities. Generally, interrelationships exist between market prices of natural gas and power. As such, an increase in natural gas pricing would potentially have a similar impact on forward power markets. At June 30, 20172018 and December 31, 2016,2017, a hypothetical 10%10.0% increase or decrease in market prices of natural gas and electricity would change the fair value of the Company's derivative portfolio, classified as Level 3 within the fair value hierarchy, by $1.0$1.1 million and $0.2$0.9 million, respectively.
Long-Lived Assets Measured at Fair Value on a Nonrecurring Basis
Puget Energy records the fair value of its intangible assets in accordance with ASC 360, “Property, Plant, and Equipment,” (ASC 360). The fair value assigned to the power contracts was determined using an income approach comparing the contract rate to the market rate for power over the remaining period of the contracts incorporating non-performance risk. Management also incorporated certain assumptions related to quantities and market presentation that it believes market participants would make in the valuation. The fair value of the power contracts is amortized as the contracts settle.
ASC 360 requires long-lived assets to be tested for impairment on an annual basis, and upon the occurrence of any events or circumstances that would be more likely than not to reduce the fair value of the long-lived assets below their carrying value. One such triggering event is a significant decrease in the forward market prices of power.
As of June 30, 2017,2018, Puget Energy completed valuation and impairment testing of its power purchase contracts classified as intangible assets and found no impairment. However, asAs of March 31, 2017,2018, the Wells Hydro contract was determined to be impaired due to significant decreasesa decrease in forward power prices for this contract of 14.1% for years 2017-2022, and 24.4% for years 2023-203539.0% from December 31, 2016,2017, causing an impairment of $1.9 million.
The following table presents the following impairments totaling $80.3 million wereimpairment recorded to the Company's intangible asset contracts, with corresponding reductions to the regulatory liability as follows:liability:
| | Puget Energy | | |
(Dollars in Thousands) | | | | | | | | | | | | |
Valuation Date | Contract Name | Carrying Value | | Fair Value | | Write Down | Contract Name | Carrying Value | | Fair Value | | Write Down |
March 31, 2017 | Wells Hydro | $ | 14,879 |
| | $ | 13,067 |
| | $ | 1,812 |
| |
| Rocky Reach | 235,331 |
| | 159,818 |
| | 75,513 |
| |
| Priest Rapids RP | 5,665 |
| | 2,657 |
| | 3,008 |
| |
Total impairment | | $ | 255,875 |
| | $ | 175,542 |
| | $ | 80,333 |
| |
March 31, 2018 | | Wells Hydro | $ | 4,302 |
| | $ | 2,395 |
| | $ | 1,907 |
|
The valuations were measured using a discounted cash flow, income-based valuation methodology. Significant inputs included forward electricity prices and power contract pricing which provided future net cash flow estimates classified as Level 3 within the fair value hierarchy. A less significant input is the discount rate reflective of PSE's cost of capital used in the valuation.
The following table presents the significant unobservable inputs used in estimating the impaired long-term power purchase contracts' fair value:
|
| | | | | | |
Puget Energy | | | | | | |
Valuation Date | Unobservable Input | Low | | High | | Average |
March 31, 2017 | | | | | | |
Wells Hydro | Power prices | $8.76 per MWh | | $26.70 per MWh | | $20.86 per MWh |
| Power contract costs (in thousands) | 3,965 per qtr. | | 4,223 per qtr. | | 4,051 per qtr. |
Rocky Reach | Power prices | $8.53 per MWh | | $48.21 per MWh | | $27.69 per MWh |
| Power contract costs (in thousands) | 5,827 per qtr. | | 6,780 per qtr. | | 6,150 per qtr. |
Priest Rapids RP | Power prices | $13.70 per MWh | | $29.38 per MWh | | $23.14 per MWh |
| Power contract costs (in thousands) | 620 per year | | 4,022 per year | | 2,306 per year |
|
| | | | | | |
Puget Energy | | | | | | |
Valuation Date | Unobservable Input | Low | | High | | Average |
March 31, 2018 | Power prices (per MWh) | $9.69 | | $25.30 | | $17.50 |
| Power contract costs per quarter (in thousands) | 4,126 | | 4,126 | | 4,126 |
| |
(5)(6) | Retirement Benefits |
PSE has a defined benefit pension plan (Qualified Pension Benefits) covering the largest portion of PSE employees. Pension benefits earned are a function of age, salary, years of service and, in the case of employees in the cash balance formula plan, the applicable annual interest crediting rates. Starting January 1, 2014, allfor non-represented and United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry (UA) represented employees, along with International Brotherhood of Electrical Workers (IBEW) represented employees hired on or afterand December 12, 2014 who elect to accumulatefor employees represented by the Company contribution in the cash balance formula portion of the pension plan,IBEW, participants will receive annual pay credits of 4%4.0% each year. They willyear in the defined benefit pension or 401k plan account. Those employees electing the defined benefits pension plan also receive interest credits, like other participants in the cash balance pension formula of the pension plan, which are at least 1%1.0% per quarter. When an employee with a vested cash balance formula benefit leaves PSE, he or she will have annuity and lump sum options for distribution. Those who select the lump sum option will receive their current cash balance amount. PSE also maintains a non-qualified Supplemental Executive Retirement Plansupplemental executive retirement plan (SERP) for its key senior management employees.
In addition to providing pension benefits, PSE provides access tolegacy group medicalhealth care coverage and legacy life insurance benefits (Other Benefits) for certain retired employees. These benefits are provided principally through an insurance company. The group medical insurance premiums, paid primarily by retirees, are based on the benefits provided during the prior year.
Puget Energy's retirement plans were re-measured as a result of the merger in 2009 which represents the difference between Puget Energy records purchase accounting adjustments associated withand PSE's retirement plans.
In March 2017, the re-measurementFASB issued ASU 2017-07, requiring that an employer report the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) are required to be presented in the retirement plans.income statement separately from the service cost component and outside a subtotal of income from operations. The Company has included in the consolidated statements of income: (i) the components of service cost within utility operations and maintenance for PSE and within non-utility expense and other for Puget Energy, and (ii) all non-service cost components in other income.
The following tables summarize the Company’s net periodic benefit cost for the three and six months ended June 30, 20172018 and 2016:2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Three Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 5,023 |
| | $ | 4,605 |
| | $ | 228 |
| | $ | 271 |
| | $ | 16 |
| | $ | 24 |
|
Interest cost | 7,088 |
| | 7,226 |
| | 571 |
| | 582 |
| | 130 |
| | 157 |
|
Expected return on plan assets | (11,942 | ) | | (11,687 | ) | | — |
| | — |
| | (116 | ) | | (111 | ) |
Amortization of prior service cost | (495 | ) | | (495 | ) | | 11 |
| | 11 |
| | — |
| | — |
|
Amortization of net loss (gain) | — |
| | — |
| | 269 |
| | 228 |
| | (88 | ) | | (29 | ) |
Net periodic benefit cost | $ | (326 | ) | | $ | (351 | ) | | $ | 1,079 |
| | $ | 1,092 |
| | $ | (58 | ) | | $ | 41 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 10,040 |
| | $ | 9,209 |
| | $ | 457 |
| | $ | 542 |
| | $ | 36 |
| | $ | 49 |
|
Interest cost | 14,186 |
| | 14,452 |
| | 1,143 |
| | 1,163 |
| | 250 |
| | 313 |
|
Expected return on plan assets | (23,892 | ) | | (23,374 | ) | | — |
| | — |
| | (231 | ) | | (222 | ) |
Amortization of prior service cost | (990 | ) | | (990 | ) | | 22 |
| | 22 |
| | — |
| | — |
|
Amortization of net loss (gain) | — |
| | — |
| | 538 |
| | 456 |
| | (201 | ) | | (58 | ) |
Net periodic benefit cost | $ | (656 | ) | | $ | (703 | ) | | $ | 2,160 |
| | $ | 2,183 |
| | $ | (146 | ) | | $ | 82 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Puget Sound Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
|
| | Three Months Ended June 30, |
| (Dollars in Thousands) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Components of net periodic benefit cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | 5,023 |
| | $ | 4,605 |
| | $ | 228 |
| | $ | 271 |
| | $ | 16 |
| | $ | 24 |
|
| Interest cost | 7,088 |
| | 7,226 |
| | 571 |
| | 582 |
| | 130 |
| | 157 |
|
| Expected return on plan assets | (11,963 | ) | | (11,736 | ) | | — |
| | — |
| | (116 | ) | | (111 | ) |
| Amortization of prior service cost | (393 | ) | | (393 | ) | | 11 |
| | 11 |
| | — |
| | — |
|
| Amortization of net loss (gain) | 3,095 |
| | 3,740 |
| | 392 |
| | 333 |
| | (148 | ) | | (90 | ) |
| Net periodic benefit cost | $ | 2,850 |
| | $ | 3,442 |
| | $ | 1,202 |
| | $ | 1,197 |
| | $ | (118 | ) | | $ | (20 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Three Months Ended June 30, |
(Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 5,425 |
| | $ | 5,023 |
| | $ | 212 |
| | $ | 228 |
| | $ | 17 |
| | $ | 16 |
|
Interest cost | 6,780 |
| | 7,088 |
| | 530 |
| | 571 |
| | 110 |
| | 130 |
|
Expected return on plan assets | (12,559 | ) | | (11,942 | ) | | — |
| | — |
| | (117 | ) | | (116 | ) |
Amortization of prior service cost | (495 | ) | | (495 | ) | | 11 |
| | 11 |
| | — |
| | — |
|
Amortization of net loss (gain) | 462 |
| | — |
| | 394 |
| | 269 |
| | (86 | ) | | (88 | ) |
Net periodic benefit cost | $ | (387 | ) | | $ | (326 | ) | | $ | 1,147 |
| | $ | 1,079 |
| | $ | (76 | ) | | $ | (58 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Puget Sound Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
|
| | Six Months Ended June 30, |
| (Dollars in Thousands) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Components of net periodic benefit cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | 10,040 |
| | $ | 9,209 |
| | $ | 457 |
| | $ | 542 |
| | $ | 36 |
| | $ | 49 |
|
| Interest cost | 14,186 |
| | 14,452 |
| | 1,143 |
| | 1,163 |
| | 250 |
| | 313 |
|
| Expected return on plan assets | (23,931 | ) | | (23,472 | ) | | — |
| | — |
| | (231 | ) | | (222 | ) |
| Amortization of prior service cost | (787 | ) | | (786 | ) | | 22 |
| | 22 |
| | — |
| | — |
|
| Amortization of net loss (gain) | 6,524 |
| | 7,480 |
| | 783 |
| | 666 |
| | (320 | ) | | (180 | ) |
| Net periodic benefit cost | $ | 6,032 |
| | $ | 6,883 |
| | $ | 2,405 |
| | $ | 2,393 |
| | $ | (265 | ) | | $ | (40 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Six Months Ended June 30, |
(Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 10,851 |
| | $ | 10,040 |
| | $ | 423 |
| | $ | 457 |
| | $ | 35 |
| | $ | 36 |
|
Interest cost | 13,560 |
| | 14,186 |
| | 1,060 |
| | 1,143 |
| | 220 |
| | 250 |
|
Expected return on plan assets | (25,119 | ) | | (23,892 | ) | | — |
| | — |
| | (235 | ) | | (231 | ) |
Amortization of prior service cost | (990 | ) | | (990 | ) | | 22 |
| | 22 |
| | — |
| | — |
|
Amortization of net loss (gain) | 925 |
| | — |
| | 790 |
| | 538 |
| | (172 | ) | | (201 | ) |
Net periodic benefit cost | $ | (773 | ) | | $ | (656 | ) | | $ | 2,295 |
| | $ | 2,160 |
| | $ | (152 | ) | | $ | (146 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Puget Sound Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
|
| | Three Months Ended June 30, |
| (Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Components of net periodic benefit cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | 5,425 |
| | $ | 5,023 |
| | $ | 212 |
| | $ | 228 |
| | $ | 17 |
| | $ | 16 |
|
| Interest cost | 6,780 |
| | 7,088 |
| | 530 |
| | 571 |
| | 110 |
| | 130 |
|
| Expected return on plan assets | (12,569 | ) | | (11,963 | ) | | — |
| | — |
| | (117 | ) | | (116 | ) |
| Amortization of prior service cost | (393 | ) | | (393 | ) | | 11 |
| | 11 |
| | — |
| | — |
|
| Amortization of net loss (gain) | 3,630 |
| | 3,095 |
| | 517 |
| | 392 |
| | (142 | ) | | (148 | ) |
| Net periodic benefit cost | $ | 2,873 |
| | $ | 2,850 |
| | $ | 1,270 |
| | $ | 1,202 |
| | $ | (132 | ) | | $ | (118 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Sound Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Six Months Ended June 30, |
(Dollars in Thousands) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 10,851 |
| | $ | 10,040 |
| | $ | 423 |
| | $ | 457 |
| | $ | 35 |
| | $ | 36 |
|
Interest cost | 13,560 |
| | 14,186 |
| | 1,060 |
| | 1,143 |
| | 220 |
| | 250 |
|
Expected return on plan assets | (25,138 | ) | | (23,931 | ) | | — |
| | — |
| | (235 | ) | | (231 | ) |
Amortization of prior service cost | (787 | ) | | (787 | ) | | 22 |
| | 22 |
| | — |
| | — |
|
Amortization of net loss (gain) | 7,260 |
| | 6,524 |
| | 1,035 |
| | 783 |
| | (283 | ) | | (320 | ) |
Net periodic benefit cost | $ | 5,746 |
| | $ | 6,032 |
| | $ | 2,540 |
| | $ | 2,405 |
| | $ | (263 | ) | | $ | (265 | ) |
The following table summarizes the Company’s change in benefit obligation for the periods ended June 30, 20172018 and December 31, 2016:2017:
| | Puget Energy and Puget Sound Energy | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits | Qualified Pension Benefits | | SERP Pension Benefits | | Other Benefits |
| Six Months Ended
| | Year Ended | | Six Months Ended
| | Year Ended | | Six Months Ended
| | Year Ended | Six Months Ended | | Year Ended | | Six Months Ended | | Year Ended | | Six Months Ended | | Year Ended |
(Dollars in Thousands) | June 30, 2017 | | December 31, 2016 | | June 30, 2017 | | December 31, 2016 | | June 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 |
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of period | $ | 652,607 |
| | $ | 643,088 |
| | $ | 51,734 |
| | $ | 51,279 |
| | $ | 11,194 |
| | $ | 13,946 |
| $ | 700,481 |
| | $ | 652,607 |
| | $ | 55,754 |
| | $ | 51,734 |
| | $ | 11,454 |
| | $ | 11,194 |
|
Service cost | 10,040 |
| | 18,913 |
| | 457 |
| | 1,085 |
| | 36 |
| | 93 |
| 10,851 |
| | 20,081 |
| | 423 |
| | 913 |
| | 35 |
| | 72 |
|
Interest cost | 14,186 |
| | 28,689 |
| | 1,143 |
| | 2,325 |
| | 250 |
| | 533 |
| 13,560 |
| | 28,373 |
| | 1,060 |
| | 2,285 |
| | 220 |
| | 500 |
|
Actuarial loss (gain) | (253 | ) | | 1,545 |
| | — |
| | 106 |
| | 373 |
| | (2,262 | ) | — |
| | 40,945 |
| | — |
| | 2,722 |
| | — |
| | 725 |
|
Benefits paid | (20,894 | ) | | (38,730 | ) | | (955 | ) | | (3,061 | ) | | (572 | ) | | (1,264 | ) | (21,300 | ) | | (40,594 | ) | | (1,080 | ) | | (1,900 | ) | | (562 | ) | | (1,137 | ) |
Medicare part D subsidy received | — |
| | — |
| | — |
| | — |
| | 100 |
| | 148 |
| — |
| | — |
| | — |
| | — |
| | 85 |
| | 100 |
|
Administrative Expense | — |
| | (898 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | (931 | ) | | — |
| | — |
| | — |
| | — |
|
Benefit obligation at end of period | $ | 655,686 |
| | $ | 652,607 |
| | $ | 52,379 |
| | $ | 51,734 |
| | $ | 11,381 |
| | $ | 11,194 |
| $ | 703,592 |
| | $ | 700,481 |
| | $ | 56,157 |
| | $ | 55,754 |
| | $ | 11,232 |
| | $ | 11,454 |
|
The aggregate expected contributions by the Company to fund the qualified pension plan, SERP and the other postretirement plans for the year ending December 31, 20172018 are expected to be at least $18.0 million, $1.9$5.5 million and $0.3 million, respectively. During the three months ended June 30, 2017,2018, the Company contributed $9.0 million, $0.5$4.5 million and $0.1$0.6 million to fund the qualified pension plan SERP and other postretirement plan,SERP, respectively. During the six months ended June 30, 2017,2018, the Company contributed $18.0 million, $1.0$9.0 million and $0.2$1.1 million to fund the qualified pension plan and SERP, andrespectively. The Company contributed an immaterial amount to fund the other postretirement plan, respectively.
plans.
| |
(6) | (7) Regulation and Rates |
2013 Expedited Rate Filing, Decoupling and Centralia Decision
On June 25, 2013, the Washington Commission issued final orders resolving the amended decoupling petition, the Expedited Rate Filing (ERF) and the Petition for Reconsideration (related to the TransAlta Centralia power purchase agreement). Order No.7
in the ERF/decoupling proceeding approved PSE's ERF filing with a small change to its cost of capital from 7.80% to 7.77% to update long-term debt costs and a capital structure that included 48.0% common equity with a return on equity (ROE) of 9.8%. This order also approved the property tax tracker discussed below and approved the amended decoupling and rate plan filing with the further condition that PSE and the customers will share 50.0% each in earnings in excess of the 7.77% authorized rate of return. In addition, the K-Factor (rate plan) increase allowed decoupling revenue per customer for the recovery of delivery system costs to subsequently increase by 3.0% for the electric customers and 2.2% for the natural gas customers on January 1 of each year, until the conclusion of PSE's next general rate case (GRC) which was filed January 13, 2017, as discussed below. In the rate plan, increases are subject to a cap of 3.0% of the total revenue for customers.
General Rate Case Filing
OnIn January 13, 2017, PSE filed its GRCgeneral rate case (GRC) with the Washington Commission. The GRC filing included a required plan to address Colstrip Units 1 and 2 closures, requested that electric energy supply fixed costs be included in PSE's decoupling mechanism, and contained requests for two new mechanisms to address regulatory lag. The Washington Commission which proposedentered a final order accepting the multi-party settlement agreement and determined the contested issues in the case on December 5, 2017
and new rates became effective December 19, 2017. The settlement agreement provides for a weighted cost of capital of 7.74%,7.6% or 6.69%6.55% after-tax, and a capital structure of 48.5% in common equity with a return on equity of 9.8%9.5%. The requestedsettlement also resulted in a combined electric tariff changes were a net increase of $86.3 million, or 4.1%, annually. The requested combined natural gas tariff changes were a net decrease of $22.3 million, or 2.4%, annually. The filing was subsequently suspended, which meanschange that the final rates granted in the proceeding will go into effect no later than December 13, 2017. PSE filed a supplemental filing in the GRC on April 3, 2017, which among other things provided updates to power costs. The requested combined electric tariff changes based on the updated supplemental filing would resultresulted in a net increase of $67.9$20.2 million, or 3.2%0.9%, annually. The requestedannually, and a combined natural gas tariff changes based on the updated supplemental filing would resultchange that resulted in a net decrease of $29.3$35.5 million, or 3.2%3.8%, annually.
PSE’sThe GRC filing includedalso re-purposed the required planbenefit for PTCs and hydro-related treasury grants to fund and recover decommissioning and remediation costs for Colstrip Units 1 and 2. As the Company monetizes PTCs, which are PTCs used on the filed tax returns, the regulatory liability is transferred to a reserve for Colstrip Units 1 and 2 closures,decommissioning and remediation costs.
For further details regarding the 2017 GRC filing, see Note 3, "Regulation and Rates" to the consolidated financial statements included in Item 3, "Legal Proceedings" in8 of the Company's Annual Report on theCompany’s Form 10-K for the yearperiod ended December 31, 2016. Additionally, PSE’s filing contains requests for two new mechanisms to address regulatory lag. PSE has requested procedures for an ERF that can be used to update PSE’s delivery revenues on an expedited basis following a GRC proceeding. PSE also requested approval to establish an electric cost recovery mechanism (CRM), similar to its existing natural gas CRM, which would allow PSE to obtain accelerated cost recovery on specified electric reliability projects.2017.
Decoupling Filings
While fluctuations in weather conditions will continue to affect PSE's billed revenue and energy supply expenses from month to month, PSE's decoupling mechanisms are expected to mitigateassist in mitigating the impact of weather on operating revenue and net income. TheSince July 2013, the Washington Commission has allowed PSE to record a monthly adjustment to its electric and natural gas operating revenues related to electric transmission and distribution, natural gas operations and general administrative costs from most residential, commercial and industrial customers to mitigate the effects of abnormal weather, conservation impacts and changes in usage patterns per customer. As a result, these electric and natural gas revenues will beare recovered on a per customer basis regardless of actual consumption levels. PSE's energy supply costs, which are part of the PCA and PGA mechanisms, are not included in the decoupling mechanism. The revenue recorded under the decoupling mechanisms will be affected by customer growth and not actual consumption. During the rate plan, which ended in December 2017, the allowed decoupling revenue per customer for the recovery of delivery system costs increased by 3.0% for the electric customers and 2.2% for the natural gas customers on January 1 of each year. Following each calendar year, PSE will recover from, or refund to, customers the difference between allowed decoupling revenue and the corresponding actual revenue during the following May to affectedApril time period.
On December 5, 2017, the Washington Commission approved PSE’s request within the 2017 GRC to extend the decoupling mechanism with some changes to the methodology that took effect on December 19, 2017. Electric and natural gas delivery revenues will continue to be recovered on a per customer basis and electric fixed production energy costs will now be decoupled and recovered on the basis of a fixed monthly amount. The allowed decoupling revenue for electric and natural gas customers overwill no longer increase annually each January 1 as occurred prior to December 19, 2017. Approved revenue per customer costs can only be changed in a 12-month period beginningGRC or expedited rate filing (ERF). Approved electric fixed production energy costs can only be changed in May followinga GRC or power cost only rate case (PCORC). Other changes to the calendar year end.decoupling methodology approved by the Washington Commission include regrouping of electric and natural gas non-residential customers and the exclusion of certain electric schedules from the decoupling mechanism going forward. The rate test which limits the amount of revenues PSE can collect in its annual filings increased from 3.0% to 5.0% for natural gas customers but will remain at 3.0% for electric customers. The decoupling mechanism will end on December 31, 2017, unless the requested continuation of the mechanism is approvedbe reviewed again in PSE's 2017 GRC. PSE's decoupling mechanism over and under collections will still be collectiblePSE’s first rate case filed in or refundable after December 31, 2017, even2021, or in a separate proceeding, if the decoupling mechanism is not extended.appropriate.
The Washington Commission approved the followingOn June 30, 2018, PSE requestsperformed an analysis to change rates under itsdetermine if electric and natural gas decoupling mechanisms:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions)1 |
Electric: | | | |
May 1, 2017 | 2.0% | | $41.9 |
May 1, 2016 | 1.0 | | 20.8 |
Natural Gas: | | | |
May 1, 2017 | 2.4% | | $22.4 |
May 1, 2016 | 2.8 | | 25.4 |
_______________
| |
1
| The increase inrevenue deferrals would be collected from customers within 24 months of the annual period, per ASC 980. If not, for GAAP purposes only, PSE would need to record a reserve against the decoupling revenue and regulatory asset balance. Once the revenue is forecasted to be collected within 24 months, the reserve can be reversed. The analysis indicated all deferred revenue is net of reductions from excess earnings of $11.4 million for electric and $2.1 million for natural gas in 2017, and $11.9 million for electric and $5.5 million for natural gas in 2016. |
As noted earlier, the Company is also limited to a 3.0% annual decoupling related cap on increases in total revenue. This limitation has been triggered as follows for natural gas with no impacts to electric:
|
| |
Effective Date Accrued Through | Deferrals not Included in Annual Rate Increases (Dollars in Millions) |
Natural Gas: | |
2016 | $47.4 |
2015 | 28.7 |
Existing deferrals maywill be included in customer rates beginning in May 2018, subject to subsequent applicationcollected within 24 months of the earnings test andannual period; therefore, there were no adjustments to 2017 or 2018 decoupling revenue other than to record the 3.0% cap onpreviously unrecognized decoupling related rate increases. deferrals of $20.8 million at December 31, 2016.
Electric Regulation and Rates
Storm Damage Deferral Accounting
The Washington Commission issued a GRC order that defined deferrable catastrophic/extraordinary lossesstorm events and provided that costs in excess of $8.0 million annuallythe annual cost threshold may be deferred for qualifying storm damage costs that meet the modified Institute of Electrical and Electronics Engineers outage criteria for a system average interruption duration index. For the six months ended June 30, 2017 and June 30, 2016,2018, PSE incurred $20.8$8.9 million and $15.6 million, respectively, in storm-related electric transmission and distribution system restoration costs, of which no current year amount was deferred to a regulatory asset. This compares to $20.8 million incurred in storm-related electric transmission and distribution system restoration costs for the six months ended June 30, 2017, of which $12.1 million was deferred to a regulatory asset inasset. Under the December 5, 2017 and $6.5 million in 2016.
Power Cost Adjustment Mechanism
PSE currently has a PCA mechanism that provides for the deferral of power costs that vary from the “power cost baseline” level of power costs. The “power cost baseline” levels are set, in part, based on normalized assumptions about weather and hydroelectric conditions. Excess power costs or savings are apportioned between PSE and its customers pursuant to the graduated scale set forth in the PCA mechanism and will trigger a surcharge or refund when the cumulative deferral trigger is reached.
The graduated scale that was applicable through December 31, 2016 was as follows:
|
| | | |
Annual Power Cost Variability | Company’s Share | | Customers' Share |
+/- $20 million | 100% | | —% |
+/- $20 million - $40 million | 50 | | 50 |
+/- $40 million - $120 million | 10 | | 90 |
+/- $120 + million | 5 | | 95 |
On August 7, 2015, the Washington Commission issued an order approving the settlement proposing changes to the PCA mechanism. The settlement agreement took effect January 1, 2017 and applies the following graduated scale:
|
| | | | | | | | |
| Company's Share | | Customers' Share |
Annual Power Cost Variability | Over | | Under | | Over | | Under |
Over or Under Collected by up to $17 million | 100% | | 100% | | —% | | —% |
Over or Under Collected by between $17 million - $40 million | 35 | | 50 | | 65 | | 50 |
Over or Under Collected beyond $40 + million | 10 | | 10 | | 90 | | 90 |
The settlement also resulted inregarding PSE’s GRC, the following changes to PSE’s storm deferral mechanism were approved: (i) the PCA mechanism:cumulative annual cost threshold for deferral of storms under the mechanism increased from $8.0 million to $10.0 million effective January 1, 2018; and (ii) qualifying events where the total qualifying cost is less than $0.5 million will not qualify for deferral and these costs will also not count toward the $10.0 million annual cost threshold.
Reduction
Washington Commission Tax Deferral Filing
The TCJA was signed into law in December 2017. As a result of this change, PSE re-measured its deferred tax balances under the new corporate tax rate. PSE filed an accounting petition on December 29, 2017 requesting deferred accounting treatment for the impacts of tax reform. The deferral accounting treatment results in the tax rate change being captured in the deferred income tax balance with an offset to the cumulative deferral triggerregulatory liability for surcharge or refund from $30.0 milliondeferred income taxes. Additionally, on March 30, 2018, PSE filed for a rate change for electric and natural gas customers associated with TCJA to $20.0 million;
Removal of fixed production costs fromreflect the PCA mechanism and placing themdecrease in the decoupling mechanism, assumingfederal corporate income tax rate from 35.0% to 21.0%. The filing did not address excess deferred taxes or the decoupling mechanism continues after its review indeferred balance associated with the 2017 GRC. If decoupling was not to continue, those fixed production costs would be treated the same as other non-PCA costs unless permission to treat them in another manner is obtained from the Washington Commission. These fixed production costs include: (i) return and depreciation/amortization on fixed production assets and regulatory assets and liabilities; (ii) return, depreciation, transmissionover-collection of income tax expense and revenues on specific transmission assets; and (iii) hydroelectric, other production and other power related expenses and O&M costs;
Suspension of the requirement that a GRC must be filed within three months after rates are approved in a Power Cost Only Rate Case (PCORC);
Agreement, for a five-year period, that PSE will not file a GRC or PCORC within six months of the date rates go into effect for a PCORC filing; and
Establishment of a five-year moratorium on changes to the PCA.
For the six months ended June 30, 2017, PSE under recovered its power costs by $8.6 million of which no amount was apportioned to customers. This compares to an under recovery of power costs of $3.1$34.6 million for the six months ended Juneperiod January 1 through April 30, 20162018 (the time period that encompasses the effective date of which no amounts were apportionedthe TCJA through May 1, 2018, the effective date of the rate change). The $34.6 million tax over-collection decreased PSE's revenue and increased the regulatory liability for a refund to customers. Load increased in 2017 compared to 2016 which was offset by a decreasePSE’s proposal in the total baseline ratefiling is to address both the excess deferred taxes and an increasethe deferred balance associated with the over-collection of income tax expense in costs. Additionally, this change was due to the new 2017 mechanism which fixed production costs, other costs and adjustments are no longer included.PSE’s accounting petition. The mechanism is now comparing variable PCA costs using the variable costs portionoverall impact of the baseline rate. The fixed costs will become part of the decoupling mechanism, assuming the decoupling mechanism continues after its review in the GRC, but until then the fixed costs are being deferred using the fixed cost portion of the baseline rate.
Electric Conservation Rider
The electric conservation rider collects revenue to cover the costs incurred in providing services and programs for conservation. Ratesrate change, annually on May 1 to collect the annual budget that started the prior January and to true-up for actual compared to forecast conservation expenditures from the prior year as well as actual load being different than the forecasted load set in rates.
The following table sets forth conservation rider rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2017 | 0.7% | | $16.5 |
May 1, 2016 | (0.5) | | (11.7) |
Electric Property Tax Tracker Mechanism
The purposeannual period from May 2018 through April 2019, is a revenue decrease of the property tax tracker mechanism is to pass through the cost of all property taxes incurred by the Company. The mechanism removes property taxes from general rates$72.9 million, or 3.4% for electric and includes those costs$23.6 million, or 2.7% for recovery in an adjusting tariff rate. After the implementation, the mechanism acts as a tracker rate schedule and collects the total amount of property taxes paid. The tracker will be adjusted on May 1 each year based on that year's assessed property taxes and true-ups to the rate from the prior year.
The following table sets forth property tax tracker mechanism rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2017 | (0.04)% | | $(0.9) |
May 1, 2016 | 0.3 | | 5.7 |
Federal Incentive Tracker Tariff
The Federal Incentive Tracker Tariff passes through to customers the benefits associated with realized treasury grants and Production Tax Credits. The filing results in a credit back to customers for pass-back of treasury grant amortization and pass-through of interest and any related true-ups. The filing is adjusted annually for new Federal benefits, actual versus forecast interest and to true-up for actual load being different than the forecasted load set in rates.
The following table sets forth the Federal Incentive Tracker Tariff revenue requirement approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates from prior year | | Total credit to be passed back to eligible customers (Dollars in Millions) |
January 1, 2017 | 0.3% | | $(51.7) |
January 1, 2016 | (0.2) | | (57.3) |
Power Cost Update Compliance Filing
On September 30, 2016, PSE filed with the Washington Commission an update to power costs under Schedule 95, which was consistent with the Commission's Order 4 in PSE’s 2014 PCORC under Docket No. UE-141141 and required under the joint petition filed March 9, 2016, seeking to postpone the filing of PSE's GRC. This allowed PSE to implement the December 1, 2016 price and volume changes associated with the Centralia Coal Transition purchase power agreement through a compliance filing.
The following table sets forth the updated compliance filing rate adjustment that became effective on December 1, 2016, by operation of law and the corresponding expected annual impact on PSE's revenue based on the effective date:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
December 1, 2016 | (1.7)% | | $(37.3) |
Natural Gas Regulation and Rates
Natural Gas Conservation Rider
The natural gas conservation rider collects revenue to cover the costs incurred in providing services and programs for conservation. Rates change annually on May 1 to collect the annual budget that started the prior January and to true-up for actual versus forecast conservation expenditures from the prior year as well as actual load being different than the forecasted load set in rates.
The following table sets forth conservation rider rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | | |
| Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
|
|
|
| May 1, 2017 | (0.1)% | | $(1.0) |
| May 1, 2016 | 0.3 | | 2.9 |
Natural Gas Property Tax Tracker Mechanism
The purpose of the property tax tracker mechanism is to pass through the cost of all property taxes incurred by the Company. The mechanism removes property taxes from general rates and includes those costs for recovery in an adjusting tariff rate. After the implementation, the mechanism acts as a tracker rate schedule and collects the total amount of property taxes paid. The tracker will be adjusted on May 1 each year based on that year's assessed property taxes.
The following table sets forth property tax tracker mechanism rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2017 | (0.1)% | | $(1.1) |
May 1, 2016 | 0.4 | | 3.5 |
Natural Gas Cost Recovery Mechanism
The purpose of the CRM is to recover capital costs related to projects included in PSE's pipe replacement program plan on file with the Washington Commission with the intended effect of enhancing the safety of the natural gas distribution system.
The following table sets forth CRM rate adjustments as originally proposed by PSE or approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
November 1, 2017, proposed | 0.6% | | $5.4 |
November 1, 2016 | 0.6 | | 5.6 |
Purchased Gas Adjustment
PSE has a PGA mechanism that allows PSE to recover expected natural gas supply and transportation costs and defer, as a receivable or payable, any natural gas supply and transportation costs that exceed or fall short of this expected natural gas cost amount in PGA mechanism rates, including accrued interest. PSE is authorized by the Washington Commission to accrue carrying costs on PGA receivable and payable balances. A receivable or payable balance in the PGA mechanism reflects an under recovery or over recovery, respectively, of natural gas cost through the PGA mechanism.
The following table sets forth the PGA rate adjustment approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective date:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
November 1, 2016 | (0.4)% | | $(4.1) |
| |
(7) | Asset Retirement Obligations |
The Company has recorded liabilities for steam generation sites, combustion turbine generation sites, wind generation sites, distribution and transmission poles, and natural gas mains where disposal is governed by ASC 410 “Asset Retirement and Environmental Obligations (ARO)”.
On April 17, 2015, the United States Environmental Protection Agency (EPA) published a final rule, effective October 19, 2015, that regulates Coal Combustion Residuals (CCR) under the Resource Conservation and Recovery Act, Subtitle D. The CCR ruling requires the Company to perform an extensive study on the effects of coal ash on the environment and public health. The rule addresses the risks from coal ash disposal, such as leaking of contaminants into ground water, blowing of contaminants into the air as dust, and the catastrophic failure of coal ash surface impoundments.
The CCR rule and two new agreements which include a consent decree with the Sierra Club and a settlement agreement with the Sierra Club and the National Wildlife Federation in 2016 make significant changes to the Company’s Colstrip operations. The changes were reviewed by the Company and the plant operator in 2015 and 2016. PSE had previously recognized a legal obligation in 2003 under EPA rules to dispose of coal ash material at Colstrip. Due to the updated Colstrip information, additional disposal costs were added to the ARO.
On September 6, 2016, PSE entered into two new agreements requiring the Company to close the Colstrip 1 and 2 plants on or before July 1, 2022 and to incur additional costs, such as, monitoring, water treatment, forced evaporation and post-closure care for all Colstrip Units. As a result, in 2016 the Company increased the Colstrip ARO ending liability by $45.7 million for Colstrip Units 1 and 2 and $37.0 million for Colstrip Units 3 and 4.
The actual ARO costs related to the CCR rule requirements may vary substantially from the estimates used to record the increased obligation due to uncertainty about the compliance strategies that will be used and the preliminary nature of available data used to estimate costs. The Company will continue to gather additional data and coordinate with the plant operator to make decisions about compliance strategies and the timing of closure activities. As additional information becomes available, the Company will update the ARO obligation for these changes, which could be material.
For the six months ended June 30, 2017, the Company reviewed the estimated remediation costs at Colstrip and reduced the Colstrip ARO liability by $5.0 million for Colstrip Units 1 and 2 and $13.3 million for Colstrip Units 3 and 4.gas.
The following table describes the changes to the Company’s ARO for the six months ended June 30, 2017:
|
| | | |
Puget Sound Energy | |
(Dollars in Thousands) | Changes in ARO |
Balance at December 31, 2016 | $ | 200,345 |
|
New asset retirement obligation recognized in the period | — |
|
Liability adjustments | (136 | ) |
Revisions in estimated cash flows | (18,329 | ) |
Accretion expense | 2,746 |
|
Balance at June 30, 2017 | $ | 184,626 |
|
(8) Commitments and Contingencies
| |
(8) | Commitment and Contingencies |
Colstrip
PSE has a 50% ownership interest in Colstrip Units 1 and 2 and a 25% interest in Colstrip Units 3 and 4. On March 6, 2013, the Sierra Club and the Montana Environmental Information Center filed a Clean Air Act citizen suit against all Colstrip owners in the U.S. District Court, District of Montana. Based on a second amended complaint filed in August 2014, the plaintiffs' lawsuit alleged violations of permitting requirements under the New Source Review/Prevention of Significant Deterioration program of the Clean Air Act arising from projects (plaintiffs initially claimed seventy-three projects, but this was reduced to two projects before trial in May 2016) undertaken at Colstrip during the time period from 2001 to 2012. On July 12, 2016, PSE reached a settlement with the Sierra Club to dismiss all of the Clean Air Act allegations against the Colstrip Generating Station, which was approved by the court on September 6, 2016. As part of the settlement that was signed by all Colstrip owners, Colstrip 1 and 2 owners, PSE agreed, along withand Talen Energy, (the owner of the other 50% interest in Colstrip Units 1 and 2),agreed to retire the two oldest units (Units 1 and 2) at Colstrip in eastern Montana by no later than July 1, 2022. PSE expects that theThe Washington Commission will allowallows full recovery in rates of the net book value (NBV) at retirement and related decommissioning costs consistent with prior precedents. As a result, PSE reclassified $176.8 million from a utility plant asset to a regulatory asset, which represents
Depreciation rates were updated in the expected NBV at retirement ofGRC effective December 19, 2017, where PSE's depreciation increased for Colstrip Units 1 and 2 based onto recover plant costs to the expected shutdown date of July 1, 2022 as of December 31, 2016. Due to a re-estimate ofdate. The increase in depreciation caused the Colstrip Units 1 and 2 ARO costs, the regulatory asset account wasto be reduced to $175.2$129.2 million and $127.6 million as of June 30, 2017. Colstrip Units 32018 and 4, which are newer and more efficient, are not affected by the settlement, and allegations in the lawsuit against Colstrip Units 3 and 4 were dismissed as part of the settlement. While PSE has estimated the ARO for Colstrip Units 1 and 2,December 31, 2017, respectively. However, the full scope of decommissioning activities and costs may vary from the estimates that are available at this time. The GRC also repurposed PTCs and hydro-related treasury grants to fund and recover decommissioning and remediation costs for Colstrip Units 1 and 2. Additionally, PSE will accelerate the depreciation of Colstrip Units 3 and 4, per the terms of the GRC settlement, to December 31, 2027.
Greenwood
On March 9, 2016, a natural gas explosion occurred in the Greenwood neighborhood of Seattle, WA, damaging multiple structures. The Washington Commission Staff completed its investigation of the incident and filed a complaint on September 20, 2016, seeking up to $3.2 million in fines from PSE. As of September 30, 2016, PSE accrued $3.2 million for the fine.2016. On March 28, 2017, pipeline safety regulators and PSE reached a settlement in response to the complaint. As part of the agreement, PSE agreed to pay a penalty of $2.8$1.5 million, of which $1.3 million was suspended on condition that PSE completedand is currently implementing a comprehensive inspection and remediation program. The settlement was presented to the Washington Commission during a scheduled hearing on May 15, 2017. On June 19, 2017, the Washington Commission approved the settlement without conditionsHowever, litigation is still pending regarding damage and adopted the reduced penalty of $2.8 million, of which $1.3 million was suspended. On June 30, 2017, PSE paid the $1.5 million penalty it had accrued previously to a liability reserve account for property damagepersonal injury claims.
Other Commitments and Contingencies
The Company is also involved in litigation relating to claims arising out of its operations in the normal course of business. The Company recorded reserves of $0.5 million and $0.7 million relating to these claims as of June 30, 2017 and December 31, 2016, respectively.
In additionThere have been no material changes to the contractual obligations and consolidated commercial commitments disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, during2017.
(9) Other
Long-Term Debt
On June 4, 2018, PSE issued $600.0 million of 30-year Senior Notes under its senior note indenture at an interest rate of 4.223% with a maturity date of June 15, 2048. The proceeds from the six months endedissuance were used to pay the principal and accrued interest on the Company’s $200.0 million Secured Notes that matured on June 30, 2017, the Company entered into new power supply15, 2018, outstanding commercial paper borrowings of $348.0 million and service contracts with estimated payment obligations totaling $703.2 million through 2028.other general corporate expenses.
Item 2. 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 report on Form 10-Q. The discussion contains forward-looking statements that involve risks and uncertainties, such as Puget Energy, Inc. (Puget Energy) and Puget Sound Energy, Inc. (PSE) objectives, expectations and intentions. Words or phrases such as “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “future,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “should,” “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. 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 and in the section entitled "Risk Factors" included in Part I, Item 1A in Puget Energy's and Puget Sound Energy's Form 10-K for the period ended December 31, 2016.2017. Except as required by law, neither Puget Energy nor PSE undertakes any 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 U.S. Securities and Exchange Commission (SEC) 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.
Overview
Puget Energy is an energy services holding company and substantially all of its operations are conducted through its subsidiary PSE, a regulated electric and natural gas utility company. PSE is the largest electric and natural gas utility in the state of Washington, primarily engaged in the business of electric transmission, distribution and generation and natural gas distribution. Puget Energy's business strategy is to generate stable cash flows by offering reliable electric and natural gas service in a cost-effective manner through PSE. Puget Energy also has a wholly-owned non-regulated subsidiary, Puget LNG, LLC (Puget LNG). Puget LNG was formed on November 29, 2016, and, which has the sole purpose of owning, developing and financing the non-regulated activity of the Tacoma LNG facility, currently under construction. All of Puget Energy's common stock is indirectly owned by Puget Holdings, LLC (Puget Holdings). Puget Holdings is owned by a consortium of long-term infrastructure investors including Macquarie Infrastructure Partners, I, Macquarie Infrastructure Partners II, Macquarie Capital Group Limited, FSS Infrastructure Trust, the Canada Pension Plan Investment Board, the British Columbia Investment Management Corporation, and the Alberta Investment Management Corporation. Puget Energy and PSE are collectively referred to herein as “the Company.”
PSE generates revenue and cash flow primarily from the sale of electric and natural gas services to residential and commercial customers within a service territory covering approximately 6,000 square miles, principally in the Puget Sound region of the state of Washington. PSE continually balances its load requirements, generation resources, purchase power agreements, and market purchases to meet customer demand. The Company's external financing requirements principally reflect the cash needs of its construction program, its schedule of maturing debt and certain operational needs. PSE requires access to bank and capital markets to meet its financing needs.
Factors and Trends Affecting PSE's Performance
The principal business, economic and other factors that affect PSE's operations and financial performance include:
The rates PSE is allowed to charge for its services;
PSE’s ability to recover power costs that are included in rates which are based on volume;
Weather conditions, including the impact of temperature on customer load; the impact of extreme weather events on budgeted maintenance costs; meteorological conditions such as snow-pack, stream-flow and wind-speed which affect power generation, supply and price;
Regulatory decisions allowing PSE to recover purchased power and fuel costs, on a timely basis;
PSE’s ability to supply electricity and natural gas, either through company-owned generation, purchase power contracts or by procuring natural gas or electricity in wholesale markets;
Equal sharing between PSE and its customers of earnings which exceed PSE's authorized rate of return;return (ROR);
Availability and access to capital and the cost of capital;
Regulatory compliance costs, including those related to new and developing federal regulations of electric system reliability, state regulations of natural gas pipelines and federal, state and local environmental laws and regulations;
Wholesale commodity prices of electricity and natural gas;
Increasing capital expenditures with additional depreciation and amortization;
Bonus depreciationTax reform, the effect of lower tax rates, and the impactregulatory treatment of excess deferred tax balances on rate base;base and customer rates;
General economic conditions in PSE's service territory and its effects on customer growth and use-per-customer; and
Federal, state, and local taxes.
Further detail regarding the factors and trends affecting performance of the Company during the fiscal quarter ended June 30, 20172018 is set forth below in this "Overview" section as well as in other sections of Management's Discussion and Analysis.
Regulation of PSE Rates and Recovery of PSE Costs
PSE's regulatory requirements and operational needs require the investment of substantial capital in 20172018 and future years. As PSE intends to seek recovery of these investments through the regulatory process, its financial results depend heavily upon favorablesufficient outcomes from that process. The rates that PSE is allowed to charge for its services influence its financial condition, results of operations and liquidity. PSE is highly regulated and the rates that it charges its retail customers are approved by the Washington Utilities and Transportation Commission (Washington Commission). The Washington Commission has traditionally required these rates be determined based, to a large extent, on historic test year costs plus weather normalized assumptions about hydroelectric conditions and power costs in the relevant rate year. Incremental customer growth and sales typically have not provided sufficient revenue to cover general cost increases over time due to the combined effects of regulatory lag and attrition. Accordingly, the Company will need to seek rate relief through a rate case on a regular and frequent basis in the future.foreseeable future after the investment is made. In addition, the Washington Commission determines whether the Company's expenses and capital investments are reasonable and prudent for the provision of cost effective,cost-effective, reliable and safe electric and natural gas service. If the Washington Commission determines that a capital investment is not reasonable or prudent, the costs (including return on any resulting rate base) related to such capital investment may be disallowed, partially or entirely, and not recovered in rates.
Washington state law also requires PSE to pursue electric conservation that is cost-effective, reliable and feasible. PSE’s mandate to pursue electric conservation initiatives may have a negative impact on the electric business financial performance due to lost margins from lower sales volumes as variable power costs are not part of the decoupling mechanism. Although not specified by Washington state law, the Washington Commission also sets natural gas conservation achievement standards for PSE. The effects of achieving these standards will, however, have only a slight negative impact on natural gas business financial performance due to the natural gas business being almost fully decoupled.
General Rate Case Filing
OnIn January 13, 2017, PSE filed its general rate case (GRC) with the Washington Commission. The Washington Commission which proposedentered a weighted cost of capital of 7.74%, or 6.69% after-tax,final order accepting the multi-party settlement agreement and a capital structure of 48.5% in common equity with a return on equity of 9.8%. The requested combined electric tariff changes were a net increase of $86.3 million, or 4.1%, annually. The requested combined natural gas tariff changes were a net decrease of $22.3 million, or 2.4%, annually. The filing was subsequently suspended, which means thatdetermined the final rates grantedcontested issues in the proceeding will go into effect no later thancase on December 13,5, 2017 and new rates became effective December 19, 2017. PSE filed a supplemental filing inFor further details regarding the GRC on April 3, 2017 which among other things provided updates to power costs. The requested combined electric tariff changes based on the updated supplemental filing would result in a net increase of $67.9 million, or 3.2%, annually. The requested combined natural gas tariff changes based on the updated supplemental filing would result in a net decrease of $29.3 million, or 3.2%, annually.
PSE’s GRC filing, see Note 3, "Regulation and Rates" to the consolidated financial statements included the required plan for Colstrip Units 1 and 2 closures, seein Item 3, "Legal Proceedings" in8 of the Company's Annual Report on the Form 10-K for the yearperiod ended December 31, 2016.2017.
Washington Commission Tax Deferral Filing
The TCJA was signed into law in December 2017. As a result of this change, PSE re-measured its deferred tax balances under the new corporate tax rate. PSE filed an accounting petition on December 29, 2017 requesting deferred accounting treatment for the impacts of tax reform. The deferral accounting treatment results in the tax rate change being captured in the deferred income tax balance with an offset to the regulatory liability for deferred income taxes. Additionally, on March 30, 2018, PSE filed for a rate change for electric and natural gas customers associated with TCJA to reflect the decrease in the federal corporate income tax rate from 35% to 21%. The filing did not address excess deferred taxes or the deferred balance associated with the over collection of income tax expense for the period January 1 through April 30, 2018 (the time period that encompasses the effective date of the TCJA through May 1, 2018, the requested effective date of the rate change). PSE’s proposal in the filing contains requests for two new mechanismsis to address regulatory lag.both the excess deferred taxes and the deferred balance associated with the over collection of income tax expense in PSE’s accounting petition.
The Washington Commission approved the following PSE has requested procedures for an Expedited Rate Filing (ERF) that can
be usedrequests to update PSE’s delivery revenues on an expedited basis following a GRC proceeding. PSE also requested approval to establish anchange rates annually under its electric cost recovery mechanism (CRM), similar to its existingand natural gas CRM, which would allow PSE to obtain accelerated cost recovery on specified electric reliability projects.tax deferral filing:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
Electric: | | | |
May 1, 2018 | (3.4)% | | $(72.9) |
Natural Gas: | | | |
May 1, 2018 | (2.7) | | (23.6) |
Decoupling Filings
While fluctuations in weather conditionsOn December 5, 2017, the Washington Commission approved PSE’s request within the 2017 GRC to extend the decoupling mechanism with some changes to the methodology that took effect on December 19, 2017. Electric and natural gas delivery revenues will continue to affect PSE's billed revenue and energy supply expenses from month to month, PSE's decoupling mechanisms are expected to mitigate the impact of weather on operating revenue and net income. The Washington Commission has allowed PSE to record a monthly adjustment to its electric and natural gas operating revenues related to electric transmission and distribution, natural gas operations and general administrative costs from most residential, commercial and industrial customers to mitigate the effects of abnormal weather, conservation impacts and changes in usage patterns per customer. As a result, these electric and natural gas revenues will be recovered on a per customer basis regardlessand electric fixed production energy costs will now be decoupled and recovered on the basis of actual consumption levels.a fixed monthly amount. The energy supply costs, which are part of the power cost adjustment (PCA) and purchased gas adjustment (PGA) mechanisms, are not included in the decoupling mechanism. The revenue recorded under the decoupling mechanisms will be affected by customer growth and not actual consumption. PSE will recover or refund the difference between allowed decoupling revenue for electric and natural gas customers will no longer increase annually each January 1 as occurred prior to December 19, 2017. Approved revenue per customer costs can only be changed in a GRC or expedited rate filing (ERF). Approved electric fixed production energy costs can only be changed in a GRC or power cost only rate case (PCORC). Other changes to the decoupling methodology approved by the Washington Commission include regrouping of electric and natural gas non-residential customers and the corresponding actual revenueexclusion of certain electric schedules from the decoupling mechanism going forward. The rate cap which limits the amount of revenues PSE can collect in its annual filings increased from 3.0% to affected5.0% for natural gas customers over a 12-month period beginning in May following the calendar year end.but will remain at 3.0% for electric customers. The decoupling mechanism will end on December 31, 2017, unless the requested continuation of the mechanism is approvedto be reviewed again in PSE's 2017 GRC. The decoupling mechanism over and under collections will still be collectiblefirst GRC filed in or refundable after December 31, 2017, even2021, or in a separate proceeding, if the decoupling mechanism is not extended.appropriate.
On April 28, 2017, the
The Washington Commission approved PSE's requestthe following PSE requests to change rates for prior deferrals under its electric and natural gas decoupling mechanism, effective May 1, 2017. The overall changes represent a rate increase for electric customers of $41.9 million, or 2.0%, annually, and a rate increase for natural gas customers of $22.4 million, or 2.4%, annually. In addition, PSE exceeded the earnings test threshold for both its electric and natural gas business in 2016. As a result, PSE filed with the Washington Commission a reduction in electric decoupling deferral and revenue of $11.4 million and a reduction in natural gas decoupling deferral and revenue of $2.1 million. This was included as a reduction to the electric and natural gas rate increases noted above. mechanisms:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions)1 |
Electric: | | | |
May 1, 2018 | (1.1)% | | $(25.2) |
May 1, 2017 | 2.0 | | 41.9 |
May 1, 2016 | 1.0 | | 20.8 |
Natural Gas: | | | |
May 1, 2018 | 1.7% | | $15.9 |
May 1, 2017 | 2.4 | | 22.4 |
May 1, 2016 | 2.8 | | 25.4 |
_______________
| |
1 | The increase in revenue is net of reductions from excess earnings of $10.0 million for electric and $4.9 million for natural gas effective May 1, 2018, $11.9 million for electric and $2.2 million for natural gas effective May 1, 2017, and $11.9 million for electric and $5.5 million for natural gas effective May 1, 2016. |
As noted earlier, at the time of the filings below, the Company iswas also limited to a 3.0% annual decoupling related cap on increases in total revenue. This limitation washas been triggered for the natural gas residential rate class. The resulting amount of deferral that was not included in the 2017 rate increase is $47.4 millionas follows for natural gas revenue that was accrued through December 31, 2016. The amount not recovered in 2017 may be included in customer rates beginning in May 2018, subjectwith no impacts to subsequent application of the earnings test and the 3.0% cap on decoupling related rate increases. electric:
Due to the 3.0% cap on annual decoupling increases noted above and the size of decoupling deferral assets on the balance sheet, PSE performed an analysis as of June 30, 2017 to determine if electric and natural gas decoupling revenue deferrals would be collected from customers within 24 months of the annual period. The analysis indicated all current deferred revenues for electric and natural gas will be collected within 24 months of the annual period; therefore, there were no adjustments to 2017 decoupling revenues other than to record the previously unrecognized decoupling deferrals of $20.8 million. |
| |
Effective Date Accrued Through | Deferrals not Included in Annual Rate Increases (Dollars in Millions)1 |
Natural Gas: | |
2016 | $47.4 |
Other Proceedings_______________
Microsoft
On October 7, 2016, PSE filed a tariff to provide open access service to a narrow set of qualifying customers. Subsequent to that tariff filing, parties to the case reached an all-party settlement that would convert the tariff to a special contract only allowing retail access for the loads of the Microsoft Corporation currently being served under PSE’s electric Schedule 40. The special contract includes the following conditions: (i) Microsoft exceed Washington State’s current renewable portfolio standards, (ii) the remainder of their power be carbon free, (iii) there be no reduction in their funding of PSE’s conservation programs, (iv) an exit fee be paid that will be a straight pass through to customers and (v) Microsoft fund enhanced low-income support. A definitive agreement among the parties, the special contract and supportive testimony were filed with the Washington Commission on April 11, 2017 with hearings that occurred on May 3, 2017. The Washington Commission issued an order on July 13, 2017 approving PSE’s special contract with Microsoft. Microsoft cannot begin taking service under the special contract until it has the required metering installed and has contracts for the supply and transmission of its power supply. PSE currently anticipates these conditions will be met in late 2018.
Voluntary Long-Term Renewable Energy
On September 28, 2016, the Washington Commission approved PSE's tariff revision to create an additional voluntary renewable energy product, effective September 30, 2016. This provides customers with energy choices to help them meet their sustainability goals. Incremental costs of the program will be allocated to the voluntary participants of the program as is the case with PSE’s existing Green Power programs. PSE initially offered this service to larger customers (aggregated annual loads greater than 10,000,000 kWh) and government customers. Approximately 135 MW of new wind generation facilities will be constructed in the region by a developer under contract to PSE which will meet the demand for this voluntary renewable energy product project. | |
1 | Existing deferrals after December 2017 may be included in customer rates beginning in May 2019, subject to subsequent application of the earnings test and the cap on decoupling related rate increases, which for natural gas customers, was changed from 3.0% to 5.0% as a result of the Washington Commission order in PSE's GRC. |
Electric Rates
Power Cost Adjustment Mechanism
PSE currently has a PCApower cost adjustment (PCA) mechanism that provides for the deferral of power costs that vary from the “power cost baseline” level of power costs. The “power cost baseline” levels are set, in part, based on normalized assumptions about weather and hydroelectric conditions. Excess power costs or savings are apportioned between PSE and its customers pursuant to the graduated scale set forth in the PCA mechanism and will trigger a surcharge or refund when the cumulative deferral trigger is reached.
The graduated scale that was applicable through December 31, 2016 was as follows:
|
| | | |
Annual Power Cost Variability | Company's Share | | Customers’ Share |
+/- $20 million | 100% | | —% |
+/- $20 million - $40 million | 50 | | 50 |
+/- $40 million - $120 million | 10 | | 90 |
+/- $120 + million | 5 | | 95 |
On August 7, 2015, the Washington Commission issued an order approving the settlement proposing changes to the PCA mechanism. The settlement agreement took effectEffective January 1, 2017 and applies the following scale:graduated scale is used in the PCA mechanism:
|
| | | | | | | |
| Company's Share | | Customers’ Share |
Annual Power Cost Variability | Over | | Under | | Over | | Under |
Over or Under Collected by up to $17 million | 100% | | 100% | | —% | | —% |
Over or Under Collected by between $17 million - $40 million | 35 | | 50 | | 65 | | 50 |
Over or Under Collected beyond $40 + million | 10 | | 10 | | 90 | | 90 |
The settlement also resulted in the following changes to the PCA mechanism:
Reduction to the cumulative deferral trigger for surcharge or refund from $30.0 million to $20.0 million;
Removal of fixed production costs from the PCA mechanism and placing them in the decoupling mechanism, assuming the decoupling mechanism continues after its review in the 2017 GRC. If decoupling was not to continue, those fixed production costs would be treated the same as other non-PCA costs unless permission to treat them in another manner is obtained from the Washington Commission. These fixed production costs include: (i) return and depreciation/amortization on fixed production assets and regulatory assets and liabilities; (ii) return, depreciation, transmission expense and revenues on specific transmission assets; and (iii) hydroelectric, other production and other power related expenses and O&M costs;
Suspension of the requirement that a GRC must be filed within three months after rates are approved in a Power Cost Only Rate Case (PCORC);
Agreement, for a five-year period, that PSE will not file a GRC or PCORC within six months of the date rates go into effect for a PCORC filing; and
Establishment of a five-year moratorium on changes to the PCA.
On September 30, 2016, PSE filed an accounting petition with the Washington Commission which requestsrequested deferral of the variances, either positive or negative, between the fixed costs previously recovered in the PCA and the revenue received to cover the allowed fixed costs. The deferral period requested iswas January 1, 2017 through December 31, 2017 when rates gowent into
effect from PSE's 2017 GRC. On November 10, 2016, the Washington Commission issued Order No. 01 approving PSE’s accounting petition.
With the final determination in PSE’s GRC, this deferral ceased with the rate effective date of December 19, 2017.
For the six months ended June 30, 2017,2018, in its PCA mechanism, PSE underover recovered its power costs by $8.6$15.3 million of which no amount was apportioned to customers. This compares to an under recovery of power costs of $3.1$8.6 million for the six months ended June 30, 20162017 of which no amounts were apportioned to customers. Load increasedPower costs decreased in 20172018 compared to 2016 which2017, although the effect of the lower power costs in the PCA mechanism was offset by a decrease in load used to calculate the totalbaseline amount and a slightly lower baseline rate and an increase in costs. Additionally, this change was due to the new 2017 mechanism which fixed production costs, other costs and adjustments are no longer included. The mechanism is now comparing variable PCA costs using the variable costs portion of the baseline rate. The fixed costs will become part of the decoupling mechanism, assuming the decoupling mechanism continues after its review in the GRC, but until then the fixed costs are being deferred using the fixed cost portion of the baseline rate. 2018.
Electric Conservation Rider
On April 28, 2017,The electric conservation rider collects revenue to cover the costs incurred in providing services and programs for conservation. Rates change annually on May 1 to collect the annual budget that started the prior January and to true-up for the difference between actual conservation expenditures and the forecasted conservation expenditures from the prior year as well as the difference between actual load and the forecasted load set in rates.
The following table sets forth conservation rider rate adjustments approved by the Washington Commission approved PSE's request to change rates under its electric conservation rider mechanism,and the corresponding expected annual impact on PSE’s revenue based on the effective May 1, 2017. The rate filing requests recovery of estimated program year expenditures as well as a true up for actual costs and collections for the conservation program for the prior period which would result in a rate increase for electric customers of $16.5 million, or 0.7%, annually.dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2018 | (0.8)% | | $(18.0) |
May 1, 2017 | 0.7 | | 16.5 |
May 1, 2016 | (0.5) | | (11.7) |
Electric Property Tax Tracker Mechanism
On April 28, 2017,The purpose of the Washington Commission approved PSE's request to change rates under its electric property tax tracker mechanism effective May 1, 2017. The approved filing incorporatesis to pass through the effectscost of an increase toall property taxes paidincurred by the Company. The mechanism was implemented in 2013 and removed property taxes from general rates and included those costs for recovery in an adjusting tariff rate. The mechanism acts as well as true-ups toa tracker rate schedule and collects the ratetotal amount of property taxes assessed. The tracker is adjusted each year in May based on that year's assessed property taxes and true-up from the prior year which would result in ayear.
The following table sets forth property tax tracker mechanism rate decrease for electric customers of $0.9 million, or 0.04%, annually.adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2018 | (0.1)% | | $(1.3) |
May 1, 2017 | (0.04) | | (0.9) |
May 1, 2016 | 0.3 | | 5.7 |
Federal Incentive Tracker Tariff
On December 22, 2016, the Washington Commission approved the annual true-up and rate filing to PSE'sThe Federal Incentive Tracker Tariff passes through to customers the benefits associated with an effective date of January 1, 2017.the wind-related treasury grants. The true-up filing resultedresults in a total credit of $51.7 million to be passed back to eligible customers over the twelve months beginning January 1, 2017. The total credit includes $38.1 million which represents thefor pass-back of treasury grant amortization and $13.6 million represents the pass throughpass-through of interest and any related true-ups. The filing is adjusted annually for new federal benefits, actual versus forecast interest and to true-up for the difference between actual load and the forecasted load set in additionrates. Rates change annually on January 1. Additionally, this tracker is impacted by the TCJA previously discussed. Accordingly, PSE filed for a one-time rate change to a minor true-up associated withbe effective May 1, 2018 to recognize the 2016decrease in the federal corporate income tax rate period. This filing represents an overall average rate increase of 0.3% annually.from 35% to 21%.
Power Cost Update Compliance Filing
On September 30, 2016, PSE filed withThe following table sets forth the federal incentive tracker tariff revenue requirement approved by the Washington Commission an update to power costs under Schedule 95, which was consistent withand the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates from prior year | | Total credit to be passed back to eligible customers (Dollars in Millions) |
May 1, 2018 | 0.4% | | $(40.1) |
January 1, 2018 | 0.2 | | (48.2) |
January 1, 2017 | 0.3 | | (51.7) |
January 1, 2016 | (0.2) | | (57.3) |
Residential Exchange Benefit
The residential exchange program passes through the residential exchange program benefits that PSE receives from the Bonneville Power Administration (BPA). Rates change bi-annually on October 1.
The following table sets forth residential exchange benefit adjustments approved by the Washington Commission's Order No. 04 inCommission and the 2014 PCORC, and required undercorresponding expected annual impact on PSE’s revenue based on the joint petition filed March 9, 2016, seeking to postpone the filing of PSE’s GRC. The filing requested a reduction in Schedule 95 rates of $37.3 million or an overall rate decrease of 1.7% annually. A corresponding reduction in the PCA Mechanism Baseline Rate used to track the PCA imbalance for sharing was also requested in this filing. PSE’s rate filing became effective on December 1, 2016 by operation of law.dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Total credit to be passed back to eligible customers (Dollars in Millions) |
October 1, 2017 | (0.6)% | | $(80.8) |
Natural Gas Rates
Natural Gas Conservation Rider
On April 28, 2017, the Washington Commission approved PSE's annual filing request to change rates under itsThe natural gas conservation rider mechanism, effectivecollects revenue to cover the costs incurred in providing services and programs for conservation. Rates change annually on May 1 2017. The rate filing requests recovery of estimated programto collect the annual budget that started the prior January and to true-up for the difference between actual conservation expenditures and forecasted conservation expenditures from the prior year expenditures as well as a true up forthe difference between actual costsload and collections for the forecasted load set in rates.
The following table sets forth conservation program forrider rate adjustments approved by the prior period which would result in a rate decrease for natural gas customers of $1.0 million, or 0.1%, annually.Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective dates:
|
| | | | |
| Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
|
|
|
| May 1, 2017 | (0.1) | | (1.0) |
| May 1, 2016 | 0.3 | | 2.9 |
Natural Gas Property Tax Tracker Mechanism
On April 28, 2017,The purpose of the Washington Commission approved PSE's annual filing request to change rates under its natural gas property tax tracker mechanism is to pass through the cost of all property taxes incurred by the Company. The mechanism was implemented in 2013 and removed property taxes from general rates and included those costs for recovery in an adjusting tariff rate. The mechanism acts as a tracker rate schedule and collects the total amount of property taxes assessed. The tracker is adjusted each year in May based on that year's assessed property taxes and adjustments to the rate from the prior year.
The following table sets forth property tax tracker mechanism rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective May 1, 2017, which would result in a rate decrease for natural gas customers of $1.1 million, or 0.1%, annually.dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
May 1, 2018 | (0.2)% | | $(2.2) |
May 1, 2017 | (0.1) | | (1.1) |
May 1, 2016 | 0.4 | | 3.5 |
Natural Gas Cost Recovery Mechanism
On June 1, 2017, PSE filed with the Washington Commission PSE's CRM natural gas tariff filing with an effective date of November 1, 2017. The purpose of this filingthe cost recovery mechanism (CRM) is to recover capital costs related to projects included in PSE's pipe replacement program plan on file with the Washington Commission with the intended effect of enhancing the safety of the natural gas distribution system. Rates change annually on November 1.
The following table sets forth CRM rate adjustments approved by or pending with the Washington Commission and the corresponding expected annual impact toon PSE’s revenue based on the CRM rates is an annual revenue increase of $5.4 million, or 0.6%, annually.effective dates:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
November 1, 2018 (proposed as originally filed and pending approval) | 0.4% | | $3.7 |
November 1, 2017 | 0.5 | | 4.9 |
November 1, 2016 | 0.6 | | 5.6 |
Purchased Gas Adjustment
PSE has a purchased gas adjustment (PGA) mechanism that allows PSE to recover expected natural gas supply and transportation costs and defer, as a receivable or liability, any natural gas supply and transportation costs that exceed or fall short of this expected natural gas cost amount in PGA mechanism rates, including accrued interest. PSE is authorized by the Washington Commission to accrue carrying costs on PGA receivable and payable balances. A receivable or payable balance in the PGA mechanism reflects an under recovery or over recovery, respectively, of natural gas cost through the PGA mechanism. Rates change annually on November 1.
The following table sets forth the PGA rate adjustments approved by the Washington Commission and the corresponding expected annual impact on PSE’s revenue based on the effective date:
|
| | | |
Effective Date | Average Percentage Increase (Decrease) in Rates | | Increase (Decrease) in Revenue (Dollars in Millions) |
November 1, 2017 | (3.3)% | | $(30.8) |
November 1, 2016 | (0.4) | | (4.1) |
Other Proceedings
Large Customer Retail Wheeling
On October 27,7, 2016, PSE filed a tariff to provide open access service to a narrow set of qualifying customers. Subsequent to that tariff filing, parties to the case reached an all-party settlement that converted the tariff to a special contract only allowing retail access for the loads of the Microsoft Corporation currently being served under PSE’s electric Schedule 40. The special contract includes the following conditions: (i) Microsoft must exceed Washington State’s current renewable portfolio standards, (ii) the remainder of power sold to Microsoft must be carbon free, (iii) there will be no reduction in Microsoft's funding of PSE’s conservation programs, (iv) Microsoft will pay a transition fee that will be a straight pass-through to customers and (v) Microsoft will fund enhanced low-income support. A definitive agreement among the parties, the special contract and supportive testimony
were filed with the Washington Commission on April 11, 2017 with hearings that occurred on May 3, 2017. The Washington Commission issued an order on July 13, 2017 approving PSE’s special contract with Microsoft. Microsoft cannot begin taking service under the special contract until it has the required metering installed, has contracts for the supply and transmission of its power supply and pays the transition fee.
Voluntary Long-Term Renewable Energy
On September 28, 2016, the Washington Commission approved PSE's CRM natural gas tariff filingrevision to create an additional voluntary renewable energy product, effective September 30, 2016. This provides customers with an effective date of November 1, 2016. The purpose of this filing iselectric generation resource options to recover capitalhelp them meet their sustainability goals. Incremental costs related to enhancing the safety of the natural gas distribution system. The impactprogram will be allocated to the CRM ratesvoluntary participants of the program as is anthe case with PSE’s existing Green Power programs. PSE initially offered this service, Green Direct, to larger customers (aggregated annual revenue increaseloads greater than 10,000 MWh) and government customers. The initial resource option offered under this rate schedule is a new wind generation facility with the capacity of $5.6 million, or 0.6%, annually.
Purchased Gas Adjustment
On October 27, 2016,approximately 136.8 MW that will be constructed in the Washington Commission approved PSE's PGA natural gas tariff filing with an effective date of November 1, 2016, which reflects changesregion by a developer under contract to PSE to meet the demand for this voluntary renewable energy product. PSE anticipates that customers will start receiving energy through this program in wholesale natural gas and pipeline transportation costs and changes in deferral amortization rates. The impact2019. Twenty-one customers have fully subscribed to the PGA rates is an annual revenue decreaseanticipated output of $4.1 million, or 0.4%, annually with no impact on net operating income.
the project.
For additional information, see Note 6,7, "Regulation and Rates" to the consolidated financial statements included in Item 1 of this report.
Other Factors and Trends
Access to Debt Capital
PSE relies on access to bank borrowings and short-term money markets as sources of liquidity and longer-term capital markets to fund its utility construction program, to meet maturing debt obligations and other capital expenditure requirements not satisfied by cash flow from its operations or equity investment from its parent, Puget Energy. Neither Puget Energy nor PSE have any debt outstanding whose maturity would accelerate upon a credit rating downgrade. However, a ratings downgrade could adversely affect the Company's ability to renew existing, or obtain access to new credit facilities and could increase the cost of such facilities. For example, under Puget Energy's and PSE's credit facilities, the borrowing costs increase as their respective credit ratings decline due to increases in credit spreads and commitment fees. If PSE is unable to access debt capital on reasonable terms, its ability to pursue improvements or acquisitions, including generating capacity, which may be relied on for future growth and to otherwise implement its strategy, could be adversely affected. PSE monitors the credit environment and expects to continue to be able to access the capital markets to meet its short-term and long-term borrowing needs. PSE'sIn October 2017, Puget Energy and PSE each entered into new 5-year credit facilities that replaced the previous facilities and are scheduled to mature in 2019 and Puget Energy's senior secured credit facility matures in 2018. For additionalOctober 2022. Additional information see discussion on credit facilities is set forth below in Part 1, Item 2,the “Puget Sound Energy - Credit Facilities” and "Puget Energy - Credit Facility". sections.
Regulatory Compliance Costs and Expenditures
PSE's operations are subject to extensive federal, state and local laws and regulations. These regulations cover electric system reliability, natural gas pipeline system safety and energy market transparency, among other areas. Environmental laws and regulations related to air and water quality, including climate change and endangered species protection, waste handling and disposal (including generation by-products such as coal ash), remediation of contamination and siting new facilities also impact the Company's operations. PSE must spend a significant amount of resources to fulfill requirements set by regulatory agencies, many of which have greatly expanded mandates on measures including resource planning, remediation, monitoring, pollution control equipment and emissions-related abatement and fees.
Compliance with these or other future regulations, such as those pertaining to climate change, could require significant capital expenditures by PSE and may adversely affect PSE's financial position, results of operations, cash flows and liquidity.
Other Challenges and Strategies
Competition
PSE’s electric and natural gas utility retail customers generally do not have the ability to choose their electric or natural gas supplier; and therefore, PSE’s business has historically been recognized as a natural monopoly. However, PSE faces competition from public utility districts and municipalities that want to establish their own municipal-owned utility, as a result of which PSE may lose a number of customers. Further, PSE also faces increasing competition for sales to its retail customers. Alternativecustomers through alternative methods of electric energy generation, including solar and other self-generation methods, compete with PSE for sales to existing electric retail customers.methods. In addition, PSE’s natural gas customers may elect to use heating oil, propane or other fuels instead of using and purchasing natural gas from PSE.
Results of Operations
Puget Sound Energy
Non-GAAP Financial Measures - Electric and Natural Gas Margins
The following discussion includes financial information prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), as well as two other financial measures, electric margin and natural gas margin, that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that includes adjustments that result in a departure from GAAP presentation. The presentation of electric margin and natural gas margin is intended to supplement an understanding of PSE’s operating performance. Electric margin and natural gas margin are used by PSE to determine whether PSE is collecting the appropriate amount of revenue from its customers in order to maintain electric and natural gas margins to ultimately provide adequate recovery of operating costs, including interest and equity returns. PSE’s electric margin and natural gas margin measures may not be comparable to other companies’ electric margin and natural gas margin measures. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.
Electric Margin
Electric margin represents 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. The following tablechart displays the details of PSE's electric margin changes:changes for the three months ended June 30, 2017 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Electric Margin | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Electric operating revenue: | | | | | | | | | | |
|
|
Residential sales | $ | 253,011 |
| | $ | 231,345 |
| | $ | 21,666 |
| | $ | 637,834 |
| | $ | 576,176 |
| | $ | 61,658 |
|
Commercial sales | 202,738 |
| | 197,668 |
| | 5,070 |
| | 441,070 |
| | 429,394 |
| | 11,676 |
|
Industrial sales | 25,844 |
| | 24,975 |
| | 869 |
| | 55,581 |
| | 54,677 |
| | 904 |
|
Other retail sales | 4,801 |
| | 4,868 |
| | (67 | ) | | 9,695 |
| | 10,202 |
| | (507 | ) |
Total retail sales | 486,394 |
| | 458,856 |
| | 27,538 |
| | 1,144,180 |
| | 1,070,449 |
| | 73,731 |
|
Transportation sales | 2,651 |
| | 2,779 |
| | (128 | ) | | 5,714 |
| | 5,622 |
| | 92 |
|
Sales to other utilities and marketers | 5,979 |
| | 10,729 |
| | (4,750 | ) | | 14,687 |
| | 17,538 |
| | (2,851 | ) |
Decoupling revenue | 24,358 |
| | 15,783 |
| | 8,575 |
| | 11,581 |
| | 34,476 |
| | (22,895 | ) |
Other decoupling revenue1 | (4,682 | ) | | 4,538 |
| | (9,220 | ) | | (7,698 | ) | | (2,663 | ) | | (5,035 | ) |
Other | 15,107 |
| | 4,467 |
| | 10,640 |
| | 30,328 |
| | 1,921 |
| | 28,407 |
|
Total electric operating revenues2 | 529,807 |
| | 497,152 |
| | 32,655 |
| | 1,198,792 |
| | 1,127,343 |
| | 71,449 |
|
Minus electric energy costs: | |
| | |
| | | | | | | | |
Purchased electricity2 | 129,799 |
| | 118,551 |
| | 11,248 |
| | 309,381 |
| | 261,448 |
| | 47,933 |
|
Electric generation fuel2 | 34,163 |
| | 40,930 |
| | (6,767 | ) | | 85,473 |
| | 95,123 |
| | (9,650 | ) |
Residential exchange2 | (15,121 | ) | | (13,376 | ) | | (1,745 | ) | | (38,568 | ) | | (33,516 | ) | | (5,052 | ) |
Total electric energy costs | 148,841 |
| | 146,105 |
| | 2,736 |
| | 356,286 |
| | 323,055 |
| | 33,231 |
|
Electric margin3 | $ | 380,966 |
| | $ | 351,047 |
| | $ | 29,919 |
| | $ | 842,506 |
| | $ | 804,288 |
| | $ | 38,218 |
|
| | | | | | | | | | | |
Electric Energy Sales, MWh | | | | | | | | | | | |
Residential sales | 2,227,999 |
| | 2,062,717 |
| | 165,282 |
| | 5,704,408 |
| | 5,175,549 |
| | 528,859 |
|
Commercial sales | 2,129,016 |
| | 2,083,751 |
| | 45,265 |
| | 4,512,612 |
| | 4,370,929 |
| | 141,683 |
|
Industrial sales | 289,516 |
| | 284,081 |
| | 5,435 |
| | 597,596 |
| | 591,171 |
| | 6,425 |
|
Other retail sales | 20,840 |
| | 21,362 |
| | (522 | ) | | 44,338 |
| | 46,096 |
| | (1,758 | ) |
Total energy sales to customers | 4,667,371 |
| | 4,451,911 |
| | 215,460 |
| | 10,858,954 |
| | 10,183,745 |
| | 675,209 |
|
_________________________________*Includes decoupling cash collections, ROR excess earnings, and decoupling 24-month revenue reserve.
| |
| Includes amortization of prior year collection/refund, adjustments related to excess rate of return, and adjustments related to amounts that will not be collected within 24 months. |
| |
2
| As reported on PSE’s Consolidated Statement of Income. |
| |
3
| Electric margin does not include any allocation for amortization/depreciation expense or electric generation operation and maintenance expense. |
Three Months Endedmonths ended June 30, 2017 compared to 20162018
Electric Operating Revenue
Electric operating revenues increased $32.7decreased $28.3 million primarily due to highera decrease in decoupling revenue of $28.2 million and lower electric retail sales of $27.5 million, other electric operating revenues of $10.6 million and decoupling revenue of $8.6$12.9 million; partially offset by a decrease in other decoupling revenue of $9.2$5.7 million and transportation and other revenues of $5.6 million. These items are discussed in detail below.
Electric retail sales increased $27.5decreased $12.9 million primarily due to a $22.2decrease in rates of $8.2 million increasefrom the following: (i) a decrease in rates of 3.5% as a result of a decrease in corporate tax rates in the TCJA filing, (ii) a decoupling rate mechanism decrease of 1.1% annually effective May 2018, and (iii) a $4.7 million decrease primarily from lower retail residential electricity usage of 215,460 Megawatt Hour (MWhs) and an increase2.5% compared to the prior year. The reduced usage was primarily due to a decrease in ratesheating degree days of $5.3 million.15.1% compared to 2017.
Decoupling revenue increased $8.6decreased $28.2 million an increaseprimarily due to $23.4 million of $16.2 million ofPCA fixed cost deferrals. In 2017, the PCA fixed cost deferrals previously recordedwere not load shaped within the mechanism, which led to a large over-collection. In 2018, PCA fixed costs are load shaped within the decoupling mechanism to more accurately reflect annual load trends. In addition, the decoupling deferrals decreased $4.8 million due to a decrease in allowed revenue per customer slightly offset by a decrease of $7.6 million associated with less decoupled revenues in excess ofelectricity usage as noted above. As a result, actual customer billings asrevenue was closer to PSE's allowed revenue per the decoupling mechanism compared to 2016.2017.
Other decoupling revenue decreased $9.2increased $5.7 million due to increased rate of return (ROR) excess earnings of $7.4 million and an increase of decouplinga decrease in cash collections of $2.5$3.5 million as compareddue to 2016.lower amortization rates and reduced usage and in 2018 a true-up of $2.3 million was recorded for 2017 electric ROR to $9.5 million.
Other electric operatingTransportation and other revenue increased $10.6$5.6 million primarily due to a PTCchange in production tax credit (PTC) deferral revenue of $5.7$7.6 million in 2016 as compared to no PTC deferral in 2017for the re-purpose of the PTCs and an increase in net non-corewholesale natural gas sales of $5.0$3.1 million due to an increase of 4.3% in wholesale electricity prices; partially offset by tax reform deferrals for revenue subject to refunds of $5.1 million.
Electric EnergyPower Costs
Purchased electricityElectric power costs expense increased $11.2decreased $6.1 million primarily due to a $9.6 million increase primarily related to firm purchases from TransAlta Centralia and a $3.7 million increase in energy imbalance market (EIM) purchases compared to 2016. These increases were due to additional load requirements and lower costs to buy on the open market compared to generating power. The increases were partially offset by a decrease of $4.4 million of secondary purchases.electric generation fuel expense. This item is discussed in detail below:
Electric generation fuel expense decreased $6.8$4.4 million primarily due to a number$3.4 million reduction of factors includingcoal generation costs primarily at Colstrip units 1 and 2 for variable fuel costs due to a $2.2 million18.1% decrease in financial losses on natural gas fuelproduction as units 1 and 2 were shut down for maintenance during the second quarter of 2018. In addition, there was a $1.0 million reduction in 2017 as comparedcombustion turbine generation costs primarily due to 2016, a $2.1 million decrease in the lower of cost or market inventory adjustment for coal recorded in 2017 compared to 2016, and a $1.4 million decrease in the cost of coal burned. The decrease in the cost of coal burned was driven by a decrease in the average price of coal in 2017 compared to 2016 and offset by an increase in wind generation of 4.2% and reduction in customer usage.
The following chart displays the volumedetails of coal burned in 2017. PSE's electric margin changes for the six months ended June 30, 2017 and 2018:
______________
*
Includes decoupling cash collections, ROR excess earnings, and decoupling 24-month revenue reserve.
Six Months Endedmonths ended June 30, 2017 compared to 20162018
Electric Operating Revenue
Electric operating revenues increased $71.4$2.4 million primarily due to higher retail salestransportation and other revenues of $73.7$28.9 million and sales to other operating revenuesutilities of $28.4$3.7 million; partially offset by decreases inlower electric retail sales of $20.9 million and decoupling revenue of $22.9 million and other decoupling adjustments of $5.0$10.8 million. These items are discussed in detail below.
Electric retail sales increased $73.7decreased $20.9 million primarily due to a $71.0decrease of $36.1 million increase infrom lower retail electricity usage of 675,209 Megawatt Hour (MWhs)3.0% compared to the prior year and partially offset by an increase in rates of $2.8 million.$15.2 million due to the decoupling rate mechanism rate increase of 2.0% annually effective May 2017 and the GRC rate increase of 0.9% annually effective December 2017. The rate increases were partially offset by rate decrease in May 2018 of 3.5% due to change in corporate tax rates as a result of TCJA. The reduced usage was due to a decrease of residential and commercial use per customer of 4.8% and 1.1%, respectively, primarily due to a decrease in heating degree days of 12.0% compared to 2017.
Sales to other utilities increased $3.7 million due to a 9.8% increase in volumes sold and a 13.9% increase in price. EIM sales drove the increase in volumes.
Decoupling revenue decreased $22.9$10.8 million primarily due to a decrease in decoupling deferrals of $9.2 million as driven by actual revenue being closer to PSE's allowed decoupled revenues in excess of actual customer billings asrevenue per the decoupling mechanism compared to 2016.2017. This was primarily driven by a decrease in allowed revenue per customer compared to 2017 which was offset by lower customer usage. The remaining $1.6 million decrease is a result of fixed production costs collection being greater than allowed compared to 2017.
Other decouplingTransportation and other revenue decreased $5.0increased $28.9 million primarily due to an increasea change in decoupling cash collectionsPTC deferral revenue of $6.3 million;$51.2 million for the re-purpose of the PTCs; partially offset by a decreasetax reform deferrals for revenue subject to refunds of 24-month revenue reserve of $2.0 million as compared to 2016.$24.1 million.
Electric Power Costs
Other electric operating revenueElectric power costs increased $28.4decreased $40.9 million primarily due to an increase in net non-core gas salesa decrease of $19.1$26.1 million of purchased electricity costs and a PTC deferraldecrease of $10.8$13.3 million of electric generation fuel expense. These items are discussed in 2016 as compared to no PTC deferral in 2017.detail below:
Electric Energy Costs
Purchased electricity expense increased $47.9decreased $26.1 million primarily due to a $19.7 million increase related to firm7.3% decrease in wholesale electricity purchases from TransAlta Centralia,and a 1.4% decrease in wholesale prices. The decrease in purchases was primarily driven by a decrease in load and an increase of $9.4 millionwind and combustion turbine generation of secondary purchases, an $8.4 million increase in EIM purchases,27.8% and an $8.3 million increase in10.5%, respectively, which decreased the power exchange contract with Pacific Gas & Electric Company. These increases were dueneed to purchase additional load requirements and lower costs to buy on the open market compared to generatingwholesale power.
Electric generation fuel expense decreased $9.7$13.3 million primarily due to a $7.8$10.1 million decreasereduction in financial losses on natural gas fuelcombustion turbine generation costs as a result of a reduction in 2017 as comparedpeaker combustion turbine generation due to 2016favorable wholesale electricity prices and wind and hydro production. There was also a $2.1$3.2 million decrease inreduction of coal generation costs primarily at Colstrip units 1 and 2 due to a shutdown during the lowersecond quarter of cost or market inventory adjustment2018 for coal recorded in 2017 compared to 2016.
Residential exchange credits increased $5.1 million resulting from higher Residential Exchange Program (REP) credits associated with the BPA REP settlement. The REP credit is a pass-through tariff item with a corresponding credit in electric operating revenue, with no impact on net income. The Northwest Power Act, through the REP, provides access to the benefits of low-cost federal power for residential and small farm customers of regional utilities, including PSE. The program is administered by the BPA. Pursuant to agreements (including settlement agreements) between the BPA and PSE, the BPA has provided payments of REP benefits to PSE, which PSE has passed through to its residential and small farm customers in the form of electricity bill credits.maintenance.
Natural Gas Margin
Natural gas margin is natural gas sales to retail and transportation customers less the cost of natural gas purchased, including transportation costs to bring natural gas to PSE'sPSE’s service territory. The PGA mechanism passes through to customers increases or decreases in the natural gas supply portion of the natural gas service rates based upon changes in the price of natural gas purchased from producers and wholesale marketers or changes in natural gas pipeline transportation costs. PSE's margin or net income is not affected by changes under the PGA mechanism because over-and-under recoveries of natural gas costs included in baseline PGA rates are deferred and either refunded or collected from customers, respectively, in future periods.
The following
tablechart displays the details of PSE's natural gas
margin:margin changes for the three months ended June 30, 2017 and 2018: |
| | | | | | | | | | | | | | | | | | | | | | | |
Natural Gas Margin | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Natural gas operating revenue: | | | | | | | | | | |
|
Residential sales | $ | 120,052 |
| | $ | 92,099 |
| | $ | 27,953 |
| | $ | 401,933 |
| | $ | 309,830 |
| | $ | 92,103 |
|
Commercial sales | 55,370 |
| | 44,125 |
| | 11,245 |
| | 158,099 |
| | 125,273 |
| | 32,826 |
|
Industrial sales | 4,281 |
| | 3,627 |
| | 654 |
| | 11,868 |
| | 10,393 |
| | 1,475 |
|
Total retail sales | 179,703 |
| | 139,851 |
| | 39,852 |
| | 571,900 |
| | 445,496 |
| | 126,404 |
|
Transportation sales | 5,385 |
| | 5,018 |
| | 367 |
| | 10,932 |
| | 10,111 |
| | 821 |
|
Decoupling revenue | 2,888 |
| | 15,979 |
| | (13,091 | ) | | (3,357 | ) | | 36,030 |
| | (39,387 | ) |
Other decoupling revenue1 | (11,024 | ) | | (297 | ) | | (10,727 | ) | | (5,617 | ) | | (10,661 | ) | | 5,044 |
|
Other | 3,153 |
| | 2,892 |
| | 261 |
| | 6,311 |
| | 5,875 |
| | 436 |
|
Total natural gas operating revenues2 | 180,105 |
| | 163,443 |
| | 16,662 |
| | 580,169 |
| | 486,851 |
| | 93,318 |
|
Minus purchased natural gas energy costs2 | 63,183 |
| | 48,273 |
| | 14,910 |
| | 215,984 |
| | 171,376 |
| | 44,608 |
|
Natural gas margin3 | $ | 116,922 |
| | $ | 115,170 |
| | $ | 1,752 |
| | $ | 364,185 |
| | $ | 315,475 |
| | $ | 48,710 |
|
| | | | | | | | | | | |
Natural Gas Volumes | | | | | | | | | | | |
(Therms in Thousands): | | | | | | | | | | | |
Residential | 98,526 |
| | 72,506 |
| | 26,020 |
| | 370,175 |
| | 286,531 |
| | 83,644 |
|
Commercial firm | 52,135 |
| | 41,387 |
| | 10,748 |
| | 162,585 |
| | 127,467 |
| | 35,118 |
|
Industrial firm | 5,241 |
| | 4,394 |
| | 847 |
| | 14,397 |
| | 12,389 |
| | 2,008 |
|
Interruptible | 12,627 |
| | 8,582 |
| | 4,045 |
| | 27,044 |
| | 24,377 |
| | 2,667 |
|
Total retail natural gas volumes, therms | 168,529 |
| | 126,869 |
| | 41,660 |
| | 574,201 |
| | 450,764 |
| | 123,437 |
|
Transportation volumes | 56,261 |
| | 56,164 |
| | 97 |
| | 119,049 |
| | 118,249 |
| | 800 |
|
Total natural gas volumes | 224,790 |
| | 183,033 |
| | 41,757 |
| | 693,250 |
| | 569,013 |
| | 124,237 |
|
_______________
| |
1*Includes decoupling cash collections, ROR excess earnings, and decoupling 24-month revenue reserve. | Includes amortization of prior year collection/refund, adjustments related to excess rate of return, and adjustments related to amounts that will not be collected within 24 months. |
| |
2
| As reported on PSE’s Consolidated Statement of Income. |
| |
3
| Natural gas margin does not include any allocation for amortization/depreciation expense or natural gas operations and maintenance expense. |
Three Months Endedmonths ended June 30, 2017 compared to 20162018
Natural Gas Operating Revenue
Natural gas operating revenue increased $16.7decreased $19.9 million primarily due to an increasea decrease of $39.9$19.1 million in total retail sales due to an increasea decrease of natural gas usage;usage, a decrease in transportation and other revenue of $2.9 million and a decrease of $2.3 million in decoupling revenue; partially offset by a $13.1$4.4 million reduction in decoupling revenue and a decrease of $10.7 millionincrease in other decoupling revenue. These items are discussed in detail below.
Natural gas retail sales revenue increased $39.9decreased $19.1 million due to a decrease of $11.5 million in natural gas sales, which is a result of a decrease in natural gas load of 7.6% from 2017 and a decrease in revenue per therm of $7.6 million. The decrease in revenue per therm was primarily due to rate changes from the following filings: GRC which decreased rates 3.8% annually effective December 2017, PGA which decreased rates 3.3% annually effective November 2017, 3.0% decrease in May 2018 for the change in corporate tax rate due to the TCJA and is offset by an increase in decoupling rates of $45.9 million from an additional 41,6601.7% annually effective May 2018, see Management's Discussion and Analysis, "Regulation and Rates" included in Item 2 of therms sold; partially offset by a decrease of $6.1 millionthis report for natural gas rate changes. Natural gas load decreased primarily due to rate adjustments.the decrease in average therms used as a result of a 15.1% decrease in heating degree days, which decreased the natural gas heating load compared to prior year.
Decoupling revenue decreased $13.1$2.3 million primarily due actual revenue being closer to PSE's allowed revenue per the decoupling mechanism compared to 2017. This was primarily driven by a decrease in allowed decoupled revenues in excess of actualrevenue per customer billings as compared to 2016.2017 which was offset by lower customer usage as discussed in the retails sales above.
Other decoupling revenue increased $4.4 million primarily driven by ROR sharing accrual of $5.2 million in 2017 as compared to no ROR sharing accrual in 2018.
Transportation and other revenuedecreased $10.7$2.9 million primarily due to increased ROR excess earnings sharingtax reform deferrals for revenue subject to refund of $9.0 million and increased decoupling cash collections of $2.8 million as compared to 2016.$2.0 million.
Natural Gas Energy Costs
Purchased natural gas expense increased $14.9decreased $9.3 million primarily due to an increasea decrease in natural gas usage.costs included in PGA rates effective November 1, 2017 as compared to those effective November 1, 2016, and a decrease in natural gas usage of 7.6%.
The following chart displays the details of PSE's natural gas margin changes for the six months ended June 30, 2017 and 2018:
_______________
*Includes decoupling cash collections, ROR excess earnings, and decoupling 24-month revenue reserve.
Six Months Endedmonths ended June 30, 2017 compared to 20162018
Natural Gas Operating Revenue
Natural gas operating revenue increased $93.3decreased $89.7 million primarily due to an increasea decrease of $126.4$68.8 million in total retail sales due to additionala decrease of natural gas usage and an increasenatural gas rates, a decrease of $11.6 million in other decoupling revenue and a decrease in transportation and other revenue of $5.0 million;$11.5 million, partially offset by a $39.4$2.2 million reductionincrease in decoupling revenue. These items are discussed in detail below.
Natural gas retail sales revenue increased $126.4decreased $68.8 million due to a decrease of $48.1 million in natural gas sales, which is a result of a decrease in natural gas load of 8.6% from 2017 and a decrease in revenue per therm of $20.7 million. The decrease in revenue per therm was primarily due to a rate changes from the following filings: GRC which decreased rates 3.8% annually effective December 2017, PGA which decreased rates 3.3% annually effective November 2017, 3.0% decrease in May 2018 for the change in corporate tax rate due to the TCJA and is offset by an increase in decoupling
rates of $122.0 million from an additional 123,4372.4% and 1.7% annually effective May 2017 and May 2018, respectively, see Management's Discussion and Analysis, "Regulation and Rates" included in Item 2 of therms sold and an increase of $4.4 millionthis report for natural gas rate changes. Natural gas load decreased primarily due to rate adjustments.
the decrease in average therms used per residential and commercial customers of 9.4% and 6.9%, respectively, compared to 2017, as a result of a 12.0% decrease in heating degree days, which decreased the natural gas heating load compared to prior year.Decoupling revenue decreased $39.4increased $2.2 million primarily due to a decrease in use per customer, driven by a decrease in heating degree days as discussed above in natural gas retail sales. This caused actual revenue to decrease below PSE's allowed revenue, which increased decoupled revenuesrevenue in excess of actual2018. The decrease in usage was partially offset by a decrease in allowed revenue per customer billings as compared to the prior period.in 2018.
Other decoupling revenue increased $5.0decreased $11.6 million year-over-year due to the following: (i) in 2016, there was $19.6 million of decoupling deferred revenue that could not be collected within 24 months. This was recognized in the first quarter of 2017 as it met the alternative revenue program revenue recognition guidelines. There was no deferred revenue at 2017 year end and therefore, no additional revenue recognized in the first two quarters of the 24-month revenue reserve, previously unrecognized, of $20.2 million. The increase was partially2018, (ii) offset by an increasea $5.8 million ROR accrual in decoupling cash collections of $13.1 and an increase in ROR excess earning sharing of $2.1 million2017 as compared to 2016.no accrual in 2018 due to under earning by the Company.
Transportation and other revenue decreased $11.5 million primarily due to tax reform deferrals for revenue subject to refund of $10.5 million.
Natural Gas Energy Costs
Purchased natural gas expense increased $44.6decreased $34.5 million primarily due to an increasea decrease in natural gas usage.costs included in PGA rates effective November 1, 2017 as compared to those effective November 1, 2016, and a decrease in natural gas usage of 8.6%.
Other Operating Expenses and Other Income (Deductions)
The following tablechart displays the details of PSE's operating expenses and other income (deductions) for the three and six months ended June 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Puget Sound Energy | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Operating expenses: | |
| | |
| | |
| | | | | | |
Net unrealized (gain) loss on derivative instruments | $ | 3,834 |
| | $ | (46,724 | ) | | $ | 50,558 |
| | $ | 23,121 |
| | $ | (63,546 | ) | | $ | 86,667 |
|
Utility operations and maintenance | 145,555 |
| | 138,018 |
| | 7,537 |
| | 297,618 |
| | 284,008 |
| | 13,610 |
|
Non-utility expense and other | 9,374 |
| | 8,822 |
| | 552 |
| | 17,865 |
| | 17,856 |
| | 9 |
|
Depreciation and amortization | 119,457 |
| | 111,273 |
| | 8,184 |
| | 234,710 |
| | 218,787 |
| | 15,923 |
|
Conservation amortization | 25,691 |
| | 22,540 |
| | 3,151 |
| | 60,453 |
| | 55,751 |
| | 4,702 |
|
Taxes other than income taxes | 77,032 |
| | 67,871 |
| | 9,161 |
| | 195,731 |
| | 170,163 |
| | 25,568 |
|
Other income (deductions): | | | | | | | | | | | |
Other income | 6,126 |
| | 7,077 |
| | (951 | ) | | 12,086 |
| | 13,052 |
| | (966 | ) |
Other expense | (2,042 | ) | | (2,122 | ) | | 80 |
| | (3,257 | ) | | (3,462 | ) | | 205 |
|
Interest expense | (57,436 | ) | | (58,044 | ) | | 608 |
| | (115,723 | ) | | (116,460 | ) | | 737 |
|
Income tax expense | 22,794 |
| | 38,002 |
| | (15,208 | ) | | 94,591 |
| | 109,140 |
| | (14,549 | ) |
2018:
Three Months Endedmonths ended June 30, 2017 compared to 20162018
Other Operating Expenses
Net unrealized (gain) loss on derivative instrumentsexpense decreased $50.6$10.7 million tofrom a loss of $3.8 million. The net lossprimary driver for the three months ended June 30, 2017 was compriseddecrease in losses consists of a loss of $5.7$9.5 million relatedgain due to an increase in natural gas for power derivative instruments and a $1.9 million gain related to electricity derivative instruments. This compares to a gain of $45.3 million related to natural gas for power derivative instruments and a gain of $1.4 million related to electricity derivative instruments, respectively, during the three months ended June 30, 2016. The overall loss was primarily due to a decrease in the gain from settlements and a decrease in the quarter-to-date change of natural gas and wholesale electricity forward prices from June 30, 2016 to June 30, 2017. If the market price is less than book price for purchases it results in a loss. The majority of the Company's hedging portfolio is made up of purchase transactions.8.3%.
Utility operations and maintenance expense increased $7.5decreased $5.4 million primarily due to increases in administrative and general operations and maintenance expense of $10.8 million primarily due to rents, electric maintenance of general plant, injuries and damages and pension expenses; partially offsetdriven by a decrease in electric transmissionthe following: (i) decrease of $2.7 million in wind generation contract maintenance due to replacement of capital units of property and distribution, natural gas operations, customer services and administrative and general expense(ii) decrease of $3.4 million.$1.3 million due to lower meter service contracts tied to the Consumer Price Index in 2018 compared to 2017.
Depreciation and amortization expense increased $8.2$31.0 million primarily due to $2.1a depreciation rate change effective December 2017 as a result of the GRC and the following: (i) amortization of PTC regulatory liability of $7.6 million ofin 2018; (ii) electric depreciation expense relatedincreased $15.7 million, primarily due to net asset additions to production and distribution of $10.8 million and $173.7 million, respectively; (iii) an increase of $4.0 million due to net additions of $176.2$102.3 million of electric distribution and general assets,computer software; (iv) an increase of storm damage and regulatory amortization of $3.7 million and (v) an increase in natural gas environmental cost amortization of $2.2 million. These increases were partially offset by (i) conservation amortization decreased $1.7 million relatedprimarily due to an additional $186.0 milliona decrease of electric rate change of 0.8% annually effective May 1, 2018 and lower customer usage due to lower heating degree days in 2018 as compared to 2017 and (ii) a decrease in natural gas distribution assets, and an increasedepreciation expense of $3.8 million of amortization expense relatedprimarily due to an increase of computer software assets.a depreciation rate change to a lower rate.
Taxes other than income taxes increased $9.2decreased $3.7 million primarily due to an increasedecreases in municipal taxes of $3.4$1.3 million due to increased revenue, an increase inand state excise taxes of $2.8$1.4 million and an increaseas a result of $2.4 milliona decrease in property taxes due to increased revenue and load.retail revenue.
Other Income, Interest Expense and Income Tax Expense
Interest expense decreased $3.7 million primarily related to lower interest rates on long-term debt due to the refinancing of the $250.0 million in junior subordinated notes and $200.0 million in senior secured notes at a lower interest.
Income tax expensedecreased $15.2$15.8 million primarily driven by lowerthe following: (i) approximately $4.7 million from the impact of tax reform with a decrease in statutory tax rate from 35% to 21% and a decrease in pre-tax income.income with a tax effect of approximately $8.4 million.
The following chart displays the details of PSE's operating expenses and other income (deductions) for the six months ended June 30, 2017 and 2018:
Six Months Endedmonths ended June 30, 2017 compared to 20162018
Other Operating Expenses
Net unrealized (gain) loss on derivative instruments expense decreased $86.7$31.0 million tofrom a loss of $23.1 million. The net lossprimary drivers for the six months ended June 30, 2017 was compriseddecrease in losses consists of a loss of $21.9$31.8 million relatedgain due to an increase in electricity and natural gas for power derivative instrumentsforward prices of 13.9% and 8.3%, respectively. The increase in the weighted average wholesale electric and natural gas forward prices resulted in a $6.3 million gain and a $1.2$25.5 million loss related to electricity derivative instruments. This compares to a gain, of $50.8 million related to natural gas for power derivative instruments and a gain of $12.7 million related to electricity derivative instruments during the six months ended June 30, 2016. The overall loss was primarily due to a decrease in natural gas and wholesale electricity forward prices from June 30, 2016 to June 30, 2017. The majority of the Company's hedging portfolio is made up of purchase transactions.respectively.
Utility operations and maintenance expense increased $13.6$3.0 million which was primarily driven by increased labor expenses of $4.7 million due to the following: increasesan increase in administrative and general and customer service expense of $20.3system reliability projects, $4.4 million primarily due to customer records, collections, low income programs, rents, employee pension and benefits, injuries and damage, electric maintenance of general plant and outside services expense. This wasan increase in locate services; partially offset by a $3.2 million net decrease storm expense from less storms in 2018 compared to 2017 and a $1.4 million decrease in electric transmission, distribution and natural gas operation expense of $6.5 million primarily related to distribution operations supervision and engineering, meter, distribution maintenance of underground lines and monitoring expenses and operation of load dispatch.tree trimming services.
Depreciation and amortization expense increased $15.9$102.3 million primarily due to $8.0a depreciation rate change effective December 2017 as a result of the GRC which increased and the following: (i) amortization of PTC regulatory liability of $51.2 million ofin 2018; (ii) electric depreciation expense increased $31.3 million, primarily due to net asset additions to production and distribution of $176.2$10.8 million and $173.7 million, respectively; (iii) an increase of $3.3$8.1 million due to net additions of $186.0$102.3 million of natural gas distribution assets andcomputer software: (iv) an increase of $7.7 millionstorm damage and regulatory amortization of amortization expense related to$7.4 million; (v) an increase in natural gas environmental cost amortization of computer software assets.$4.4 million; these increases were partially offset by (vi) a decrease in natural gas depreciation expense of $7.6 million primarily due to a depreciation rate change to a lower rate.
Taxes other than income taxes increased $25.6decreased $11.2 million primarily due to an increase of $8.9 million in property taxes due to increased revenue and load, an increasedecreases in municipal taxes of $8.9$4.3 million due to increased revenue and an increase in state excise taxes of $7.8 million.$3.6 million, as a result of a decrease in retail revenue; additionally, a decrease of $3.4 million related to the property tax tracker, which decreased due to load.
Other Income, Interest Expense and Income Tax Expense
Interest expense decreased $5.3 million primarily related to lower interest rates on long-term debt due to the refinancing of the $250.0 million in junior subordinated notes and $200.0 million in senior secured notes at a lower interest.
Income tax expensedecreased $14.5$65.9 million primarily driven by lowerthe following: (i) approximately $30.6 million from the impact of tax reform with a decrease in statutory tax rate from 35% to 21%, (ii) a decrease in pre-tax income.book income with a tax effect of approximately $14.7 million, and (iii) approximately $23.8 million due to the impact of tax reform on utility plant related deferred taxes. The impact of tax reform has had a significant effect on the effective tax rate for PSE and Puget Energy. Management estimates the effective tax rate for 2018 to be between 10% and 15% for PSE and between 6% and 12% for Puget Energy.
Puget Energy
Primarily, all operations of Puget Energy are conducted through its subsidiary PSE. Puget Energy's net income (loss) for the three and six months ended June 30, 2017 and 20162018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
Benefit/(Expense) | Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in Thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
PSE net income | $ | 50,654 |
| | $ | 80,900 |
| | $ | (30,246 | ) | | $ | 193,746 |
| | $ | 237,406 |
| | $ | (43,660 | ) |
Non-utility expense and other | 3,231 |
| | 3,644 |
| | (413 | ) | | 6,526 |
| | 7,043 |
| | (517 | ) |
Other income (deductions) | 136 |
| | — |
| | 136 |
| | 137 |
| | — |
| | 137 |
|
Non-hedged interest rate swap (expense) | — |
| | (359 | ) | | 359 |
| | 28 |
| | (1,213 | ) | | 1,241 |
|
Interest expense1 | (28,417 | ) | | (28,029 | ) | | (388 | ) | | (56,538 | ) | | (56,067 | ) | | (471 | ) |
Income tax benefit (expense) | 9,671 |
| | 8,397 |
| | 1,274 |
| | 18,926 |
| | 18,570 |
| | 356 |
|
Puget Energy net income (loss) | $ | 35,275 |
| | $ | 64,553 |
| | $ | (29,278 | ) | | $ | 162,825 |
| | $ | 205,739 |
| | $ | (42,914 | ) |
_______________
| |
1
| Puget Energy’s interest expense includes elimination adjustments of intercompany interest on long-term debt. |
Summary Results of Operation
Three and Six Months Endedmonths ended June 30, 2017 compared to 20162018
Summary Results of Operation
Puget Energy’s net income decreased for the three andmonths ended June 30, 2018 by $31.6 million primarily due to a decrease over the prior year for PSE's net income as well as decreases in income tax benefit:
Income tax benefit decreased by $6.0 million due primarily to the impact of tax reform with a decrease in statutory tax rate from 35% to 21% as well as a decrease in pre-tax income.
Puget Energy's net income (loss) for the six months ended June 30, 2017 and 2018 are as follows:
Six months ended June 30, 2017 compared to 2018
Summary Results of Operation
Puget Energy’s net income decreased for the six months ended June 30, 2018 by $29.3$12.3 million and $42.9 million, respectively, which is primarily due to PSE'sa decrease in netnon-utility and other expense, as well as a decrease in income tax benefit:
Other income increased by $5.1 million primarily as a result of $30.2the reclassification of the non-service cost component of pension benefit cost. For further information on this reclassification, see Note 6, "Retirement Benefits" in the Combined Notes to Consolidated Financial Statements in Item I.
•Non utility expense and other decreased by $6.4 million and $43.7 primarily due to a reduction in qualified pension expense.
Income tax benefit decreased by $5.6 million respectively. No additional factors significantly impacted Puget Energy's netdue primarily to the impact of tax reform with a decrease in statutory tax rate from 35% to 21% as well as a decrease in pre-tax income.
Capital Requirements
Contractual Obligations and Commercial Commitments
In additionDuring the six months ended June 30, 2018, there were no material changes to the contractual obligations and consolidated commercial commitments disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, during the six months ended June 30, 2017, the Company has entered into two new power supply and service contracts with estimated payment obligations totaling $703.2 million through 2028.2017.
The following are the Company's aggregate availability under commercial commitments as of June 30, 2017:2018:
|
| | | | | | | | | | | | | | | | | | | |
Puget Sound Energy and Puget Energy | Amount of Available Commitments Expiration Per Period |
(Dollars in Thousands) | Total | | 2017 | | 2018-2019 |
| | 2020-2021 |
| | Thereafter |
|
PSE working capital facility1 | $ | 650,000 |
| | $ | — |
| | $ | 650,000 |
| | $ | — |
| | $ | — |
|
PSE energy hedging facility1 | 350,000 |
| | — |
| | 350,000 |
| | — |
| | — |
|
Inter-company short-term debt2 | 30,000 |
| | — |
| | — |
| | — |
| | 30,000 |
|
Total PSE commercial commitments | $ | 1,030,000 |
| | $ | — |
| | $ | 1,000,000 |
| | $ | — |
| | $ | 30,000 |
|
Puget Energy revolving credit facility3 | 739,446 |
| | — |
| | 739,446 |
| | — |
| | — |
|
Less: Inter-company short-term debt elimination2,3 | (30,000 | ) | | — |
| | — |
| | — |
| | (30,000 | ) |
Total Puget Energy commercial commitments | $ | 1,739,446 |
| | $ | — |
| | $ | 1,739,446 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
Puget Sound Energy and Puget Energy | Amount of Available Commitments Expiration Per Period |
(Dollars in Thousands) | Total | | 2018 | | 2019 - 2020 |
| | 2021 - 2022 |
| | Thereafter |
|
Commercial commitments: | | | | | | | | | |
PSE revolving credit facility1 | 800,000 |
| | — |
| | — |
| | 800,000 |
| | — |
|
Inter-company short-term debt1 | $ | 30,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30,000 |
|
Total PSE commercial commitments | 830,000 |
| | — |
| | — |
| | 800,000 |
| | 30,000 |
|
Puget Energy revolving credit facility2 | 660,449 |
| | — |
| | — |
| | 660,449 |
| | — |
|
Less: Inter-company short-term debt elimination1 | $ | (30,000 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (30,000 | ) |
Total Puget Energy commercial commitments | 1,460,449 |
| | — |
| | — |
| | 1,460,449 |
| | — |
|
_______________
| |
1 | For more information, see "Financing Program - Puget Sound Energy - Credit Facilities - in the Management's Discussion and Analysis section"Section". |
| |
2 | For more information, see "Financing Program - Puget Sound Energy - Demand Promissory Note - in the Management's Discussion and Analysis section". |
| |
3
| For more information, see "Financing Program - Puget Energy - Credit Facility - in the Management's Discussion and Analysis section"Section". |
Off-Balance Sheet Arrangements
As of June 30, 2017,2018, the Company had no off-balance sheet arrangements that have or are reasonably likely to have a material effect on the Company's financial condition.
Utility Construction Program
PSE’s construction programs for generating facilities, the electric transmission system, the natural gas and electric distribution systems and the Tacoma LNG facility are designed to support reliable energy deliver,delivery, meet regulatory requirements, and customer growth. Construction expenditures, excluding equity allowance for funds used during construction (AFUDC), totaled 431.5$452.2 million for the six months ended June 30, 2017.2018. Presently planned utility construction expenditures, excluding equity AFUDC, are as follows:
| | Capital Expenditure Projections | | | | | | | | | | |
(Dollars in Thousands) | 2017 | | 2018 | | 2019 | 2018 | | 2019 | | 2020 |
Total energy delivery, technology and facilities expenditures | $ | 1,092,000 |
| | $ | 972,000 |
| | $ | 809,000 |
| $ | 1,003,000 |
| | $ | 839,000 |
| | $ | 740,000 |
|
The program is subject to change based upon general business, economic and regulatory conditions. Utility construction expenditures and any new generation resource expenditures may be funded from a combination of sources which may include cash from operations, short-term debt, long-term debt and/or equity. PSE’s planned capital expenditures may result in a level of spending that will exceed its cash flow from operations. As a result, execution of PSE’s strategy is dependent in part on continued access to capital markets.
Capital Resources
Cash from Operations
| | Puget Sound Energy | Six Months Ended June 30, 2017 | Six Months Ended June 30, |
(Dollars in Millions) | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change |
Net income | $ | 193,746 |
| | $ | 237,406 |
| | $ | (43,660 | ) | $ | 189,818 |
| | $ | 193,746 |
| | $ | (3,928 | ) |
Non-cash items1 | 406,108 |
| | 312,533 |
| | 93,575 |
| 351,940 |
| | 408,783 |
| | (56,843 | ) |
Changes in cash flow resulting from working capital2 | 175,755 |
| | 91,520 |
| | 84,235 |
| 153,022 |
| | 175,755 |
| | (22,733 | ) |
Regulatory assets and liabilities | (44,731 | ) | | (120,615 | ) | | 75,884 |
| 4,591 |
| | (46,101 | ) | | 50,692 |
|
Other noncurrent assets and liabilities | (31,202 | ) | | 7,820 |
| | (39,022 | ) | |
Other noncurrent assets and liabilities3 | | (14,956 | ) | | (32,507 | ) | | 17,551 |
|
Net cash provided by operating activities | $ | 699,676 |
| | $ | 528,664 |
| | $ | 171,012 |
| $ | 684,415 |
| | $ | 699,676 |
| | $ | (15,261 | ) |
_______________
| |
1 | Non-cash items include depreciation, amortization, deferred income taxes, net unrealized (gain) loss on derivative instruments, AFUDC-equity, PTCs and AFUDC-equity.other miscellaneous non-cash items. |
| |
2 | Changes in working capital include receivables, unbilled revenue, materials/supplies, fuel/gas inventory, income taxes, prepayment, PGA, accounts payable and accrued expenses. |
| |
3 | Other non-current assets and liabilities include funding of pension liability. |
Six Months Ended June 30, 2018 compared to 2017
Cash generated from operations for the six months ended June 30, 2018 decreased by $15.3 million including a net income decrease of $3.9 million. The following are significant factors that impacted PSE's cash flows from operations:
Cash flow adjustments resulting from non-cash items decreased $56.8 million primarily due to changes in deferred income tax and tax credits of $76.1 million, production tax credit monetization of $51.2 million and derivative instruments of $31.0 million offset by changes in depreciation and amortization of $101.9 million. For further discussion, see note 7, "Regulation and Rates" and Management's Discussion and Analysis, "Other Operating Expenses" in Item 2.
Cash flow resulting from regulatory assets and liabilities increased $50.7 million primarily due to deferred accounting treatment for the impacts of tax reform and decoupling collections. For further discussion, see Management's Discussion and Analysis, "Electric Operating Revenue" and "Natural Gas Operating Revenue" in Item 2.
|
| | | | | | | | | | | |
Puget Energy | Six Months Ended June 30, |
(Dollars in Millions) | 2018 | | 2017 | | Change |
Net income | $ | (39,276 | ) | | $ | (30,921 | ) | | $ | (8,355 | ) |
Non-cash items1 | (2,725 | ) | | (13,458 | ) | | 10,733 |
|
Changes in cash flow resulting from working capital2 | 3,438 |
| | (8,415 | ) | | 11,853 |
|
Regulatory assets and liabilities | — |
| | — |
| | — |
|
Other noncurrent assets and liabilities3 | (6,655 | ) | | 18,788 |
| | (25,443 | ) |
Net cash provided by operating activities | $ | (45,218 | ) | | $ | (34,006 | ) | | $ | (11,212 | ) |
_______________
| |
1 | Non-cash items include depreciation, amortization, deferred income taxes, net unrealized (gain) loss on derivative instruments, AFUDC-equity, PTCs and other miscellaneous non-cash items. |
| |
2 | Changes in working capital include receivables, unbilled revenue, materials/supplies, fuel/gas inventory, income taxes, prepayments, purchased gas adjustments,PGA, accounts payable and accrued expenses. |
| |
3 | Other noncurrent assets and liabilities include funding of pension liability. |
Six Months Ended June 30, 20172018 compared to 20162017
Cash generated from operations for the six months ended June 30, 2017 increased2018, in addition to the changes discussed at PSE above, decreased by $171.0$11.2 million including a net income decrease of $43.7 million.compared to the same period in 2017. The following are significantchange was primarily impacted by the factors that impacted PSE's cash flows from operations:explained below:
Cash flow resulting from non-cash items increased $93.6$10.7 million primarily due to changes in derivative instruments of 86.7 million.deferred income taxes.
Cash flow resulting from working capital increased $84.2 million due to changes in accounts receivable, unbilled revenue, materials and supplies, prepayments, purchased gas adjustments and accounts payable.
Cash flow resulting from regulatory assets and liabilities increased $75.9$11.9 million primarily due to changes in power cost adjustments and purchased gas adjustments.accounts receivable.
Cash flow resulting from other noncurrent assets and liabilities decreased $39.0$25.4 million primarily due to changes in asset retirement obligations and pension funding partially offset by changes in long-term deferred credits.
|
| | | | | | | | | | | |
Puget Energy | Six Months Ended June 30, 2017 |
(Dollars in Millions) | 2017 | | 2016 | | Change |
Net income | $ | 162,825 |
| | $ | 205,739 |
| | $ | (42,914 | ) |
Non-cash items1 | 387,042 |
| | 292,094 |
| | 94,948 |
|
Changes in cash flow resulting from working capital2 | 167,340 |
| | 94,498 |
| | 72,842 |
|
Regulatory assets and liabilities | (44,731 | ) | | (120,615 | ) | | 75,884 |
|
Other noncurrent assets and liabilities | (6,806 | ) | | 5,519 |
| | (12,325 | ) |
Net cash provided by operating activities | $ | 665,670 |
| | $ | 477,235 |
| | $ | 188,435 |
|
_______________
| |
1
| Non-cash items include depreciation, amortization, deferred income taxes, net unrealized (gain) loss on derivative instruments and AFUDC-equity. |
| |
2
| Changes in working capital include receivables, unbilled revenue, materials/supplies, fuel/gas inventory, income taxes, prepayments, purchased gas adjustments, accounts payable and accrued expenses. |
Six Months Ended June 30, 2017 comparedthe reclassification of construction work-in-process related to 2016
Cash generated from operations for the six months ended June 30, 2017 increased by $188.4 million compared to the same period in 2016. The net difference was primarily impacted by the increase from cash flow provided by the operating activities of PSE, as previously discussed. The remaining variance is explained below:
Cash flow resulting from working capital decreased $11.4 million primarily due to a larger change in accounts receivable.
Cash flow resulting from other noncurrent assets and liabilities increased $26.7 million primarily due to changes in other property and investments related to Puget LNG.investments.
Financing Program
The Company's external financing requirements principally reflect the cash needs of its construction program, its schedule of maturing debt and certain operational needs. The Company anticipates refinancing the redemption of bonds or other long-term borrowings with its credit facilities and/or the issuance of new long-term debt. Access to funds depends upon factors such as Puget Energy's and PSE's credit ratings, prevailing interest rates and investor receptivity to investing in the utility industry, Puget Energy and PSE. The Company believes it has sufficient liquidity through its credit facilities and access to capital markets and operations to fund its needs over the next twelve months.
Proceeds from PSE’s short-term borrowings and sales of commercial paper are used to provide working capital and the interim funding of utility construction programs. Puget Energy and PSE continue to have reasonable access to the capital and credit markets.
Puget Sound Energy
Credit Facilities
As of June 30, 2018, PSE has two unsecured revolvinghad an $800.0 million credit facilities which provide, in aggregate, $1.0 billion offacility to meet short-term liquidity needs. These facilities consist of a $650.0 million revolving liquidity facility (which includes a liquidity letter ofThe credit facility and a swingline facility) to be used for general corporate purposes, including a backstop to the Company's commercial paper program and a $350.0 million revolving energy hedging facility (which includes an energy hedging letter of credit facility). The $650.0 million liquidity facility includes a swingline feature allowing same day availability on borrowings up to $75.0 million. The credit facilities also havefacility has an accordionexpansion feature which, upon the banks' approval, would increase the total size of these facilitiesthe facility to $1.5$1.4 billion. TheseThe unsecured revolving credit facilities maturefacility matures in April 2019.October 2022.
The credit agreements areagreement is syndicated among numerous lenders and containcontains usual and customary affirmative and negative covenants that, among other things, place limitations on PSE's ability to transact with affiliates, make asset dispositions and investments or permit liens to exist. The credit agreementsagreement also containcontains a financial covenant of total debt to total capitalization of 65%65.0% or less. PSE certifies its compliance with such covenants to participating banks each quarter. As of June 30, 2017,2018, PSE was in compliance with all applicable covenant ratios.
The credit agreements provideagreement provides PSE with the ability to borrow at different interest rate options. The credit agreements allowagreement allows PSE to borrow at the bank's prime rate or to make floating rate advances at London Interbank Offered Rate (LIBOR) plus a spread that is based upon PSE's credit rating. PSE must pay a commitment fee on the unused portion of the credit facilities.facility. The spreads and the commitment fee depend on PSE's credit ratings. As of the date of this report, the spread to the LIBOR is 1.25% and the commitment fee is 0.175%.
As of June 30, 2017,2018, no amounts were drawn and outstanding under PSE's $650.0 million liquiditycredit facility. No letters of credit were outstanding under either facility, and $5.0$28.0 million was outstanding under the commercial paper program. Outside of
the credit agreements,agreement, PSE had a $3.1 million letter of credit in support of a long-term transmission contract and a $1.0 million letter of credit in support of natural gas purchases in Canada.
Demand Promissory Note
In 2006, PSE entered into a revolving credit facility with Puget Energy, in the form of a credit agreement and a demand promissory note (Note) pursuant to which PSE may borrow up to $30.0 million from Puget Energy subject to approval by Puget Energy. Under the terms of the Note, PSE pays interest on the outstanding borrowings based on the lower of the weighted-average interest rates of PSE'sPSE’s outstanding commercial paper interest rate or PSE'sPSE’s senior unsecured revolving credit facility. Absent such borrowings, interest is charged at one-month LIBOR plus 0.25%. As of June 30, 2017,2018, PSE had no outstanding balance under the Note.
Long Term Debt
On March 5, 2018, PSE commenced a tender offer and related consent solicitation to purchase any and all of the outstanding $250.0 million 6.974% Series A Enhanced Junior Subordinated Notes due June 1, 2067. Holders of the notes received $1,005 per $1,000 principal amount of notes plus accrued and unpaid interest for notes tendered and accepted by the early tender payment deadline of March 16, 2018. Holders of notes tendered after the early tender payment deadline, but prior to the tender offer expiration on April 2, 2018 were to receive the tender offer consideration of $975 per $1,000 of principal amount of the notes plus accrued but unpaid interest. A total of $193.4 million in principal amount of notes were tendered by the early payment deadline and no notes were tendered after the early payment deadline. On March 20, 2018, $194.9 million was paid to the holders of the tendered notes. This amount included the principal, early tender consideration and accrued interest up to, but not including March 20, 2018.
Concurrently with the tender offer, PSE solicited consents from a majority (in principal amount) of the holders of PSE’s 6.274% Senior Notes due March 15, 2037 to terminate the replacement capital covenant granted to the holders of those notes. The termination of the covenant was necessary because it included restrictions related to repurchases, redemptions and repayments of the 6.974% Series A Enhanced Junior Subordinated Notes. PSE received consents from holders of 87.7% of the 6.274% Senior Notes and paid a consent fee totaling $2.6 million to those holders on March 19, 2018.
On March 28, 2018, PSE issued a notice of redemption, effective April 27, 2018, for the remaining $56.6 million principal amount of the 6.974% Series A Enhanced Junior Subordinated Notes. The notes were redeemed at a price equal to 100% of their principal amount plus accrued and unpaid interest up to, but excluding the redemption date.
On June 4, 2018, PSE issued $600.0 million of 30 year Senior Notes under its senior note indenture at an interest rate of 4.223% with a maturity date of June 15, 2048. The proceeds from the issuance were used to pay the principal and accrued interest on the company’s $200.0 million Secured Notes that matured on June 15, 2018, outstanding commercial paper borrowings of $348.0 million and other general corporate expenses.
Debt Restrictive Covenants
The type and amount of future long-term financings for PSE may be limited by provisions in PSE's electric and natural gas mortgage indentures.
PSE’s ability to issue additional secured debt may also be limited by certain restrictions contained in its electric and natural gas mortgage indentures. Under the most restrictive tests at June 30, 2017,2018, PSE could issue:
Approximately $2.4$2.0 billion of additional first mortgage bonds under PSE’s electric mortgage indenture based on approximately $4.1$3.3 billion of electric bondable property available for issuance, subject to a minimuman interest coverage ratio limitation of 2.0 times net earnings available for interest (as defined in the electric utility mortgage), which PSE exceeded at June 30, 2017;2018; and
Approximately $468.0$511.0 million of additional first mortgage bonds under PSE’s natural gas mortgage indenture based on approximately $780.0$851.7 million of natural gas bondable property available for issuance, subject to a minimum combined natural gas and electric interest coverage test of 1.75 times net earnings available for interest and a natural gas interest coverage test of 2.0 times net earnings available for interest (as defined in the natural gas utility mortgage), both of which PSE exceeded at June 30, 2017.2018.
At June 30, 2017,2018, PSE had approximately $6.9$7.1 billion in electric and natural gas rate base to support the interest coverage ratio limitation test for net earnings available for interest.
Shelf Registrations
On November 21, 2016, PSE filed a shelf registration statement under which it may issue, as of the date of this report, up to $800.0$200.0 million aggregate principal amount of senior notes secured by first mortgage bonds. The shelf registration will expire in November 2019.
Dividend Payment Restrictions
The payment of dividends by PSE to Puget Energy is restricted by provisions of certain covenants applicable to long-term debt contained in PSE’s electric and natural gas mortgage indentures. At June 30, 2017,2018, approximately $690.1$753.6 million of unrestricted retained earnings was available for the payment of dividends under the most restrictive mortgage indenture covenant.
Pursuant to the terms of the Washington Commission merger order, PSE may not declare or pay dividends if PSE’s common equity ratio, calculated on a regulatory basis, is 44.0% or below except to the extent a lower equity ratio is ordered by the Washington Commission. Also, pursuant to the merger order, PSE may not declare or make any distribution unless on the date of distribution PSE’s corporate credit/issuer rating is investment grade, or, if its credit ratings are below investment grade, PSE’s ratio of Earnings Before Interest, Tax, Depreciationearnings before interest, tax, depreciation and Amortizationamortization (EBITDA) to interest expense for the most recently ended four fiscal quarter periods prior to such date is equal to or greater than 3.0 to 1.0. The common equity ratio, calculated on a regulatory basis, was 53.2%49.6% at June 30, 20172018 and the EBITDA to interest expense was 5.35.6 to 1.0 for the twelve months ended June 30, 2017.2018.
PSE’s ability to pay dividends is also limited by the terms of its credit facilities, pursuant to which PSE is not permitted to pay dividends during any Event of Default (as defined in the facilities), or if the payment of dividends would result in an Event of Default, such as failure to comply with certain financial covenants.
Puget Energy
Credit Facility
At June 30, 2017,2018, Puget Energy maintained an $800.0 million revolving senior secured credit facility which matures April 2018.in October 2022. The Puget Energy revolving senior secured credit facility also has an accordion feature which, upon the banks' approval, would increase the size of the facility to $1.3 billion.
The revolving senior secured credit facility provides Puget Energy the ability to borrow at different interest rate options and includes variable fee levels. Interest rates may be based on the bank's prime rate or LIBOR, plus a spread based on Puget Energy's credit ratings. Puget Energy must pay a commitment fee on the unused portion of the facility. As of June 30, 2017,2018, there was $60.6$139.6 million drawn and outstanding under the facility. As of the date of this report, the spread over LIBOR was 1.75% and the commitment fee was 0.275%. For additional information, see Note 6, "Regulation and Rates" to the consolidated financial statements included in Part 1 of this report.
The revolving senior secured credit facility contains usual and customary affirmative and negative covenants. The agreement also contains a maximum leverage ratio financial covenant as defined in the agreement governing the senior secured credit facility. As of June 30, 2017,2018, Puget Energy was in compliance with all applicable covenants.
On May 15, 2017, Puget Energy entered into a revolving credit agreement with Puget LNG, a wholly owned subsidiary of Puget Energy. Under the agreement, Puget Energy agreed to loan up to $200.0 million to Puget LNG to finance Puget LNG’s portion of the construction costs of a liquefied natural gas facility located at the Port of Tacoma. The interest rate for amounts borrowed under the agreement is equal to the one month LIBOR rate in effect on the first day of each month plus the applicable margin Puget Energy would pay on loans under its credit facility plus 0.50%. Interest under the agreement is due on the first business day of each quarter and Puget LNG may elect to make payment in kind (PIK) interest payments in which the interest due is added to the balance outstanding under the agreement. The maximum balance outstanding under the agreement, including PIK interest, is $200.0 million.
Dividend Payment Restrictions
Puget Energy’s ability to pay dividends is also limited by the merger order issued by the Washington Commission. Pursuant to the merger order, Puget Energy may not declare or make a distribution unless on such date Puget Energy’s ratio of consolidated EBITDA to consolidated interest expense for the four most recently ended fiscal quarters prior to such date is equal to or greater than 2.0 to 1.0. Puget Energy's EBITDA to interest expense was 3.63.7 to 1.0 for the twelve months ended June 30, 20172018.
At June 30, 2017,2018, the Company was in compliance with all applicable covenants, including those pertaining to the payment of dividends.
Other
New Accounting Pronouncements
For the discussion of new accounting pronouncements, see Note 2, "New Accounting Pronouncements" to the consolidated financial statements in PartItem I of this report.
Colstrip
PSE has a 50% ownership interest in Colstrip Units 1 and 2 and a 25% interest in Colstrip Units 3 and 4. On March 6, 2013, the Sierra Club and the Montana Environmental Information Center filed a Clean Air Act citizen suit against all Colstrip owners in the U.S. District Court, District of Montana. Based on a second amended complaint filed in August 2014, the plaintiffs' lawsuit alleged violations of permitting requirements under the New Source Review/Prevention of Significant Deterioration program of the Clean Air Act arising from projects (plaintiffs initially claimed seventy-three projects, but this was reduced to two projects before trial in May 2016) undertaken at Colstrip during the time period from 2001 to 2012. On July 12, 2016, PSE reached a settlement with the Sierra Club to dismiss all of the Clean Air Act allegations against the Colstrip Generating Station, which was approved by the court on September 6, 2016. As part of the settlement that was signed by all Colstrip owners, Colstrip 1 and 2 owners, PSE agreed, along withand Talen Energy, (the owner of the other 50% interest in Colstrip Units 1 and 2),agreed to retire the two oldest units (Units 1 and 2) at Colstrip in eastern Montana by no later than July 1, 2022. PSE expects that theThe Washington Commission will allowallows full recovery in rates of the net book value (NBV) at retirement and related decommissioning costs consistent with prior precedents. As a result, PSE reclassified $176.8 million from a utility plant asset to a regulatory asset, which represents
Depreciation rates were updated in the expected NBV at retirement ofGRC effective December 19, 2017, where PSE's depreciation increased for Colstrip Units 1 and 2 based onto recover plant costs to the expected shutdown date of July 1, 2022 as of December 31, 2016. Due to a re-estimate ofdate. The increase in depreciation caused the Colstrip Units 1 and 2 Asset Retirement and Environmental obligation (ARO) costs, the regulatory asset account wasto be reduced to $175.2$129.2 million and $127.6 million as of June 30, 2017. Colstrip Units 32018 and 4, which are newer and more efficient, are not affected by the settlement, and allegations in the lawsuit against Colstrip Units 3 and 4 were dismissed as part of the settlement. While PSE
has estimated the ARO for Colstrip Units 1 and 2,December 31, 2017, respectively. However, the full scope of decommissioning activities and costs may vary from the estimates that are available at this time. The GRC also repurposed PTCs and hydro-related treasury grants to fund and recover decommissioning and remediation costs for Colstrip Units 1 and 2. Additionally, PSE will accelerate the depreciation of Colstrip Units 3 and 4, per the terms of the GRC settlement, to December 31, 2027.
Greenwood
On March 9, 2016, a natural gas explosion occurred in the Greenwood neighborhood of Seattle, WA, damaging multiple structures. The Washington Commission Staff completed its investigation of the incident and filed a complaint on September 20, 2016, seeking up to $3.2 million in fines from PSE. As of September 30, 2016, PSE had accrued $3.2 million for the fine.2016. On March 28, 2017, Pipelinepipeline safety regulators and PSE reached a settlement in response to the complaint. As part of the agreement, PSE agreed to pay a penalty of $2.8$1.5 million, of which $1.3 million was suspended on condition that PSE completedand is currently implementing a comprehensive inspection and remediation program. The settlement was presented to the Washington Commission during a scheduled hearing on May 15, 2017. On June 19, 2017, the Washington Commission approved the settlement without conditionsHowever, litigation is still pending regarding damage and adopted the reduced penalty of $2.8 million, of which $1.3 million was suspended. On June 30, 2017, PSE paid the $1.5 million penalty it had accrued previously to a liability reserve account for property damagepersonal injury claims.
Regional Haze Rule
On June 15, 2005, the Environmental Protection Agency (EPA) issued the Clean Air Visibility rule to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines Best Available Retrofit Technology (BART) requirements for electric generating units, including presumptive limits for sulfur dioxide, particulate matter and nitrogen oxide controls for large units. The final Federal Implementation Plan for Montana (FIP) for Regional Haze was issued in September 2012. There are no immediate requirements for Units 3 and 4, but Units 1 and 2 will need to upgrade pollution controls to meet new sulfur dioxide and nitrogen oxide limits. The Sierra Club filed an appeal of the FIP with the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) on November 15, 2012 and Talen Energy also filed an appeal as the Colstrip operator.
The case was heard on May 15, 2014 in Seattle, Washington, and the final decision by the Ninth Circuit was issued June 9, 2015. The Ninth Circuit Court of Appeals reviewed the EPA’s first phase requirements for Colstrip and found that the EPA had not adequately justified the need for two of the control technologies and remanded these two issues back to the EPA. The EPA informally indicated that it will wait until the next Regional Haze planning period to reissue a FIP.
The ruling in no way affects the future planning periods for the Regional Haze program or the glide path for the Company. The current EPA assessment is that the state of Montana will require significant emission reductions to meet the natural visibility goal by 2064 which means additional emission reductions will be necessary in future 10-year planning periods, beginning in the 2018-2028 periods, and there is risk and uncertainty regarding potential costs.
On January 10, 2017, the EPA provided revisions to the Regional Haze Rule which were published in the Federal Register. Among other things, these revisions delayed new Regional Haze review from 2018 to 2021, however, the end date will remain 2028. Aspects of these revisions are currently being challenged by various entities nationwide and a briefingPSE is scheduled forunable to predict the end of July 2017. In the meantime, Montana has indicated that they plan to work on and submit a State Implementation Plan for the second planning period.
Coal Combustion Residuals
On April 17, 2015, the EPA published a final rule, effective October 19, 2015, that regulates Coal Combustion Residuals (CCR's) under the RCRA, Subtitle D. The EPA issued another rule, effective October 4, 2016, extending certain compliance deadlines under the CCR rule. The CCR rule addresses the risks from coal ash disposal, such as leaking of contaminants into ground water, blowing of contaminants into the air as dust, and the catastrophic failure of coal ash containment structures by establishing technical design, operation and maintenance, closure and post closure care requirements for CCR landfills and surface impoundments, and corrective action requirements for any related leakage. The rule also sets forth recordkeeping and reporting requirements, including posting specific information related to CCR surface impoundments and landfills to publicly-accessible websites.
The initial rule was self-implementing to be enforced by citizen lawsuits rather than the EPA. On December 16, 2016, President Obama signed legislation amending RCRA to allow a state to take over the CCR program. Under the amendment, if a state does not seek approval of a permit program or if the EPA denies a state application, the EPA would be required to adopt a permit program in lieu of the current self-implementing rule, as long as Congress grants the funding for the EPA to do so. This would not eliminate the threat of citizen lawsuits, but could provide more certainty regarding interpretations and ultimate compliance. If no permit program is in effect in a state, the CCR rule will remain self-implementing.
The CCR rule requires significant changes to the Company's Colstrip operations and those changes were reviewed by the Company and the plant operator in the second quarter of 2015. PSE had previously recognized a legal obligation under the EPA rules to dispose of coal ash material at Colstrip in 2003. Due to the CCR rule, additional disposal costs were added to the ARO.
outcome.
Clean Air Act 111(d)/EPA Clean Power Plan
In June 2014, the EPA issued a proposed Clean Power Plan (CPP) rule under Section 111(d) of the Clean Air Act designed to regulate GHG emissions from existing power plants. The proposed rule includes state-specific goals and guidelines for states to develop plans for meeting these goals. PSE filed comments on this rule in December 2014. The EPA published a final rule on October 23, 2015. The rule was being challenged by other states and parties, and the Supreme Court granted a stay of the rule on February 9, 2016 until the litigation is resolved. On March 31, 2017, thethen EPA Administrator, Scott Pruitt, signed a notice of withdrawal of the proposed CPP federal plan and model trading rules.rules and, on October 10, 2017, the EPA proposed to repeal the CPP rule. The EPA is now reportedly developing a replacement CPP rule for Section 111(d) and it is expected sometime in the third quarter of 2018. PSE is still reviewing the impact of this development. However, Washington has moved forward with its own Clean Air Rule (CAR). The potential impacts of the Washington Clean Air Rule are described, below.monitoring these developments and cannot yet predict a final outcome.
Washington Clean Air Rule
The CAR was adopted on September 15, 2016 in Washington State and attempts to reduce greenhouse gas emissions from “covered entities” located within Washington State. Included under the new rule are large manufacturers, petroleum producers and natural gas utilities, including PSE. The CAR sets a cap on emissions associated with covered entities, which decreases over time approximately 5%5.0% every three years. Entities must reduce their carbon emissions, or purchase emission reduction units (ERUs), as defined under the rule, from others.
The CAR covers natural gas distributors and subjects them to an emissions reduction pathway based on the indirect emissions of their customers. The CAR regulates the emissions of natural gas utilities' 1.2 million customers across the state, adding to the cost of natural gas for homes and businesses, which may increase costs to PSE customers.
On September 27, 2016, PSE, along with Avista Corporation, Cascade Natural Gas Corporation and NW Natural, filed an actiona lawsuit in the U.S. District Court for the Eastern District of Washington challenging the CAR. On September 30, 2016, the four companies filed a similar challenge to the CAR in Thurston County Superior Court. While awaitingOn December 15, 2017, the outcomeThurston County Superior Court invalidated the CAR. The Department of Ecology appealed the Superior Court decision in March 2018. The federal court litigation currently is stayed pending resolution of the pending litigation, the Company has undertaken steps to comply with the first compliance period of the CAR, which began January 1, 2017.state case.
Related Party Transactions
In August 2015, PSE filed a proposal with the Washington Commission to develop a LNG facility at the Port of Tacoma. The Tacoma LNG facility will provide peak-shaving services to PSE’s natural gas customers, and will provide LNG as fuel to transportation customers, particularly in the marine market. Following a mediation process and the filing of a settlement stipulation by PSE and all parties, the Washington Commission issued an order on October 31, 2016 that allowed PSE’s parent company, Puget Energy, to create a wholly-owned subsidiary, named Puget LNG, LLC (Puget LNG). Puget LNG, which was formed on November 29, 2016, will havefor the sole purpose of owning, developing and financing the non-regulated activity of the Tacoma LNG facility. Puget LNG has entered into one fuel supply agreement with a maritime customer and is marketing the facility’s expected output to other potential customers.
Currently under construction, theThe Tacoma LNG facility is expected to be operational in 2019.currently under construction. Pursuant to the Commission’s order, Puget LNG will be allocated approximately 57%57.0% of the capital and operating costs of the Tacoma LNG facility and PSE will be allocated the remaining 43%43.0% of the capital and operating costs. PSE and Puget LNG are considered related parties with similar ownership by Puget Energy. Therefore, capital and operating costs that occur under PSE and are allocated to Puget LNG are related party transactions by nature. As of June 30, 2017,2018, Puget LNG has incurred $65.2$144.7 million in construction work in progress and operating costs related to Puget LNG’s portion of the Tacoma LNG facility. The portion of the Tacoma LNG facility allocated to PSE will be subject to regulation by the Washington Commission.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various forms of market risk, consisting primarily of fluctuations in commodity prices, counterparty credit risk, as well as interest rate risk. PSE maintains risk policies and procedures to help manage the various risks. There have been no material changes to market risks affecting the Company from those set forth in Part II, Item 7A - "Quantitative and Qualitative Disclosures about Market Risk" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Commodity Price Risk
The nature of serving regulated electric and natural gas customers with its portfolio of owned and contracted electric generation resources exposes PSE and its customers to some volumetric and commodity price risks. PSE’s Energy Management Committee
(EMC) establishes energy risk management policies and procedures to manage commodity and volatility risks and the related effects on credit, tax, accounting, financing and liquidity.
PSE's objective is to minimize commodity price exposure and risks associated with volumetric variability in the natural gas and electric portfolios. It is not engaged in the business of assuming risk for the purpose of speculative trading. PSE hedges open natural gas and electric positions to reduce both the portfolio risk and the volatility risk in prices.
Counterparty Credit Risk
PSE is exposed to credit risk primarily through buying and selling electricity and natural gas to serve customers. Credit risk is the potential loss resulting from a counterparty's non-performance under an agreement. PSE manages credit risk with policies and procedures for counterparty analysis and measurement, monitoring and mitigation of exposure. Additionally, PSE has entered into commodity master arrangements (i.e., WSPP, Inc. (WSPP), International Swaps and Derivatives Association (ISDA) or North American Energy Standards Board (NAESB)) with its counterparties to mitigate credit exposure.
Interest Rate Risk
The Company believes its interest rate risk primarily relates to the use of short-term debt instruments, variable-rate leases and anticipated long-term debt financing needed to fund capital requirements. The Company manages its interest rate risk through the issuance of mostly fixed-rate debt with varied maturities. The Company utilizes internal cash from operations, borrowings under its commercial paper program, and its credit facilities to meet short-term funding needs. Short-term obligations are commonly refinanced with fixed-rate bonds or notes when needed and when interest rates are considered favorable. The Company may also enter into swaps or other financial hedge instruments to manage the interest rate risk associated with the debt.
Item 4. Controls and Procedures
Puget Energy
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of Puget Energy’s management, including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, Puget Energy has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 20172018, the end of the period covered by this report. Based upon that evaluation, the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer of Puget Energy concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
ThereIn May 2018, Puget Energy implemented a financial systems modernization project designed to improve the financial processes, tools and methods used throughout our business. The new/updated systems were used in preparing financial information for the three and six months ended June 30, 2018. Management monitored developments related to the financial systems modernization project, including working with the project team to ensure control impacts around the consolidation process were identified and documented, in order to assist management in evaluating impact to related internal controls. System integration and user acceptance testing were completed to aid management in its evaluations. Additionally, post-implementation reviews of the system implementation and impacted business processes were conducted to enable management to evaluate the design and effectiveness of internal controls around the consolidations process during the period.
Except as previously described, there have been no changes in Puget Energy's internal control over financial reporting that occurred during the period covered by this quarterly reportquarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Puget Sound Energy
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of PSE’s management, including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, PSE has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 20172018, the end of the period covered by this report. Based upon that evaluation, the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer of PSE concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in Puget Sound Energy's internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
In January 2017,May 2018, Puget Sound Energy implemented a financial systems modernization project designed to improve the financial processes, tools and methods used throughout our business. The new/updated systems were used in preparing financial information for the three and six months ended June 30, 2017.2018. Management monitored developments related to the financial systems modernization
project, including working with the project team to ensure control impacts around the consolidation process were identified and documented, in order to assist management in evaluating impactsimpact to related internal control.controls. System integration and user acceptance testing were conductedcompleted to aid management in its evaluations. Post-implementationAdditionally, post-implementation reviews of the system implementation and impacted business processes were being conducted to enable management to evaluate the design and effectiveness of internal controls around the consolidations process during 2017.the period.
During 2017, PSE implemented internal controls covering the evaluation and assessment of revenue contracts related to the adoption of the new revenue recognition standard as of January 1, 2018.
Except as previously described, there have been no changes in PSE's internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, PSE's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Contingencies arising out of the Company's normal course of business existed as of June 30, 20172018. Litigation is subject to numerous uncertainties and the Company is unable to predict the ultimate outcome of these matters. For details on legal proceedings, see Note 8, "Commitment"Commitments and Contingencies" in the Combined Notes to Consolidated Financial Statements in PartItem I.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in Part I, Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the period ended December 31, 2016.
2017.
Item 6. Exhibits
Included in the Exhibit Index are a list of exhibits filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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101 | Financial statements from the Quarterly Report on Form 10-Q of Puget Energy, Inc. and Puget Sound Energy, Inc. for the quarter ended June 30, 2018 filed on August 1, 2018 formatted in XBRL: (i) the Consolidated Statement of Income (Unaudited), (ii) the Consolidated Statements of Comprehensive Income (Unaudited), (iii) the Consolidated Balance Sheets (Unaudited), (iv) the Consolidated Statements of Cash Flows (Unaudited), and (v) the Notes to Consolidated Financial Statements (submitted electronically herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
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| | PUGET ENERGY, INC. PUGET SOUND ENERGY, INC. |
| | /s/ Daniel A. DoyleStephen King |
| | Daniel A. DoyleStephen King
Senior Vice President and Chief FinancialController & Principal Accounting Officer
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Date: | August 2, 20171, 2018 | |
EXHIBIT INDEX
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3(i).1 | Amended Articles of Incorporation of Puget Energy (incorporated herein by reference to Exhibit 3.1 to Puget Energy’s Current Report on Form 8-K, dated February 6, 2009, Commission File No. 1-16305). |
3(i).2 | Amended and Restated Articles of Incorporation of Puget Sound Energy, Inc. (incorporated herein by reference to Exhibit 3.2 to Puget Sound Energy’s Current Report on Form 8-K, dated February 6, 2009, Commission File No. 1-4393). |
3(ii).1 | Amended and Restated Bylaws of Puget Energy dated February 6, 2009 (incorporated herein by reference to Exhibit 3.3 to Puget Energy’s Current Report on Form 8-K, Commission File No. 1-16305). |
3(ii).2 | Amended and Restated Bylaws of Puget Sound Energy, Inc. dated February 6, 2009 (incorporated herein by reference to Exhibit 3.4 to Puget Sound Energy’s Current Report on Form 8-K, Commission File No. 1-4393). |
12.1* | Statement setting forth computation of ratios of earnings to fixed charges of Puget Energy, Inc. (2012 through 2016 and 12 months ended June 30, 2017). |
12.2* | Statement setting forth computation of ratios of earnings to fixed charges of Puget Sound Energy, Inc. (2012 through 2016 and 12 months ended June 30, 2017). |
31.1* | Chief Executive Officer certification of Puget Energy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2* | Principal Financial Officer certification of Puget Energy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.3* | Chief Executive Officer certification of Puget Sound Energy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.4* | Principal Financial Officer certification of Puget Sound Energy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* | Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | Financial statements from the Quarterly Report on Form 10-Q of Puget Energy, Inc. and Puget Sound Energy, Inc. for the quarter ended June 30, 2017 filed on August 2, 2017 formatted in XBRL: (i) the Consolidated Statement of Income (Unaudited), (ii) the Consolidated Statements of Comprehensive Income (Unaudited), (iii) the Consolidated Balance Sheets (Unaudited), (iv) the Consolidated Statements of Cash Flows (Unaudited), and (v) the Notes to Consolidated Financial Statements (submitted electronically herewith).
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