GENERAL
Puget Energy is an energy services holding company incorporated in the state of Washington in 1999. All of its operations are conducted through its subsidiary, PSE, a utility company. Puget Energy has no significant assets other than the stock of PSE.
Puget Energy is owned through a holding company structure 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 (CPPIB), the British Columbia Investment Management Corporation and the Alberta Investment Management Corporation. All of Puget Energy’s common stock is indirectly owned by Puget Holdings.
Corporate Strategy
Puget Energy is the direct parent company of PSE, the oldest and largest electric and natural gas utility headquartered 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 earnings and cash flow by offering reliable electric and natural gas service in a cost-effective manner through PSE.
Customers and Revenue Overview
PSE is a public utility incorporated in the state of Washington in 1960. PSE furnishes electric and natural gas service in a territory covering approximately 6,000 square miles, principally in the Puget Sound region.
The following tables present the number of PSE customers and revenue by customer class for electric and natural gas as of December 31, 2015 and 2014:
Electric
Natural Gas
December 31,
Percent
2015
2014
Change
Customers: 1
Residential
976,583
966,144
1.1
%
742,494
733,135
1.3
%
Commercial
123,681
121,814
1.5
55,208
55,021
0.3
Industrial
3,423
3,457
(1.0
)
2,397
2,392
0.2
Other
6,354
6,144
3.4
227
209
8.6
Total
1,110,041
1,097,559
800,326
790,757
1.2
As of December 31, 2015
(Dollars in Thousands)
Revenue
Percentage
Revenue:
$
1,061,117
51.2
597,572
65.9
867,786
41.9
268,044
29.6
114,223
5.5
22,420
2.5
30,359
1.4
18,666
2.0
2,073,485
100
906,702
_______________
PSE's revenues and associated expenses are not generated evenly throughout the year, primarily due to seasonal weather patterns, varying wholesale prices for electricity and the amount of hydroelectric energy supplies available to PSE, which make quarter-to-quarter comparisons difficult. Weather conditions in PSE's service territory have an impact on customer energy usage, affecting PSE's billed revenue and energy supply expenses. While both PSE's electric and natural gas sales are generally greatest during winter months, variations in energy usage by customers occur from season to season and also month to month within a season, primarily as result of weather conditions. PSE normally experiences its highest retail energy sales, and subsequently often higher power costs, during the winter heating season in the first and fourth quarters of the year and its lowest sales and subsequently lower power costs in the third quarter of the year. 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 for electric and natural gas operations are expected to normalize the impact of weather on operating revenue and net income. Under the decoupling mechanism, the Washington Commission allows 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 residential, commercial and industrial customers.
Capital Expenditures
In the five-year period ended December 31, 2015, PSE’s gross electric utility plant additions were $3.4 billion and retirements were $424.5 million. In the same five-year period, PSE’s gross natural gas utility plant additions were $748.4 million and retirements were $100.0 million and PSE’s gross common utility plant additions were $360.6 million and retirements were $228.3 million. Gross electric utility plant at December 31, 2015 was approximately $9.6 billion, which consisted of 36.0% distribution, 41.1% generation, 14.1% transmission and 8.8% general plant and other. Gross natural gas utility plant at December 31, 2015 was approximately $3.4 billion, which consisted of 93.0% distribution and 7.0% general plant and other. Gross common utility general and intangible plant at December 31, 2015 was approximately $548.7 million.
Employees
At December 31, 2015, PSE had approximately 2,800 full-time employees. Approximately 1,100 PSE employees are represented by the United Association of Plumbers and Pipefitters (UA) and the International Brotherhood of Electrical Workers Union (IBEW). The current contracts with the UA and the IBEW expire on September 30, 2017 and March 31, 2017, respectively.
Puget Energy does not have any employees. PSE's employees provide employment services to Puget Energy and charges for their related salaries and benefits at cost.
Segment Information
Puget Energy operates one reportable business segment referred to as the regulated utility segment. For more information on this segment, see Note 17 to the consolidated financial statements included in Item 8 of this report.
Corporate Location
PSE’s and Puget Energy's principal executive offices are located at 10885 NE 4th Street, Suite 1200, Bellevue, Washington 98004 and the telephone number is (425) 454-6363.
Available Information
The information required by Item 101(e) of Regulation S-K is incorporated herein by reference to the material under “Additional Information” in Item 10 Part III of this annual report.
REGULATION AND RATES
PSE is subject to the regulatory authority of: (1) the FERC with respect to the transmission of electricity, the sale of electricity at wholesale, accounting and certain other matters; and (2) the Washington Commission as to retail rates, accounting, the issuance of securities and certain other matters. PSE also must comply with mandatory electric system reliability standards developed by the NERC, the electric reliability organization certified by the FERC, which standards are enforced by the Western Electricity Coordinating Council in PSE’s operating territory.
2013 Expedited Rate Filing, Decoupling and Centralia Decision
PSE filed a settlement agreement with the Washington Commission on March 22, 2013. The agreement was intended to settle all issues regarding decoupling, a power purchase agreement with TransAlta Centralia and the expedited rate filing (ERF) which is limited in scope and rate impact, includes the property tax tracker, and is intended to establish baseline rates on which the
decoupling mechanism is to operate. The Washington Commission placed the ERF and decoupling filings under a common procedural schedule.
On June 25, 2013, the Washington Commission issued final orders resolving the amended decoupling petition, the ERF filing 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. 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 rate plan increased allowed decoupling revenue per customer for the recovery of delivery system costs which will subsequently increase by 3.0% for the electric customers and 2.2% for the gas customers on January 1 of each year, until the conclusion of PSE's next general rate case (GRC), which will be filed before April 1, 2016. In the rate plan, rate increases are subject to a cap of 3.0% of total revenue for customers. Order No. 8 in the TransAlta Centralia proceeding granted in part and denied in part PSE's Petition for Reconsideration, clarifying certain portions of the Washington Commission's original order regarding TransAlta Centralia.
Rate mechanisms include: (1) trackers that typically track costs regarding a single specific costs during the previous 12-month period, and: (2) riders that project cost recovery during a forward looking 12-month period. Both allow rapid recovery of an expenditure without the lengthy process of a full GRC. The following table shows PSE’s rate filing and whether or not they are included in decoupling rates:
Rate Filings
Gas
Baseline rates
Yes
Annual rate plan increase
Expedited rate filing rider
Merger credit
No
Power cost only rates mechanism
N/A
Federal incentive tracker
Low income rates tracker
No
Pipeline cost recovery mechanism tracker
Prior year decoupling deferral tracker
Property tax tracker
Renewable energy credit tracker
Residential exchange credits tracker
Conservation costs rider
PGA rider
Decoupling Filings
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 residential, commercial and industrial customers to eliminate the effects of abnormal weather, conservation impacts and changes in usage patterns per customer with the exception of the electric business where power costs are not part of the decoupling mechanism. As a result, these electric and natural gas revenues will be recovered on a per customer basis regardless of actual consumption levels. 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. Following each calendar year, PSE will recover or refund the difference between allowed decoupling revenue and the corresponding actual revenue to affected customers during the following May to April time period. The allowed decoupling revenue per customer for the recovery of delivery system costs will subsequently increase by 3.0% for the electric customers and 2.2% for the natural gas customers on January 1 of each year. The decoupling mechanism will end on February 28, 2017 unless the continuation of the mechanism is approved in PSE’s next GRC filing which PSE is required to file by April 1, 2016 at the latest.
On April 22, 2015, the Washington Commission approved PSE's request to change rates under its electric and natural gas decoupling mechanism, effective May 1, 2015. As part of this filing, PSE also requested to change the methodology of how decoupling deferrals are calculated going forward and adjust deferrals calculated in 2014. The change was requested, approved and implemented to eliminate the amortization of prior years’ accumulated decoupling deferrals from the calculation of the current year decoupling deferrals. The effect of the methodology change was a reduction of approximately $12.0 million previously recognized revenue from May through December of 2014. The overall changes represent a rate increase for electric customers of $53.8 million, or 2.6% annually, and a rate increase for natural gas customers of $22.0 million, or 2.1% annually, effective May
1, 2015. As noted earlier, the Company is also limited to a 3.0% annual decoupling related cap on increases in total revenue. This limitation was triggered for certain rate classes. The resulting amount of deferral that was not included in the 2015 rate increase is $1.9 million for electric revenue and $8.2 million for natural gas revenue that was accrued through December 31, 2014.
On April 24, 2014, the Washington Commission approved PSE’s request to change rates under its electric and natural gas decoupling mechanism, effective May 1, 2014. The rate change incorporated the effects of an increase to the allowed delivery revenue per customer as well as true-ups to the rate from the prior year. This represents a rate increase for electric customers of $10.6 million, or 0.5% annually, and a rate decrease for natural gas customers of $1.0 million, or 0.1% annually.