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Puget Sound Energy was sold in the spring of 2008 to a group of Australian and Canadian investors for $30 a share. The article below is from the company's last fiscal year: FY 2007.
Puget Sound Energy (NYSE:PSD) is the oldest and largest utility in the state of Washington.  At the end of 2007, the company provided electricity to 1,056,400 customers and delivered natural gas to 729,500 customers, the majority of whom were located in the Puget Sound region of the state.
As Puget's customer base has expanded, it has had to increase it's capacity for power generation. In 2005 and 2006, the company purchased two wind plants with generating capacities of 150 MW and 229 MW. It is still looking to acquire more generation facilities in the future, in order to avoid projected shortfalls of 412 aMW of electricity in 2008 and 222 aMW in 2009. Growing its generating and distribution capacity has other benefits for Puget; since the company is a utility, its revenues are regulated by the Washington Commission in the form of a set allowed return on the value of its rate base, or assets. The higher the value of its rate base, the higher its revenues.
Since the company generates 60% of its electricity using coal, rising coal prices have been putting pressure on Puget's electric margins, while volatile natural gas prices have done the same for its gas business. Fortunately, the Washington Commission is relatively quick to respond to changes in commodities prices, making several rate changes since 2005 in response to changing gas prices. Unless the Commission acts instantly, however, there will always be some lag between rising gas prices and increasing rates, forcing the company to take losses to potential revenue. Puget also experiences seasonality in all of its revenues, with electric distribution revenues increasing during the AC-intensive months of summer and gas revenues increasing during the heating-intensive winter months, and no regulatory aid to balance out the two.
As a utilities company, Puget Sound has no real competitors, since the high cost of infrastructure installation puts of market entrants. In October, 2007, Puget announced that it would be acquired by a group of private investors for $7.4 billion - $30.00 per common share.
Puget Energy is an energy holding company that operates wholly through its subsidiary, Puget Sound Energy, providing electricity and natural gas to residential, commercial, and industrial customers. In 2007, PSD purchased 66.2% of its energy resources and produced 32.8% of its resources from coal, hydroelectric, wind, and natural gas powered facilities. Also in 2007, PSD purchased 43.8% of its natural gas supply, obtaining the rest of its supply from storage facilities that had been previously filled. PSD's revenues come from diverse sources, as its largest customer accounts only for 1.2% of its total revenues.
Between 2005 and 2007, operating revenues steadily increased, driven in large part to a growing customer base. In order to accommodate the growth, PSD increased its production capabilities: in 2005 a wind plant with the capacity to produce 150 MW per year was purchased and in 2006 another wind plant of capacity 229 MW was purchased. Puget plans on acquiring more power generation facilities in the future in order to minimize energy shortfalls that it believes will be present after 2008.
Between 2005 and 2006 there was a sharp decline in revenue from Other segments, which is explained by the sale of InfrastruX. In 2005, before InfrastruX was sold, it contributed 6.1% of Puget's net income annually and 4.2% of its assets.
As of December 31, 2007, Puget had approximately 1,056,400 electric customers. Of these, 933,200 were residential, 116,400 were commercial, and 3,800 were industrial. Puget also had 729,500 natural gas customers, of which 673,600 were residential, 53,100 were commercial, 2,600 were industrial and 100 were transportation. 363,200 customers purchased both natural gas and electricity from Puget. 
Between 2005 and 2007, electric utility and gas utility profits increased steadily. Customer growth and favorable regulation, such as increases in the regulated rate of return, drove the increase. For example, in 2007, the customer growth rate was 1.7% for electricity and 2.3% for natural gas. 
In 2007, net income was $191 million compared to $177 million the year before. The increase resulted from higher electricity and gas sales. The increase in net income between 2006 and 2005 was primarily due to the sale of InfrastruX.
On October 25, 2007, Puget Sound Energy announced that it had agreed to be acquired through a definitive merger agreement by a consortium of private investors for $7.4 billion. Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation, led a group that also includes Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Bank Limited. The group will pay $30.00 per PSD common share, a $6.05 premium per share based on the October 25, 2007 closing share price of $23.95.The transaction, expected to close during the fourth quarter of 2008, is subject to the approval of Puget Energy's shareholders and certain other regulatory approvals.
The Washington Utilities and Transportation Commission (Washington Commission) regulates the return return on Puget Sound Energy's rate base in both its natural gas and electric service. The rate base is a value that a utility is allowed to earn a certain rate of return on. The rate of return is typically based on operating costs and sometimes capital expenditures. The rate system and regulatory system are in place to ensure the utility charges fair prices, since utilities generally have monopolies in their areas because of the high cost of installing infrastructure.
In 2005 and 2006, the Washington Commission authorized 14.7% and 10.2% rate increases for the natural gas segment, respectively. The increases were reflected in increased annual revenues of $95.1 million and $121.6 million for the segment. However, in 2007 the Washington Commission decreased the gas rate by 13.0%, which caused a decline in revenues of $148.1 million. The decrease was enacted primarily because of lower costs of natural gas in the future market.  On July 1, 2006 the Washington Commission increased the power cost rate for Puget's electric segment by 5.9% and on September 1, 2007 the rate was increased again by 3.7%. The increases resulted in revenue increases of $45.3 million and $64.7 million, respectively.
Puget's revenues and profit depend substantially on the rate base and rate of return, and the future regulatory climate in the state will dictate the direction the rate bases move. The only other way for the company to increase revenues is by growing its rate base- the higher the rate base, the higher the revenue based on the rate of return. Growing the rate base is costly, however, and typically requires the installation of new infrastructure.
Since PSD operates primarily in a single geographical area, the Puget Sound Region of Washington, the companies business is particularly susceptible to weather. Hotter summers cause more air conditioning to be used and colder winters cause more heating to be used. Although these conditions are potentially beneficial due to the accompanying increase in revenue, they also place Puget Energy at the risk of an energy shortfall. In fact, Puget Energy estimates it will be short 412 aMW of electricity in 2008. Moreover, many scientists believe that global warming will unpredictably impact weather for Policymakers and energy usage in the future, and weather patterns are generally unpredictable from year to year, regardless.
During the first quarter of 2007, when Washington was experiencing winter, gas revenues were $467 million. During the second quarter of 2007, the summer months, gas revenues were significantly less at $142 million.  Gas revenues are higher during winter months because heaters typically use natural gas as the energy source. Similarly, PSD sees higher electric revenues in the summer, because air conditioners use electricity as the energy source.
In 2007, Puget Sound Energy produced 4,800,028 MWh of electric power from coal, which represented 20.2% of its total energy resources. Two benchmark U.S. sources of coal saw significant price increases through the twelve months preceding March 2008: coal from central Appalachia rose 93% in price and coal from the Powder River Basin of Wyoming rose 63%. Puget is not as dependent on coal as many other electric producers, and in fact has most recently been investing in wind and hydroelectric plants for power generation as part of its stated initiative to provide safe energy. This has come in large part due to the adoption of a Renewable Portfolio Standard in the state of Washington. The new standard demands that 3% of a utility's power come from renewable sources by 2012 and 15% by 2020. Nonetheless, rising coal prices will affect profitability unless Puget can reduce its reliance on coal even further.
In 2007, Puget purchased 43.8% of its natural gas resources, which it then distributes to customers. In addition, 5.1% of its electric power supply in 2007 came from natural gas, as well as 25.3% of its 2007 peak power resources. Between June and November of 2007, natural gas prices were below $8 mmbtu. After November 2007, the price of natural gas started to fluctuate heavily, with the overall trend being an increase. By June 11th, 2008, natural gas prices had reached $12.66 mmbtu, an increase of over 50%. In 2007, PSD obtained 54.2% of its natural gas from its personal stores. If the company continues to obtain a significant amount of gas from previously purchased reserves, PSD will be partially shielded from the higher natural gas prices of 2008, as these reserves would have been purchased at earlier, cheaper prices. Compounding this effect is the fact that as of the end of 2007, Pugets' contracts with natural gas suppliers had remaining terms of up to 7 years, which means that the company has locked in past prices for future natural gas purchases. Furthermore, regulatory agencies determine PSD's rate of return based on futures prices, not the price that the company paid for natural gas , so in 2008, Puget should be able to obtain higher profit margins since 2008 futures prices are significantly higher than the prices the company actually paid for its gas . If natural gas prices continue to rise, however, Puget will be adversely affected as it replenishes its natural gas stores and enters into new contracts for purchasing, both at higher prices.
Since Puget Sound Energy is a utility, the company has little competition. utilities are typically monopolies that are regulated to ensure they are charging fair prices. utilities are an exception to monopoly laws because they require enormous capital expenditures, such as power lines and power plants, and it would be extremely inefficient if many companies existed in the same area and duplicated all of the same facilities.
Avista - Avista is an electric and natural gas utility that is headquartered in Spokane, Washington and operates in Washington, Idaho, and Oregon. Avista serves 633,000 customers, about half of which are natural gas and half are electric customers.
Pacific Power - Pacific Power is a division of PacifiCorp, a utility that serves over 1.6 million customers in six different states in the western U.S. Pacific Power operates only electricity in the state Washington and serves about 120,000 customers.
|Puget Sound Energy||Avista||Pacific Power||Cascade Natural Gas||Northwest Natural Gas|
|Electric Operating Revenues (FY 2007, USD Million)||1,998||711||284 (2006)||-||-|
|GasOperating Revenues (FY 2007, USD Million)||1,208||577||-||8,506||1,015|