Response of utilities commission may make or break financial status of Puget Sound Energy

Moody’s changes outlook for ratings of Puget Sound Energy and its parent to negative from stable

New York, September 7, 2001 – Moody’s Investors Service changed the outlook for the ratings of Puget Sound Energy, Inc. (PSE; Baa1 Sr. Sec.) to negative from stable to reflect the effects that recent changes in regional power market dynamics have had on PSE’s ability to withstand resulting net power cost volatility.

At the same time, Moody’s also changed the rating outlook for Puget Energy, Inc. (Puget; Baa3 Issuer Rating) to negative from stable. Puget Energy is the parent holding company for PSE. The parent’s Baa3 issuer rating and negative outlook reflects the fact that PSE will continue to be the predominant source of earnings and cash flow for Puget Energy, among other factors.

Recently imposed price caps by the Federal Energy Regulatory Commission and other market conditions have reduced the value of PSE’s existing supply portfolio and significantly increased the utility’s estimates for net power costs for the remainder of 2001 and 2002.

To address this issue, PSE recently asked for regulatory approval to immediately implement a power cost deferral mechanism and a rate adjustment to begin recovering cost deferrals starting November 1, 2001. PSE also agreed to file a general rate case by November 1, 2001. These actions are intended to create a direct linkage between customer bills and PSE’s actual power supply costs.

It is worth noting that this approach would be comparable to the purchased gas adjustment (PGA) mechanism that utilities in Washington currently utilize. The PGA is earnings neutral, although there is a performance-based incentive aspect to the mechanism.

Moody’s said that the Washington Utilities and Transportation Commission (WUTC) has been generally supportive of PSE’s past efforts to ensure recovery of costs incurred to service the utility’s customers.

At this juncture, Moody’s expressed concerns about PSE’s increased need for regulatory support to maintain sufficient earnings and cash flow to support the current rating.

A supportive response from the WUTC in the ongoing proceedings would help stabilize PSE’s rating outlook, whereas a harsh stance would cause more rating pressure, absent other mitigating steps that PSE might take.

Puget Sound Energy, Inc. is a combination electric and gas utility subsidiary of Puget Energy, Inc. Both companies maintain headquarters in Bellevue, Washington.

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