Bellevue, WA-based Puget Sound Energy (PSE) reported Tuesday that a bad investment in a venture capital fund for energy start-ups lowered its 2003 earnings by $4 million.

“There was a confidentiality agreement as part of the ($8 million) investment agreement in the fund,” a Puget spokesperson said, noting that the company could not reveal the name of the fund. Puget officials described the venture capital investment fund as one that “primarily invests in companies that are working in the energy research and development (R&D) arena.”

The utility’s hope is that the investment will result in “technology and systems that ultimately advance the industry and save customers in the long run. It is basically an R&D investment in the industry on our part,” the Puget spokesperson said.

The impairment charge for the sour investments lowered Puget’s income on common stock for 2003 to $114.7 million, or $1.20/share. The $4 million after-tax charge against earnings was not included in the Feb. 10 report of 2003 unaudited financial results that put overall income at $120.2 million, or $1.26/share, for Puget Energy, and $118.7, or $1.25/share, for the utility subsidiary, Puget Sound Energy (PSE).

“The impairment was established when PSE learned from the manager of the venture capital fund that it intends to record unrealized losses of certain portfolio assets in its calendar year 2003 financial statements, reflecting current venture capital conditions and near-term liquidity prospects for the portfolio companies,” Puget indicated in its announcement.

The investment is on the utility’s books, but it is not in rate base; shareholders have funded the investment outside of PSE’s retail utility rates, the spokesman said. “There are a number of other utilities and non-utilities in this particular fund,” he said.

“We’re hopeful that the firms that the fund has invested in will eventually be successful and will help move the industry forward. There is still a chance that will happen. For venture capital and the way the market has been the last couple of years, the losses aren’t that surprising.”

PSE said it has invested $8.2 million since 1997 in the venture capital fund — an 11.11% minority interest — in which the fund manager has sole discretion over management and investment decisions, and as of Dec. 31, 2003, the utility’s investment was worth $2.1 million. In addition, PSE is still obligated to invest another $500,000 before the fund terminates in December 2007.

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