<PAGE>   1

 
                            SCHEDULE 14A INFORMATION
 
          PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
                    EXCHANGE ACT OF 1934 (AMENDMENT NO.   )
 
Filed by the Registrant /X/
 
Filed by a Party other than the Registrant / /
 
Check the appropriate box:


<TABLE>
<S>                                         <C>
/ /  Preliminary Proxy Statement           / / Confidential, for Use of the Commission
                                               Only (as permitted by Rule 14a-6(e)(2))
/X/  Definitive Proxy Statement
/ /  Definitive Additional Materials
/ /  Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
 
                            Puget Sound Energy, Inc.
--------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)
 

--------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
 
/X/  No fee required
 
/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
 
     (1)  Title of each class of securities to which transaction applies:
 
     (2)  Aggregate number of securities to which transaction applies:
 
     (3)  Per unit price or other underlying value of transaction computed
          pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
          filing fee is calculated and state how it was determined):
 
     (4)  Proposed maximum aggregate value of transaction:
 
     (5)  Total fee paid:
 
/ /  Fee paid previously with preliminary materials.
 
/ /  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2) and identify the filing for which the offsetting fee was paid
     previously. Identify the previous filing by registration statement number,
     or the Form or Schedule and the date of its filing.
 
     (1)  Amount Previously Paid:
 
     (2)  Form, Schedule or Registration Statement No.:
 
     (3)  Filing Party:
 
     (4)  Date Filed:
<PAGE>   2
                            PUGET SOUND ENERGY, INC.

                    Notice of Annual Meeting of Shareholders
                         To Be Held May 12, 1998 at the
         Washington State Convention & Trade Center, Seattle, Washington




To the Holders of Common Stock of
Puget Sound Energy, Inc.:

The Annual Meeting of Shareholders of Puget Sound Energy, Inc. will be held at
10:00 a.m. on May 12, 1998 at the Washington State Convention & Trade Center,
located at 800 Convention Place, Seattle, Washington for the purpose of acting
upon the following matters:

1.  To elect four Directors to serve until the expiration of their terms and
    until their successors are elected and qualified.

2.  To consider any and all other matters that may properly come before the
    meeting and any adjournment thereof.

Only shareholders of record at the close of business on March 16, 1998 will be
entitled to attend and vote at the meeting. If your shares are registered in the
name of a brokerage firm or trustee and you plan to attend the meeting, please
obtain from the firm or trustee a letter, account statement or other evidence of
your beneficial ownership of those shares to facilitate your admittance to the
meeting.

If you are a participant in the Company's Stock Purchase and Dividend
Reinvestment Plan, please note that the enclosed proxy covers all shares in your
account, including any shares that may be held in such plan.

March 31, 1998
Bellevue, Washington
By Order of the Board of Directors,


/s/ JAMES W. ELDREDGE
--------------------------------------
James W. Eldredge, Corporate Secretary


<PAGE>   3

<TABLE>
TABLE OF CONTENTS

<S>                                                                                     <C>
Proxy Statement..........................................................................1


Annual Report............................................................................1


Voting Rights and Proxy..................................................................1


Election of Directors....................................................................2


Security Ownership of Directors and Executive Officers...................................6


Board of Directors and Committee Meetings................................................7


Compensation and Retirement Committee Report.............................................9


Stock Price Performance Graph...........................................................12


Summary Compensation Table..............................................................13


Aggregated SAR Exercises in 1997 and Fiscal Year-End Options/SAR Values.................15


Long-Term Incentive Plan Awards in 1997.................................................16


Retirement Benefits Statement...........................................................17


Employment Contracts, Termination of Employment and
      Change-in-Control Arrangements....................................................18


Independent Public Accountants..........................................................21


Section 16(a) Beneficial Ownership Reporting Compliance.................................21


Shareholder Proposals...................................................................21


Solicitation of Proxies.................................................................21


Map to Annual Meeting...................................................................22
</TABLE>



        YOUR VOTE IS IMPORTANT
        The Company has approximately 63,000 shareholders of record. Many
        shareholders own 100 shares or less. Each shareholder, regardless of the
        number of shares owned, is requested to complete, date, sign and return
        promptly the enclosed proxy form, using the accompanying addressed
        envelope.



<PAGE>   4

PROXY STATEMENT

The following information is furnished in connection with the solicitation of
proxies for the Annual Meeting of Shareholders (the "Annual Meeting") of Puget
Sound Energy, Inc. ("Puget" or the "Company") to be held at 10:00 a.m. on May
12, 1998 at the Washington State Convention & Trade Center, located at 800
Convention Place, Seattle, Washington. The approximate mailing date of the proxy
material is March 31, 1998. The mailing address of the Company's principal
executive offices is Puget Sound Energy, Inc., P.O. Box 97034, Bellevue,
Washington 98009-9734.

Management is not aware of any matter to be presented for action at the Annual
Meeting other than the election of four Directors.


ANNUAL REPORT

The Company's Annual Report for 1997, including audited financial statements, is
being mailed to shareholders on or about March 31, 1998.


VOTING RIGHTS AND PROXY

The Company's Common Stock is the only class of stock entitled to vote at the
Annual Meeting. Approximately 84.5 million shares of Common Stock were
outstanding on March 16, 1998, the record date for the Annual Meeting. The
holders of a majority of the shares of the Common Stock, present in person or by
proxy at the Annual Meeting, constitute a quorum for the transaction of
business. Each holder of Common Stock generally is entitled to one vote for each
share held on the record date on each item to be voted on at an Annual Meeting
of Shareholders. In electing Directors, however, every holder of Common Stock
has the right of cumulative voting, namely, the right to multiply the number of
votes represented by shares held of record by the number of Directors to be
elected, and then cast all such votes for one candidate or distribute them among
any two or more candidates. Under Washington law and the Company's Articles of
Incorporation, if a quorum is present at the Annual Meeting, the four nominees
for election as Directors who receive the greatest number of votes cast for the
election of Directors at the Annual Meeting by the shares present in person or
represented by proxy at the Annual Meeting and entitled to vote shall be elected
Directors. In the election of Directors, any actions other than a vote for a
nominee will have the practical effect of voting against the nominee. Because
brokers have discretion to vote shares of Common Stock held on behalf of
beneficial owners, if no instructions for voting such shares are received as to
the matter to be voted on at the Annual Meeting, such shares will be voted "for"
the matter; there will be no "broker non-votes."

Unless your proxy is mutilated or otherwise received in such form or at such
time as to render it not votable, the shares represented by your proxy will be
voted as directed and, if no direction is indicated, will be voted for all
management proposals as set forth in this Proxy Statement. A shareholder may
revoke a proxy card at any time before it is voted by delivering


                                                                               1
<PAGE>   5

a written notice of revocation to the Corporate Secretary of the Company or by
signing and delivering another proxy card that is dated later. If the
shareholder attends the Annual Meeting in person, either giving notice of
revocation to an inspector of election at the Annual Meeting or voting at the
Annual Meeting will revoke the proxy. A proxy, when executed and not so revoked,
will be voted and, if it contains any specifications, will be voted in
accordance with the specifications so made. ChaseMellon Shareholder Services,
L.L.C. acts as tabulator and Inspector of Elections for the proxies of the
shareholders of record, brokers and banks. The identity and vote of all
shareholders shall not be disclosed to any third party except as necessary to
meet applicable legal requirements. If any other matters should properly come
before the Annual Meeting, it is the intention of the persons named in the
accompanying proxy to vote thereon in accordance with their judgment on such
matters.

ELECTION OF DIRECTORS

The number of Directors is determined by resolution of the Board of Directors,
subject to revision by the shareholders. The Board of Directors has, by
resolution, fixed the number of Directors at twelve. The terms of the Directors
are classified so that generally each year approximately one-third of the
Directors are elected for a three-year term. These three groups of Directors are
identified herein as Class I, Class II and Class III Directors. At the Annual
Meeting, four Class I Directors will be elected to serve for a term of three
years expiring on the date of the Annual Meeting of Shareholders in 2001.

Proxies will be voted for the following named nominees. In the event any nominee
is not available to serve as a Director at the date of the Annual Meeting (which
is not now anticipated), the persons named in the enclosed proxy shall have full
discretion and authority to vote or refrain from voting for any other nominee in
accordance with their judgment. Directors are elected to hold office until their
successors are elected and qualified, or until resignation or removal in the
manner provided in the Bylaws of the Company.

The names of nominees for Director of the Company are set forth below.


CLASS I NOMINEES
TERMS EXPIRE 2001

DOUGLAS P. BEIGHLE

Mr. Beighle served as Senior Vice President of The Boeing Company (aerospace
manufacturing and sales) from 1986 until his retirement on May 1, 1997. He
served The Boeing Company as Vice President from 1980 to 1986. Mr. Beighle, age
65, has been a Director of the Company since 1981 and also serves as a director
of Washington Mutual, Inc. and Active Voice Corporation.

PHYLLIS J. CAMPBELL

Ms. Campbell has been President of U.S. Bank, Washington (financial institution)
since 1993. She also served as Area President of U.S. Bank, Washington for
Seattle-King County from 1992 to 1993, Executive Vice President and Manager from
1989 to 1992, and in various banking capacities since 1973. Ms. Campbell, age
46, has been a Director of the Company since 1993 and also serves as a director
of SAFECO Corporation, and is a Regent of Washington State University.




2
<PAGE>   6
DONALD J. COVEY

Mr. Covey has been a Director of the Company since the consummation of the
Merger of Washington Energy Company (WECo) and Washington Natural Gas Company
(WNG) into Puget Sound Power & Light Company on February 10, 1997 (the
"Merger"). Mr. Covey, age 69, previously served as a Director of Washington
Energy Company and Washington Natural Gas Company from 1982 through February 10,
1997. Mr. Covey served as Chairman of the Board of Directors of UNICO
Properties, Inc. (property management), Seattle, Washington, from 1990 until his
retirement in December 1994. Prior to that he served UNICO as Chief Executive
Officer from 1983 to 1992 and President from 1975 to 1990.


WILLIAM S. WEAVER

Mr. Weaver has been President of the Company since May 1997 and Chief Executive
Officer since January 13, 1998. He also served as Chairman of Unregulated
Subsidiaries from February 14, 1997 through January 12, 1998 and Vice Chairman
of the Board of Directors from February 14, 1997 through May 18, 1997. Prior to
that he had served as Executive Vice President and Chief Financial Officer of
the Company since 1991. Before joining the Company, he was a partner in the law
firm of Perkins Coie. Mr. Weaver, age 54, has been a Director of the Company
since 1991.


The names of the Class II and Class III Directors of the Company who are not
standing for election and whose terms of office will continue after the Annual
Meeting are listed as follows:

CLASS II DIRECTORS
TERMS EXPIRE 1999

ROBERT L. DRYDEN

Mr. Dryden has been a Director of Puget Sound Energy since the consummation of
the Merger. Mr. Dryden, age 64, previously served as a Director of WECo and WNG
from 1991 through February 10, 1997. He has been Executive Vice President,
Airplane Production, Boeing Commercial Airplane Group, Seattle, Washington,
since 1990. Mr. Dryden also serves as a director of U.S. Bancorp.


JOHN D. DURBIN

Mr. Durbin has been a Principal in Olympic Capital Partners, Inc. (investment
banking), Seattle, Washington, since October 1996. He served as President and
Chief Executive Officer of Hostar International, Inc. from 1988 until his
retirement in June 1995, and has been a General Partner of John Durbin &
Associates since 1969. His prior positions include Chairman and President of CEC
Equipment Company from 1982 to 1987 and Chairman of Spokane Truck Sales, Inc.
from 1983 to 1987. Mr. Durbin, age 62, has been a Director of the Company since
1984 and also serves as a director of Fluke Corporation, ConnexT, Inc. (a
subsidiary of the Company) and UTILX Corporation.



                                                                               3
<PAGE>   7

DANIEL J. EVANS

Mr. Evans has been Chairman of Daniel J. Evans Associates (consulting) since
1989. His prior positions include United States Senator, State of Washington,
from 1983 to 1989 and Chairman, Pacific Northwest Power and Conservation
Planning Council from 1981 to 1983. Mr. Evans, age 72, has been a Director of
the Company since 1990 and also serves as a director of Attachmate, Inc.,
Burlington Northern Santa Fe Inc., Flow International Corporation, Tera Computer
Company, Western Wireless Corporation and Washington Mutual, Inc.

SALLY G. NARODICK

Ms. Narodick has been a Director of Puget Sound Energy since the consummation of
the Merger. She is currently a Consultant on Strategic Planning for Educational
Technology (educational software development) for IBM Corporation. Ms. Narodick,
age 52, previously served as a Director of WECo and WNG from 1989 through
February 10, 1997 and was Chairman and Chief Executive Officer of Edmark
Corporation from October 1989 to September 1996. She also serves as a director
of Penford Corporation and Fluke Corporation.


CLASS III DIRECTORS
TERMS EXPIRE 2000

CHARLES W. BINGHAM

Mr. Bingham served as Executive Vice President of Weyerhaeuser Company (forest
products industry) from 1981 until his retirement in July 1995 and Senior Vice
President from 1972 to 1981. Mr. Bingham, age 64, has been a Director of the
Company since 1978.

JOHN W. ELLIS

Mr. Ellis has been Chairman of the Board and Chief Executive Officer of The
Baseball Club of Seattle since 1992. He served as Chairman of the Board of the
Company from 1987 to 1993 and as Chief Executive Officer from 1976 to 1992. Mr.
Ellis, age 69, has been a Director of the Company since 1969 and also serves as
a director of SAFECO Corporation, Washington Mutual Savings Bank, UTILX
Corporation and Associated Electric & Gas Insurance Services, Ltd. Mr. Ellis is
also Chairman of the Board of Trustees of Seattle University.

TOMIO MORIGUCHI

Mr. Moriguchi has been a Director of Puget Sound Energy since the consummation
of the Merger. Mr. Moriguchi, age 61, previously served as a Director of WECo
and WNG from 1988 through February 10, 1997 and has served as Chairman and Chief
Executive Officer of Uwajimaya, Inc. (food and merchandise distributor),
Seattle, Washington, since December 1994. Previously, he served as President of
Uwajimaya, Inc. from 1965 through December 1994. He also serves as a member of
Seafirst Advisory Council and is President, Town and Country Travel, Inc.,
Seattle, Washington, President and Chairman of the Board of North American Post
Publishing Company, Seattle, Washington and director, Federal Reserve Bank of
San Francisco/Seattle Branch.



4

<PAGE>   8

RICHARD R. SONSTELIE

Mr. Sonstelie has been Chairman of the Company since February 10, 1997. His
prior positions with the Company include Chief Executive Officer from 1992 to
January 1998, Chief Operating Officer from 1991 to 1992, Chief Financial Officer
from 1987 to 1991 and Executive Vice President from 1985 to 1987. Mr. Sonstelie,
age 53, has been a Director of the Company since 1987 and also serves as a
director of the Federal Reserve Bank of San Francisco/Seattle Branch, Utech
Venture Capital Corporation and Edison Electric Institute.


OTHER DIRECTOR INFORMATION

Mr. R. Kirk Wilson, age 59, currently serves as a Class I Director and will be
retiring from Board Service on May 12, 1998 concurrent with the expiration of
his three year term. Mr. Wilson has been a Director of the Company since 1976
and is currently the Chairman of the Board of Brown & Cole, Inc. (retail
supermarkets), Bellingham, Washington.



                                                                               5
<PAGE>   9

SECURITY OWNERSHIP OF DIRECTORS AND
EXECUTIVE OFFICERS

The following table sets forth information as of March 16, 1998, concerning the
shares of the Company's Common Stock beneficially owned by each Director and
nominee, the executive officers named in the Summary Compensation Table (the
"named executive officers") and Directors and executive officers of the Company
as a group. No Director or executive officer owns more than 1% of the
outstanding shares of Common Stock. The Company is not aware of any person who
beneficially owns five percent or more of the Common Stock.

NAME OF BENEFICIAL OWNER

<TABLE>
<CAPTION>
                                                                           Number of
                                     Number of           Number of        Shares that
                                   Beneficially           Share              May Be
                                      Owned             Equivalents        Acquired by
Nominees and Directors                Shares               Held         Exercising Options
----------------------             ------------         -----------     -------------------
<S>                                     <C>              <C>             <C>
Douglas P. Beighle                      3,410
Charles W. Bingham                      3,033
Phyllis J. Campbell                     1,000
Donald J. Covey                         5,003            1,859(2)
Robert L. Dryden                        3,764            1,049(2)
John D. Durbin                          2,560
John W. Ellis                          28,896(1)
Daniel J. Evans                         1,000
Tomio Moriguchi                           472            1,859(2)
Sally G. Narodick                         258            1,570(2)
R. Kirk Wilson                         17,044

Executive Officers
------------------
 (*also serve as Directors)

Richard R. Sonstelie*                  11,493(1)
William S. Weaver*                     11,480(1)
Timothy J. Hogan                        5,840(1)                            15,828(3)
James P. Torgerson                      5,151(1)
Gary B. Swofford                        5,793(1)

All Directors and executive officers  106,197            6,337              15,828
</TABLE>


(1) Includes shares credited under the Company's Investment Plan for Employees
    through March 16, 1998.

(2) Shares represent grants of stock under the former Washington Energy
    Company's Director Stock Bonus Plan. These shares were converted to Puget
    Sound Energy shares at the Merger exchange ratio of .86 to 1.

(3) Represents unexercised stock options granted by WECo prior to the Merger,
    which were converted into options to purchase the Company's Common Stock at
    the Merger exchange ratio of .86 to 1.



6

<PAGE>   10

BOARD OF DIRECTORS AND COMMITTEE MEETINGS

The Board of Directors has established four standing committees, which meet
outside of regular Board of Directors meetings, to assist in the discharge of
the Directors' responsibilities. The names of these committees, their current
membership and a brief statement of their principal responsibilities are
presented below.


BOARD OF DIRECTORS MEETINGS

Ten Board of Directors meetings were held during 1997. Each Director attended at
least 75% of the meetings of the Board of Directors and committees of the Board
on which the Director served. Average attendance at all Board of Directors
meetings and committee meetings during 1997 was 95%.


AUDIT COMMITTEE

The Audit Committee currently includes Douglas P. Beighle (Chairperson), Charles
W. Bingham, Donald J. Covey, John D. Durbin, Daniel J. Evans, Tomio Moriguchi
and R. Kirk Wilson. The Audit Committee is responsible for reviewing the annual
report of the independent auditors, evaluating the external and internal audit
functions and recommending to the Board of Directors the retention of
independent auditors and other auditing matters. Eight Audit Committee meetings
were held during 1997.


DIRECTOR AFFAIRS COMMITTEE

The Director Affairs Committee currently includes Daniel J. Evans (Chairperson),
Phyllis J. Campbell and Donald J. Covey. The Director Affairs Committee acts and
makes recommendations with respect to identification and selection of candidates
for Directors, Director tenure, committee assignments and Director compensation
matters. Shareholders may propose candidates for consideration as nominees to
the Board of Directors; such proposals should be directed in writing to the
Company's Corporate Secretary prior to each annual meeting. Director candidates
are considered on the basis of recognized achievements and their ability to
bring skills and experience to the deliberations of the Board of Directors.
Three Director Affairs Committee meetings were held during 1997.


COMPENSATION AND RETIREMENT COMMITTEE

The Compensation and Retirement Committee
currently includes R. Kirk Wilson (Chairperson), Douglas P. Beighle, Phyllis J.
Campbell, Robert L. Dryden, John D. Durbin, and Sally G. Narodick. The
Compensation and Retirement Committee acts and makes recommendations to the
Board of Directors with respect to executive compensation, the retirement plan
and other benefit plans for employees. Eight Compensation and Retirement
Committee meetings were held during 1997.


STRATEGIC OPPORTUNITIES COMMITTEE

The Strategic Opportunities Committee currently includes John D. Durbin
(Chairperson), Douglas P. Beighle, Phyllis J. Campbell, Robert L. Dryden, John
W. Ellis and Sally G. Narodick. The Strategic Opportunities Committee acts and
makes recommendations to the Board of Directors with respect to new business
development matters. Three Strategic Opportunities Committee meetings were held
during 1997.





                                                                               7

<PAGE>   11
DIRECTOR COMPENSATION

Directors who are not Company employees are paid a quarterly retainer of $6,250
plus $800 for each Board of Directors meeting and committee meeting attended. A
minimum of 40% of quarterly retainer payments are made in Company Common Stock.
Directors optionally can receive 100% of their retainer payments in Common
Stock, or defer receipt of shares under the Puget Sound Energy Director Stock
Plan. The Chairpersons of the Audit, Director Affairs and Compensation and
Retirement Committees receive additional quarterly retainers of $500 each.
Directors who are also officers of the Company do not receive any compensation
for duties performed as Directors. Mr. Sonstelie, as Chairman of the Board, will
be compensated under the terms of his employment agreement with the Company
dated as of January 13, 1998. (See "Employment Contracts, Termination of
Employment and Change-In-Control Arrangements.") The Company and Mr. Ellis
entered into a consulting agreement that commenced in October 1993 and will end
September 30, 1998. Under the terms of this agreement, Mr. Ellis provides
consulting and other services to the Company, including representing the Company
in various industry- and community-related committees and activities. For these
services, Mr. Ellis is paid $2,000 per month for the term of the agreement. In
addition, the Company provides administrative support for Mr. Ellis's services
performed under the consulting agreement.



8

<PAGE>   12

COMPENSATION AND RETIREMENT COMMITTEE REPORT

The Board of Directors delegates responsibility for executive compensation to
the Compensation and Retirement Committee (the "Committee). The Committee's
members are Douglas P. Beighle, Phyllis J. Campbell, Robert L. Dryden, John D.
Durbin, Sally G. Narodick and R. Kirk Wilson, all of whom are nonemployee
Directors and none of whom participate in the compensation programs described
here for executives. Messrs. Dryden and Durbin and Ms. Narodick became members
of the Committee on March 13, 1997. The Committee establishes compensation for
the Chief Executive Officer and reviews and approves the Chief Executive
Officer's recommended compensation action for the other executive officers. The
following is the report of the Committee on executive compensation for 1997.

In determining executive compensation, the Committee is guided by competitive
pay practices in similar-sized companies within both the electric and the
combination gas and electric utility industries and by its belief that executive
compensation should:

  o  Attract and retain outstanding executives by providing compensation
     opportunities consistent with the electric and combination gas and electric
     utility industries for similar positions.

  o  Place a significant portion of each executive's total pay at risk to
     motivate executives to achieve Company and individual performance goals.

  o  Tie incentive compensation to Company performance, in the short-term to
     favorable operating results and, in the long-term, by aligning the
     interests of executive officers with the long-term interests of the
     Company's shareholders.

Overall, the Committee makes compensation decisions in the context of the
competitiveness of the entire compensation package as compared to appropriate
market indices. The Committee's principal source of total compensation market
data is a selection of about 20 similar-sized companies from the Edison Electric
Institute's ("EEI") comprehensive, industry-wide annual survey of management
pay. The comparison companies are included in the EEI 100 Index of
Investor-owned Electrics, and the EEI Combination Gas & Electric Investor-owned
Utilities Index used in the Stock Price Performance Graph.

The Committee has adopted an executive compensation philosophy that encompasses
a mix of base salary and annual and long-term incentive programs. The total
package is designed to provide participants with appropriate incentives for both
current performance as well as long-term incentives for achieving the Company's
objective of enhancing shareholder value. In the aggregate for the named
executives, long-term incentives comprise the largest portion of incentive pay.


BASE SALARY

Generally, base salaries for Company executives are designed to be below median
salary levels as compared to positions of similar responsibility in
similar-sized companies in the EEI survey. When such base salaries are combined
with above-median annual and long-term incentive compensation targets, total
compensation opportunities will be competitive with the median total
compensation level for similar positions found in similar-sized companies in the
EEI survey.

As part of the merger process in 1997, the Committee undertook a comprehensive
market analysis of total compensation. Recognizing the increased size of the
Company and the impact of combining the gas and electric services of the merged
companies, the Committee adjusted base salaries of the named executives to
reflect these changes. Total cash compensation, defined as base salaries plus
annual incentive awards and the expected value from the 1997 long-term incentive



                                                                               9
<PAGE>   13

grants, for the named executive officers in 1997 was set at approximately the
median for positions of similar responsibility and job complexity in
similar-sized companies in the EEI survey.


ANNUAL INCENTIVE COMPENSATION

All executive officers participate in the Company's annual Pay at Risk Plan. The
intent of this Plan is to provide financial incentives to executives for
achieving desired annual operating results. For 1997, the targeted opportunity
for awards from this Plan varied by executive officer: Mr. Sonstelie's target
was 45% of base salary; Mr. Weaver's was 40% of base salary; Mr. Torgerson's was
35% of base salary and Messrs. Swofford and Hogan's were 30% of base salary.

The annual incentive plan for 1997 had three components: the achievement of
earnings per share goals (weighted at 50%), the achievement of operations and
maintenance budget goals (weighted at 25%) and performance on key customer
service and business efficiency indicators (weighted at 25%). The key customer
service and business efficiency indicators were realized at a level that funded
25% of the individual participant's target award. This award was paid to all
plan participants except Messrs. Sonstelie and Weaver, who were not paid an
award because the earnings per share and budget goals did not achieve minimum
funding levels.


LONG TERM INCENTIVE COMPENSATION

The 1995 Long-Term Incentive Compensation Plan, approved by shareholders in
1995, reflects the Committee's desire to link compensation to the growth of
shareholder value. Under this plan, awards of contingent grants of the Company's
Common Stock were made to executives and key employees. The 1997 awards will be
payable in stock at the end of a four-year period based on the Company's
cumulative four-year total shareholder return relative to the EEI 100 Index of
Investor-owned Electrics used in the Stock Price Performance Graph. The number
of shares delivered at the end of the four-year cycle will range from zero to
175% of the contingent grant. To receive 100% of the grant, performance must be
at the 55th percentile ranking among EEI 100 companies and to receive 175% of
the grant, performance must be at or above the 85th percentile ranking. Dividend
equivalents will be paid out in cash at the end of the performance period in
relation to the number of underlying shares earned. The grants made in 1997 to
the named executive officers are shown on the Long-Term Incentive Plan Awards in
1997 table.

Before 1995, awards made under the Company's Long Term Incentive Program for
Senior Management in 1994 continued under their original terms. No additional
awards have been made since 1994. Under that plan, participants could be
allocated Performance Share Units ("PSUs") and Stock Appreciation Rights
("SARs") both of which are payable only in cash.

Each PSU grant had a four-year term. The last grant, made in 1994, matured on
December 31, 1997. A PSU's value is the price of the Company's Common Stock at
the end of the PSU's term plus the per share dividend paid during the term. The
number of PSUs on which values are paid ranged from zero to 160% of those
granted. This number is based on the Company's four-year, total shareholder
return compared to the returns reported in the EEI 100 Index of Investor-owned
Electrics. The Company's total shareholder return compared to the EEI 100 Index
of Investor-owned Electrics for the four-year period was at the target 55th
percentile, resulting in an award level of 100% of the PSUs originally granted.
The payout under this plan to the participating named executives is shown on the
Summary Compensation Table.

Each SAR grant has a 10-year term and vests 20% per year beginning one year
after the date of grant. A SAR's value is the gain of the price of the Common
Stock over the base price, which is the closing market value of the Common Stock
on the date of grant, plus the incremental value of per share dividend increases
during the holding period. SAR grants were last made in 1994. The values of SARs
exercised in 1997, and of all outstanding SARs, are shown on the Aggregated SAR
Exercises in 1997 and Fiscal Year-End Option/SAR Values Table.



10
<PAGE>   14

CHIEF EXECUTIVE OFFICER COMPENSATION

Mr. Sonstelie was named Chief Executive Officer of the Company in May 1992 and
Chairman of the Board in February 1997. His base salary was set at $500,000 on
February 10, 1997. While Mr. Sonstelie's base salary was slightly below the
median of similar-sized companies in the EEI survey, his targeted total
compensation (base salary plus annual incentive award and expected value from
the 1997 long-term incentive grant) in 1997 was at the median for chief
executive officers of similar-sized companies in the EEI survey.

Mr. Sonstelie did not receive an annual incentive award pursuant to the 1997 Pay
at Risk Plan because desired corporate results were not achieved. Because this
award was not paid, Mr. Sonstelie's total annual cash compensation for 1997 fell
well below the median for chief executive officers of similar-sized companies in
the EEI survey.

Mr. Sonstelie's individual performance objectives, approved by the Committee in
April 1997, focused on the successful completion of the Merger process, the
achievement of certain key corporate performance objectives focusing on customer
service and cost control, and specific short- and long-term strategic objectives
intended to competitively position the Company and enhance long-term shareholder
value.

On January 13, 1998, Mr. Weaver was named Chief Executive Officer. Mr. Sonstelie
continues to serve as Chairman of the Board. An Employment Agreement entered
into in October 1995 between Mr. Sonstelie and the Company has been superseded
by an Employment Agreement dated January 13, 1998. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."

Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
generally disallows a tax deduction to public companies for compensation over $1
million paid to the Company's chief executive officer and four other most highly
compensated executive officers, unless that compensation is deferred or is
considered performance-based. The compensation disclosed in this Proxy Statement
qualifies for deductibility under Section 162(m), and executive compensation for
1998 is also expected to qualify for deductibility. The Company currently
intends to continue structuring the performance-based portion of its executive
officer compensation to achieve maximum deductibility under Section 162(m) with
minimal sacrifices in flexibility and corporate objectives.

                                          COMPENSATION AND RETIREMENT COMMITTEE

                                          R. Kirk Wilson, Chairperson
                                          Douglas P. Beighle
                                          Phyllis J. Campbell
                                          Robert L. Dryden
                                          John D. Durbin
                                          Sally G. Narodick



                                                                              11
<PAGE>   15

STOCK PRICE PERFORMANCE GRAPH

Set forth below is a comparison of the five-year cumulative total shareholder
return (share price appreciation plus reinvested dividends) on the Company's
Common Stock against the cumulative total return of the Standard & Poor's 500
Stock Index, the EEI 100 Index of Investor-owned Electrics and the EEI
Combination Gas & Electric Investor-owned Utilities Index.


                        Five-Year Cumulative Total Return

<TABLE>
<CAPTION>
                                        1992       1993      1994      1995      1996      1997
                                        ----       ----      ----      ----      ----      ----
<S>                                     <C>       <C>       <C>       <C>       <C>       <C>
Puget Sound Energy                      $100      $ 98.1    $ 86.9    $108.8    $121.1    $163.1
S&P 500 Index                           $100      $110.1    $111.5    $153.4    $188.7    $251.6
EEI 100 Index                           $100      $111.2    $ 98.3    $128.8    $130.3    $166.0
EEI Combination Gas & Electric Index    $100      $111.7    $ 97.3    $123.9    $123.1    $159.2
</TABLE>


This comparison assumes $100 was invested on December 31, 1992, in (a) the
Company's Common Stock, (b) the S&P 500 Stock Index, (c) the EEI 100 Index of
Investor-owned Electrics and (d) the EEI Combination Gas & Electric
Investor-owned Utilities Index. The graph then observes, in each case, stock
price growth and dividends paid (assuming dividend reinvestment) over the
following five years.

The EEI 100 Index, which was also included in the Company's 1997 proxy
statement, will not be included in future proxy statements. Future proxy
statements will include only the EEI Combination Gas & Electric Investor-owned
Utilities Index, since the Company is now a combined electric and gas business.

The Board of Directors and its Compensation and Retirement Committee recognize
that the market price of stock is influenced by many factors, one of which is
Company performance. The stock price contribution to the total return
performance shown on the graph is not necessarily indicative of future price
performance.



12

<PAGE>   16

       SUMMARY COMPENSATION TABLE

       THE FOLLOWING INFORMATION IS FURNISHED FOR THE YEARS ENDED DECEMBER 31,
       1997, 1996, AND 1995 WITH RESPECT TO THE NAMED EXECUTIVE OFFICERS.
       COMPENSATION INCLUDES AMOUNTS DEFERRED AT THE OFFICER'S ELECTION.



<TABLE>
<CAPTION>
                                                         Annual                           Long-Term Compensation
                                                       Compensation                               Awards
                                         ------------------------------------------- ------------------------------
                                                                       Other         Restricted
  Name and                                                             Annual         Stock            LTIP             All Other
  Principal Position in 1997(1)   Year   Salary ($)   Bonus ($)   Compensation ($)(2) Award ($)(3)    Payouts ($)    Compensation($)
-------------------------------- ------ ------------ ----------- ------------------- ------------- ---------------- ----------------
<S>                               <C>      <C>                <C>     <C>               <C>        <C>                   <C>
  R. SONSTELIE                    1997     483,903            0                                    466,310(4)            127,487(5)
  CHAIRMAN AND                    1996     400,008      155,000                                                           17,604
  CHIEF EXECUTIVE OFFICER         1995     388,817      140,000                                                           15,736

  W. WEAVER                       1997     299,598            0                                        208,046(4)        128,549(6)
  PRESIDENT                       1996     260,004      100,000                                                           13,608
                                  1995     256,275       80,000                         199,996                           12,309

  J. TORGERSON                    1997     196,652       35,750        35,210                          144,850(7)         23,115(8)
  VICE PRESIDENT
  AND CHIEF FINANCIAL OFFICER

  G. SWOFFORD                     1997     181,333       13,875                                        132,719(4)        130,851(9)
  VICE PRESIDENT                  1996     165,000       45,000                                                            6,593
  CUSTOMER OPERATIONS             1995     163,138       40,000                                                           44,812

  T. HOGAN                        1997     161,144       27,100        31,360                           84,329(7)         24,249(10)
  VICE PRESIDENT
  SYSTEM OPERATIONS
</TABLE>



<PAGE>   17



SUMMARY COMPENSATION TABLE FOOTNOTES

(1)  EFFECTIVE JANUARY 13, 1998, MR. WEAVER WAS ALSO NAMED CHIEF EXECUTIVE
     OFFICER. MR. SONSTELIE REMAINS CHAIRMAN OF THE BOARD.

     MR. TORGERSON BECAME AN EXECUTIVE OFFICER OF THE COMPANY IN FEBRUARY 1997
     AND RESIGNED FROM THE COMPANY EFFECTIVE MARCH 13, 1998. THE TABLE INCLUDES
     THE FOLLOWING AMOUNTS PAID TO MR. TORGERSON IN 1997 BY WECO PRIOR TO THE
     MERGER: SALARY, $13,750; BONUS, $16,500; AND LTIP PAYOUTS, $144,850.

     MR. HOGAN BECAME AN EXECUTIVE OFFICER OF THE COMPANY IN FEBRUARY 1997. THE
     TABLE INCLUDES THE FOLLOWING AMOUNTS PAID TO MR. HOGAN IN 1997 BY WECO
     PRIOR THE MERGER: SALARY, $11,334; BONUS, $13,600, AND LTIP PAYOUTS,
     $84,329.

(2)  EXCEPT AS NOTED IN THE TABLE, THE AGGREGATE AMOUNT OF PREREQUISITES OR
     PERSONAL BENEFITS WAS LESS THAN THE REQUIRED REPORTING THRESHOLD (THE
     LESSER OF $50,000 AND 10% OF ANNUAL SALARY AND BONUS FOR THE NAMED
     EXECUTIVE OFFICER). AMOUNTS SHOWN FOR MESSRS. TORGERSON AND HOGAN INCLUDE
     $27,200 EACH FOR A ONE-TIME-ONLY VEHICLE ALLOWANCE, ALSO RECEIVED BY ALL
     OTHER WECO EXECUTIVES CONTINUING WITH THE COMPANY, ASSOCIATED WITH THE
     COMPANY'S POLICY TO NOT PROVIDE EXECUTIVES WITH COMPANY-PURCHASED
     AUTOMOBILES

(3)  ON JUNE 30, 1995, MR. WEAVER WAS GRANTED 8,743 PHANTOM SHARES. THE
     AGGREGATE VALUE OF THE PHANTOM SHARES WAS $199,996, BASED ON A STOCK PRICE
     AT JUNE 30, 1995 OF $22.875. THE PHANTOM SHARES VEST, SUBJECT TO CONTINUED
     EMPLOYMENT, EQUALLY OVER FOUR YEARS BEGINNING ON JULY 1, 1996, AND ARE
     VALUED AND PAID OUT IN CASH AS TO THE VESTED PORTION ON EACH SUCH DATE. THE
     PAYMENT VALUE OF EACH PHANTOM SHARE IS THE MARKET PRICE ON THE VESTING
     DATE, PLUS THE AGGREGATE DIVIDENDS PAID ON EACH SUCH SHARE DURING THE
     PERIOD THE PHANTOM SHARE IS HELD. AT DECEMBER 31, 1997, 4,372 PHANTOM
     SHARES WERE OUTSTANDING WITH AN AGGREGATE VALUE OF $131,991 (BASED ON A
     STOCK PRICE OF $30.19 PER SHARE AT DECEMBER 31, 1997). IN CONJUNCTION WITH
     MR. WEAVER'S APPOINTMENT AS CHIEF EXECUTIVE OFFICER ON JANUARY 13, 1998,
     THE COMPENSATION AND RETIREMENT COMMITTEE PAID MR. WEAVER A PRO-RATA VALUE
     OF THE PHANTOM SHARES AS OF DECEMBER 31, 1997, AND CANCELED THE REMAINING
     PHANTOM SHARES.

(4)  REPRESENTS PAYMENT OF A PSU AWARD FOR THE FOUR-YEAR CYCLE ENDED ON DECEMBER
     31, 1997. THE PSU AWARD ENTITLED THE HOLDER TO RECEIVE A CASH PAYMENT EQUAL
     TO (A) THE AVERAGE MARKET PRICE OF ONE SHARE OF COMMON STOCK DURING THE
     MONTH OF DECEMBER OF THE LAST YEAR OF THE FOUR-YEAR CYCLE, PLUS (B) THE
     AGGREGATE DIVIDENDS WITH RESPECT TO ONE SHARE OF COMMON STOCK FROM JANUARY
     1 OF THE YEAR IN WHICH THE PSU AWARD IS MADE UNTIL THE LAST DAY OF THE LAST
     MONTH OF THE FOUR-YEAR CYCLE. THE NUMBER OF PSUS ON WHICH VALUES WERE PAID
     WAS BASED ON THE COMPANY'S FOUR-YEAR AVERAGE TOTAL SHAREHOLDER RETURN
     RELATIVE TO THE COMPANIES IN THE EEI 100 INDEX OF INVESTOR-OWNED ELECTRICS.

(5)  REPRESENTS $3,900 MATCH UNDER THE INVESTMENT PLAN FOR EMPLOYEES; $22,800
     MATCH UNDER THE INVESTMENT PLAN MAKE-UP; $5,472 IMPUTED INCOME ON LIFE
     INSURANCE; AND $95,315 FOR A ONE-TIME PAYMENT IN CONNECTION WITH THE
     RESTRUCTURING OF THE COMPANY'S PAID-TIME-OFF ACCRUAL POLICY FOR ALL
     NON-UNION EMPLOYEES.

(6)  REPRESENTS $7,263 MATCH UNDER THE INVESTMENT PLAN FOR EMPLOYEES; $6,980
     MATCH UNDER THE INVESTMENT PLAN MAKEUP; $7,392 IMPUTED INCOME ON LIFE
     INSURANCE; AND $106,914 FOR A ONE-TIME PAYMENT IN CONNECTION WITH THE
     RESTRUCTURING OF THE COMPANY'S PAID-TIME-OFF ACCRUAL POLICY FOR ALL
     NON-UNION EMPLOYEES.

(7)  THE LTIP PAYMENTS FOR MESSRS. TORGERSON AND HOGAN WERE IN PAYMENT OF
     PERFORMANCE SHARES GRANTED BY WECO PRIOR TO THE MERGER, WHOSE VESTING WAS
     ACCELERATED UPON CONSUMMATION OF THE MERGER.

(8)  REPRESENTS $7,852 MATCH UNDER THE INVESTMENT PLAN FOR EMPLOYEES; $3,366
     MATCH UNDER THE INVESTMENT PLAN MAKE-UP; $2,294 IMPUTED INCOME ON LIFE
     INSURANCE; AND $9,603 FOR A ONE-TIME PAYMENT IN CONNECTION WITH THE
     RESTRUCTURING OF THE COMPANY'S PAID-TIME-OFF ACCRUAL POLICY FOR ALL
     NON-UNION EMPLOYEES.

(9)  REPRESENTS $4,008 MATCH UNDER THE INVESTMENT PLAN FOR EMPLOYEES; $26,710
     MATCH UNDER THE INVESTMENT PLAN MAKE-UP; $1,448 IMPUTED INCOME ON LIFE
     INSURANCE; AND $98,685 FOR A ONE-TIME PAYMENT IN CONNECTION WITH THE
     RESTRUCTURING OF THE COMPANY'S PAID-TIME-OFF ACCRUAL POLICY FOR ALL
     NON-UNION EMPLOYEES.

(10) REPRESENTS $5,404 MATCH UNDER THE INVESTMENT PLAN FOR EMPLOYEES; $3,438
     MATCH UNDER THE INVESTMENT PLAN MAKE-UP; $1,122 IMPUTED INCOME ON LIFE
     INSURANCE; AND $14,285 FOR A ONE-TIME PAYMENT IN CONNECTION WITH THE
     RESTRUCTURING OF THE COMPANY'S PAID-TIME-OFF ACCRUAL POLICY FOR ALL
     NON-UNION EMPLOYEES.



14

<PAGE>   18


AGGREGATED SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUES

The following information is furnished for the year ended December 31, 1997 with
respect to the named executive officers for SAR exercises which occurred during
1997 and for unexercised options and SARs outstanding at fiscal year end. No
options or SARs were granted in 1997.

<TABLE>
<CAPTION>
   -------------------------------------------------------------------------------------------------
                      Number of                                                  Value of Unexercised
                       Shares                  Number of Shares Underlying              In-The-
                     Underlying     Value        Unexercised Options/SARs       Money Options/SARs at
                      Exercised    Realized       at Fiscal Year-End (#)         Fiscal Year-End ($)
   Name               SARs (#)      ($)(1)      Exercisable/Unexercisable     Exercisable/Unexercisable(2)
   -------------------------------------------------------------------------------------------------
<S>                    <C>         <C>             <C>                           <C>
   R. Sonstelie        37,960      254,522         28,640 / 10,800               112,622 / 77,202
   
   W. Weaver             --           --           13,640 / 5,060                 63,862 / 37,729

   J. Torgerson          --           --           22,267 / 1,956                216,315 / 28,636
   
   G. Swofford          3,600       25,884          2,560 / 3,040                  6,566 / 24,298

   T. Hogan              --           --           15,828 / 1,129                154,100 / 15,828
</TABLE>



(1) This amount is the aggregate of the market value of the Common Stock at the
    time the SAR was exercised minus the base price for the SAR, plus the
    incremental value of per share dividend increases during the holding period.

(2) Amounts are the aggregate of the number of options/SARs multiplied by the
    difference between the closing price of the Common Stock on the New York
    Stock Exchange on December 31, 1997 of $30.19 per share minus the exercise
    or base price for that option/SAR. There is no guarantee that if and when
    these options/SARs are exercised they will have this value.

As a result of the Merger, each outstanding WECo stock option, including
outstanding options then held by Messrs. Torgerson and Hogan, were converted
into Company options at the same exercise price and term as the WECo options.
The options issued in substitution for previously granted WECo options are not
shown as options granted in 1997. Mr. Torgerson exercised options to purchase
22,267 shares on January 2, 1998. His remaining options for 1,956 shares were
paid in accordance with his change-in-control agreement with WECo, which was
assumed by the Company. See "Employment Contracts Termination of Employment and
Change-In-Control Arrangements".



                                                                              15

<PAGE>   19

LONG-TERM INCENTIVE PLAN AWARDS IN 1997

The following information is furnished for the year ended December 31, 1997 with
respect to the named executive officers for the grants made under the Company's
1995 Long-Term Incentive Compensation Plan during 1997.



<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                        Estimated Future Share Payouts
                                                  --------------------------------------------
                     Number of     Period Until
                      Shares      Maturation or     Threshold       Target         Maximum
Name                   (#)(1)         Payout           (#)            (#)            (#)
----------------------------------------------------------------------------------------------
<S>                   <C>            <C>                <C>          <C>            <C>
R. Sonstelie          15,900         4 years            0            15,900         27,825


W. Weaver              7,520         4 years            0             7,520         13,160


J. Torgerson           4,035(2)      4 years            0             4,035          7,061


G. Swofford            2,750         4 years            0             2,750          4,813


T. Hogan               2,750(3)      4 years            0             2,750          4,813
</TABLE>



(1) Awards are contingent grants of the Company's Common Stock. The number of
    shares delivered at the end of the four-year cycle will range from zero to
    175% of the contingent grant. This number depends on the Company's four-year
    total shareholder return compared to the returns reported in the EEI 100
    Index of Investor-owned Electrics. Dividend equivalents will be paid in cash
    at the end of the performance period in relation to the number of underlying
    shares earned.

(2) In addition to the 1997 grant shown here, Mr. Torgerson also received 1,757
    shares for the 1995 - 1998 LTIP cycle and 2,361 shares for the 1996 - 1999
    LTIP cycle, reflecting a pro-rated participation in those plan cycles. Mr.
    Torgerson's LTIP awards were paid in accordance with his change-in-control
    agreement with WECo, which was assumed by the Company. See "Employment
    Contracts, Termination of Employment and Change-In-Control Arrangements."

(3) In addition to the 1997 grant shown here, Mr. Hogan also received 1,440
    shares for the December 1995 - 1998 LTIP cycle and 1,935 shares for the 1996
    - 1999 LTIP cycle, reflecting a pro-rated participation in those plan
    cycles.



16

<PAGE>   20


RETIREMENT BENEFITS STATEMENT

Estimated retirement benefits for the named executive officers are shown in the
table below, assuming retirement on January 1, 1998 at age 62 after selected
periods of service. The benefit levels shown are the estimated aggregate values
resulting from the Company's funded pension plan, its Supplemental Executive
Retirement Plan (the "SERP"), WNG Nonqualified Retirement Plan benefits, the
SERP pension-type rollover accounts in the Deferred Compensation Plan and the
Cash Balance Restoration Matching Account within the Deferred Compensation Plan.
The benefits shown in the table are not subject to any deduction for Social
Security benefits.


            Estimated Annual Benefit Upon Retirement at Age 62

<TABLE>
<CAPTION>
            FINAL AVERAGE
            COMPENSATION                    YEARS OF CREDITED SERVICE
            ------------            --------------------------------------------
                                         5               10              15+
                                        --               --              ---
<S>                                 <C>               <C>              <C>
              $100,000              $ 16,667          $ 33,333         $ 50,000
               200,000                33,333            66,667          100,000
               300,000                50,000           100,000          150,000
               400,000                66,667           133,333          200,000
               500,000                83,333           166,667          250,000
               600,000               100,000           200,000          300,000
</TABLE>


The named executive officers have the following years of credited service as of
December 31, 1997: R. Sonstelie, 23.5; W. Weaver, 29.5; J. Torgerson, 9.17; G.
Swofford, 30.42; and T. Hogan, 21.33. Estimated aggregate benefits are based on
50% of average annual compensation (salary plus bonus) for the highest three
calendar years in the last five complete calendar years prior to retirement (or
the highest 24 consecutive months for Mr. Weaver; see "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements"). The three-year
averages (24 consecutive month average for Mr. Weaver) as of December 31, 1997
are as follows for the named executive officers: R. Sonstelie, $539,777; W.
Weaver, $431,428; J. Torgerson, $202,092; G. Swofford, $198,157; T. Hogan,
$171,095.



                                                                              17

<PAGE>   21



EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS


AGREEMENTS

Mr. Sonstelie entered into an employment agreement with the Company effective as
of January 13, 1998, which replaced an employment agreement dated October 18,
1995. The agreement provides that Mr. Sonstelie will serve as Chairman of the
Company's Board of Directors (assuming his election to the Board by the
Company's shareholders) until the Board's regularly scheduled meeting in January
2000, and perform such other duties as are properly requested of him by the
Board or the Company's President and Chief Executive Officer. The agreement,
which terminates on March 31, 2000 (subject to earlier termination in certain
circumstances), provides that Mr. Sonstelie will devote his full working time to
the Company during the term of the agreement.

During his term of employment, Mr. Sonstelie will receive a base annual salary
of $500,000. Mr. Sonstelie will also participate in the Company's Pay At Risk
plans for 1998 and 1999, with a target award of 40% of base salary, and in the
Long-Term Incentive Compensation Plan, with grants of 6,580 and 3,660
performance units in the 1998-2001 and 1999-2002 cycles, respectively. The value
of these awards will be based on Company performance through March 31, 2000.

Mr. Sonstelie will receive vacation, medical, life and disability insurance
benefits during the term of the agreement on terms substantially as favorable as
those provided to other executives, and will be eligible to participate in the
Company's Retirement Plan, Investment Plan, Deferred Compensation Plan and SERP.
In addition, Mr. Sonstelie will receive an enhanced benefit under the Company's
SERP because his SERP benefit will not be reduced for early commencement on
April 1, 2000.

Mr. Sonstelie will also receive a severance payment upon his retirement equal to
three times the base annual salary described above, and medical, dental and life
insurance benefits for three years after his retirement.

If the Company terminates the agreement (except termination "for cause" as
defined in the agreement), or Mr. Sonstelie's employment terminates due to death
or disability prior to the end of the term of the agreement, Mr. Sonstelie will
be entitled to receive all compensation and benefits provided for in the
agreement through such term.

In addition, if Mr. Sonstelie's employment terminates due to a material adverse
change in the terms of his employment following a "change in control" (as
defined in the agreement), except termination for cause or termination due to
death or incapacity, Mr. Sonstelie will be entitled to receive (a) his annual
base salary earned through termination and accrued benefits; (b) an amount equal
to his annual base salary at the rate applicable on the date of termination plus
any additional compensation awarded for the year most recently ended, multiplied
by the number of years or partial years remaining until March 31, 2000; (c)
continued participation until March 31, 2000 in the Company's employee benefit
plans or provision for substantially similar benefits; (d) a payment equal to
the difference between the exercise prices of all options or similar rights, if
any, held by Mr. Sonstelie (whether or not then fully exercisable) and the
higher of (i) the market price of the Common Stock on the date of termination
and (ii) the highest price per share actually paid in connection with any change
in control of the Company; and (e) a cash payment equal to any excise taxes
payable by Mr. Sonstelie in connection with excess parachute payments plus the
tax expense to him resulting from this payment.



18

<PAGE>   22

Messrs. Weaver and Swofford have agreements with the Company under which they
will be entitled to receive certain payments and benefits if (1) Mr. Weaver's
employment terminates for any reason other than at the normal retirement date as
defined in the SERP or (2) Mr. Swofford terminates his employment for "good
reason" or the Company terminates his employment "without cause" (as those terms
are defined in the agreements) or his employment is terminated upon death or
disability. Messrs. Weaver and Swofford will be entitled to receive (a) annual
base salary earned through termination and accrued benefits; (b) an amount equal
to three times annual base salary at the rate applicable on the date of
termination plus any additional compensation awarded for the year most recently
ended; (c) continued participation for three years in the Company's employee
benefit plans or provision for substantially similar benefits; (d) a cash
payment at normal retirement date of an amount equal to the actuarial equivalent
of the additional retirement compensation they would have earned had employment
continued for three more years; (e) a payment equal to the difference between
the exercise prices of all options or similar rights, if any, held by them
(whether or not then fully exercisable) and the higher of (i) the market price
of the Common Stock on the date of termination and (ii) the highest price per
share actually paid in connection with any change in control of the Company; and
(f) a cash payment equal to any excise taxes payable by them in connection with
excess parachute payments plus the tax expense to them resulting from this
payment.

In addition, Mr. Weaver's agreement provides that the benefits payable to him
under the SERP will be based upon his average compensation for his highest
consecutive 24 months of service rather than the period otherwise specified in
the SERP. The agreement for Mr. Swofford provides that he will be paid a
retention incentive benefit based on continued employment for an extended period
following the Merger equal to three times his annual base salary in 1996 plus
the bonus paid in 1996. The incentive benefit will vest in three equal
installments after one year, three years and five years of continued employment
after the Merger. The vested portion of the incentive benefit will be paid in
equal monthly installments over a three-year period beginning on the date his
employment terminates. If his employment is terminated for cause, only current
base salary plus accrued vacation and any other compensation actually accrued
through the date of termination, and the vested portion of the incentive
benefit, will be payable.


Messrs. Hogan and Torgerson entered into agreements effective as of August 17,
1995 with WECo, the predecessor company in the Merger, which have been assumed
by the Company. Under these agreements, Messrs. Torgerson and Hogan generally
are entitled to receive the same type of payments and benefits as described for
Messrs. Weaver and Swofford in sections (a) through (e) of the paragraph before
last if they terminate their employment for "good reason" or the Company
terminates their employment "without cause" within three years following a
"change in control" (as those terms are defined in the agreements)."


1995 LONG-TERM INCENTIVE COMPENSATION PLAN

Under the Company's 1995 Long-Term Incentive Compensation Plan, in the event of
a sale of substantially all the assets or a liquidation of the Company or a
merger or consolidation of the Company as a result of which shareholders of the
Company receive cash, securities or other property in exchange for their shares
of Common Stock, each stock award that is at the time outstanding will
automatically accelerate so that each such award shall, immediately prior to
such corporate transaction, become 100% vested, except that such award will not
so accelerate except under certain circumstances where such award is assumed or
replaced in connection with the corporate transaction. The plan administrator
has the discretion, exercisable at any time before a sale, merger,
consolidation, reorganization, liquidation or change in control of the Company,
as defined by the plan administrator, to take such further action as it
determines to be necessary or advisable, and fair and equitable to holders, with
respect to awards under the Plan.





                                                                              19
<PAGE>   23
LONG TERM INCENTIVE PROGRAM FOR SENIOR MANAGEMENT

Under the Company's Long-Term Incentive Program for Senior Management, upon
dissolution or liquidation of the Company, or merger or consolidation of the
Company as a result of which shareholders of the Company receive cash,
securities or other property in exchange for their shares of Common Stock, all
SARs will terminate, but each holder will have the right immediately prior to
such transaction to exercise his or her SARs, whether or not the SARs have
vested.



20

<PAGE>   24

INDEPENDENT PUBLIC ACCOUNTANTS

The firm of Coopers & Lybrand L.L.P. has examined the financial statements of
the Company since 1933. Representatives of the firm will be present at the
Annual Meeting, with the opportunity to make a statement and to answer
appropriate shareholder questions.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under Section 16 of the Securities Exchange Act of 1934, as amended, directors
and officers of the Company are required to report their holdings of and
transactions in the Company's Common Stock to the Securities and Exchange
Commission. To the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company and written representations that no
other reports were required, during 1997 all persons subject to the Section 16
reporting requirements with regard to the Company filed the required reports on
a timely basis, except that the Initial Statement of Beneficial Ownership for
Mr. Stephen A. McKeon, an officer of the Company, was inadvertently filed 94
days late.


SHAREHOLDER PROPOSALS

Any shareholder proposal intended for inclusion in the Company proxy material
for the 1999 Annual Meeting of Shareholders must be received at the principal
executive office of the Company not later than December 1, 1998.

SOLICITATION OF PROXIES

Proxies in the form enclosed are solicited by and on behalf of the Company.
William S. Weaver, President and Chief Executive Officer, and James W. Eldredge,
Corporate Secretary, and each or either of them, are named as proxies. Proxies
may be solicited by mail, personal interview, telephone and fax. It is
anticipated that banks, brokerage houses and other custodians, nominees or
fiduciaries will be requested to forward soliciting materials to their
principals and to obtain authorization for the execution of proxies and will be
reimbursed for their expenses incurred in connection therewith. Proxies may also
be solicited by officers, Directors, employees and other agents of the Company
without compensation therefor, except for reimbursement of expenses. All costs
of solicitation of proxies will be borne by the Company.

March 31, 1998
Bellevue, Washington
By Order of the Board of Directors

/s/  WILLIAM S. WEAVER
-------------------------------------
William S. Weaver
President and Chief Executive Officer


                                                                              21
<PAGE>   25

MAP TO ANNUAL MEETING


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PROXY                                                       
                                                       [PUGET SOUND ENERGY LOGO]
                                                      


                            PUGET SOUND ENERGY, INC.

           THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints WILLIAM S. WEAVER and JAMES W. ELDREDGE, and
each or either of them, as Proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as designated
below, all the shares of Common Stock of PUGET SOUND ENERGY, INC. held of record
by the undersigned on March 16, 1998, at the Annual Meeting of Shareholders to
be held on May 12, 1998, or any adjournment thereof.

       (This Proxy Card continues and MUST be signed on the reverse side)


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                                                                Please mark
                                                              your votes as
                                                               indicated in
                                                               this example. /X/



                                       FOR                     WITHHOLD
                              all nominees listed              AUTHORITY
                            below (except as marked         to vote for all
                             to the contrary below)      nominees listed below


1. ELECTION OF DIRECTORS              / /                         / /
   DOUGLAS P. BEIGHLE
   PHYLLIS J. CAMPBELL
   DONALD J. COVEY
   WILLIAM S. WEAVER


   (INSTRUCTION: To withhold authority to vote for any individual nominee, write
   that nominee's name in this space).


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   This proxy when properly executed will be voted in the manner directed herein
   by the undersigned shareholder. PROXY CARDS PROPERLY EXECUTED AND RETURNED
   WITHOUT DIRECTION WILL BE VOTED FOR PROPOSAL 1. In their discretion, the
   Proxies are authorized to vote upon such other business as may properly come
   before the meeting and any adjournment thereof.


   PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
   ENCLOSED ENVELOPE



Signature______________ Signature if Held Jointly__________________ Date________

Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.


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