UNITED STATES
                                             SECURITIES AND EXCHANGE COMMISSION
                                                   Washington, D.C. 20549

# FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

       OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

       For the transition period from __________ to __________

|            | Exact name of registrant as specified   | I.R.S.        
|----------- | --------------------------------------- | --------------
|            | in its charter, state of incorporation, | Employer      
|Commission  | address of principal executive offices, | Identification
|File Number | telephone number                        | Numbers       

|1-16305 | PUGET ENERGY, INC.                | 91-1969407
|------- | --------------------------------- | ----------
|        | A Washington Corporation.         |           
|        | 10885 N.E. 4th Street, Suite 1200 |           
|        | Bellevue, Washington 98004-5591   |           
|        | (425) 454-6363                    |           

|1-4393 | PUGET SOUND ENERGY, INC.          | 91-0374630
|------ | --------------------------------- | ----------
|       | A Washington Corporation.         |           
|       | 10885 N.E. 4th Street, Suite 1200 |           
|       | Bellevue, Washington 98004-5591   |           
|       | (425) 454-6363                    |           

---

Securities registered pursuant to
Section 12(b) of the Act:

| | TITLE OF EACH CLASS                                  | NAME OF EACH EXCHANGEON WHICH LISTED
| | ---------------------------------------------------- | ------------------------------------
| | Puget Energy, Inc.     Common Stock, $0.01 par value | N.Y.S.E.                            
| |                                                      |                                     
| | Preferred Share Purchase Rights                      | N.Y.S.E.                            
| |                                                      |                                     
| | Puget Sound Energy, Inc.     8.4% Capital Securities | N.Y.S.E.                            

Securities registered pursuant to
Section 12(g) of the Act:

| | TITLE OF
EACH CLASS                                                        | 
| | -------------------------------------------------------------------------- | 
| | Puget Sound Energy, Inc.     Preferred Stock, (cumulative, $100 par value) | 
| |                                                                            | 
| | 8.231% Capital Securities                                                  | 

Puget
Sound Energy, Inc. meets the conditions set forth in General  Instructions I(1)(a) and
(b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure
format.

Indicate
by check mark whether the registrants: (1) have filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrants were required to file such reports), and
(2) have been subject to such filing requirements for the past 90 days. 
                    Yes /X/  No /  /
        Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. / / 
        Indicate
by check mark whether Puget Energy, Inc. is an accelerated filer (as defined in Exchange
Act Rule 12b-2).  
                Yes /X/ No / / 
        Indicate
by check mark whether Puget Sound  Energy,  Inc. is an  accelerated  filer (as defined in
Exchange Act Rule 12b-2). 
                 Yes /  /  No /X /
        The
aggregate market value of the voting stock held by non-affiliates of Puget Energy, Inc. at
June 30, 2003 (the last business day of Puget Energys most recently completed second
fiscal quarter) was approximately $2,238,688,000. The number of shares of Puget Energy,
Inc.s common stock outstanding at February 27, 2004 was 99,246,495 shares.

All
of the outstanding shares of voting stock of Puget Sound Energy, Inc. are held by Puget
Energy, Inc.

Documents Incorporated by
Reference

Portions
of the Puget Energy, Inc. proxy statement for its 2004 Annual Meeting of Shareholders to
be filed with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2003 are incorporated by reference in Part III hereof.

This
Annual Report on Form 10-K is a combined report being filed separately by two different
registrants: Puget Energy, Inc. and Puget Sound Energy, Inc. Puget Sound Energy, Inc.
makes no representation as to the information contained in this report relating to Puget
Energy, Inc. and the subsidiaries of Puget Energy, Inc. other than Puget Sound Energy,
Inc. and its subsidiaries.

---

---

INDEX

|                          
|--------------------------
|Definitions               
|Forward-Looking Statements
|Part I                    

| |    |                                                     |                                      
| | -- | --------------------------------------------------- | -------------------------------------
| | 1. | Business                                            |                                      
| |    |                                                     | General                              
| |    |                                                     | Regulation and Rates                 
| |    |                                                     | Utility Industry Overview            
| |    |                                                     | Electric Operating Statistics        
| |    |                                                     | Electric Supply                      
| |    |                                                     | Gas Operating Statistics             
| |    |                                                     | Gas Supply                           
| |    |                                                     | Energy Conservation                  
| |    |                                                     | Environment                          
| |    |                                                     | Executive Officers of the Registrants
| | 2. | Properties                                          |                                      
| | 3. | Legal Proceedings                                  
| | 4. | Submission of Matters to a Vote of Security Holders

|       
|-------
|Part II

| |     |                                                                                         
| | --- | ----------------------------------------------------------------------------------------
| | 5.  | Market for Registrant's Common Equity and Related Shareholder Matters                   
| | 6.  | Selected Financial Data                                                                 
| | 7.  | Management's Discussion and Analysis of    Financial Condition and Results of Operations
| | 7a. | Quantitative and Qualitative Disclosures about Market Risk                              
| | 8.  | Financial Statements and Supplementary Data                                             
| | 9.  | Changes in and Disagreements with Accountants on Accounting
   and Financial Disclosure 
| | 9a. | Controls and Procedures                                                                 

|        
|--------
|Part III

| |     |                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------
| | 10. | Directors and Executive Officers of the Registrants                                              
| | 11. | Executive Compensation                                                                           
| | 12. | Security Ownership of Certain Beneficial Owners and Management
   and Related Stockholder Matters
| | 13. | Certain Relationships and Related Transactions                                                   
| | 14. | Principal Accountant Fees and Services                                                           
| | 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                  
|
| |     | Signatures                                                                                       
| |     | Report of Management                                                                             
| |     | Report of Independent Auditors - Puget Energy, Inc.                                              
| |     | Report of Independent Auditors - Puget Sound Energy, Inc.                                        
| |     | Exhibit Index                                                                                    

DEFINITIONS

|AFUDC                 | Allowance for Funds Used During Construction              
|--------------------- | ----------------------------------------------------------
|                      |                                                           
|BPA                   | Bonneville Power Administration                           
|                      |                                                           
|CAISO                 | California Independent System Operator                    
|                      |                                                           
|Chelan                | Public Utility District No. 1 of Chelan County, Washington
|                      |                                                           
|Dth                   | Dekatherm (one Dth is equal to one MMBtu)                 
|                      |                                                           
|FASB                  | Financial Accounting Standards Board                      
|                      |                                                           
|FERC                  | Federal Energy Regulatory Commission                      
|                      |                                                           
|FIN                   | Financial Accounting Standards Board Interpretation       
|                      |                                                           
|FPA                   | Federal Power Act                                         
|                      |                                                           
|InfrastruX            | InfrastruX Group, Inc.                                    
|                      |                                                           
|KW                    | Kilowatts                                                 
|                      |                                                           
|kWh                   | Kilowatt Hours                                            
|                      |                                                           
|LIBOR                 | London Interbank Offered Rate                             
|                      |                                                           
|LNG                   | Liquefied Natural Gas                                     
|                      |                                                           
|MMBtu                 | One Million British Thermal Units                         
|                      |                                                           
|MW                    | Megawatts (one MW equals one thousand KW)                 
|                      |                                                           
|MWh                   | Megawatt Hours                                            
|                      |                                                           
|NOPR                  | Notice of Proposed Rulemaking                             
|                      |                                                           
|NWP                   | Williams Northwest Pipeline Corporation                   
|                      |                                                           
|PCA                   | Power Cost Adjustment                                     
|                      |                                                           
|PGA                   | Purchased Gas Adjustment                                  
|                      |                                                           
|PG&E                  | Pacific Gas & Electric Company                            
|                      |                                                           
|PSE                   | Puget Sound Energy, Inc.                                  
|                      |                                                           
|PUDs                  | Washington Public Utility Districts                       
|                      |                                                           
|Puget Energy          | Puget Energy, Inc.                                        
|                      |                                                           
|PURPA                 | Public Utility Regulatory Policies Act                    
|                      |                                                           
|RFP                   | Request for Proposal                                      
|                      |                                                           
|RTO                   | Regional Transmission Organization                        
|                      |                                                           
|SFAS                  | Statement of Financial Accounting Standards               
|                      |                                                           
|SMD                   | FERC Standard Market Design                               
|                      |                                                           
|Washington Commission | Washington Utilities and Transportation Commission        

---

FORWARD-LOOKING STATEMENTS

Puget
Energy, Inc. (Puget Energy) and Puget Sound Energy, Inc. (PSE) are including the following
cautionary statement in this Form 10-K to make applicable and to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by or on behalf of Puget Energy or PSE. This report
includes forward-looking statements, which are statements of expectations, beliefs, plans,
objectives, assumptions of future events or performance. Words or phrases such as
anticipates, believes, estimates, expects,
intends, plans, predicts, projects,
will likely result, will continue or similar expressions identify
forward-looking statements. 
        Forward-looking
statements involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed. Puget Energys and PSEs expectations,
beliefs and projections are expressed in good faith and are believed by Puget Energy and
PSE, as applicable, to have a reasonable basis, including without limitation
managements examination of historical operating trends, data contained in records
and other data available from third parties; but there can be no assurance that Puget
Energys and PSEs expectations, beliefs or projections will be achieved or
accomplished. 
        In
addition to other factors and matters discussed elsewhere in this report, some important
factors that could cause actual results or outcomes for Puget Energy and PSE to differ
materially from those discussed in forward-looking statements include:

| | Risks relating
to the regulated utility business (PSE)
| | ------------------------------------------------------

| | governmental
policies and regulatory actions, including those of the Federal Energy Regulatory
Commission (FERC) and the Washington Utilities and Transportation Commission (Washington
Commission), with respect to allowed rates of return, financings, industry and rate
structures, transmission and generation business structures within PSE, acquisition and
disposal of assets and facilities, operation and construction of electric generating
facilities, distribution and transmission facilities, licensing of hydro operations,
recovery of other capital investments, recovery of power and gas costs, recovery of
regulatory assets, and present or prospective wholesale and retail competition;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | financial
difficulties of other energy companies and related events, which may affect the
regulatory and legislative process in unpredictable ways and also adversely affect the
availability of and access to capital and credit markets;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | wholesale
market disruption, which may result in a deterioration in market liquidity, increase the
risk of counterparty default, affect the regulatory and legislative process in
unpredictable ways, limit the availability of and access to capital credit markets,
affect wholesale energy prices and/or impede PSEs ability to manage its energy
portfolio risks;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
effect of wholesale market structures (including, but not limited to, new market design
such as Regional Transmission Organization (RTO) West and Standard Market Design);
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | weather,
which can have a potentially serious impact on PSEs revenues and its ability to
procure adequate supplies of gas, fuel or purchased power to serve its customers and on
the cost of procuring such supplies;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | hydroelectric
conditions, which can have a potentially serious impact on electric capacity and PSEs
ability to generate electricity;
|- | -------------------------------------------------------------------------------------------------------------------------------------

| | the
amount of collection, if any, of PSEs receivables from the California Independent
System Operator (CAISO) and the amount of refunds found to be due from PSE to the CAISO
or others;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | industrial,
commercial and residential growth and demographic patterns in the service territories of
PSE;
|- | ---------------------------------------------------------------------------------------------------------

| | general
economic conditions in the Pacific Northwest;
|- | -----------------------------------------------------

| | the
loss of significant customers or changes in the business of significant customers, which
may result in changes in demand for PSE's services;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | plant
outages, which can have an impact on PSEs expenses and its ability to procure
adequate supplies to replace the lost energy;
|- | ----------------------------------------------------------------------------------------------------------------------------------

| | the
ability to renew contracts for electric and gas supply and the price of renewal;
|- | ------------------------------------------------------------------------------------

| | blackouts
or large curtailments of transmission systems, whether PSEs or others, which
can have an impact on PSEs ability to deliver load to its customers; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
ability to relicense FERC hydro projects at a cost-effective level.
|- | -----------------------------------------------------------------------

| | Risks
relating to the non-regulated utility service business (InfrastruX Group, Inc.)
| | -------------------------------------------------------------------------------------

| | the
failure of InfrastruX to service its obligations under its credit agreement, in which
case Puget Energy, as guarantor, may be required to satisfy these obligations, which
could have a negative impact on Puget Energys liquidity and access to capital;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
inability to generate internal growth at InfrastruX, which could be affected by, among
other factors, InfrastruXs ability to expand the range of services offered to
customers, attract new customers, increase the number of projects performed for existing
customers, hire and retain employees and open additional facilities;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
ability of InfrastruX to integrate acquired companies within existing operations without
substantial costs, delays or other operational or financial problems, which involves a
number of special risks;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
effect of competition in the industry in which InfrastruX competes, including from
competitors that may have greater resources than InfrastruX, which may enable them to
develop expertise, experience and resources to provide services that are superior in both
price and quality;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
extent to which existing electric power and gas companies or prospective customers will
continue to outsource services in the future, which may be impacted by, among other
things, regional and general economic conditions in the markets InfrastruX serves;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | delinquencies
associated with the financial conditions of InfrastruX's customers;
|- | ---------------------------------------------------------------------------------

---

| | the
impact of any goodwill impairments on the results of operations of InfrastruX arising
from its acquisitions, which could have a negative effect on the results of operations of
Puget Energy;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
impact of adverse weather conditions that negatively affect operating conditions and
results; and
|- | -----------------------------------------------------------------------------------------------------

| | the
ability to obtain adequate bonding coverage and the cost of such bonding.
|- | -----------------------------------------------------------------------------

| | Risks
relating to both the regulated and non-regulated businesses
| | -----------------------------------------------------------------

| | the
impact of acts of terrorism or similar significant events, such as the attack on September 11, 2001;
|- | --------------------------------------------------------------------------------------------------------

| | the
ability of Puget Energy, PSE and InfrastruX to access the capital markets to support
requirements for working capital, construction costs and the repayment of maturing debt;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | capital
market conditions, including changes in the availability of capital or interest rate
fluctuations;
|- | ----------------------------------------------------------------------------------------------------------

| | changes
in Puget Energys or PSEs credit ratings, which may have an adverse impact on
the availability and cost of for Puget Energy, PSE and InfrastruX;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | legal
and regulatory proceedings;
|- | ---------------------------------

| | changes
in, and compliance with, environmental and endangered species laws, regulations,
decisions and policies concerning the environment, natural resources, and fish and
wildlife (including the Endangered Species Act);
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | employee
workforce factors, including strikes, work stoppages, availability of qualified employees
or the loss of a key executive;
|- | ----------------------------------------------------------------------------------------------------------------------------------

| | the
ability to obtain and keep patent or other intellectual property rights to generate revenue;
|- | ------------------------------------------------------------------------------------------------

| | the
ability to obtain adequate insurance coverage and the cost of such insurance; and
|- | -------------------------------------------------------------------------------------

| | the
impacts of natural disasters such as earthquakes, hurricanes or landslides.
|- | -------------------------------------------------------------------------------

Any
forward-looking statement speaks only as of the date on which such statement is made,
and, except as required by law, Puget Energy and PSE undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New factors
emerge from time to time and it is not possible for management to predict all such
factors, nor can it assess the impact of any such factor on the business or the extent to
which any factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement.

---

PART I

ITEM 1. BUSINESS

GENERAL 
        Puget
Energy, Inc. (Puget Energy) is an energy services holding company incorporated in the
State of Washington in 1999. All of its operations are conducted through its subsidiaries,
Puget Sound Energy, Inc. (PSE), a utility company, and InfrastruX Group, Inc.
(InfrastruX), a construction services company. Puget Energy has no significant assets
other than the stock of its subsidiaries. Subject to limited exceptions, Puget Energy is
exempt from regulation as a public utility holding company pursuant to Section 3(a)(1) of
the Public Utility Holding Company Act of 1935. Puget Energy and PSE are collectively
referred to herein as the Company. The following table provides the
percentages of Puget Energys consolidated operating revenues and net income
generated and assets held by the reportable segments:

|Segment            | Percent of Revenue | Percent of Net Income | Percent of Assets
|------------------ | ------------------ | --------------------- | -----------------
|                   | 2003               | 2002                  | 2001             
|Puget Sound Energy |                    | 86                    | .0%              
|InfrastruX         |                    | 13                    | .7%              
|Other subsidiaries |                    | 0                     | .3%              

Additional
financial data regarding these segments are included in Note 19 to the Consolidated
Financial Statements included with this report.

PUGET ENERGY STRATEGY        Puget
Energy is the parent company of the 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 transmission and distribution. Puget
Energys business strategy is to generate stable earnings and cash flow by focusing
primarily on the regulated utility business conducted through PSE. The key elements of
this strategy include:

| | Focus
on regulated utility business. PSE intends to continue to focus on its core electric and
natural gas transmission and distribution utility business, offering reliable electric
and gas service at a fair value to PSEs customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Add
electric generation and delivery infrastructure to meet customer needs. Ensuring stable,
cost-based energy supply is one of PSEs highest priorities. As regional demand for
energy continues to grow, PSEs committed power supply resources will not be
adequate to meet anticipated demand, especially as existing long-term power purchase
contracts begin to expire. The collapse of the merchant energy industry has resulted in
the cancellation or delay of power plant construction projects that were expected to meet
the regions supply needs at competitive prices. Accordingly, PSE has begun the
process of acquiring generation to meet load by purchasing a 49.85% interest in a 275 MW
(250 MW capacity with 25 MW planned capital improvements) gas-fired electric generating
facility located within PSEs service territory, which is anticipated to be
completed in the second quarter of 2004. Also, PSE has issued a request for proposals (RFP)
to acquire approximately 50 average MW of energy from wind power for its electric
resource portfolio and issued an RFP in February 2004 for an additional 305 MW of new
electric-power resources. PSE will also continue its expenditures on conservation through
utility programs and an RFP for another 30 average MW of energy efficient projects. In
addition to these strategies to increase capacity and energy, PSE will continue to focus
on operational excellence and efficiency in the utility business through investment in,
and development of, systems, technology and personnel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rebuild
financial strength to fund energy infrastructure and manage energy portfolio. PSE intends
to focus on the regulated business to provide credit quality, liquidity and predictable
earnings to attract investors in Puget Energy. During 2003, Puget Energy was able to
attract investors and sell additional common stock to those investors.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | Provide
return to Puget Energy shareholders through earnings growth and dividends. Generate
return and attract equity capital through growth in PSE and InfrastruX earnings and
dividends.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Achieve
PSE earnings growth. PSE earnings will grow through rebuilding common equity and
increasing the ratebase by adding generating and delivery resources where needed with
timely cost recovery. Puget Energy was able to invest additional capital in PSE through
the sale of its common stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Focus
on InfrastruX growth.Focus on internal earnings growth opportunities within the
InfrastruX subsidiaries.
| | --------------------------------------------------------------------------------------------------------------

PUGET SOUND ENERGY, INC.        PSE
is a public utility incorporated in the State of Washington. PSE furnishes electric and
gas service in a territory covering approximately 6,000 square miles, principally in the
Puget Sound region of the State of Washington.
        At
December 31, 2003, PSE had approximately 977,700 electric customers, consisting of 861,900
residential, 109,700 commercial, 4,000 industrial and 2,100 other customers; and
approximately 644,600 gas customers, consisting of 593,800 residential, 48,000 commercial,
2,700 industrial and 100 transportation customers. At December 31, 2003, approximately
310,900 customers purchased both forms of energy from PSE. For the year 2003, PSE added
approximately 19,700 electric customers and approximately 22,600 gas customers,
representing annualized growth rates of 2.1% and 3.6% respectively. During 2003,
PSEs billed retail and transportation revenues from electric utility operations,
excluding conservation trust collections, were derived 48% from residential customers, 43%
from commercial customers, 7% from industrial customers and 2% from transportation and
other customers. PSEs retail revenues from gas utility operations were derived 64%
from residential customers, 29% from commercial customers, 5% from industrial customers
and 2% from transportation customers. During this period the largest customer accounted
for approximately 1% of PSEs operating revenues. 
        PSE
is affected by various seasonal weather patterns throughout the year and, therefore,
utility revenues and associated expenses are not generated evenly during the year.
Variations in energy usage by consumers occur from season to season and from month to
month within a season, primarily as a result of weather conditions. PSE normally
experiences its highest retail energy sales in the first and fourth quarters of the year.
Sales of electricity to wholesale customers also vary by quarter and year depending
principally upon economic factors and weather conditions. PSE has a purchased gas
adjustment (PGA) mechanism in retail gas rates to recover variations in gas supply and
transportation costs. PSE also has a power cost adjustment (PCA) mechanism in electric
rates to recover variations in electricity costs on a shared basis between customers and
PSE.
        In
the five-year period ended December 31, 2003, PSEs gross electric utility plant
additions were $941 million and retirements were $210 million. In the five-year period
ended December 31, 2003, PSEs gross gas utility plant additions were $551 million
and retirements were $76 million. In the same five-year period, PSEs gross common
utility plant additions were $211 million and retirements were $45 million. Gross electric
utility plant at December 31, 2003 was approximately $4.3 billion, which consisted of 59%
distribution, 27% generation, 6% transmission and 8% general plant and other. Gross gas
utility plant as of December 31, 2003 was approximately $1.7 billion, which consisted of
86% distribution, 6% transmission and 8% general plant and other. Gross common utility
general and intangible plant at December 31, 2003 was approximately $391 million.

INFRASTRUX GROUP, INC.
        InfrastruX
was incorporated in the State of Washington in 2000 to pursue the non-regulated
construction services business. InfrastruX is a national leader in providing
infrastructure construction services to the electric and gas utility industries.
InfrastruX has acquired 12 companies, primarily in the south/Texas, the north-central and
eastern United States, that are engaged in some or all of the following services and
activities in their respective regions or nationally:

| |  | Electric:
Overhead and underground power line and cable construction, installation and maintenance,
including high-voltage transmission and distribution lines, copper and fiberoptic cables;
duct installation; revitalization and damage prevention for underground power lines and
cables using the patented Cablecure® treatment; substation construction; and other
specialty services for new and existing infrastructures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| |  | Gas:
Large-diameter pipeline installation and maintenance; service lines and meters;
conventional river crossings and bridge maintenance; cathodic protection; power station
fabrication and installation; vacuum excavation; hydrostatic testing; internal pipeline
inspection; product pipelines; and other specialty services for distribution and
transmission pipeline services including small, mid-size and large-bore directional
drilling for virtually all pipeline diameters and soil conditions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

InfrastruX
is affected by seasonal weather conditions and, therefore, revenues and associated
expenses are not generated evenly during the year. InfrastruX will usually experience its
highest revenues in the second and third quarters of the year, as spring and summer months
are routinely the most productive time of year for the construction industry due to longer
daylight hours and generally better weather conditions. 
        InfrastruXs
operating strategy revolves around leveraging the synergies of a core group of outstanding
infrastructure construction contractors whose asset base, expertise, local knowledge,
relationships and years of successful operations form a strong base for a growing
business. The ability to share workforce, production equipment and expertise within and
between regional geographies allows InfrastruX to provide local support for its customers
and also move quickly to provide additional services as needs arise. The formation of
regional service centers in 2003, where appropriate, is providing enhanced oversight and
control as well as cost efficiencies surrounding back office operations, equipment control
and other operational areas.
        The
construction services industry is both highly competitive and highly fragmented as a
result of low barriers to entry, the historical geographic segmentation of utility
customers and the natural limitations of service delivery. Competitors of InfrastruX
include large established and emerging national companies and many smaller regional
companies. Puget Energy believes that InfrastruXs competitive strengths, including a
diverse customer base, long-standing relationships with several key customers and
operational expertise in construction services will benefit InfrastruX, but there can be
no assurance that a competitor will not be able to develop expertise, experience and
resources to provide services that are superior in quality or price to InfrastruXs
services. 
        While
the general outlook appears to be improving, in the near term, InfrastruXs market
opportunities will continue to be constrained by the general economic and utility industry
downturn that has resulted in reduced spending on infrastructure construction, including
large pipeline and utility projects, by many of InfrastruXs customers. As a result,
competition on project bids will continue to be very strong, which may reduce profit
margins and adversely impact revenue growth. Puget Energy management continues to believe
that in the long term the opportunities for InfrastruX are excellent given an aging
transmission and distribution infrastructure, forecasted growth in energy demand and the
need for greater network infrastructure construction services.

EMPLOYEES        At
December 31, 2003, Puget Energy and its subsidiaries had approximately 5,164 full-time
employees:

|Puget Sound Energy | 2,155
|------------------ | -----
|InfrastruX         | 3,009
|Total Puget Energy | 5,164

Approximately
1,100 PSE employees are represented by the International Brotherhood of Electrical Workers
Union (IBEW) or the United Association of Plumbers and Pipefitters (UA). The labor
contracts with the IBEW and UA run through 2007 and 2006, respectively. 
        Approximately
400 InfrastruX employees are represented by the IBEW, UA, United Steelworkers of America,
Laborers International Union of North America or other unions. Some unions have annual
contract renewals while others have multiple-year contracts.

---

CORPORATE LOCATION
        Puget
Energys and PSEs principal executive offices are located at 10885 N.E. 4th
Street, Suite 1200, Bellevue, Washington 98004 and the telephone number is (425) 454-6363.

AVAILABLE INFORMATION
        The
Companys website address is www.pse.com. The Companys reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 are available or may be accessed free of charge through the Investors section
of the Companys website as soon as reasonably practical after the reports are
electronically filed with, or furnished to, the SEC. The Companys website and the
information contained therein or connected thereto are not intended to be incorporated
into this Annual Report on Form 10-K. 
        In
addition, the following corporate governance materials of the Company are available in the
Investors section of the Companys website, and a copy will be mailed upon request to
Puget Energy, Inc., Investor Services, P.O. Box 97034, PSE-08S, Bellevue, Washington
98009-9734:

| |  | Corporate
Governance Guidelines;
| | - | --------------------------------

| |  | Corporate Ethics and Compliance Code
| | - | ------------------------------------

| |  | Audit
 Committee,  Governance and Public Affairs  Committee and Compensation  and Leadership
 Development  Committee          charters;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | Code
of Ethics for the Companys Chief Executive Officer and senior financial officers.
| | - | ---------------------------------------------------------------------------------------

If
the Company waives any material provision of its Code of Ethics for its Chief Executive
Officer and senior financial officers or its Corporate Ethics and Compliance Code, or substantively changes
 the codes for any specific officer, the Company will disclose that
waiver on its website within five business days.

REGULATION AND RATES 
        PSE
is subject to the regulatory authority of (1) the Washington Commission as to retail
utility rates, accounting, the issuance of securities and certain other matters and (2)
FERC with respect to the transmission of electric energy, the resale of electric energy at
wholesale, accounting and certain other matters.

ELECTRIC RATES AND REGULATION
        On
October 24, 2003, PSE filed a request with the Washington Commission to increase its
electric rates $64.4 million to recover higher projected power supply costs. The proposed
rate increase includes, among other things, the recovery of the projected costs associated
with PSEs proposed acquisition of a 49.85% share of Frederickson Power LPs
Frederickson 1 generation facility (250 MW) located near Tacoma, Washington. 
        On
January 30, 2004, the Washington Commission staff filed testimony responding to PSEs
filing. The Washington Commission staffs testimony finds that the decision to
acquire the interest in the Frederickson 1 plant was prudent and that PSEs
costs to do so were reasonable. Accordingly, the Washington Commission staff recommended
to the Washington Commission that PSEs costs be recovered in rates. No other party
filed testimony questioning the decision or costs to acquire the Frederickson 1 plant.
Favorable treatment of this acquisition will benefit PSEs customers and PSE going
forward. 
        In
the same proceeding, Washington Commission staff and other parties, including the group
Industrial Customers of the Northwest Utilities (ICNU), filed testimony seeking downward
adjustments to PSEs proposed electric rate increase. Among other things, they
propose that a significant amount of PSEs future fuel costs associated with an
electric generating facility be disallowed for recovery in electric rates based upon their
interpretation of a 1994 Commission Order and a contention that PSE should have secured
fixed-price fuel supply options that were available in late 1997. After factoring in such
proposed fuel supply disallowances and certain lower estimates of future power costs which
would be trued-up to incurred actuals through PSEs PCA mechanism, the Washington
Commission staff recommends a net rate increase of $7.5 million as compared to PSEs
requested $64.4 million. If the Washington Commission were to adopt
the Washington Commission staffs or ICNUs recommendations, the proposed fuel
cost disallowances would adversely affect PSEs future financial performance.

---

PSE
believes that the fuel cost disallowances proposed by the Washington Commission staff are
legally and factually deficient, and PSE filed its rebuttal case on February 13, 2004.
Washington Commission staff is independent from the Washington Commission in such a
litigated proceeding and their positions do not represent an indication of the final
outcome of the proceeding. The hearing was held in late February and the resolution of the
power cost only rate case is expected by mid-April 2004. Another step in completing the
acquisition of the power generating facility is to obtain the approval of FERC in
accordance with the Federal Power Act (FPA). In December 2003, FERC issued an order in a
case involving Oklahoma Gas & Electric Company (OGE) that suggested that FERC would
scrutinize these transactions. In the OGE case, FERC has decided to hold hearings to
analyze the effects on market share and transmission availability that would flow from the
OGE acquisition. PSE took that decision into account when it filed its application in
January 2004. FERC issued a letter on February 12, 2004 in response to PSEs filing
seeking additional information. PSE responded to the request on February 27, 2004, and
still anticipates FERC approval of the acquisition in early 2004. 
        PSE
is currently preparing to file a general tariff electric rate case with the Washington
Commission in the second quarter of 2004. The resolution of the general rate case may be
up to an 11-month process from the time the general rate case is filed. 
        On
June 20, 2002, the Washington Commission issued final regulatory approval of the
comprehensive electric rate settlement submitted by PSE, key constituents and customer
groups, Washington Commission staff and the Washington State Attorney Generals
Public Counsel Section. The authorization granted PSE a 4.6% electric general rate
increase that began July 1, 2002, which was intended to generate approximately $59 million
in additional revenue annually. In addition, the settlement provided for an 8.76% overall
return on capital based on a projected capital structure with an equity component of 40%
and an authorized 11% return on common equity. The settlement resolved all electric and
gas cost allocation issues and established an 8.76% overall return on capital. 
        The
settlement also included a PCA mechanism that triggers if PSEs costs to provide
customers electricity falls outside certain bands from a normalized level of power
costs established in the electric general rate case. The cumulative maximum pre-tax
earnings exposure due to power cost variations over the four-year period ending June 30,
2006 is limited to $40 million plus 1% of the excess. All significant variable power
supply cost drivers are included in the PCA mechanism (hydroelectric generation
variability, market price variability for purchased power and surplus power sales, natural
gas and coal fuel price variability, generation unit forced outage risk and wheeling cost
variability). On an annual July through June basis, the mechanism apportions increases or
decreases in power costs, on a graduated scale, between PSE and its customers in the
following manner:

|Annual Power Cost Variability | Customers' Share | Company's Share (1)
|----------------------------- | ---------------- | -------------------
|+/- $20 million               |                  | 0                  
|+/- $20-$40 million           |                  | 50                 
|+/- $40-$120 million          |                  | 90                 
|+/- $120+ million             |                  | 95                 

(1)            Over
the four-year period July 1, 2002 through June 30, 2006, the Companys
          share of pre-tax power cost variations is capped at a cumulative $40 million
          plus 1% of the excess.

Interest
will be accrued on any overcollection or undercollection of the customers share of
the excess power cost that is deferred. PSE can request a PCA rate surcharge if for any
12-month period the actual or projected deferred power costs exceed $30 million.
PSEs cumulative share of the power costs through December 31, 2003 was $40 million.
Principally because of adverse hydro conditions and escalating gas costs for electric
generation in 2003, PSE reached the $40 million cumulative cap under the PCA mechanism in
the fourth quarter of 2003. During 2003, PSEs share of the excess power costs was
$34.8 million compared to $5.2 million for 2002. Under the PCA mechanism, further
increases in variable power costs through June 30, 2006 would be apportioned 99% to
customers and 1% to PSE. PSE is required to file a Compliance Filing with the Washington
Commission annually on June 30, in relation to the power costs under the PCA mechanism. 
        The
settlement also gave PSE the financial flexibility to rebuild its common equity ratio to
at least 39% over a three-and-one-half-year period, with milestones of 34%, 36% and 39% at
the end of 2003, 2004 and 2005, respectively. If PSE should fail to meet this schedule, it
would be subject to a 2% rate reduction penalty. As of December 31, 2003, PSE has restored
its common equity ratio to a 40% level, exceeding the required level for 2003 by 6%.

---

RESIDENTIAL AND SMALL FARM EXCHANGE CREDIT
        In
June 2001, PSE and Bonneville Power Administration (BPA) entered into an amended settlement
agreement regarding the Residential Purchase and Sale Program, under which PSEs
residential and small farm customers would continue to receive the benefits of federal
power. Completion of this agreement enabled PSE to continue to provide a Residential and
Farm Energy Exchange Benefit credit to residential and small farm customers. The amended
settlement agreement provides that, for its residential and small farm customers, PSE will
receive: (a) cash payment benefits during the period July 1, 2001 through September 30,
2006 and (b) benefits in the form of power or cash payments during the period October 1,
2006 through September 30, 2011. 
        Under
the amended settlement agreement regarding the Residential Purchase and Sale Program, PSE
reduces residential and small farm customers revenue on a per kWh basis through the
Residential and Farm Energy Exchange Benefit credit. The credit has no impact on
PSEs electric margin or net income, as a corresponding reduction is included in
purchased electricity expenses. The amended settlement agreement regarding the Residential
Purchase and Sale Program provides PSEs residential and small farm customers the
benefits of lower-cost federal power. 
        On
June 17, 2002, PSE entered into an agreement with BPA, which modified the payment
provisions of the amended settlement agreement to provide for conditional deferral of
payment by BPA of certain amounts to be paid under the original agreement. Under the
modified agreement, BPA deferred paying a portion of the benefits it would have otherwise
paid. The amount of benefits deferred was $3.5 million each month for the eight-month
period beginning February 2003, for a total deferral of $27.7 million. Contemporaneously
with entering into this agreement with PSE, BPA entered into other agreements similar to
the agreement with PSE through which other investor-owned utilities and BPA agreed to
BPAs deferral of payments in its fiscal year 2003. The total cumulative amount
deferred under the agreement with PSE and other such agreements equals $55 million. Absent
certain adjustments tied to a BPA rate adjustment clause, BPA will begin paying back the
amount deferred with interest over the 60-month period beginning October 1, 2006. 
        In
January 2003, PSE filed revised tariff sheets with the Washington Commission to reflect
this modification to the agreement between PSE and BPA. The Washington Commission accepted
the tariff changes and the Residential and Farm Energy Exchange Benefit credit was changed
to $0.01740 per kWh from $0.01817 per kWh for the period February 15, 2003 through
September 30, 2006. On June 30, 2003, BPA adopted its final Record of Decision in the
February 2003 rate case, which established a formula under the BPA rate adjustment clause
to be used in adjusting the rate that will affect the level of residential exchange
benefits for PSEs customers. The adjustment under the formula went into effect on
October 1, 2003, resulting in both a reduction of benefits of $1.0 million a month for a
12-month period and, under the modified amended settlement agreement mentioned above, an
offsetting acceleration of the payment of the above-described $27.7 million deferral. The
net result is no change in the cash being received from BPA for the 12-month period, but a
reduction in the total benefits to be received in the October 1, 2003 through September
30, 2011 period. 
        For
2003 and 2002, the Residential and Farm Energy Exchange Benefit credited to
customers was
$181.9 million and $156.8 million, respectively, with a related offset to power costs. PSE
received payments from BPA in the amount of $147.9 million and $171.2 million during 2003
and 2002, respectively. The difference between the customers credit and the amount
received from BPA either increases or decreases the previously deferred amount owed to
customers. The aggregated deferred amount is recorded on PSEs balance sheet as
restricted cash. Absent certain adjustments tied to the BPA rate adjustment clause
described above, the modified amended settlement agreement will provide for payments from
BPA in the amount of $630.6 million for the period January 2003 through September 2006 and
for a pass-through of the same amount to eligible residential and small farm customers. 
        On
October 23, 2003, PSE signed conditional settlement agreements including a Stipulation and
Agreement for Settlement, a Waiver and Covenant Not to Sue, and an Amendment No. 1 to the
amended settlement agreement. These conditional settlement agreements, which are now void
because certain conditions were not satisfied, included provisions for the dismissal of
certain lawsuits regarding residential exchange benefits, an elimination of the adjustment
mentioned above for the 12-month period commencing October 1, 2003, the deferral of the
receipt of certain benefits, a change in the methodology used to calculate residential
benefits in the October 1, 2006 through September 30, 2011 period, and elimination of a
risk premium that would otherwise have been payable by BPA under certain conditions under
the amended settlement agreement.

---

There
are several actions in the U.S. Ninth Circuit Court of Appeals against BPA, in which the
petitioners assert or may assert that BPA acted contrary to law or without authority in
deciding to enter into, or in entering into or performing, a number of contracts,
including the amended settlement agreement and the conditional settlement agreements
between BPA and PSE described above. BPA rates used in such amended settlement agreement
between BPA and PSE for determining the amounts of money to be paid to PSE as residential
exchange benefits during the period October 1, 2001 through September 30, 2006 have been
confirmed, approved and allowed to go into effect by FERC. There are also several actions
in the U.S. Ninth Circuit Court of Appeals against BPA, in which petitioners assert that
BPA acted contrary to law in adopting or implementing the rates or rate adjustment clause
upon which the benefits received or to be received from BPA during the October 1, 2001
through September 30, 2006 period are based. It is not clear what impact, if any, review
of such rates and the above-described District Court and U.S. Ninth Circuit Court of
Appeals actions may have on PSE.

GAS RATES AND REGULATION
        PSE
has a PGA mechanism in retail gas rates to recover variations in gas supply and
transportation costs. The PGA mechanism passes through to customers these variations in
gas rates, and therefore PSEs gas margin and net income are not affected by changes
in the PGA rates. The following rate adjustments were approved by the Washington
Commission in relation to the PGA during 2003, 2002 and 2001:

|EFFECTIVE DATE    | PERCENTAGE INCREASE
(DECREASE) IN RATES | ANNUAL INCREASE (DECREASE)
IN REVENUES
(DOLLARS IN MILLIONS)
|----------------- | --------------------------------------- | ------------------------------------------------------------
|October 1, 2003   |                                         |                                                             
|April 10, 2003    |                                         |                                                             
|November 1, 2002  |                                         |                                                             
|September 1, 2002 |                                         |                                                             
|June 1, 2002      |                                         |                                                             
|September 1, 2001 |                                         |                                                             
|January 12, 2001  |                                         |                                                             

On
August 28, 2002, the Washington Commission approved a 5.8% gas rate increase in general
rates to cover higher costs of providing natural gas services to customers. The increase
was intended to provide approximately $35.6 million annually in revenues. This rate
increase became effective September 1, 2002. 
        PSE
is currently preparing to file a general tariff gas rate case with the Washington
Commission in the second quarter of 2004. The resolution of the general rate case may be
up to an 11-month process from the time the general rate case is filed.

UTILITY INDUSTRY OVERVIEW
        FEDERAL REGULATION
        Since
the mid-1990s FERC has required public utilities operating under the FPA to provide open
access of their transmission systems to third parties under tariffs approved by FERC. As a
result of open access, there has been no material effect on the financial statements of
PSE. 
        On
July 31, 2002, FERC issued its Notice of Proposed Rulemaking on Remedying Undue
Discrimination through Open Access Transmission Service and Standard Electricity Market
Design (SMD NOPR). The SMD NOPR would have major implications for the delivery of electric
energy throughout the United States if enacted in its proposed form. Major elements of
FERCs proposal include: (a) The use of Network Access Service would replace the
existing network and point-to-point services. All customers, including load-serving
entities on behalf of bundled retail load, would be required to take network service under
a new pro forma tariff. (b) Vertically integrated utilities would be required to retain
Independent Transmission Providers to administer the new tariff and functionally operate
transmission systems. (c) Regional State Advisory Committees and other regional entities
would form to coordinate the planning, certification and siting of new transmission
facilities in cooperation with states. State regulators and industry representatives have
pointed out that the western North American electricity market has unique characteristics
that may not readily lend themselves to the SMD NOPR proposed by FERC. FERC has expressed
its willingness to offer regional flexibility in its order on RTO West, Docket Nos.
RT01-35-005 and RT01-35-007, issued September 18, 2002. In April 2003, FERC issued a white
paper responding to concerns of state regulators regarding the impact of the SMD NOPR
proposal on the western market. PSE cannot predict the outcome of the SMD NOPR or whether
the ultimate resolution will have a material impact on the financial condition, results of
operations or liquidity of the Company.

STATE REGULATION
        The
electric utility business in the State of Washington is fully regulated and provides
service to its customers under cost-based tariff rates. PSE is not aware of any proposals
or prospects for retail deregulation in the State of Washington.

        Since
1986 PSE has been offering gas transportation as a separate service to industrial and
commercial customers who choose to purchase their gas supply directly from producers and
gas marketers. The continued evolution of the natural gas industry, resulting primarily
from FERC Orders 436, 500 and 636, has served to increase the ability of large gas
end-users to independently obtain gas supply and transportation services. Although PSE has
not lost any substantial industrial or commercial load as a result of such activities, in
certain years up to 160 customers annually have taken advantage of unbundled
transportation service; in 2003, 134 commercial and industrial customers, on average,
chose to use such service. The shifting of customers from sales to transportation does not
materially impact utility margin, as PSE earns similar margins on transportation service
as it does on large-volume, interruptible gas sales.

---

ELECTRIC OPERATING
STATISTICS

|TWELVE MONTHS ENDED DECEMBER 31                     | 2003 |  | 2002 |            | 2001 |  
|--------------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|                                                   
|Generation and purchased power-kWh (thousands):     |      |  |      |            |      |  
|Company-controlled resources                        |      |  |      | 6,965,840  |      |  
|Contracted resources                                |      |  |      | 11,021,471 |      |  
|Non-firm energy purchased                           |      |  |      | 8,121,009  |      |  
|                                                   
|Total generation and purchased power                |      |  |      | 26,108,320 |      |  
|Less losses and company use                         |      |  |      | (1,338,401 | )    |  
|                                                   
|Total energy sold, kWh                              |      |  |      | 24,769,919 |      |  
|                                                   
|Electric energy sales, kWh (thousands):             |      | 
|Residential                                         |      |  |      | 9,845,854  |      |  
|Commercial                                          |      |  |      | 8,222,166  |      |  
|Industrial                                          |      |  |      | 1,372,815  |      |  
|Other customers                                     |      |  |      | 93,438     |      |  
|                                                   
|Total energy billed to customers                    |      |  |      | 19,534,273 |      |  
|Unbilled energy sales - net increase (decrease)     |      |  |      | 65,082     |      |  
|                                                   
|Total energy sales to customers                     |      |  |      | 19,599,355 |      |  
|Sales to other utilities and marketers              |      |  |      | 5,170,564  |      |  
|                                                   
|Total energy sales, kWh                             |      |  |      | 24,769,919 |      |  
|                                                   
|Less: optimization purchases for sales to other     |      | 
|utilities and marketers                             |      |  |      | (62,200    | )    |  
|Transportation, including unbilled                  |      |  |      | 2,020,562  |      |  
|                                                   
|Net electric energy sales and transported, kWh      |      |  |      | 26,728,281 |      |  
|                                                   
|Electric operating revenues by classes (thousands): |      | 
|Residential                                         |      |  | $    | 603,722    |      | $
|Commercial                                          |      |  |      | 556,038    |      |  
|Industrial                                          |      |  |      | 88,201     |      |  
|Other customers                                     |      |  |      | 54,259     |      |  
|                                                   
|Operating revenues billed to customers1             |      |  |      | 1,302,220  |      |  
|Unbilled revenues - net increase (decrease)         |      |  |      | 4,193      |      |  
|                                                   
|Total operating revenues from customers             |      |  |      | 1,306,413  |      |  
|Transportation, including unbilled                  |      |  |      | 11,542     |      |  
|Sales to other utilities and marketers              |      |  |      | 193,714    |      |  
|Less: optimization purchases for sales to other     |      | 
|utilities and marketers                             |      |  |      | (2,206     | )    |  
|                                                   
|Total electric operating revenues                   |      |  | $    | 1,509,463  |      | $
|                                                   
|Number of customers served (average):               |      | 
|Residential                                         |      |  |      | 854,088    |      |  
|Commercial                                          |      |  |      | 108,479    |      |  
|Industrial                                          |      |  |      | 3,952      |      |  
|Other                                               |      |  |      | 2,060      |      |  
|Transportation                                      |      |  |      | 16         |      |  
|                                                   
|Total customers (average)                           |      |  |      | 968,595    |      |  
|                                                   
|Average retail revenues per kWh sold:               |      | 
|Residential                                         |      |  | $    | 0.0617     |      | $
|Commercial                                          |      |  |      | 0.0680     |      |  
|Industrial                                          |      |  |      | 0.0650     |      |  
|Average retail revenue per kWh sold                 |      |  |      | 0.0646     |      |  
|                                                   
|Average revenue billed to residential customers     |      |  | $    | 711        |      | $
|Average kWh used by residential customers           |      |  |      | 11,528     |      |  
|                                                   
|Heating degree days                                 |      |  |      | 4,527      |      |  
|Percent of normal - NOAA 30-year average            |      |  |      | 94.4%      |      |  
|                                                   
|Load factor                                         |      |  |      | 73.5%      |      |  
|                                                   

|
|

1 Operating  revenues  in
 2003,  2002  and 2001  were  reduced  by $7.7  million,  $12.7  million  and  $31.0
 million, respectively,  as a result of PSE's sale of $237.7 million of its  investment
in  customer-owned  conservation  measures. Beginning July 2003,  these related  revenues
are now  consolidated as a result of Financial  Accounting  Standards Board
Interpretation  No. 46. (See "Operating  Revenues - Electric" in  Management's
 Discussion and Analysis and Note 1 to the Consolidated Financial Statements.)

ELECTRIC SUPPLY
        At
December 31, 2003, PSEs peak electric power resources were approximately 4,537,495
KW. PSEs historical peak load of approximately 4,847,000 KW occurred on
December 21, 1998. In order to meet an extreme winter peak load, PSE supplements its
electric power resources with call options and other instruments that may include, but are
not limited to, weather-related hedges and exchange agreements. During 2003, PSEs
total electric energy production was supplied 26.7% by its own resources, 19.9% through
long-term contracts with several of the Washington Public Utility Districts (PUDs) that
own hydroelectric projects on the Columbia River and 22.3% from other firm purchases.
Short-term wholesale purchases, net of sales to other utilities and marketers, accounted
for 14.1% of energy purchases in 2003. 
        The
following table shows PSEs electric energy supply resources at December 31, 2003 and
2002, and energy production during the year:

| |                                     |                                
| | ----------------------------------- | -------------------------------
| | PEAK POWER RESOURCESAT DECEMBER 31, | ENERGY PRODUCTION(IN THOUSANDS)

|                                              | 2003 | 2002      | 2003 | 2002
|--------------------------------------------- | ---- | --------- | ---- | ----
|                                             
|                                              |      | KW        |      | %   
|                                             
|Purchased resources:                          |     
|Columbia River PUD contracts                  |      | 1,349,460 |      | 29  
|Other hydro1                                  |      | 177,160   |      | 3   
|Other producers1                              |      | 1,209,675 |      | 26  
|Short-term wholesale energy 
      purchases2 |      | N/A       |      |     
|                                             
|Total purchased                               |      | 2,736,295 |      | 60  
|                                             
|Company-controlled resources:                 |     
|Hydro                                         |      | 310,400   |      | 6   
|Coal                                          |      | 700,000   |      | 15  
|Natural gas/oil                               |      | 790,800   |      | 17  
|                                             
|Total Company-controlled                      |      | 1,801,200 |      | 39  
|                                             
|Total                                         |      | 4,537,495 |      | 100 
|                                             

PSE
filed its electric Least Cost Plan on April 30, 2003 with the Washington Commission. The
plan supported a strategy of diverse electric power resource acquisitions including
resources fueled by natural gas and coal, renewable resources (e.g., wind) and shared
resources. A Least Cost Plan Update was filed in August 2003, which integrated
conservation programs into the resource mix. The Least Cost Plan was followed with the
proposed acquisition of a gas combined-cycle combustion turbine, and the issuing of a wind
resource RFP in December 2003. An all-source RFP was issued in February 2004.

---

COMPANY-CONTROLLED ELECTRIC GENERATION RESOURCES
        At
December 31, 2003, PSE has the following plants with an aggregate net generating capacity
of 1,801,200 KW:

|Plant Name                    | Plant Type                    | Total KWCapacity |  | Year Installed       
|----------------------------- | ----------------------------- | ---------------- |  | ---------------------
|Colstrip 1 & 2 (50% interest) | Coal                          | 330,000          |  | 1975 & 1976          
|Colstrip 3 & 4 (25% interest) | Coal                          | 370,000          |  | 1984 & 1986          
|Upper Baker River             | Hydro                         | 91,000           |  | 1959                 
|Lower Baker River             | Hydro                         | 79,000           |  | Reconstructed 1960   
|                              |                               |                  |  | Upgraded 2001        
|White River3                  | Hydro                         | 70,000           |  | 1911                 
|Snoqualmie Falls              | Hydro                         | 44,400           |  | 1898 to 1911 and 1957
|Electron                      | Hydro                         | 26,000           |  | 1904 to 1929         
|Fredonia Units 1 & 2          | Dual-fuel combustion turbines | 210,000          |  | 1984                 
|Fredrickson Units 2 & 3       | Dual-fuel combustion turbines | 150,000          |  | 1981                 
|Whitehorn Units 2 & 3         | Dual-fuel combustion turbines | 150,000          |  | 1981                 
|Fredonia Units 3 & 4          | Dual-fuel combustion turbines | 108,000          |  | 2001                 
|Encogen                       | Natural gas cogeneration      | 170,000          |  | 1993                 
|Crystal Mountain              | Internal combustion           | 2,800            |  | 1969                 

|
|

1 Power  received from other
 utilities is classified  between  hydro and other  producers  based on the character of
the   utility system used to supply the power or, if the power is supplied from a
particular resource,  the character of that   resource. 2 Short-term wholesale purchases net
of resales of 5,170,564 MWh and 6,063,076 MWh for 2003 and 2002, respectively,   account
for 14.1% and 7.4% of energy purchases. 3 Effective  January 15, 2004, the
White River generating  plant ceased  operations as a result of PSE rejecting the FERC
license.

PSE
and PPL Montana, the other owner of Colstrip Units 1 & 2, are engaged in a dispute
with Western Energy Company, a subsidiary of Westmoreland Coal Company, the supplier of
coal to the Colstrip power plants. The dispute is in the binding arbitration process and
concerns the price that PSE and PPL Montana will pay for coal under the contract for
Colstrip Units 1 & 2 through the end of the contract in 2009. This arbitration is
contemplated as a price adjustment mechanism in that contract. The present arbitration
schedule would resolve the dispute in the second quarter of 2004. Any price adjustment
could be retroactive to July 30, 2001 and would apply through the rest of the term. Fuel
supply costs for electric generation after July 1, 2002 are part of PSEs PCA
mechanism.  
        On
October 13, 2003, PSE received a letter from Western Energy Company that enclosed an Audit
Issue Letter dated July 25, 2003 from the Montana Department of Revenue, pertaining to
some allegedly underpaid royalties on coal purchased by PSE from Western Energy Company
between February 1997 and June 2000. PSE used the coal as fuel for its share of the
Colstrip Units 3 & 4 generating plant. PSEs coal price for that period was
reduced by a settlement PSE and Western Energy Company had entered into in 1997. Western
Energy Company takes the position that PSE must reimburse Western Energy Company for any
additional charges that result from the Audit Issue Letter. The Audit Issue Letter seeks
payment of over $1.1 million for royalties for the federal government. If that position is
correct, it could raise issues of other royalties and taxes that might apply. PSE will
investigate and defend this claim vigorously. PSE cannot predict the outcome of this
issue.

FERC HYDROELECTRIC LICENSES
        As
part of its hydroelectric operations, PSE is required to obtain licenses from FERC. A
typical license contains mandatory conditions of operation, such as flow rate
requirements, adherence to certain ramping protocols for outages, maintenance of reservoir
levels, equipment upgrade projects, and fish and wildlife mitigation projects. The
licensing and relicensing processes involve harmonizing conflicting rights and obligations
of numerous governmental, non-governmental and private parties, and dealing with issues
that may include environmental compliance, fish protection and mitigation, water quality,
Native American rights, private landowner rights, title claims, operational and capital
improvements, and flood control. As a result, a number of political, compliance and
financial risks can arise from the licensing and relicensing processes. 
        PSE
owns four hydroelectric projects: the Baker River Project, the Snoqualmie Falls Project,
the Electron Project and the White River Project. The Baker River and Snoqualmie Falls
Projects are operating under the jurisdiction of FERC. FERC regulates dam safety and
administers proceedings under the FPA to license jurisdictional hydropower projects. FERC
licenses are generally issued for a term of 30-50 years. The Baker River and
Snoqualmie Falls Projects are currently in FERC relicensing proceedings. Relicensing
proceedings involve multiple parties and interests, and frequently take several years to
complete. Relicensing proceedings also invoke the jurisdiction of other federal and state
agencies, and these agencies determine various matters that affect the terms and
conditions of the FERC license. The Electron Project is not subject to FERC jurisdiction.
The White River Project was shut down on January 15, 2004 as a result of PSEs
rejection of the FERC license that made the project uneconomical to operate. 
        Baker
River Project. The Baker River Project consists of the Lower Baker Development
(constructed in 1925) and the Upper Baker Development (constructed in 1959) and is located
upstream of the confluence of the Baker and Skagit Rivers in Whatcom and Skagit Counties.
The project has a current authorized capacity of 170.0 MW. The project was licensed for 50
years, effective May 1, 1956. The projects current license expires on April 30,
2006, and PSE will issue its Notice of Intent to file a new license application in April
2004. Consultation has been

---

initiated with the National Marine Fisheries Service and
United States Fish and Wildlife Service under Section 7 of the Endangered Species Act, and
consultation is ongoing with PSE acting as the non-federal representative during said
consultation. PSE anticipates submitting a new license application to relicense the
project on or before April 30, 2004. 
        Snoqualmie
Falls Project. The Snoqualmie Falls Project, built in 1898, was the worlds first
electric generating facility to be built totally underground. It is located 3.5 miles
downstream of the confluence of the North, Middle and South Forks of the Snoqualmie River.
The project has a current authorized capacity of 44.4 MW. The original license of the
project was issued May 13, 1975, effective March 1, 1956, and terminated on December 31,
1993. PSE filed its application to relicense the project on November 25, 1991, and has
been operating the project pursuant to annual licenses issued by FERC since the original
license expired. 
        All
necessary federal and state review processes prerequisite to FERCs issuance of a new
license were completed as of October 2003. The Snoqualmie Tribe filed an appeal of the
State of Washington, Department of Ecologys water quality certification in November
2003, which appeal is presently pending before the Washington State Pollution Control
Hearings Board. The matter is set for hearing on March 22, 2004. The outcome of this
matter is not expected to have a material impact upon the financial condition, results of
operations or liquidity of the Company. 
        Electron
Project.The Electron Project was built in 1904 in the upper reaches of the Puyallup
River. The projects capacity is currently 26.0 MW. In 1977, the project was
determined to be a pre-1935 project under the FPA and therefore
not subject to FERC jurisdiction. In this status, the project can continue to operate
without a FERC license absent post-1935 construction of a nature sufficient to
invoke FERCs jurisdiction. PSE does not anticipate undertaking any betterments or
improvements to the project that would entail post-1935 construction.
        The
project also operates in compliance with the terms and conditions of a Resource
Enhancement Agreement with the Puyallup Indian Tribe. This agreement resolved the
Tribes long-standing claims for resource and other damages allegedly associated with
the construction and operation of the project. The agreement also provides that in 2018
PSE must decide to either retire the project by 2026 or, in lieu of retirement, undertake
significant upgrades that would likely invoke FERC jurisdiction. The outcome of these
deliberations is not expected to have a material impact upon the financial condition,
results of operations or liquidity of the Company. 
        White
River Project. The White River Project was built in 1911 and was operated as a hydropower
facility until January 15, 2004. The projects capacity was 70.0 MW. For many years,
the project was believed to fall outside of the jurisdiction of the FPA. In the 1970s,
FERCs jurisdiction over the project was established. PSE submitted a license
application to FERC in 1983. In December 1997, FERC issued a proposed license for the
project. PSE appealed the 1997 license because it contained terms and conditions that
would render ongoing operations of the project uneconomic relative to alternative
resources. In November 2003, PSE determined that it could no longer continue to
economically operate the project due to additional conditions related to two listings
under the Endangered Species Act. On December 23, 2003, PSE notified FERC of its intent to
reject the 1997 license, cease generation of electricity and terminate the FERC licensing
proceeding. PSE is actively seeking to sell the project to one or more entities interested
in maintaining the reservoir for commercial purposes. 
        On
December 29, 2003, PSE entered into a one-year contract with the United States Army Corps
of Engineers (COE) to maintain operation of the White River diversion dam to support the
COEs ongoing operation of its Mud Mountain Dam fish passage facilities. The
agreement provides for reimbursement of a portion of PSEs operating costs and
directs PSE to operate the diversion dam in accordance with measures determined by federal
agencies to be necessary to protect listed species and habitat. Homeowners and others
interested in preserving the project reservoir (Lake Tapps) have expressed concern over
the possible loss of the reservoir and there has been a solicitation of interest in a
potential lawsuit against PSE to preserve the reservoir, but no such lawsuit has been
filed. In January 2001, certain environmental groups gave notice of their intent to sue
for alleged violations of the Endangered Species Act, but no such lawsuit has been filed. 
        On
December 10, 2003, PSE filed a petition with the Washington Commission for an Accounting
Order which will allow for rate recovery of the unrecovered investment in the project. The
resolution of this matter will be decided in the power cost only rate case, which is
expected by mid-April 2004. The Washington Commission staffs testimony in
PSEs pending power cost only rate case proceeding supports PSEs
petition. At December 31, 2003, the White River Project net book value totaled $68.4
million, which included $47.9 million of net utility plant, $15.2 million of capitalized
FERC licensing costs and $5.3 million of costs related to construction work in progress.
The FERC licensing costs and construction work in progress charges were deferred to a
regulatory asset. To meet the demands of PSEs retail customers, electric generation
after January 15, 2004 will be purchased from the wholesale energy market.

NEW GENERATION RESOURCES
        In
October 2003, PSE completed negotiations to purchase a 49.85% interest in a 275 MW (250 MW
capacity with 25 MW planned capital improvements) gas-fired electric generating facility
located within Western Washington. The purchase will add approximately 137 MW of electric
generation capacity to serve PSEs retail customers. PSE submitted a power cost only
rate case in October 2003 to the Washington Commission to recover the approximately $80
million cost of the new generating facility and other power costs. The power cost only
rate case is expected to last approximately five months, with an order anticipated to be
issued in mid-April 2004. Accordingly, the acquisition of the plant, subject to favorable
approval by the Washington Commission, could be completed by April 2004. In addition, the
acquisition will require approval from FERC under the FPA. PSE filed its application in
January 2004 with FERC and anticipates approval in early 2004. 
        In
addition, PSE has issued an RFP to acquire approximately 50 average MW of energy from wind
power for its electric-resource portfolio and is currently evaluating responses to this
request. PSE issued an RFP in February 2004 for an additional 305 MW of electric power
resource generation with proposals due back in March 2004.

COLUMBIA RIVER ELECTRIC ENERGY SUPPLY CONTRACTS
        During
2003, approximately 19.9% of PSEs energy output was obtained at an average cost of
approximately $0.0164 per kWh through long-term contracts with several of the Washington
PUDs that own and operate hydroelectric projects on the Columbia River. 
        PSEs
purchases of power from the Columbia River projects are on a cost of service
basis under which PSE pays a proportionate share of the annual debt service and operating
and maintenance costs of each project in proportion to the contractual shares that PSE has
rights to from such project. Such payments are not contingent upon the projects being
operable, which means PSE is required to make the payments

---

even if power is not being
delivered. These projects are financed through substantially level debt service payments,
and their annual costs may vary over the term of the contracts as additional financing is
required to meet the costs of major repairs or replacements or license requirements, or
changes to annual operating and maintenance expenses are required. 
        PSE
has contracted to purchase from Chelan County PUD (Chelan) a 50% share of the output of
the original units of the Rock Island Project, which percentage will remain unchanged for
the duration of the contract that expires in 2012. PSE has also contracted to purchase the
output of the additional Rock Island units for the duration of the contract. As of
December 31, 2003, PSEs aggregate capacity from all units of the Rock Island Project
was 413,900 KW. PSEs share of output of the additional Rock Island units may be
reduced by up to 10% per year. Chelan began withdrawing 5% of the power from the
additional Rock Island units for use in meeting its local load on July 1, 2000. The
maximum withdrawal that Chelan may make from the additional units is 50%. The schedule of
withdrawals by Chelan for the additional Rock Island units is as follows:

|                   |                       |                              
|------------------ | --------------------- | -----------------------------
|Date of Withdrawal | Withdrawal Percentage | PSE Capacity after Withdrawal
|July 1, 2003       | 10%                   | 75%                          
|February 1, 2005   | 10%                   | 65%                          
|July 1, 2005       | 10%                   | 55%                          
|November 1, 2006   | 5%                    | 50%                          

PSE
has contracted to purchase from Chelan 38.9% (505,000 KW of peak capacity as of December
31, 2003) of the annual output of the Rocky Reach Project, which percentage remains
unchanged for the remainder of the contract which expires in 2011. 
        PSE
has contracted to purchase from Douglas County PUD 31.3% (261,000 KW as of December 31,
2003) of the annual output of the Wells Project, the percentage of which remains unchanged
for the remainder of the contract which expires in 2018. 
        Early
in 2003, the Colville Confederated Tribes (Colville Tribe) presented a claim to Douglas
County PUD based upon allegedly unpaid past annual charges for the Wells Hydroelectric
Project for the use of Colville tribal lands. The Colville Tribe also claimed that annual
charges would also be due for periods into the future. Since April 2003, Douglas County
PUD and Colville Tribe representatives have discussed settlement of this issue. The
settlement discussions may lead to a resolution of the claim. A settlement of this claim
could affect the quantity or the price of the output of the Wells Project purchased by
PSE. PSE has contracted to purchase from Grant County PUD 8.0% (72,000 KW as of December
31, 2003) of the annual output of the Priest Rapids Development and 10.8% (98,000 KW of
peak capacity as of December 31, 2003) of the annual output of the Wanapum Development,
which percentages remain unchanged for the remainder of the original contract terms which
expire in 2005 and 2009, respectively. On December 28, 2001, PSE signed a contract offer
for new contracts for the Priest Rapids and Wanapum Developments. On April 12, 2002, PSE
signed amendments to those agreements which are technical clarifications of certain
sections of the agreements. Under the terms of these contracts, PSE will continue to
obtain capacity and energy for the term of any new FERC license to be obtained by Grant
County PUD. Grant County PUD filed an Application for New License for the Priest
Rapids Project on October 29, 2003. The new contracts' terms begin in November 2005
for the Priest Rapids Development and in November 2009 for the Wanapum Development. Unlike
the current contracts, in the new contracts PSEs share of power from the
developments declines over time as Grant County PUDs load increases. 
        On
March 8, 2002, the Yakama Nation filed a complaint with FERC, which alleged that Grant
County PUDs new contracts unreasonably restrain trade and violate various sections
of the FPA and Public Law 83-544. On November 21, 2002, FERC dismissed the complaint while
agreeing that certain aspects of the complaint had merit. As a result, FERC has ordered
Grant County PUD to remove specific sections of the contract which constrain the parties
to the Grant County PUD contracts from competing with Grant County PUD for a new license.
A rehearing was requested but was denied by FERC on April 16, 2003. Both the Yakama Nation
and Grant County PUD have appealed the FERC decision and the appeals have been
consolidated in the Ninth Circuit Court of Appeals.

ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH OTHER UTILITIES
        PSE
has entered into long-term firm purchased power contracts with other utilities in the West
region. PSE is generally not obligated to make payments under these contracts unless power
is delivered. 
        Under
a 1985 settlement agreement relating to Washington Public Power Supply System Nuclear
Project No. 3, in which PSE had a 5% interest, PSE is entitled to receive electric power
from BPA, beginning January 1, 1987, during the months of November through April. Under
the contract, PSE is guaranteed to receive not less than 191,667 MWh in each contract year
until PSE has received total deliveries of 5,833,333 MWh. PSE expects the contract to be
in effect until at least June 2008. Also pursuant to the 1985 settlement agreement, BPA
has an option to request that PSE deliver up to 56 MW of exchange energy to BPA in all
months except May, July and August for contract year 2003  2004. 
        On
October 31, 2003, a 15-year contract for the purchase of firm power and energy between
PacifiCorp and PSE expired under the terms of the agreement. The contract provided for 120
average MW of energy and 200 MW of peak capacity annually. 
        On
October 1, 1989, PSE signed a contract with The Montana Power Company, which subsequently
sold its utility assets to NorthWestern Corporation (NorthWestern) in 2002. Under the
contract, NorthWestern provides PSE 71 average MW of energy (97 MW of peak capacity) over
a 21-year period. This contract expires in December 2010. On September 14, 2003,
NorthWestern filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code. PSE has several long-term contracts with NorthWestern under which PSE jointly owns
facilities or purchases power or transmission services from NorthWestern. PSE and
NorthWestern entered into a settlement of one outstanding dispute concerning transmission
losses associated with power deliveries to PSE under the 21-year power purchase agreement
PSE has with NorthWestern. That settlement was approved by the bankruptcy court on
December 11, 2003. PSE does not expect the filing of NorthWesterns petition to
have a material impact upon the financial condition, results of operations or liquidity of
the Company. 
        PSE
executed an exchange agreement with Pacific Gas & Electric Company (PG&E) which
became effective on January 1, 1992. Under the agreement, 300 MW of capacity together with
up to 413,000 MWh of energy are exchanged seasonally each year. No payments are made under
this agreement. PG&E is a summer peaking utility and provides power during the months
of November through February. PSE is a

---

winter peaking utility and provides power during
the months of June through September. Each party may terminate the contract upon notifying
the other party at least five years in advance. On December 20, 2001, PSE notified
PG&E of its intent to terminate the agreement as of the end of 2006. In May 2002,
PG&E responded and stated its view that PSEs notice was void due to
PG&Es bankruptcy. PSE has not responded to the PG&E letter.

ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH NON-UTILITY GENERATORS
        As
required by the federal Public Utility Regulatory Policies Act, PSE entered into long-term
firm purchased power contracts with non-utility generators. The most significant of these
are the contracts described below which PSE entered into in 1989, 1990 and 1991 with
operators of natural gas-fired cogeneration projects. PSE purchases the net electrical
output of these three projects at fixed and annually escalating prices, which were
intended to approximate PSEs avoided cost of new generation projected at the time
these agreements were made. 
        On
February 24, 1989, PSE executed a 20-year contract to purchase 108 average MW of energy
and 123 MW of capacity, beginning in April 1993, from Sumas Cogeneration Company, L.P.,
which owns and operates a natural gas-fired cogeneration project located in Sumas,
Washington. 
        On
June 29, 1989, PSE executed a 20-year contract to purchase 70 average MW of energy and 80
MW of capacity, beginning October 11, 1991, from the March Point Cogeneration Company
(March Point), which owns and operates a natural gas-fired cogeneration facility known as
March Point Phase I located at the Equilon refinery in Anacortes, Washington. On
December 27, 1990, PSE executed a second contract (having a term coextensive with the
first contract) to purchase an additional 53 average MW of energy and 60 MW of capacity,
beginning in January 1993, from another natural gas-fired cogeneration facility owned and
operated by March Point, which facility is known as March Point Phase II and is located at
the Equilon refinery in Anacortes, Washington. 
        On
March 20, 1991, PSE executed a 20-year contract to purchase 216 average MW of energy and
245 MW of capacity, beginning in April 1994, from Tenaska Washington Partners, L.P., which
owns and operates a natural gas-fired cogeneration project located near Ferndale,
Washington. In December 1997 and January 1998, PSE and Tenaska Washington Partners entered
into revised agreements in which PSE became the principal natural gas supplier to the
project and power purchase prices under the Tenaska contract were revised to reflect
market-based prices for the natural gas supply. PSE obtained an order from the Washington
Commission creating a regulatory asset related to the $215 million restructuring payment.
Under terms of the order, PSE was allowed to accrue as an additional regulatory asset
one-half the carrying costs of the deferred balance over the first five years, which ended
December 2002. The balance of the regulatory asset at December 31, 2003 was $216.7
million, which will be recovered in electric rates through 2011. In the power cost only
rate case, the Washington Commission staff has identified a portion of this asset as a
possible disallowance for the future rate recovery. The power cost only rate case order
from the Washington Commission is expected in mid-April 2004. 
        In
December 1999, PSE bought out the remaining 8.5 years of one of the natural gas supply
contracts serving Encogen from Cabot Oil & Gas Corporation (Cabot) which provided
approximately 60% of the plants natural gas requirements. PSE became the replacement
gas supplier to the project for 60% of the supply under the terms of the Cabot agreement.
The balance of the regulatory asset at December 31, 2003 is $11.0 million, which will be
recovered in electric rates through 2008. In the power cost only rate case, the Washington
Commission staff has identified a portion of this asset as a possible disallowance for
future rate recovery. The power cost only rate case order from the Washington Commission
is expected in mid-April 2004.

ELECTRIC TRANSMISSION CONTRACTS WITH OTHER UTILITIES
        PSE
has entered into numerous transmission contracts with BPA to integrate electric generation
resources and energy contracts into the PSE system. These transmission contracts specify
that PSE will pay based on the contracted level of transmission service, regardless of
actual use.
        The
general transmission agreement with BPA provides for the integration of PSEs share
of the Colstrip Project and the PG&E exchange. The hourly demand limit is 1,161 MW.
This contract is effective through July 31, 2014. 
        PSE
has an additional six transmission agreements with BPA to integrate PSEs share of
the Mid-Columbia hydro projects. The hourly demand limit of all six contracts totals 1,136
MW. The contracts have remaining terms from 2 to 15 years. 
        PSEs
transmission expenses for integrating its firm resources was $35.1 million in 2003. The
transmission rates used by BPA for these contracts are effective through September 30,
2005. BPA rates change from time to time based upon BPAs rate cases. 
        In
October 1997, a 10-year power exchange agreement between PSE and Powerex (a subsidiary of
a British Columbia utility) became effective. Under this agreement, Powerex pays PSE for
the right to deliver up to 1,200,000 MWh annually to PSE at the Canadian border in
exchange for PSE delivering power to Powerex at various locations in the United States.
The agreement also allows Powerex to make up any exchange volumes not used up to two years
after the end of the annual period.

---

GAS OPERATING STATISTICS

|TWELVE MONTHS ENDED DECEMBER 31                                  | 2003 | 2002           | 2001
|---------------------------------------------------------------- | ---- | -------------- | ----
|                                                                
|Gas operating revenues by classes (thousands):                   |      |                |     
|Residential                                                      |      | $   401,717    |     
|Commercial firm                                                  |      | 149,671        |     
|Industrial firm                                                  |      | 24,164         |     
|Interruptible                                                    |      | 34,046         |     
|                                                                
|Total retail gas sales                                           |      | 609,598        |     
|Transportation services                                          |      | 13,796         |     
|Other                                                            |      | 10,836         |     
|                                                                
|Total gas operating revenues                                     |      | $   634,230    |     
|                                                                
|Number of customers served (average):                            |     
|Residential                                                      |      | 583,439        |     
|Commercial firm                                                  |      | 46,813         |     
|Industrial firm                                                  |      | 2,685          |     
|Interruptible                                                    |      | 611            |     
|Transportation                                                   |      | 134            |     
|                                                                
|Total customers                                                  |      | 633,682        |     
|                                                                
|Gas volumes, therms (thousands):                                 |     
|Residential                                                      |      | 500,116        |     
|Commercial firm                                                  |      | 216,951        |     
|Industrial firm                                                  |      | 36,890         |     
|Interruptible                                                    |      | 61,739         |     
|                                                                
|Total retail gas volumes, therms                                 |      | 815,696        |     
|Transportation volumes                                           |      | 209,497        |     
|                                                                
|Total volumes                                                    |      | 1,025,193      |     
|                                                                
|Working gas volumes in storage at year end, therms  (thousands): |     
|Jackson Prairie                                                  |      | 60,365         |     
|Clay Basin                                                       |      | 49,314         |     
|                                                                
|Average therms used  per customer:                               |     
|Residential                                                      |      | 857            |     
|Commercial firm                                                  |      | 4,634          |     
|Industrial firm                                                  |      | 13,739         |     
|Interruptible                                                    |      | 101,046        |     
|Transportation                                                   |      | 1,563,410      |     
|                                                                
|Average revenue per customer:                                    |     
|Residential                                                      |      | $          689 |     
|Commercial firm                                                  |      | 3,197          |     
|Industrial firm                                                  |      | 9,000          |     
|Interruptible                                                    |      | 55,722         |     
|Transportation                                                   |      | 102,955        |     
|                                                                
|Average revenue per therm sold:                                  |     
|Residential                                                      |      | $      0.803   |     
|Commercial firm                                                  |      | 0.690          |     
|Industrial firm                                                  |      | 0.655          |     
|Interruptible                                                    |      | 0.551          |     
|Average retail revenue per therm sold                            |      | 0.747          |     
|Transportation                                                   |      | 0.066          |     
|                                                                

---

GAS SUPPLY 
        PSE
currently purchases a blended portfolio of gas supplies ranging from long-term firm to
daily gas supplies from a diverse group of major and independent producers and gas
marketers in the United States and Canada. PSE also enters into short-term physical and
financial derivative instruments to hedge the cost of gas to serve its customers. All of
PSEs gas supply is ultimately transported through the facilities of Williams
Northwest Pipeline Corporation (NWP), the sole interstate pipeline delivering directly
into the Western Washington area.

|                                                                                                        | 2003 | 2002   
|------------------------------------------------------------------------------------------------------- | ---- | -------
|Peak Firm Gas Supply at December 31                                                                     |      | Dth per
|                                                                                                       
|Purchased gas supply:                                                                                   |     
|British Columbia                                                                                        |      | 167,200
|Alberta                                                                                                 |      | 76,700 
|United States                                                                                           |      | 98,400 
|                                                                                                       
|Total purchased gas supply                                                                              |      | 342,300
|                                                                                                       
|Purchased storage capacity:                                                                             |     
|Clay Basin                                                                                              |      | 54,900 
|Jackson Prairie                                                                                         |      | 54,200 
|LNG                                                                                                     |      | 69,400 
|                                                                                                       
|Total purchased storage capacity                                                                        |      | 178,500
|                                                                                                       
|Owned storage capacity:                                                                                 |     
|Jackson Prairie                                                                                         |      | 251,600
|Propane-air injection                                                                                   |      | 30,000 
|                                                                                                       
|Total owned storage capacity                                                                            |      | 281,600
|                                                                                                       
|Total peak firm gas supply                                                                              |      | 802,400
|                                                                                                       
|All
peak firm gas supplies and storage are connected to PSEs market with firm
transportation capacity.

For
baseload and peak-shaving purposes, PSE supplements its firm gas supply portfolio by
purchasing natural gas, injecting it into underground storage facilities and withdrawing
it during the winter heating season. Storage facilities at Jackson Prairie in Western
Washington and at Clay Basin in Utah are used for this purpose. PSE has been in the
process of expanding the storage capacity at Jackson Prairie since March 2003, and plans
to continue doing so through 2008. At the end of this project, PSE will have added
approximately 2,000,000 Dekatherms (one Dekatherm, or Dth, is equal to one million British
thermal units or MMBtu) of additional working storage capacity. Peaking needs are also met
by using PSE-owned gas held in NWPs liquefied natural gas (LNG) facility at
Plymouth, Washington, by producing propane-air gas at a plant owned by PSE and located on
its distribution system, and interrupting service to customers on interruptible service
rates. 
        In
1998, PSE took assignment from a third party of a peaking gas supply service contract
whereby PSE can divert up to 48,000 Dth per day of gas it supplies to Tenaska away from
the Tenaska Cogeneration Facility and toward its core gas load by causing Tenaska to
operate its facility on distillate fuel and paying the replacement costs of the distillate
fuel for such operations.
        PSE
expects to meet its firm peak-day requirements for residential, commercial and industrial
markets through its firm gas purchase contracts, firm transportation capacity, firm
storage capacity and other firm peaking resources. PSE believes it will be able to acquire
incremental firm gas supply to meet anticipated growth in the requirements of its firm
customers for the foreseeable future.

GAS SUPPLY PORTFOLIO
        For
the 2003-2004 winter heating season, PSE contracted for approximately 20.8% of its
expected peak-day gas supply requirements from sources originating in British Columbia
under a combination of long-term, medium-term and seasonal purchase agreements. Long-term
gas supplies from Alberta represent approximately 9.6% of the peak-day requirements.
Long-term and winter peaking arrangements with U.S. suppliers and gas stored at Clay Basin
make up approximately 19.1% of the peak-day portfolio. The balance of the peak-day
requirements is expected to be met with gas stored at Jackson Prairie, LNG held at
NWPs Plymouth facility and propane-air resources, which represent approximately
38.2%, 8.6% and 3.7%, respectively, of expected peak-day requirements. PSE also has the
ability to curtail service to wholesale-level customers on
interruptible service rates during a peak-day event.
        During
2003, approximately 35% of gas supplies purchased by PSE originated in British Columbia
while 22% originated in Alberta and 43% originated in the United States. The current firm,
long-term gas supply portfolio consists of arrangements with 22 producers and gas
marketers, with no single supplier representing more than 12% of expected peak-day
requirements. Contracts have remaining terms ranging from less than one year to eight
years. 
        PSEs
firm gas supply portfolio is structured to capitalize on regional price differentials when
they arise due to the nature of its

---

transportation arrangements. Gas and services are
marketed outside PSEs service territory (off-system sales) whenever on-system
customer demand requirements permit. The geographic mix of suppliers and daily, monthly
and annual take requirements permit some degree of flexibility in managing gas supplies
during off-peak periods to minimize costs.

GAS TRANSPORTATION CAPACITY
        PSE
currently holds firm transportation capacity on pipelines owned by NWP, Gas Transmission
Northwest and Duke Energy Gas Transmission. Accordingly, PSE pays fixed monthly demand
charges for the right, but not the obligation, to transport specified quantities of gas
from receipt points to delivery points on such pipelines each day for the term or terms of
the applicable agreements. 
        PSE
and WNG CAP I, a wholly-owned subsidiary of PSE, hold firm year-round capacity on NWP
through various contracts. PSE and WNG CAP I participate in the secondary pipeline
capacity market to achieve savings for PSEs customers. As a result, PSE and WNG CAP
I hold approximately 465,000 Dth per day of capacity due to capacity release and
segmentation transactions on NWP which provides firm delivery to PSEs service
territory. In addition, PSE holds approximately 413,000 Dth per day of seasonal firm
capacity on NWP to provide for delivery of stored gas during the heating season. PSE
has exchanged certain segments of its firm capacity with third parties to effectively
lower transportation costs. PSEs firm transportation capacity contracts with NWP
have remaining terms ranging from less than 1 year to 13 years. However, PSE has either
the unilateral right to extend the contracts under their current terms or the right of
first refusal to extend such contracts under current FERC orders. PSEs firm
transportation capacity on Gas Transmission Northwests pipeline, totaling
approximately 90,000 Dth per day, has a remaining term of 20 years. PSEs firm
transportation capacity on Duke Energy Gas Transmissions pipeline, totaling
approximately 40,000 Dth per day, has a remaining term of 11 years for approximately
25,000 Dth per day and has a remaining term of 16 years for approximately 15,000 Dth per
day.
        During
2003, NWP took one of its two parallel pipelines that serve Western Washington out of
service as a result of a second failure of the affected pipeline. Together, these two
pipelines had the ability to flow approximately 1,300,000 Dth per day of gas from British
Columbia. The loss of the affected pipeline reduced this ability to approximately 950,000
Dth per day. Prior to the second failure, the affected line had been operating at 80% of
its maximum allowable operating pressure. If the affected pipeline is not returned to
service, the loss could potentially decrease PSEs overall NWP capacity by 12%. NWP
is exploring options to meet firm contract obligations to PSE, which may include new
pipeline construction or purchase of firm capacity from customers of NWP who have excess
capacity. PSE does not expect the line to remain out of service indefinitely, and this
event, to date, has not adversely impacted PSEs ability to serve its customers. PSE
expects to continue meeting its customer needs throughout the pipeline repair or
remediation period.

GAS STORAGE CAPACITY
        PSE
holds storage capacity in the Jackson Prairie and Clay Basin underground gas storage
facilities adjacent to NWPs pipeline. The Jackson Prairie facility, operated and
one-third owned by PSE, is used primarily for intermediate peaking purposes since it is
able to deliver a large volume of gas over a relatively short time period. Combined with
capacity contracted from NWPs one-third stake in Jackson Prairie, PSE has peak firm
delivery capacity of over 349,000 Dth per day and total firm storage capacity exceeding
7,900,000 Dth at the facility. The location of the Jackson Prairie facility in PSEs
market area ensures supply reliability and provides significant pipeline demand cost
savings by reducing the amount of annual pipeline capacity required to meet peak-day gas
requirements. The Clay Basin storage facility is a supply area storage facility that is
used primarily to reduce portfolio costs through injections and withdrawals that take
advantage of market price volatility and is also used for system reliability. After the
release of capacity, PSE retains maximum firm withdrawal capacity of over 55,000 Dth per
day from the Clay Basin facility with total storage capacity of almost 6,700,000 Dth. The
capacity is held under two contracts with remaining terms of 10 and 16 years. The capacity
release contracts PSE has with multiple parties at the Clay Basin storage facility have
remaining terms of three months. PSEs maximum firm withdrawal capacity and total
storage capacity at Clay Basin is over 110,000 Dth per day and exceeds 13,000,000 Dth,
respectively, when PSE has not released any of the capacity.

---

LNG AND PROPANE-AIR RESOURCES
        LNG
and propane-air resources provide gas supply on short notice for short periods of time.
Due to their typically high cost, these resources are normally utilized as the supply of
last resort in extreme peak-demand periods, typically lasting a few hours or days. PSE has
a long-term contract for storage of 241,700 Dth of PSE-owned gas as LNG at NWPs
Plymouth facility, which equates to approximately three and one-half days supply at
a maximum daily deliverability of 70,500 Dth. PSE owns storage capacity for approximately
1.5 million gallons of propane. The propane-air injection facilities are capable of
delivering the equivalent of 30,000 Dth of gas per day for up to four days directly into
PSEs distribution system.

CAPACITY RELEASE
        FERC
provided a capacity release mechanism as the means for holders of firm pipeline and
storage entitlements to temporarily relinquish unutilized capacity to others in order to
recoup all or a portion of the cost of such capacity. Capacity may be released through
several methods including open bidding and by pre-arrangement. PSE continues to
successfully mitigate a portion of the demand charges related to both storage and NWP
pipeline capacity not utilized during off-peak periods through capacity release. WNG CAP I
was formed to provide additional flexibility and benefits from capacity release.
Capacity release benefits are passed on to customers through the PGA.

ENERGY CONSERVATION
        PSE
offers programs designed to help new and existing customers use energy efficiently. PSE
uses a variety of mechanisms including cost-effective financial incentives, information
and technical services to enable customers to make energy-efficient choices with respect
to building design, equipment and building systems, appliance purchases and operating
practices.
        Since
May 1997, PSE has recovered electric energy conservation expenditures through a tariff
rider mechanism. The rider mechanism allows PSE to defer the conservation expenditures and
amortize them to expense as PSE concurrently collects the conservation expenditures in
rates over a one-year period. As a result of the rider, there is no effect on earnings. 
        Since
1995, PSE has been authorized by the Washington Commission to defer gas energy
conservation expenditures and recover them through a tariff tracker mechanism. The tracker
mechanism allows PSE to defer conservation expenditures and recover them in rates over the
subsequent year. The tracker mechanism also allows PSE to recover an Allowance for Funds
Used to Conserve Energy on any outstanding balance that is not being recovered in rates.

ENVIRONMENT
        Puget
Energys operations are subject to environmental laws and regulation by federal,
state and local authorities. Due to the inherent uncertainties surrounding the development
of federal and state environmental and energy laws and regulations, Puget Energy cannot
determine the impact such laws may have on its existing and future facilities. (See Note
18 to the Consolidated Financial Statements for further discussion of environmental
sites.)

REGULATION OF EMISSIONS
        PSE
has an ownership interest in coal-fired, steam-electric generating plants at Colstrip,
Montana, which are subject to regulation of emissions and other regulatory requirements.
PSE also owns combustion turbine units in Western Washington, which are capable of being
fueled by natural gas or diesel fuel. These combustion turbines are operated to comply
with emission limits set forth in their respective air operating permits.
        There
is no assurance that in the future environmental regulations affecting sulfur dioxide,
carbon monoxide, particulate matter or nitrogen oxide emissions may not be further
restricted, or that restrictions on greenhouse gas emissions, such as carbon dioxide, or
other combustion byproducts, such as mercury, may not be imposed.

FEDERAL ENDANGERED SPECIES ACT
        Since
the 1991 listing of the Snake River Sockeye salmon as an endangered species, one more
species of salmon has been listed and two more have been proposed which may further
influence operations. Upper Columbia River Steelhead was listed by National Marine
Fisheries Service in August 1997. Anticipating the Steelhead listing, the Mid-Columbia
PUDs initiated consultation with federal and state agencies, Native American tribes and
non-governmental organizations to secure operational protection through a long-term
settlement and habitat conservation plan which includes fish protection and enhancement
measures for the next 50 years. The negotiations have concluded among the Chelan and
Douglas County PUDs and various fishery agencies, and final agreement is subject to a
National Environmental Policy Act review and power purchaser approval. Generally, the
agreement obligates the PUDs to achieve certain levels of passage efficiency for
downstream migrants at their hydroelectric facilities and to fund certain habitat
conservation measures. Grant County PUD has yet to reach agreement on these issues.
        The
proposed listings of Puget Sound Chinook salmon and spring Chinook salmon for the upper
Columbia River were approved in March 1999. The Company does not expect the listing of
spring Chinook salmon for the upper Columbia River to result in markedly differing
conditions for operations from previous listings in the area. 
        The
completed listings of Coastal/Puget Sound Distinct Population Segment of Bull Trout in the
fall of 1999 and Puget Sound Chinook salmon in the winter of 2001 are causing a number of
changes to operations of governmental agencies and private entities in the region,
including PSE. These changes may adversely affect hydro plant operations and permit
issuance for facilities construction, and increase costs for processes and facilities.
Because PSE relies substantially less on hydroelectric energy from the Puget Sound area
than from the Mid-Columbia River and because the impact on PSE operations in the Puget
Sound area is not likely to impair significant generating resources, the impact of listing
for Puget Sound Chinook salmon and Bull Trout, while potentially representing cost
exposure and operational constraints, should be

---

proportionately less than the effects of
the Columbia River listings. PSE is actively engaging the federal agencies to address
Endangered Species Act issues for PSEs generating facilities. Consultation with
federal agencies is ongoing.



EXECUTIVE OFFICERS OF THE
REGISTRANTS
        The
executive officers of Puget Energy as of January 31, 2004 are listed below. Puget Energy
considers the Chief Executive Officer of InfrastruX to be an
executive officer of Puget Energy. For their business experience during the past five
years, please refer to the table below regarding Puget Sound Energys executive
officers. Officers of Puget Energy are elected for one-year terms.

|NAME              | AGE | OFFICES                                                                                                                                                                                                                                                                                                  
|----------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|S.  P.  Reynolds  | 56  | President and Chief  Executive  Officer since  January 2002.  Director  since January 2002.                                                                                                                                                                                                              
|J.  W.  Eldredge  | 53  | Corporate Secretary and Chief Accounting Officer since April 1999.                                                                                                                                                                                                                                       
|D.  E.  Gaines    | 46  | Vice President Finance and Treasurer since March 2002.                                                                                                                                                                                                                                                   
|M.  T.  Lennon    | 41  | President and Chief Executive Officer of InfrastruX since April 2003,
President of InfrastruX, 2002 - 2003. Prior to joining InfrastruX, he
served as Managing Director of Lennon Smith Advisors, LLC, an investment
banking firm, 2000 - 2002, and Managing Director of Emerge Corporation, 1999
- 2000.
|J.  L.  O' Connor | 47  | Vice President and General Counsel since January 2003.                                                                                                                                                                                                                                                   
|B.  A.  Valdman   | 41  | Senior Vice President Finance and Chief Financial Officer since January
2004.                                                                                                                                                                                                                            

The
executive officers of Puget Sound Energy as of January 31, 2004 are listed below along
with their business experience during the past five years. Officers of Puget Sound Energy
are elected for one-year terms.

|NAME              | AGE | OFFICES                                                                                                                                                                                                                                                                                                                                                                                                           
|----------------- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|S.  P.  Reynolds  | 56  | President and Chief  Executive  Officer  since  January  2002;  President and
Chief  Executive  Officer  of  Reynolds  Energy  International,  1998 - 2002;
Director since January 2002.                                                                                                                                                                                                                          
|D.  P.  Brady     | 40  | Vice President Customer Services since February 2003;  Director and Assistant
to Chief  Operating  Officer,  2002 - 2003.  Prior  to  joining  PSE,  he was
Managing Director of Irvine  Associates  Merchant Banking Group, 2001 - 2002;
Executive  Vice   President-Operations  of  Orcom  Solutions,  2000  -  2001;
Executive  Vice  President and Chief  Financial  Officer of Orcom  Solutions,
1999 - 2000.
|P.  K.  Bussey    | 47  | Vice President  Regional and Public Affairs since  September  2003.  Prior to
joining PSE, he was President of the Washington Round Table, 1996 - 2003.                                                                                                                                                                                                                                                           
|M.  N.  Clements  | 44  | Vice President Human Resources and Labor Relations since September 2003.
Prior to joining  PSE,  she was Vice  President  of Human  Resources of Eddie
Bauer, Inc., 1998 - 2003.                                                                                                                                                                                                                                  
|J.  W.  Eldredge  | 53  | Vice President, Corporate Secretary,  Controller and Chief Accounting Officer
since  May  2001;  Corporate  Secretary,   Controller  and  Chief  Accounting
Officer, 1993 - 2001.                                                                                                                                                                                                                                 
|D.  E.  Gaines    | 46  | Vice  President  Finance and Treasurer  since March 2002;  Vice President and
Treasurer,  2001 - 2002;  Treasurer,  1994 - 2001.  Mr. Gaines is the brother
of W. A. Gaines, Vice President Engineering and Contracting.                                                                                                                                                                                          
|W.  A.  Gaines    | 48  | Vice  President   Engineering  and  Contracting   since  October  2003;  Vice
 President  Energy  Supply,  1997 - 2003.  Mr.  Gaines is the brother of D. E.
 Gaines, Vice President Finance and Treasurer.                                                                                                                                                                                                       
|K.  J.  Harris    | 39  | Vice President  Governmental  and Regulatory  Relations  since February 2003;
Vice  President  Regulatory  Affairs,  2002 - 2003;  Director  Load  Resource
Strategies and Associate  General  Counsel,  2001 - 2002;  Associate  General
Counsel, 1999 - 2001.                                                                                                                                                   
|J.  L.  Henry     | 58  | Senior Vice President Energy  Efficiency and Customer Services since February
2003;  Director of Major Accounts,  2001 - 2003;  Director  Construction  and
Technical Field Services 2000-2001; Director Major Projects, 1997 - 2000.                                                                                                                                                                             
|E.  M.  Markell   | 52  | Senior Vice President  Energy  Resources  since February 2003; Vice President
Corporate  Development,  2002 - 2003.  Prior to  joining  PSE,  he was  Chief
Financial  Officer,  Club One,  Inc.,  2000 - 2002;  Vice President and Chief
Financial Officer, United American Energy Corp., 1990 - 2000.                                                                                                           
|S.  McLain        | 47  | Senior  Vice  President   Operations  since  February  2003;  Vice  President
Operations - Delivery, 1999 - 2003.                                                                                                                                                                                                                                                                                                 
|J.  L.  O' Connor | 47  | Vice President and General Counsel since January 2003.  Prior to joining PSE,
she was interim General Counsel,  Starbucks  Corporation,  2002;  Senior Vice
President and Deputy General  Counsel,  Starbucks  Corporation,  2001 - 2002;
Vice President and Assistant General Counsel,  Starbucks Corporation,  1998 -
2001.                                                                                     
|J.  M.  Ryan      | 42  | Vice President  Energy  Portfolio  Management  since December 2001.  Prior to
joining  PSE,  she was  Managing  Director  of North  American  Marketing  of
TransAlta USA, 2001;  Managing Director  Origination of Merchant Energy Group
of the Americas, Inc., 1997 - 2001.                                                                                                                                     

---

|B.  A.  Valdman | 41 | Senior Vice  President  Finance and Chief  Financial  Officer since  December
2003.  Prior  to  joining  PSE,  he was  Managing  Director  with  JP  Morgan
Securities,  Inc., 2000 - 2003 and a member of the National Resource Group of
JP Morgan Securities, Inc. since 1993 and a banker with JP Morgan since 1987.      
|--------------- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|P.  M.  Wiegand | 51 | Vice President Project  Development and Contract  Management since July 2003;
Vice President  Corporate  Planning,  2003; Vice President Corporate Planning
and  Performance,  2002 - 2003;  Vice President Risk Management and Strategic
Planning 2000 - 2002; Director of Budgets and Performance Management,  1999 -
2000.

ITEM 2. PROPERTIES

The
principal electric generating plants and underground gas storage facilities owned by PSE
are described under Item 1, Business  Electric Supply and Gas Supply.
PSE owns its transmission and distribution facilities and various other properties.
Substantially all properties of PSE are subject to the liens of PSEs mortgage
indentures. 

        InfrastruX
operates a fleet of vehicles and equipment that it uses in its utility construction
business. Its fleet is composed of owned and leased trucks and other specialized equipment
such as backhoes, trenchers, boring machines, cranes and other equipment required to
perform its work. InfrastruX owns some of the facilities out of which it operates and
rents the remaining facilities.

ITEM 3. LEGAL PROCEEDINGS

See
the section titled Proceedings Relating to the Western Power Market under Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations. Contingencies arising out of the normal course of the Companys
business exist at December 31, 2003. The ultimate resolution of these issues is not
expected to have a material adverse impact on the financial condition, results of
operations or liquidity of the Company.

ITEM 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED 
              SHAREHOLDER MATTERS

Puget
Energys common stock, the only class of common equity of Puget Energy, is traded on
the New York Stock Exchange under the symbol PSD. At December 31, 2003, there
were approximately 43,200 holders of record of Puget Energys common stock. The
outstanding shares of PSEs common stock, the only class of common equity of PSE, are
held by Puget Energy and are not traded. 

        The
following table shows the market price range of, and dividends paid on, Puget
Energys common stock during the periods indicated in 2003 and 2002. Puget Energy and
its predecessor companies have paid dividends on common stock each year since 1943 when
such stock first became publicly held.

|              | 2003        |           | 2002        |          
|------------- | ----------- | --------- | ----------- | ---------
|              | PRICE RANGE | DIVIDENDS | PRICE RANGE | DIVIDENDS
|QUARTER ENDED | HIGH        | LOW       | PAID        | HIGH     
|March 31      |             | $         | 23.00       | $        
|June 30       |             |           | 24.40       |          
|September 30  |             |           | 24.17       |          
|December 31   |             |           | 23.99       |          

The
amount and payment of future dividends will depend on Puget Energys financial
condition, results of operations, capital requirements and other factors deemed relevant
by Puget Energys Board of Directors. The Board of Directors current policy is
to pay out approximately 60% of normalized utility earnings in dividends. 

        Puget
Energys primary source of funds for the payment of dividends to its shareholders is
dividends received from PSE. PSEs payment of common stock dividends to Puget Energy
is restricted by provisions of certain covenants applicable to preferred stock and
long-term debt contained in PSEs Articles of Incorporation and electric and gas
mortgage indentures. Under the most restrictive covenants of PSE, earnings reinvested in
the business unrestricted as to payment of cash dividends were approximately $235.9
million at December 31, 2003.

---

ITEM 6.  SELECTED
FINANCIAL DATA

The
following tables show selected financial data. Puget Energy became the holding company for
PSE on January 1, 2001 pursuant to a plan of exchange in which each share of PSE common
stock was exchanged on a one-for-one basis for Puget Energy common stock. Puget Energy
results are not on a comparable basis as InfrastruX had acquisitions from 2000 to 2003.

|PUGET ENERGY
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|--------------------------------------------------------------------------------
|YEARS ENDED DECEMBER 31                                                         
|Operating revenue                                                               
|Operating income                                                                
|Net income before cumulative effect                                             
|of accounting change                                                            
|Income for common stock from                                                    
|continuing operations                                                           
|Basic earnings per common                                                       
|share from continuing operations                                                
|Diluted earnings per common share                                               
|from continuing operations                                                      
|                                                                                
|Dividends per common share                                                      
|Book value per common share                                                     
|                                                                                
|Total assets at year end                                                        
|Long-term obligations                                                           
|Preferred stock not subject to                                                  
|mandatory redemption                                                            
|Preferred stock subject to                                                      
|mandatory redemption                                                            
|Corporation obligated, mandatorily                                              
|redeemable preferred securities of                                              
|subsidiary trust holding solely                                                 
|junior subordinated debentures                                                  
|of the corporation                                                              
|Junior subordinated debentures of                                               
|the corporation payable to a                                                    
|subsidiary trust holding                                                        
|mandatorily redeemable                                                          
|preferred securities                                                            
|                                                                                

---

|PUGET SOUND ENERGY
SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|--------------------------------------------------------------------------------------
|YEARS ENDED DECEMBER 31                                                               
|Operating revenue                                                                     
|Operating income                                                                      
|Net income before cumulative effect of                                                
|accounting change                                                                     
|Income for common stock from                                                          
|continuing operations                                                                 
|                                                                                      
|Total assets at year end                                                              
|Long-term obligations                                                                 
|Preferred stock not subject to                                                        
|mandatory redemption                                                                  
|Preferred stock subject to mandatory                                                  
|redemption                                                                            
|Corporation obligated, mandatorily                                                    
|redeemable preferred securities of                                                    
|subsidiary trust holding solely                                                       
|junior subordinated debentures of                                                     
|the corporation                                                                       
|Junior subordinated debentures of the                                                 
|corporation payable to a subsidiary                                                   
|trust holding mandatorily                                                             
|redeemable preferred securities                                                       
|                                                                                      

---

|1 | In
2003, the FASB issued Interpretation No. 46 (FIN 46) which required the consolidation
of PSE's 1995 Conservation Trust Transaction. As a result, revenues and expense
increased $5.7 million, and assets and liabilities increased $4.2 million in 2003.
FIN 46 also required deconsolidation of PSE's trust preferred securities that
are now classified as junior subordinated debt. This deconsolidation has no impact on
assets, liabilities, receivables or earnings for 2003.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | In
2001, SFAS No. 133 was implemented, which required derivative instruments to be valued at
fair value.
|- | --------------------------------------------------------------------------------------------------------

ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
             AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this annual report on Form
10-K. The discussion contains forward-looking statements that involve risks and
uncertainties, such as Puget Energys and PSEs objectives, expectations and
intentions. Puget Energys and PSEs actual results could differ materially from
results that may be anticipated by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those discussed
in the section entitled Forward-Looking Statements included elsewhere in this
report. Words or phrases such as anticipates, believes,
estimates, expects, plans, predicts,
projects, will likely result, will continue and
similar expressions are intended to identify certain of these forward-looking statements.
However, these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements.
Readers are cautioned not to place undue reliance on these forwardlooking
statements, which speak only as of the date of this report. Except as required by law,
neither Puget Energy nor PSE undertakes an obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures made in this
report and in Puget Energys and PSEs other reports filed with the Securities
and Exchange Commission that attempt to advise interested parties of the risks and factors
that may affect Puget Energys and PSEs business, prospects and results of
operations.

OVERVIEW 
        Puget
Energy is an energy services holding company and all of its operations are conducted
through its two subsidiaries. These subsidiaries are PSE, a regulated electric and gas
utility company, and InfrastruX, a utility construction and services company.

PUGET SOUND ENERGY
        PSE
generates revenues from the sale of electric and gas services, mainly to residential and
commercial customers within Washington State. A majority of PSEs revenues are
generated in the first and fourth quarters during the winter heating season in Washington
State. 

        As
a regulated utility company, PSE is subject to FERC and Washington Commission regulation
which may impact a large array of business activities, including limitation of future rate
increases; directed accounting requirements that may negatively impact earnings;

---

licensing
of PSE-owned generation facilities; and other FERC and Washington Commission directives
that may impact PSEs long-term goals. In addition, PSE is subject to risks inherent
to the utility industry as a whole including weather changes affecting purchases and sales
of energy; outages at owned and non-owned generation plants where energy is obtained;
storms which can damage transmission lines; and energy trading and wholesale market
stability over time. 

        PSEs
main operational goal has been to provide cost-effective and stable energy prices to its
customers. To help accomplish this goal, PSE is attempting to be more self-sufficient in
energy generation resources. Owning more generation resources rather than
purchasing power through contracts and on the wholesale market is intended to allow
customers rates to remain stable. As such, PSE is in the process of purchasing a
49.85% interest in a 275 MW (250 MW capacity with 25 MW planned capital improvements)
gas-fired generation facility within Western Washington, which is currently before the
Washington Commission for approval in the power cost only rate case, with an expected
order by mid-April 2004. In addition, the purchase will also require approval from FERC.
PSE has filed its application with FERC and anticipates approval in early 2004. This
purchase is the first step of PSEs long-term electric Least Cost Plan that was filed
April 30, 2003 with the Washington Commission. The plan supports a strategy of diverse
resource acquisitions including resources fueled by natural gas and coal, renewable
resources and shared resources.

INFRASTRUX
        InfrastruX
generates revenues mainly from maintenance services and construction contracts in the
south/Texas, north-central and eastern United States. A majority of its revenues are
generated during the second and third quarters which are generally the most productive
quarters for the construction industry due to longer daylight hours and generally better
weather conditions. 

        InfrastruX
is subject to risks associated with the construction industry including inability to
adequately estimate costs of projects that are bid upon under fixed-fee contracts;
continued economic downturn that limits the amount of projects available thereby reducing
available profit margins from increased competition; the ability to integrate acquired
companies within its operations without significant cost; and the ability to obtain
adequate financing and bonding coverage to continue expansion and growth. 

        InfrastruXs
main goals have been continued growth and expansion into underdeveloped utility
construction markets and to utilize its acquired entities to capitalize on depth of
expertise, asset base, geographical location and workforce to provide services that local
contractors cannot. InfrastruX has acquired 12 entities since 2000, including one
acquisition in 2003.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        PUGET ENERGY
        All
of the operations of Puget Energy are conducted through its subsidiaries, PSE and
InfrastruX. Net income in 2003 was $121.3 million on operating revenues of $2.5 billion,
compared to $117.9 million on operating revenues of $2.4 billion in 2002 and $106.8
million on operating revenues of $2.9 billion in 2001. Income for common stock was $116.2
million in 2003, compared to $110.1 million in 2002 and $98.4 million in 2001. 

        Basic
earnings per share in 2003 were $1.23 on 94.8 million weighted average common shares
outstanding compared to $1.24 on 88.4 million weighted average common shares outstanding
in 2002 and $1.14 on 86.4 million weighted average common shares outstanding in 2001.
Diluted earnings per share were $1.22 on 95.3 million weighted average common shares
outstanding compared to $1.24 on 88.8 million weighted average common shares outstanding
in 2002 and $1.14 on 86.7 million weighted average common shares outstanding in 2001. 

        Net
income in 2003 was positively impacted by an increase in utility net income of $10.9
million due to increased electric and gas margins primarily from a full years effect
of the September 1, 2002 general gas rate increase and from increased sales volumes for
electric and gas loads compared to 2002. In addition, net income in 2003 was positively
impacted by lower interest expenses of $11.4 million. This was offset by a $6.1 million
downward adjustment in the carrying value of a non-utility venture capital investment in
the fourth quarter of 2003, a $4.8 million increase in depreciation and amortization and
an $11.7 million decrease in gains on derivative instruments due to a 2002 gain from
de-designated contracts from a non-creditworthy counterparty under Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. In addition, federal tax refunds decreased in 2003 to $9.3
million compared to $10.3 million in 2002. Net income was also negatively impacted by a
decrease in InfrastruX net income of $7.7 million, net of minority interest, due to
unusually wet weather affecting productivity in the first quarter of 2003 and increased
competition in the marketplace. 

        Net
income in 2002 was positively impacted by an increase in utility net income of $4.6
million from 2001 due to increased electric and gas margins resulting from general tariff
rate increases. In addition, net income was positively impacted by $10.3 million of
federal tax refunds in 2002. Net income in 2002 was negatively impacted by a decrease in
non-utility net income of $22.8 million primarily due to a decline in property sales from
2001 at PSEs real estate investment and development subsidiary, Puget Western, Inc.,
and an $8.0 million gain on PSEs sale of the assets in its ConneXt subsidiary in
August 2001. This was partially offset by an increase of $6.9 million in net income, net
of minority interest, at InfrastruX. 

        Total
kWh energy sales to retail consumers in 2003 were 19.6 billion compared with 19.3 billion
in 2002 and 19.9 billion in 2001. Kilowatt-hour sales to wholesale customers were 5.1
billion in 2003, 3.5 billion in 2002 and 5.0 billion in 2001. Kilowatt-hours transported
to transportation customers were 2.0 billion in 2003, 2.3 billion in 2002 and 0.4 billion
in 2001. 

        Total
gas sales to retail consumers in 2003 were 815.7 million therms compared with 839.6
million therms in 2002 and 850.4 million therms in 2001. Total gas sales to transportation
customers in 2003 were 209.5 million therms compared to 207.9 million therms in 2002 and
188.2 million therms in 2001.

---

PUGET SOUND ENERGY        The
table below sets forth changes in the results of operations for PSE and its subsidiaries.

|INCREASE (DECREASE) OVER PRECEDING YEAR
(DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 | 2003 | 2002
|------------------------------------------------------------------------------------- | ---- | ----
|Operating revenue changes:                                                            |      |     
|Electric interim and general rate increase                                            |      |     
|BPA residential exchange credit                                                       |      |     
|Electric sales to other utilities and marketers                                       |      |     
|Electric revenue sold at index rates to retail customers                              |      |     
|Electric conservation trust credit                                                    |      |     
|Electric transportation revenue                                                       |      |     
|Electric load and other                                                               |      |     
|                                                                                     
|Total electric operating change                                                       |      |     
|                                                                                     
|Gas general rate increase                                                             |      |     
|Gas retail load and PGA rate change                                                   |      |     
|Gas transportation revenue and other                                                  |      |     
|                                                                                     
|Total gas operating change                                                            |      |     
|                                                                                     
|Other revenue                                                                         |      |     
|                                                                                     
|Total operating revenue change                                                        |      |     
|                                                                                     
|Operating expense changes:                                                            |      |     
|Energy costs:                                                                         |      |     
|Purchased electricity                                                                 |      |     
|Residential exchange power cost credit                                                |      |     
|Purchased gas                                                                         |      |     
|Electric generation fuel                                                              |      |     
|Unrealized gain/loss on derivative instruments                                        |      |     
|Utility operations and maintenance:                                                   |      |     
|Production operations and maintenance                                                 |      |     
|Personal energy management expenses                                                   |      |     
|Low-income program pass-through expenses                                              |      |     
|Other utility operations and maintenance                                              |      |     
|Other operations and maintenance                                                      |      |     
|Depreciation and amortization                                                         |      |     
|Conservation amortization                                                             |      |     
|Taxes other than income taxes                                                         |      |     
|Income taxes                                                                          |      |     
|                                                                                     
|Total operating expense change                                                        |      |     
|                                                                                     
|Other income change (net of tax)                                                      |      |     
|Interest charges change                                                               |      |     
|Cumulative effect of implementation of accounting change (net of tax)                 |      |     
|                                                                                     
|Net income change                                                                     |      |     
|                                                                                     

PSEs
operating revenues and associated expenses are not generated evenly during the year.
Variations in energy usage by consumers occur from season to season and from month to
month within a season, primarily as a result of weather conditions. PSE normally
experiences its highest retail energy sales during the heating season in the first and
fourth quarters of the year. Varying wholesale electric prices and the amount of
hydroelectric energy supplies available to PSE also make quarter-to-quarter comparisons
difficult. The following is additional information pertaining to the changes outlined in
the above table. 

        Electric
margin increased $19.3 million for 2003 compared to 2002 due primarily to the
non-reoccurrence of losses associated with the

---

resale of gas supply for electric
generation. Electric margin increased $2.7 million from 2001 to 2002 as a result of an
increase in kWh sales and the full-year effect of the general rate case. Electric margin
is electric sales to retail and transportation customers less pass-through tariff items
and revenue-sensitive taxes, and the cost of generating and purchasing electric energy
sold to customers including transmission costs to bring electric energy to PSEs
service territory. 
        Electric
margin for 2001 through 2003 was:

|                                                                | ELECTRIC MARGIN
|--------------------------------------------------------------- | ---------------
|(DOLLARS IN MILLIONS)TWELVE MONTHS ENDED DECEMBER 31:           | 2003           
|Electric retail sales revenue                                   |                
|Electric transportation revenue                                 |                
|Other electric revenue-gas supply resale                        |                
|                                                               
|Total electric revenue for margin                               |                
|Adjustments for amounts included in revenue:                    |                
|Pass-through tariff items (conservation and low-income tariffs) |                
|Pass-through revenue-sensitive taxes                            |                
|Residential exchange credit                                     |                
|                                                               
|Net electric revenue for margin                                 |                
|                                                               
|Minus power costs:                                              |                
|Electric generation fuel                                        |                
|Purchased electricity, net of sales to other utilities and      |                
|marketers                                                       |                
|                                                               
|Total electric power costs                                      |                
|                                                               
|Electric margin before PCA                                      |                
|Power cost deferred under the PCA                               |                
|                                                               
|Electric margin                                                 |                
|                                                               

Gas
margin increased $19.1 million in 2003 compared to 2002 due to the effects of the gas
general rate increase effective September 1, 2002. Gas margin increased $19.5 million in
2002 compared to 2001 due primarily to the gas general rate increase effective September
1, 2002 and increased usage by customers. Gas margin is gas sales to retail and
transportation customers less pass-through tariff items and revenue-sensitive taxes and
the cost of gas purchased, including gas transportation costs to bring gas to PSEs
service territory. 
        Gas
margin for 2001 through 2003 was:

|                                                                | GAS MARGIN
|--------------------------------------------------------------- | ----------
|(DOLLARS IN MILLIONS)TWELVE MONTHS ENDED DECEMBER 31:           | 2003      
|Gas retail revenue                                              |           
|Gas transportation revenue                                      |           
|                                                               
|Total gas revenue for margin                                    |           
|Adjustments for amounts included in revenue:                    |           
|Gas revenue hedge                                               |           
|Pass-through tariff items (conservation and low-income tariffs) |           
|Pass-through revenue-sensitive taxes                            |           
|                                                               
|Net gas revenue for margin                                      |           
|Minus purchased gas costs                                       |           
|                                                               
|Gas margin                                                      |           
|                                                               

---

PUGET SOUND ENERGY 2003 COMPARED TO
2002OPERATING REVENUES  ELECTRIC 

        Electric
operating revenues increased $143.6 million in 2003 compared to 2002 due primarily to an
increase of $103.2 million in wholesale electric sales to other utilities and marketers
from greater surplus volumes. Wholesale sales volumes increased by 1.6 billion kWh or
47.4% compared to 2002. Retail sales volumes increased 1.8% to 19.6 billion kWh as a
result of increased usage by commercial customers in 2003 compared to 2002. Electric
operating revenues also increased by $27.4 million due primarily to the non-occurrence of
2002 losses on the sale of excess gas supply used for electric generation. 

        During
2003, the benefits of the Residential and Farm Energy Exchange Credit to customers reduced
revenues by $181.9 million compared to $156.8 million in 2002. This credit also reduces
power costs by a corresponding amount with no impact on earnings. See Item 1, Business
 Regulation and Rates  Residential and Small Farm Exchange Credit for further
discussion. 

        During
2003, PSE collected in its electric general rate tariff as a reduction to revenue and
remitted to a grantor trust $7.7 million as compared to $12.7 million for 2002 as a result
of PSEs 1995 sale of future electric revenues associated with its investment in
conservation assets. The impact of the sale of revenue was offset by reductions in
conservation amortization and interest expense. PSEs 1995 conservation trust
transaction was consolidated in the third quarter of 2003 to meet the guidance of FASB
Interpretation No. 46 (FIN 46) and, as a result, revenues increased $5.7 million while
conservation amortization and interest expense increased by a corresponding amount with no
impact on earnings. This amount was also forwarded to the grantor trust and any cash
balance at the grantor trust is reported as restricted cash on the balance sheet. At
December 31, 2003, the balance sheet assets and liabilities have increased by $4.2
million. 

        PSE
operates within the western wholesale market and has made sales into the California energy
market. During the fourth quarter of 2000, PSE made sales to the California energy market
on which the receivable amount is still outstanding. At December 31, 2003, PSEs
receivable from the California Independent System Operator (CAISO) and other
counterparties, net of reserves, was $23.6 million. See the discussion of the CAISO
receivable and California proceedings under Proceedings Relating to the Western
Power Market.

OPERATING REVENUES 
GAS 

        Regulated
gas utility revenues in 2003 compared to 2002 decreased by $62.9 million or 9.0% due
primarily to lower Purchased Gas Adjustment (PGA) rates in 2003 as a result of refunding
the previous overcollection of PGA gas costs. In addition, warmer temperatures in 2003
resulted in 8.5% fewer heating degree days as compared to 2002 resulting in lower therm
sales.
        PGA
rates charged to customers were lower in 2003 compared to 2002 as a result of rate
decreases of 7.3% and 12.5% which took effect September 1, 2002 and November 1, 2002,
respectively, offset by a rate increase of 20.1% which took effect April 10, 2003. On
September 24, 2003, the Washington Commission approved a PGA rate increase of an annual
average of 13.3% across all groups of customers effective October 1, 2003. The PGA
mechanism passes through to customers increases or decreases in the gas supply portion of
the natural gas service rates based upon changes in the price of natural gas purchased
from producers and wholesale marketers or changes in gas pipeline transportation costs. 

        PSEs
gas margin (gas sales to retail and transportation customers less pass-through tariff
items and revenue-sensitive taxes, and the cost of gas purchased, including gas
transportation costs to bring gas to PSEs service territory) and net income are not
affected by changes under the PGA.

OTHER REVENUES 

        Other
operating revenues decreased $3.8 million primarily due to a decrease in property sales
for Puget Western, Inc. which generates a majority of its revenue through the development
and sale of property.

OPERATING EXPENSES

        Purchased
electricityexpenses increased $177.8 million in 2003 compared to 2002. PSEs
hydroelectric production and related power costs in 2003 were negatively impacted by
below-normal winter precipitation and snow pack in the Pacific Northwest region associated
with an El Nino weather condition. The January 25, 2004 Columbia Basin Runoff Summary
published by the National Weather Service Northwest River Forecast Center indicated that
the total observed runoff above Grand Coulee reservoir for the period January through
December 2003 was 87% of normal. This compares to 108% of normal for the same period in
2002. PSE reached the $40 million cumulative cap under the PCA mechanism in 2003 primarily
due to increased power costs and adverse hydro conditions. Under the PCA mechanism,
further increases in variable power costs through June 30, 2006 would be apportioned 99%
to customers and 1% to PSE. 

        To
meet customer demand, PSE dispatches resources in its power supply portfolio such as
fossil-fuel generation, owned and contracted hydro capacity and energy, and long-term
contracted power. However, depending principally upon availability of hydroelectric
energy, plant availability, fuel prices and/or changing load as a result of weather, PSE
may sell surplus power or purchase deficit power in the wholesale market. PSE manages its
core energy portfolio through short and intermediate-term off-system physical purchases
and sales, and through other risk management techniques. A PSE Risk Management Committee
oversees energy portfolio exposures. 

        Residential
exchange creditsassociated with the Residential Purchase and Sale Agreement with BPA
increased $23.9 million in 2003 compared to 2002 due to the impact of a full years
increased Residential and Farm Energy Exchange credit rate. The rate increased in January,
March and October of 2002 for residential and small farm customers. Discussion of the
amended Residential Purchase and Sale Agreement between PSE and BPA can be found under
Regulation and Rates  Residential and Small Farm Exchange Credit. The
residential exchange credits are passed through to eligible residential and small farm
customers by a corresponding reduction in revenues. 

        Purchased
gasexpenses decreased $77.9 million in 2003 compared to 2002 primarily due to a 2.1%
decrease in sales volume which was partially offset by an increase in gas market prices.
The PGA allows PSE to recover expected gas costs. PSE defers, as a receivable or
liability,

---

any gas costs that exceed or fall short of the amount in PGA rates and accrues
interest under the PGA. The PGA liability balance at December 31, 2003 was $12.0 million
compared to a liability balance of $83.8 million at December 31, 2002. 

        Electric
generation fuelexpense decreased $48.5 million in 2003 compared to 2002 as a result of
lower fuel costs for PSE-controlled gas-fired generation facilities and the result of not
operating the generating facilities due to available lower-cost wholesale power supply. 

        Unrealized
gains/losses on derivative instrumentsincreased $11.7 million in 2003 compared to 2002 as
a result of unrealized losses on gas hedge contracts that were de-designated in the fourth
quarter of 2001 and settled in 2002. The unrealized gains and losses recorded in the
income statement are the result of the change in the market value of derivative
instruments not meeting cash flow hedge criteria. (For further discussion see Note 15.) 

        PSE
has had two contracts with a counterparty whose debt ratings were below investment grade
since 2002. The first contract is a fixed for floating price natural gas swap contract for
one of its electric generating facilities. In the fourth quarter of 2003, PSE agreed to a
novation of this contract to a new counterparty which has strong credit ratings. As a
result of the novation, the collateral that was held by the original counterparty was
returned. The fixed for floating price natural gas swap contract has been designated since
inception in 2000 as a qualifying cash flow hedge. The second contract, a physical gas
supply contract for one of PSEs electric generating facilities was marked-to-market
in the fourth quarter of 2003. This contract was previously designated as a normal purchase
under SFAS No. 133. PSE has concluded that it is appropriate to reserve the mark-to-market
gain on this contract due to the credit quality of the counterparty in accordance with
SFAS No. 133 guidance, as delivery is not probable through the term of the contract, which
expires in December 2008. 

        Production
operations and maintenancecosts decreased $2.0 million in 2003 compared to 2002 due
primarily to decreased operating costs of PSEs combustion turbine plants which were
operated at lower levels in 2003 than in 2002 due to lower wholesale power prices. 

        PSEs
Personal Energy ManagementTMenergy-efficiency program costs decreased $6.3 million in
2003 compared to 2002 reflecting a decreased emphasis on the program in light of
relatively moderate energy prices and cancellation of the Time of Use program in November
2002. 

        The
Low-Income Programapproved by the Washington Commission in the general rate case
settlement began in July 2002, which resulted in increased costs of $3.3 million in 2003
compared to 2002. These costs are fully recovered in retail rates beginning at the
programs inception on July 1, 2002 for electric service and September 1, 2002 for
gas service. 

        Other
utility operations and maintenancecosts increased $8.4 million in 2003 compared to 2002
due primarily to an increase in electric overhead and underground line costs, gas
distribution main costs, least cost planning costs, due diligence costs for power resource
acquisition, certain costs associated with preparing the power cost only rate case and
meter reading expenses. Also included in the results is pension income related to
PSEs defined benefit pension plan recorded under SFAS No. 87, Employers
Accounting for Pensions. Pension and benefit costs are allocated between capital and
operations and maintenance expense based on the distribution of labor costs in accordance
with FERC guidelines. As a result, approximately 67.0% of the annual qualified pension
income of $12.9 million for 2003 was recorded as a reduction in operations and maintenance
expense compared to 66.8% of $17.7 million for 2002. Qualified pension income is expected
to decline to $8.6 million in 2004. During the fourth quarter of 2003, the Puget Sound
region was hit by a severe windstorm that caused significant damage to PSEs electric
distribution system. The windstorm is considered a catastrophic event under
Washington Commission guidelines and as a result, PSE was able to defer the repair cost of
$10.1 million for later recovery in retail rates. 

        Depreciation
and amortizationexpense increased $4.8 million in 2003 compared to 2002 due primarily to
the effects of new plant placed in service during the past year. 

        Conservation
amortizationincreased $16.0 million in 2003 compared to 2002 due to increased
conservation expenditures and the result of consolidating the off-balance sheet
conservation trust beginning July 1, 2003 in accordance with FIN 46. The consolidation of
the conservation trust increased conservation amortization by $5.7 million for the period
July through December 2003. Pass-through conservation costs are recovered through an
electric conservation rider, a gas conservation tracker mechanism and a conservation trust
rate schedule with no impact to earnings. 

        Taxes
other than income taxesdecreased $7.5 million in 2003 compared to 2002 primarily due to
the 2002 property tax expense of $5.2 million related to the State of Oregon property tax
bills covering a six-year period ending June 30, 2001 not recurring in 2003, a $1.4
million reduction in expense in the second quarter of 2003 related to the settlement of
the State of Oregon property tax bills and a $2.8 million decrease in revenue-based
Washington State excise tax and municipal tax. This was offset by a $1.6 million increase
in the State of Washington property taxes. 

        Income
taxesincreased $18.1 million in 2003 compared to 2002 as a result of increased income
offset by true-ups related to filing the prior years income tax returns that reduced
income tax expense by $3.0 million and a $6.2 million reduction in tax expense related to
the favorable resolution of a federal income tax matter from 1997 to 2002 in the second
quarter of 2003. The increase is also the result of the 2002 refunds totaling $10.3
million. The $10.3 million is composed of a $4.1 million refund related to the audit of
the Companys 1998 and 1999 federal income tax returns, a $3.5 million reduction to
income tax expense representing an adjustment to 2001 federal income tax based on the 2001
federal tax return and a $2.7 million reduction in expense related to a refund of federal
income taxes for 2000.

---

OTHER INCOME

        Other
income, net of federal income tax, decreased $3.6 million compared to 2002 reflecting a
$4.0 million after-tax downward adjustment of the carrying value of a non-utility venture
capital investment in the fourth quarter of 2003.

INTEREST CHARGES

        Interest
charges decreased $11.4 million for 2003 compared to 2002 primarily due to a decrease in
long-term and short-term debt outstanding of $12.0 million and the maturity of $72.0 million of Medium-Term Notes with
interest rates ranging from 6.20% to 7.02% during 2003, the early redemption of $123.0
million of Medium-Term Notes with interest rates ranging from 7.19% to 8.59% during 2003,
and the refinancing of $161.9 million of Pollution Control Bonds with interest rates
ranging from 5.875% to 7.25% to rates ranging from 5.00% to 5.10%. The decrease in
interest expense was partially offset by the issuance of $150 million of 3.363% Senior
Notes in May 2003. PSE was able to pay maturing notes and redeem other notes mainly with
additional equity investments by Puget Energy in 2003 and 2002.

INFRASTRUX 

        The
table below sets forth changes in the results of operations for InfrastruX, net of
minority interest.

|INCREASE (DECREASE) OVER PRECEDING YEAR
(DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 | 2003 | 2002
|------------------------------------------------------------------------------------- | ---- | ----
|Operating revenue change:                                                             |      |     
|Other operating revenue                                                               |      |     
|                                                                                     
|Operating expense change:                                                             |      |     
|Other operations and maintenance                                                      |      |     
|Depreciation and amortization                                                         |      |     
|Taxes other than income taxes                                                         |      |     
|Income taxes                                                                          |      |     
|                                                                                     
|Total operating expense change                                                        |      |     
|Other income change (net of tax)                                                      |      |     
|Interest charges change                                                               |      |     
|Minority interest change                                                              |      |     
|                                                                                     
|Net income change                                                                     |      |     
|                                                                                     

The
following additional information pertains to the changes outlined in the table above.

INFRASTRUX 
2003 COMPARED TO 2002
        InfrastruX
revenueincreased $22.3 million in 2003 compared to 2002 due primarily to acquisitions of
several companies during 2002 and 2003, which contributed to an increase of $44.4 million.
Excluding the impact of acquisitions, InfrastruX revenue decreased $22.1 million from 2002
due primarily to general market weakness and changing activities on certain lines of
business. InfrastruX records revenues as services are performed or on a percent of
completion basis for fixed-price projects. 

        InfrastruX
operations and maintenanceexpenses increased $31.7 million in 2003 compared to 2002 due
primarily to acquisitions of several companies during 2002 and 2003, which contributed to
an increase of $37.1 million. Excluding the impact of acquisitions, operations and
maintenance expenses decreased $5.4 million from 2002 due to lower productivity. The
decrease, excluding the impact of acquisitions, was not proportionate to the decline in
revenues due to the impact of severe wet weather on productivity during the
first quarter of 2003
as well as the high costs of completing work in low-volume activities in 2003. 

        Depreciation
and amortizationincreased by $3.3 million in 2003 compared to 2002 due to acquisitions
during 2003 and 2002, which were not owned during the full year of 2002. 

        Income
taxesdecreased $5.1 million in 2003 compared to 2002 due to lower income.

---

PUGET SOUND ENERGY 
2002 COMPARED TO 2001OPERATING REVENUES  ELECTRIC 

        Electric
operating revenues decreased $499.3 million in 2002 compared to 2001 due primarily to a
decrease of $445.7 million in wholesale electric sales to other utilities and marketers
due to lower surplus volumes and substantially lower prices in the wholesale electricity
market. Wholesale sales volumes decreased by 1.5 billion kWh or 30.4%. Retail sales
revenue decreased 7.7% primarily as a result of industrial and commercial customers on
market index rates switching to transportation rate tariffs beginning in July 2001, as
allowed by a Washington Commission order dated April 5, 2001 authorizing the establishment
of a new electric transportation rate tariff. The decrease was offset by an interim
electric rate surcharge in effect during the period April 1, 2002 through June 30, 2002,
which increased electric revenue by $25 million, and a 4.6% electric general rate increase
effective July 1, 2002, which increased electric revenue by approximately $32 million in
2002. Transportation revenues increased $13.0 million and volume increased 1.9 billion kWh
in 2002. 

        PSE
operates its combustion turbine plants located in Western Washington primarily as peaking
plants when it is cost-effective to do so. During 2001, PSE operated its combustion
turbine plants extensively to meet both on-system and regional load requirements largely
due to adverse hydroelectric conditions in the Pacific Northwest. For 2002, PSE did not
operate the combustion turbines to the extent it did in 2001 since market prices did not
support the dispatching of these units, and PSE could serve its customers with lower-cost
resources. As a result, sales to other utilities and marketers declined in 2002 due to low
wholesale energy prices and the reduction in operations of the combustion turbines. 

        On
June 20, 2002, the Washington Commission approved and adopted the settlement stipulation
in the general rate case, putting new rates into effect on July 1, 2002 and establishing a
PCA mechanism in the rate case settlement. The mechanism will account for a sharing of
costs and benefits that are graduated over four levels of power cost variances, with an
overall cap of $40 million (+/-) over the four-year period July 1, 2002 through June 30,
2006. The factors influencing the variability of power costs included in the proposal are
primarily weather or market related.

OPERATING REVENUES 
GAS 

        Regulated
gas utility revenues in 2002 compared to 2001 decreased by $117.9 million due primarily to
PGA rate decreases as a result of lower natural gas prices that are passed through to
customers. Gas delivered for transportation customers increased $1.1 million or 19.7
million therms in 2002. 
        On
August 29, 2001, the Washington Commission approved a decrease in PSEs natural gas
rates of 8.9% due to lower natural gas costs purchased for customers under terms of the
PGA mechanism effective September 1, 2001. Also, on May 24, 2002, the Washington
Commission allowed a decrease in PGA rates of 21.2% to become effective on June 1, 2002.
This ended a temporary surcharge that went into effect September 1, 2001. The PGA
mechanism passes through to customers increases or decreases in the gas supply portion of
the natural gas service rates based upon changes in the price of natural gas purchased
from producers and wholesale marketers or changes in gas pipeline transportation costs.
PSEs gas margin and net income are not affected by changes under the PGA. 
        On
August 28, 2002, the Washington Commission approved a 5.8% gas service rate increase in
revenue to cover higher costs of providing natural gas service to customers. This
service-related increase in revenues of approximately $35.6 million annually was offset by
an annual $45 million or 7.3% PGA rate reduction, also approved on August 28, 2002. Both
rate actions became effective September 1, 2002. 
        On
September 30, 2002, PSE filed a proposal with the Washington Commission to reduce natural
gas supply rates under the PGA for a third time in 2002. The Washington Commission
approved the proposal on October 30, 2002 and PSE lowered gas rates through the PGA by
approximately 12.5% effective November 1, 2002.



OTHER REVENUES
        Other
operating revenues decreased $22.8 million primarily due to a $22.9 million decrease in
the gross margin on property sales from PSEs real estate investment and development
subsidiary, Puget Western, Inc.

OPERATING EXPENSES
        Purchased
electricityexpenses decreased $273.3 million in 2002 compared to 2001 due to the dramatic
decline of wholesale electricity prices since June 2001 and an 83-day unplanned outage of
one of PSEs 104 MW combustion turbine electric generating units located at its
Fredonia generating station from February 21, 2001 to May 14, 2001, resulting in higher
purchased electricity costs during 2001. In addition, the historic low hydroelectric power
generation conditions experienced in 2001 in a high-priced wholesale market forced PSE to
purchase additional energy during that period to meet retail electric customer loads. 

        In
a normal water year, PSE obtains about 38% of its energy supply from low-cost
hydroelectric facilities, primarily from dams below Grand Coulee on the Columbia River.
PSEs share of the power costs through December 31, 2002 was $5.2 million. 

        Residential
exchange creditsassociated with the Residential Purchase and Sale Agreement with BPA
increased $74.1 million in 2002 compared to 2001 due to the amended Residential Purchase
and Sale Agreement between PSE and BPA reflecting increased benefits passed on to
residential and small farm customers. As of July 2001, all residential exchange credits
are passed through to eligible residential and small farm customers by a corresponding
reduction in revenues. 
        Purchased
gasexpenses decreased $132.4 million in 2002 compared to 2001 primarily due to the impact
of decreased gas costs, which are passed through to customers through the PGA mechanism,
offset by a 1% increase in sales volumes. The PGA allows PSE to recover expected gas
costs. PSE defers, as a receivable or liability, any gas costs that exceed or fall short
of the amount in PGA rates and accrues interest under the PGA. The PGA balance was a
receivable at December 31, 2001 of $37.2 million while the balance at December 31, 2002
was a liability of $83.8 million.

---

Electric
generation fuelexpense decreased $167.9 million in 2002 compared to 2001 as a result of
decreased generation costs at PSE-controlled combustion turbine facilities and lower
wholesale energy prices. These facilities operated at much higher levels during 2001
compared to 2002 to meet retail electric customer loads due to adverse hydroelectric
conditions in 2001. 
        Unrealized
gains/losses on derivative instrumentsduring 2002 resulted in a decrease in expense of
$0.4 million. The unrealized gains and losses recorded in the income statement are the
result of the change in the market value of derivative instruments not meeting cash flow
hedge criteria. In addition, SFAS No. 133 was adopted on January 1, 2001, and as a result,
a one-time $14.8 million after-tax transition loss was recorded in 2001 from recognizing
the cumulative effect of this change in accounting principle. 

        Production
operations and maintenancecosts increased $2.3 million in 2002 compared to 2001 due
primarily to a $2.0 million pre-tax charge related to an industrial accident at Colstrip
Units 1 and 2, of which PSE is a 50% owner, overall higher operating costs for the
Colstrip generating facilities and the settlement of a combustion turbine insurance claim. 

        PSEs
Personal Energy ManagementTMenergy-efficiency program costs decreased $5.9 million in
2002 compared to 2001, reflecting a decreased emphasis on the program in light of
relatively moderate energy prices and cancellation of the Time of Use program in November
2002. 
        A
new Low-Income Programapproved by the Washington Commission in the general rate case
settlement began in July 2002 which resulted in increased costs of $3.8 million in 2002
compared to 2001. These costs are fully recovered in retail rates beginning at the
programs inception on July 1, 2002 for electric and September 1, 2002 for gas. 

        Other
utility operations and maintenancecosts increased $20.2 million in 2002 compared to 2001
due primarily to higher expense related to a one-time PSE employee severance cost totaling
$4.2 million related to strategic outsourcing of operations work to service providers, and
an overall increase in administrative and meter reading expenses. Also included in the
results is pension income related to PSEs defined benefit pension plan recorded
under SFAS No. 87, Employers Accounting for Pensions. Pension and
benefit costs are allocated between capital and operations and maintenance expenses based
on the distribution of labor costs in accordance with FERC accounting instructions. As a
result, approximately 66.8% of the annual qualified pension income of $17.7 million for
2002 was recorded as a reduction in operations and maintenance expense compared to 58.0%
of $20.0 million for 2001. 

        PSEs
other operations and maintenanceexpenses decreased $6.9 million in 2002 compared to 2001
primarily due to a decrease in operating expenses at ConneXt, the assets of which were
sold in the third quarter of 2001. 

        Depreciation
and amortizationexpense increased $6.6 million in 2002 compared to 2001 due primarily to
the effects of additional plant placed into service at PSE during 2002. 

        Conservation
amortizationincreased $11.0 million in 2002 compared to 2001 due to increased
conservation expenditures. These costs are recovered in conservation rider and tracker
mechanisms with no impact to earnings. 

        Taxes
other than income taxesdecreased $5.0 million in 2002 compared to 2001 due primarily to a
decrease in revenue-based Washington State excise tax and municipal tax. This was offset
by a municipal tax expense of $1.7 million recorded in 2002 related to various claims by
cities that PSE underpaid municipal taxes owed as a result of not collecting the tax in
certain rural areas that were annexed by cities. The offset also includes a one-time
property tax expense of $5.2 million covering a six-year period ending June 30, 2001
related to Oregon State property tax bills on PSEs long-term Third AC Transmission
Intertie contract. 

        Income
taxesdecreased $24.1 million in 2002 compared to 2001. The decrease in 2002 included a
total of $10.3 million in refunds at PSE which are composed of $4.1 million related to
the audit of the Companys 1998 and 1999 federal income tax returns, a $3.5 million
reduction to expense representing an adjustment to 2001 federal income taxes based on the
2001 federal tax return and a $2.7 million reduction in expense recorded in the fourth quarter
of 2002 related to a refund of federal income taxes for 2000.

OTHER INCOME
        Other
income, net of federal income tax, decreased $11.8 million in 2002 compared to 2001 due
primarily to a one-time $8.0 million after-tax gain realized by PSE on the sale of
ConneXts assets in the third quarter of 2001.

INTEREST CHARGES 
        Interest
charges, which consist of interest and amortization on long-term debt and other interest,
increased $4.5 million in 2002 compared to 2001 primarily as a result of a full
years interest expense on the issuance of $200 million 8.40% Trust Preferred
Securities in May 2001. Other interest expense increased due primarily to a PGA liability
(over-recovery of gas costs in rates) in 2002 compared to a PGA asset (under-recovery of
gas costs in rates) in 2001. Under the PGA mechanism, interest is accrued on deferred
balances.

INFRASTRUX 
2002 COMPARED TO 2001
        InfrastruX
revenueincreased $145.7 million in 2002 compared to 2001 due primarily to acquisitions of
several companies during 2001 and 2002, which contributed to an increase of $126.0
million. Excluding the impact of acquisitions, InfrastruX revenue increased $18.7 million
from 2001 and was impacted positively by ice storm restoration work performed in Oklahoma
by InfrastruXs Texas companies and continued strong performance of remediation
services in the utility industry. InfrastruX records revenues as services are performed or
on a percent of completion basis for fixed-price projects. 

        InfrastruX
operations and maintenanceexpenses increased $122.6 million in 2002 compared to 2001
primarily due to acquisitions during 2001 and 2002, which contributed to an increase of
$103.8 million. Excluding the impact of acquisitions, InfrastruX operations and
maintenance expenses increased $18.9 million from 2001 and were impacted by the increase
of corporate infrastructure to support a growing organization, additional costs of direct
wages, construction costs and higher insurance costs incurred to support an increased
revenue base.

---

Depreciation
and amortizationincreased by $4.6 million in 2002 compared to 2001 due to acquisitions
during 2001 and 2000, which contributed $3.5 million. Increases in depreciation of $1.1
million from core companies were due primarily to the acquisition of strategic assets to
support areas of InfrastruX where significant growth opportunities exist. 

        Taxes
other than income taxesincreased $7.8 million in 2002 compared to 2001 primarily due to a
$7.3 million increase in payroll tax resulting from an increased workforce as acquisitions
were completed. 

        Income
taxesincreased $3.7 million in 2002 compared to 2001 due primarily to the acquisition of
companies during 2001 and 2002. Acquired companies accounted for an increase of $5.8
million offset by a reduction in the effective tax rate due to certain non-deductible or
partially deductible items. 

        Interest
chargesincreased $1.9 million in 2002 compared to 2001 due to an increase in the amount
drawn on InfrastruXs revolving credit facilities primarily used for funding
acquisitions. 

        Other
income,net of federal income tax, increased $2.7 million in 2002 compared to 2001 due
primarily to implementation of SFAS No. 142 which ceased amortization of goodwill.
Goodwill amortization expense in 2001 was $2.8 million.

CAPITAL RESOURCES AND
LIQUIDITY

CAPITAL REQUIREMENTS 
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

        Puget Energy.The following are Puget Energy's aggregate consolidated (including PSE) contractual and commercial
commitments as of December 31, 2003:

|Puget Energy                                  |       | Payments Due Per Period
|--------------------------------------------- | ----- | -----------------------
|CONTRACTUAL OBLIGATIONS
(DOLLARS IN MILLIONS) | Total | 2004                   
|Long-term debt                                |       |                        
|Short-term debt                               |       |                        
|Junior subordinated debentures payable to a   |       |                        
|subsidiary trust (1)                          |       |                        
|Mandatorily redeemable preferred stock        |       |                        
|Service contract obligations                  |       |                        
|Capital lease obligations                     |       |                        
|Non-cancelable operating leases               |       |                        
|Fredonia combustion turbines lease (2)        |       |                        
|Energy purchase obligations                   |       |                        
|Financial hedge obligations                   |       |                        
|Non-qualified pension funding                 |       |                        
|                                              |      
|Total contractual cash obligations            |       |                        
|                                              |      

|                                             |       | Amount of Commitment
Expiration Per Period
|-------------------------------------------- | ----- | ------------------------------------------
|COMMERCIAL COMMITMENTS
(DOLLARS IN MILLIONS) | Total | 2004                                      
|Guarantees (3)                               |       |                                           
|Liquidity facilities - available (4)         |       |                                           
|Lines of credit - available (5)              |       |                                           
|Energy operations letter of credit (6)       |       |                                           
|                                             |      
|Total commercial commitments                 |       |                                           
|                                             |      

---

|(1) | In
1997 and 2001, PSE formed Puget Sound Energy Capital Trust I and Puget Sound
          Energy Capital Trust II, respectively, for the sole purpose of issuing and
          selling preferred securities (Trust Securities) and lending the proceeds to
PSE.           The proceeds from the sale of Trust Securities were used by the Trusts to
          purchase Junior Subordinated Debentures (Debentures) from PSE. The Debentures
          are the sole assets of the Trusts and PSE owns all common securities of the
          Trusts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(2) | In
April 2001, PSE revised its master operating lease to $70 million plus           interest
with a financial institution. See Fredonia 3 and 4 Operating           Lease under
Off-Balance Sheet Arrangements below for further           discussion.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In
June 2001, InfrastruX signed a credit agreement with several banks to provide
          up to $150 million in financing. Under the credit agreement, Puget Energy is
the           guarantor of the line of credit. Certain InfrastruX subsidiaries also have
          certain borrowing capacities for working capital purposes of which Puget Energy
          is not the guarantor.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | At
December 31, 2003, PSE had available a $250 million unsecured credit           agreement
and a three-year $150 million receivables securitization facility. At           December
31, 2003, PSE had available $39.0 million of receivables for sale under           its
receivables securitization facility. See Accounts Receivable
          Securitization Program under Off-Balance Sheet Arrangements          below
for further discussions. The credit agreement and securitization facility
          provide credit support for an outstanding letter of credit totaling $0.5
          million, thereby effectively reducing the available borrowing capacity under
          these liquidity facilities to $288.5 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Puget
Energy has a $15 million line of credit with a bank. At December 31, 2003,           $5.0
million was outstanding, reducing the available borrowing capacity under           this
line of credit to $10 million. InfrastruX has $34.7 million in lines of           credit
with various banks to fund capital requirements of InfrastruX and its
          subsidiaries. InfrastruX and its subsidiaries had outstanding loans of $13.9
          million, effectively reducing the available borrowing capacity under these
lines           of credit to $20.8 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In
May 2002, PSE provided an energy trading counterparty a letter of credit in           the
amount of $0.5 million to satisfy the counterpartys credit           requirements
following PSEs senior unsecured debt downgrade in October           2001. The
letter of credit has been renewed and expires on March 15, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Puget
Sound Energy.The following are PSE's aggregate contractual and commercial
commitments as of December 31, 2003:

|Puget Sound Energy                            |       | Payments Due Per Period
|--------------------------------------------- | ----- | -----------------------
|CONTRACTUAL OBLIGATIONS
(DOLLARS IN MILLIONS) | Total | 2004                   
|Long-term debt                                |       |                        
|Junior subordinated debentures payable to a   |       |                        
|subsidiary trust (1)                          |       |                        
|Mandatorily redeemable preferred stock        |       |                        
|Service contract obligations                  |       |                        
|Non-cancelable operating leases               |       |                        
|Fredonia combustion turbines lease (2)        |       |                        
|Energy purchase obligations                   |       |                        
|Financial hedge obligations                   |       |                        
|Non-qualified pension funding                 |       |                        
|                                              |      
|Total contractual cash obligations            |       |                        
|                                              |      

|                                             |       | Amount of Commitment
Expiration Per Period
|-------------------------------------------- | ----- | ------------------------------------------
|COMMERCIAL COMMITMENTS
(DOLLARS IN MILLIONS) | Total | 2004                                      
|Liquidity facilities - available (3)         |       |                                           
|Energy operations letter of credit (4)       |       |                                           
|                                             |      
|Total commercial commitments                 |       |                                           
|                                             |      

---

|(1) | See
note (1) on previous table.
|--- | -------------------------------

|(2) | See
"Fredonia 3 and 4 Operating Lease" under "Off-Balance Sheet Arrangements" below for
further discussion.
|--- | -----------------------------------------------------------------------------------------------------------

|(3) | See
note (4) on previous table respect to PSE.
|--- | ----------------------------------------------

|(4) | See
note (6) on previous table.
|--- | -------------------------------

OFF-BALANCE SHEET ARRANGEMENTS
        ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
        In
order to provide a source of liquidity for PSE at attractive cost of capital rates, PSE
entered into a Receivables Sales Agreement with Rainier Receivables, Inc., a wholly owned
subsidiary of PSE, in December 2002. Pursuant to the Receivables Sales Agreement, PSE sold
all of its utility customer accounts receivable and unbilled utility revenues to Rainier
Receivables. Concurrently with entering into the Receivables Sales Agreement, Rainier
Receivables entered into a Receivables Purchase Agreement with PSE and a third
party. The Receivables Purchase

---

Agreement allows Rainier Receivables to sell the receivables
purchased from PSE to the third party. The amount of receivables sold by Rainier
Receivables is not permitted to exceed $150 million at any time. However, the maximum
amount may be less than $150 million depending on the outstanding amount of PSEs
receivables which fluctuate with the seasonality of energy sales to customers. 

        The
receivables securitization facility is the functional equivalent of a secured revolving
line of credit. In the event Rainier Receivables elects to sell receivables under the
Receivables Purchase Agreement, Rainier Receivables is required to pay the purchasers fees
that are comparable to interest rates on a revolving line of credit. As receivables are
collected by PSE as agent for the receivables purchasers, the outstanding amount of
receivables purchased by the purchasers declines until Rainier Receivables elects to sell
additional receivables to the purchasers. 

        The
receivables securitization facility has a three-year term, but is terminable by PSE and
Rainier Receivables upon notice to the receivables purchasers. At December 31, 2003,
Rainier Receivables had sold $111.0 million in accounts receivable and the maximum remaining
receivables available for sale was $39.0 million.

FREDONIA 3 AND 4 OPERATING LEASE
        PSE
leases two combustion turbines for its Fredonia 3 and 4 electric generating facility
pursuant to a master operating lease that was amended for this purpose in April 2001. The
lease has a term expiring in 2011, but can be canceled by PSE after August 2004. Payments
under the lease vary with changes in the London Interbank Offered Rate (LIBOR). At
December 31, 2003, PSEs outstanding balance under the lease was $59.1 million. The
expected residual value under the lease is the lesser of $37.4 million or 60% of the cost
of the equipment. In the event the equipment is sold to a third party upon termination of
the lease and the aggregate sales proceeds are less than the unamortized value of the
equipment, PSE would be required to pay the lessor contingent rent in an amount equal to
the deficiency up to a maximum of 87% of the unamortized value of the equipment.

UTILITY CONSTRUCTION
PROGRAM

        Current
utility construction expenditures for generation, transmission and distribution are
designed to meet continuing customer growth and to improve efficiencies of PSEs
energy delivery systems. Construction expenditures, excluding equity Allowance for Funds
Used During Construction (AFUDC), were $270.0 million in 2003. PSE expects construction
expenditures will be approximately $424.0 million in 2004, which includes $80.0 million
for new generating resources subject to regulatory approval. The proposed generating
resource, if approved in 2004, will be funded initially with short-term debt. Construction
expenditure estimates are subject to periodic review and adjustment in light of changing
economic, regulatory, environmental and conservation factors.



NEW GENERATION
RESOURCES
        In
October 2003, PSE completed negotiations to purchase a 49.85% interest in a 275 MW (250 MW
capacity with 25 MW planned capital improvements) gas-fired electric generating facility
located within PSEs service territory. The purchase will add approximately 137 MW of
electric generation capacity to serve PSEs retail customers. PSE submitted a power
cost only rate case in October 2003 to the Washington Commission to recover the
approximately $80 million cost of the new generating facility and other power costs. The
power cost only rate case is expected to last approximately five months. Accordingly, the
acquisition of the plant is subject to approval by the Washington Commission, and is
expected by mid-April 2004. In addition, the acquisition will require approval from FERC.
PSE filed its application in January 2004 with FERC and anticipates approval in early
2004. 
        In
addition, PSE has issued an RFP to acquire approximately 50 average MW of energy from wind
power for its electric-resource portfolio. PSE issued an RFP in February 2004 for
approximately 305 MW of thermal and other generation with proposals due back in March
2004.



OTHER ADDITIONS

        Other
property, plant and equipment additions were $15.5 million in 2003. Puget Energy expects
InfrastruXs capital additions to be $16.2 million, $18.0 million and $20.0 million
in 2004, 2005 and 2006, respectively. Construction expenditure estimates are subject to
periodic review and adjustment in light of changing economic, regulatory, environmental
and conservation factors.

CAPITAL RESOURCES CASH FROM
OPERATIONS

        Cash
generated from operations totaled $323.0 million at December 31, 2003. During the period,
$87.2 million in cash was used for AFUDC and payment of dividends. Consequently, cash
available for utility construction expenditures and other capital expenditures was $235.7
million or 77.7% of the $303.5 million in construction expenditures (net of AFUDC) and
other capital expenditure requirements for the period. For the same period in 2002, cash
generated from operations was $709.7 million, $99.3 million of which was used for AFUDC
and payment of dividends. Therefore, cash available for utility construction expenditures
and other capital expenditures at December 31, 2002 was $610.4 million. The reduction in
cash generated from operations in 2003 was primarily due to refunds reducing the PGA
balance and the reduction in cash received related to deferred tax items in 2002. 

        During
2002, PSE received $121.0 million in excess of actual gas costs from customers through the
PGA mechanism compared to refunds to customers through the PGA mechanism of $71.8 million
for 2003. Cash from deferred income taxes decreased $93.8 million due primarily to federal
income tax refunds and deferred tax credits in 2002 that did not occur in 2003. There was
also a $21.4 million decrease in cash flows as a result of returning collateral to an
energy trading counterparty in 2003 compared to a $21.4 million increase in cash flow from
receiving the collateral in 2002. Cash from materials and supplies decreased $36.8 million
due predominantly to higher gas injections in 2003 as compared to 2002 in order to
increase gas storage levels. Cash used for accounts payable decreased $27.9 million due to
fewer accrued incentives and operating-related costs at the end of 2003. In 2003, PSE also
funded the qualified pension plan in the amount of $26.5 million

---

compared to no funding
during 2002. Cash used for taxes payable increased in 2003 compared to 2002 by $31.7
million.

FINANCING PROGRAM

        Financing
utility construction requirements and operational needs is dependent upon the amount of
internally generated funds and the cost and availability of external funds through capital
markets and from financial institutions. Access to funds is dependent upon factors such as
general economic conditions, regulatory authorizations and policies, and Puget
Energys and PSEs credit ratings.

RESTRICTIVE COVENANTS

        In
determining the type and amount of future financing, PSE may be limited by restrictions
contained in its electric and gas mortgage indentures, articles of incorporation and
certain loan agreements. Under the most restrictive tests, at December 31, 2003, PSE could
issue:

| |  | approximately
$927.9 million of additional first mortgage bonds based upon approximately $1.5 billion
of electric and gas bondable property available for use for issuance subject to the
interest coverage ratio limitation of 2.0 times net earnings available for interest. PSEs
interest coverage ratio at December 31, 2003 was 2.9 times net earnings available for
interest;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
$454.5 million of additional preferred stock at an assumed dividend rate of 7.25%; and
| | - | ----------------------------------------------------------------------------------------------------

| |  | approximately
$261.3 million of unsecured long-term debt.
| | - | ---------------------------------------------------------

CREDIT RATINGS
        Neither
Puget Energy nor PSE has any rating downgrade triggers that would accelerate the maturity
dates of outstanding debt. However, a downgrade in the companies credit ratings
could adversely affect their ability to renew existing, or obtain access to new, credit
facilities and could increase the cost of such facilities. For example, under PSEs
revolving credit facility, the spreads over the index and commitment fee increase as
PSEs secured long-term debt ratings decline. A downgrade in commercial paper ratings
could preclude PSEs ability to issue commercial paper under its current programs.
The marketability of PSE commercial paper is currently limited by the A-3/P-2 ratings by
Standard & Poors and Moodys Investors Service. In addition, downgrades in
any or a combination of PSEs debt ratings may allow counterparties on a contract by
contract basis in the wholesale electric, wholesale gas and financial derivative markets
to require PSE to post a letter of credit or other collateral, make cash prepayments,
obtain a guarantee agreement or provide other mutually agreeable security.

The
ratings of Puget Energy and PSE, as of March 8, 2004, were:

|                               | Ratings          
|------------------------------ | -----------------
|                               | Standard & Poors
|Puget Sound Energy             |                  
|Corporate credit/issuer rating | BBB-             
|Senior secured debt            | BBB              
|Shelf debt senior secured      | BBB              
|Trust preferred securities     | BB               
|Preferred stock                | BB               
|Commercial paper               | A-3              
|Revolving credit facility      | *                
|Ratings outlook                | Positive         
|Puget Energy                  
|Corporate credit/issuer rating | BBB-             

* Standard & Poors does not
rate credit facilities.

SHELF REGISTRATIONS,
LONG-TERM DEBT AND COMMON STOCK ACTIVITY
        In
January 2004, Puget Energy and PSE filed a shelf registration statement with the
Securities and Exchange Commission for the offering, on a delayed or continuous basis, of
up to $500 million principal amount of:

| |  | common
stock of Puget Energy, and
| | - | ---------------------------------

| |  | senior
notes of PSE, secured by a pledge of PSEs first mortgage bonds.
| | - | -----------------------------------------------------------------------

In
March 2003, PSE refinanced $161.9 million of its Pollution Control Bonds to lower the
weighted average interest rate from 6.77% to 5.01%. In June 2003, PSE issued $150 million
principal amount of senior notes. The proceeds of $149.1 million were used to repay debt.
In November 2003, Puget Energy sold an additional 4.55 million shares of common stock. The
proceeds of $100.1 million were invested in PSE and mainly used to repay debt and redeem
high-cost preferred stock. During 2003, PSE redeemed the following long-term debt:

---

| |  | $49.8
million notes and junior subordinated debt of a subsidiary trust in February 2003 with
interest rates ranging from 7.02% to 8.231%;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | $20.0
million notes at an interest rate of 8.39% in March 2003;
| | - | ---------------------------------------------------------------

| |  | $60.0
million notes at interest rates ranging from 8.20% to 8.59% in May 2003;
| | - | ------------------------------------------------------------------------------

| |  | $31.0
million notes at interest rates ranging from 6.23% to 7.19% in August 2003; and
| | - | -------------------------------------------------------------------------------------

| |  | $54.0
million notes at interest rates ranging from 6.20% to 6.40% in December 2003.
| | - | -----------------------------------------------------------------------------------



LIQUIDITY FACILITIES AND
COMMERCIAL PAPER
        PSE
has a $250 million unsecured credit agreement with various banks which expires in June
2004 and a $150 million three-year receivables securitization program which expires in
December 2005. The receivables available for sale under the securitization program may be
less than $150 million depending on the outstanding amount of PSEs receivables which
fluctuate with the seasonality of energy sales to customers. At December 31, 2003, PSE had
available $250 million in the unsecured credit agreement and $39 million available from
the receivables securitization facility (net of $111 million sold), which provide credit
support for outstanding commercial paper and outstanding letters of credit. At December
31, 2003, there were no outstanding amounts under its commercial paper program and $0.5
million under the letters of credit, effectively reducing the available borrowing capacity
under the liquidity facilities to $288.5 million. 

        On
May 27, 2003, Puget Energy entered into a $15 million, three-year credit agreement with a
bank. Under the terms of the agreement, Puget Energy will pay a floating interest rate on
borrowings based on the LIBOR. The interest rate is set for one, two or three-month
periods at the option of Puget Energy with interest due at the end of each period. Puget
Energy will also pay a commitment fee on any unused portion of the credit facility. On May
30, 2003, Puget Energy borrowed $5 million under the credit agreement. The proceeds of the
loan were invested in InfrastruX, which used the proceeds to acquire a construction
services company in New Mexico. 

        In
June 2001, InfrastruX signed a three-year credit agreement with several banks to provide
up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In
addition, InfrastruXs subsidiaries have an additional $34.7 million in lines of
credit with various banks. Borrowings available for InfrastruX are used to fund
acquisitions and working capital requirements of InfrastruX and its subsidiaries. At
December 31, 2003, InfrastruX and its subsidiaries had outstanding loans of $150.9 million
and letters of credit of $4.7 million, effectively reducing the available borrowing
capacity under these lines of credit to $29.1 million.

STOCK PURCHASE AND
DIVIDEND REINVESTMENT PLAN 
        Puget
Energy has a Stock Purchase and Dividend Reinvestment Plan pursuant to which shareholders
and other interested investors may invest cash and cash dividends in shares of Puget
Energys common stock. Since new shares of common stock may be purchased directly
from Puget Energy, funds received may be used for general corporate purposes. Puget Energy
issued common stock from the Stock Purchase and Dividend Reinvestment Plan of $15.5
million (721,340 shares) in 2003 compared to $16.9 million (801,205 shares) in 2002.

COMMON STOCK OFFERING
PROGRAMS 
        To
provide additional financing options, Puget Energy entered into agreements in July 2003
with two financial institutions under which Puget Energy may offer and sell shares of its
common stock from time to time through these institutions as sales agents, or as
principals. Sales of the common stock, if any, may be made by means of negotiated
transactions or in transactions that may be deemed to be at-the-market
offerings as defined in Rule 415 promulgated under the Securities Act of 1933, including
in ordinary brokers transactions on the New York Stock Exchange at market prices. In
October 2003, Puget Energy sold 100,600 shares of common stock under its program with
Cantor Fitzgerald & Company. Puget Energy received approximately $2.3 million in net
proceeds from these sales.

PROCEEDINGS RELATING TO
THE WESTERN POWER MARKET
        While
PSE cannot predict the outcome of any of the individual ongoing proceedings relating to
the western power markets, PSE generally is pleased that FERC appears to be narrowing the
issues under review in the cases pending before it. The narrowing of issues allows PSE to
compare the allegations in the various proceedings with PSEs relevant records and to
better anticipate the likely outcome of each case. In the aggregate, PSE does not expect
the ultimate resolution of the issues and cases discussed below to have a material adverse
impact on the financial condition, results of operations or liquidity of the Company.

CALIFORNIA INDEPENDENT SYSTEM OPERATOR
(CAISO) RECEIVABLE AND CALIFORNIA         REFUND PROCEEDINGS

        PSE
operates within the western wholesale market and made sales into the California energy
market during the fourth quarter of 2000 through the CAISO. In August of 2000, San Diego
Gas & Electric Company filed a complaint at FERC (Docket No. EL00-95) seeking price
caps on energy sold into the CAISO and the California Power Exchange (PX) markets. The
complaint also sought refunds of prices charged above any such caps put in place. In
response to the complaint, after a number of orders that attempted to address the
California energy crisis in a variety of manners, FERC issued an Order on June 19, 2001
that imposed caps on prices beginning the next day. 

        On
July 25, 2001, FERC ordered an evidentiary hearing in Docket No. EL00-95 to determine the
amount of refunds due to California energy buyers, including the CAISO, for purchases made
in the spot markets operated by the CAISO during the period October 2, 2000
through June 20, 2001. On December 12, 2002, the Administrative Law Judge
conducting the hearings issued his certification of proposed findings on California refund
liability to FERC. The certification includes an appendix that reflects what the
Administrative Law Judge labeled as ballpark estimates of amounts owed and
owing. The certification also stated that the amounts owing should be adjusted for
interest, a calculation the Administrative Law Judge did not make. 

        The
FERC staff issued a report in August 2002 (Docket No. PA02-2) that, among other things,
recommended that FERC modify the methodology for calculating refunds in the California
refund proceeding (Docket No. EL00-95) by adopting, as a proxy for the cost of
natural

---

gas, producing basin spot prices plus transportation costs, instead of reported spot
prices for natural gas at California delivery points. This methodology of calculating the
cost of natural gas further reduced the amount owed by the CAISO to PSE for sales made
during 2000 and 2001.  The current net receivable recorded by PSE is $23.6 million. The CAISO
receivable range including the effects of
the CAISO refund and estimates of the gas price adjustment, including interest is between
$23.6 million and $34.2 million. 

        On
November 20, 2002, FERC issued an Order on Motion for Discovery Order in Docket No.
EL00-95 that granted a motion to allow parties to adduce additional evidence
into the refund proceedings that is either indicative or counter-indicative of
market manipulation. The order also authorized an appointment of an Administrative
Law Judge as a discovery master, and permitted the parties to conduct discovery and file
any such evidence with FERC. In their March 3, 2003 filing, the California parties
reiterated their allegations of market manipulation against PSE and approximately 60 other
companies. PSE and the other parties responded on March 20, 2003. 

        On
March 26, 2003, FERC issued an Order on Proposed Findings on Refund Liability in Docket
No. EL00-95 that substantially adopted the recommendations that the Administrative Law
Judge made on December 12, 2002, except that the Order also substantially adopted the FERC
staff gas price recommendation made in its August 2002 report. On October 16, 2003, FERC
issued an Order on Rehearing that largely left the refund calculation methodologies
established by the March 26, 2003 Order unchanged. The Order on Rehearing gives the CAISO
a deadline to perform its cost re-runs (which are expected to establish actual
amounts owing and owed) of five months from October 16, 2003. In February 2004, however,
FERC issued an order giving the CAISO an indefinite period of time to complete its cost
re-runs, subject to the CAISO filing monthly reports of its progress and its expected
completion dates. The CAISOs current estimates are that it will be unable to
complete the cost re-run process any earlier than August 2004. Until the CAISO completes
its cost re-run process, little other activity can take place in the FERC docket. 

        The
March 26, 2003 Order on Proposed Findings on Refund Liability also permitted generators to
make a filing to recover actual fuel costs that exceeded the calculated proxy price under
the staff methodology. PSE made such a filing on May 12, 2003. The California parties
objected to all fuel cost filings on May 21, 2003. The Order on Rehearing issued on
October 16, 2003 postpones resolution of this issue, so PSEs application for fuel
cost recovery remains pending. 

        The
Order on Rehearing issued on October 16, 2003 also expressly adopted and approved a
stipulation that confirmed that two PSE non-spot-market transactions were not
subject to refund. The total gross revenue associated with the transactions is
approximately $26.0 million. On October 17, 2003, PSE sent a demand letter to the CAISO
seeking payment of the amount due. The CAISO responded to the letter with its own letter
of November 14, 2003, expressing an unwillingness to take the issue up separately or in
advance of its cost re-run activities. PSE has not yet formally responded to
that letter.

        Because
of the numerous orders FERC has issued in Docket No. EL00-95 over a period of more than
three years, more than 80 appeals from the proceeding have already been lodged with the
U.S. Ninth Circuit Court of Appeals. The Ninth Circuits usual practice has been to
consolidate those appeals as they are filed, and hold the appellate proceedings in
abeyance pending a final determination by FERC of the issues before it. PSE has no ability
to predict how soon the Ninth Circuit may choose to take up these matters for
consideration on their merits, but the California parties have attempted to initiate a
more active review from time to time. It is likely that the case will not be finally
resolved before formal appellate review.

CALIFORNIA RECEIVABLE
        In
2001, PG&E and Southern California Edison defaulted on payment obligations owed to
various energy suppliers, including the CAISO and the California PX. The CAISO in turn
defaulted on its payment obligations to PSE and various other energy suppliers. The
California PX itself filed bankruptcy in 2001, further constraining PSEs ability to
receive payments due to controls placed on the California PXs distribution of funds
by the California PX bankruptcy court and due to the fact that the vast majority of funds
owed directly to the CAISO are owed by the California PX. In addition, the California
PXs inverse condemnation action against the State of California may influence the
delivery of funds to energy sellers such as PSE. PSE has a bad debt reserve and a
transaction fee reserve applied to the CAISO receivables, such that the net receivable at
December 31, 2003 was $23.6 million. On March 1, 2002, Southern California
Edison paid its past due energy obligations to the CAISO, the California PX and various
other parties; however, those funds were not used to pay the outstanding balance of the
CAISO obligations to PSE. 

        In
summary, the developments in the California Refund Proceeding described in the above
section have the likely effect of reducing PSEs gross receivable balance due from
the CAISO to an amount approximately equivalent to collecting payment on the two
non-spot-market transactions removed from the Refund Proceeding. PSE is
attempting early collection of proceeds associated with those sales while recognizing that
the ultimate resolution of the Refund Proceeding may be more distant in the future. PSE
anticipates that the net results of the CAISO cost re-runs and the application of the
refund calculations will extinguish or offset the CAISO receivable apart from the balance
associated with the two non-spot-market transactions. PSE is continuing to
pursue recovery of the CAISO receivable.

PACIFIC NORTHWEST REFUND PROCEEDING
        In
October 2000, PSE filed a complaint at FERC (creating Docket No. EL01-10) against
all jurisdictional sellers in the Pacific Northwest seeking prospective price
caps consistent with any result FERC supplied for the California markets. FERC dismissed
PSEs complaint on December 15, 2000, although PSE filed for rehearing in January
2001. When FERC issued its June 19, 2001 Order in Docket No. EL00-95, imposing west-wide
price constraints on energy sales, PSE moved to withdraw its rehearing request and its
complaint in the EL01-10 Docket, on the basis that the relief PSE sought was fully
provided. Various parties, including the Port of Seattle and the cities of Seattle and
Tacoma, moved to intervene in the proceeding. They asserted the ability to adopt
PSEs complaint to obtain retroactive refunds for numerous transactions, including
many that were not within the scope of the PSE complaint. The proceeding became commonly
referenced as the Pacific Northwest Refund Proceeding, despite the fact that
the original complainant, PSE, did not seek retroactive refunds. A preliminary evidentiary
hearing was held in September 2001, and an Administrative Law Judge recommendation against
refunds followed. In December 2002, FERC issued an order permitting additional discovery
and the submission of any additional evidence (parallel to the order issued in the
California Refund Proceeding) that reopened the matter to permit parties to introduce any
evidence they claimed to have of market

---

manipulation. A few parties made filings,
asserting market manipulation in early March 2003, and numerous parties, including PSE,
responded to those allegations in late March 2003. On June 25, 2003, FERC issued an order
terminating the proceeding, largely on procedural, jurisdictional and equitable grounds.
Various parties filed rehearing requests on July 25, 2003. On November 10, 2003, FERC
denied the rehearing requests, and the matter has now been appealed to the Ninth Circuit
Court of Appeals. PSE has filed its own appeal, on the basis that it had an absolute right
to withdraw the complaint before any other party intervened. The California parties also
sought rehearing on one new issue decided in the November 10, 2003 order, which request
was denied by FERC on February 9, 2004. It is expected that all appeals from this
proceeding will be consolidated and resolved together.

ORDERS TO SHOW CAUSE
        On
June 25, 2003, FERC issued two show cause orders pertaining to its western market
investigations that commenced individual proceedings against many sellers. One show cause
proceeding seeks to investigate approximately 26 entities that allegedly had potential
partnerships with Enron. PSE was not named in that show cause order, and in an
order dismissing many of the already-named respondents in the partnerships
proceedings on January 22, 2004, FERC stated that they had determined not to proceed
further against other parties. Accordingly, PSE does not expect to be named in the case. 

        The
second show cause proceeding investigated approximately 55 entities that allegedly had
engaged in potential gaming practices in the CAISO and California PX markets.
PSE is one of the entities named in the gaming show cause order (Docket No.
EL03-169). On July 16, 2003, CAISO provided data to FERC in connection with the
gaming show cause order that indicated that, under the standards adopted by
FERC in the June 25, 2003 orders, CAISOs previously reported claims against PSE as
to ricochet transactions completely disappear. Consistent with the show cause
orders invitation to attempt settlement, PSE and FERC staff filed a settlement of
all issues pending against PSE in those proceedings on August 28, 2003. The proposed
settlement admits no wrongdoing on the part of PSE, but would result in the payment of
$17,092 to settle all claims. The California parties and a few others filed oppositions to
PSEs settlement (and all others) on September 30, 2003. PSE replied to those
arguments on October 20, 2003. The presiding Administrative Law Judge certified and
recommended the PSE settlement to FERC on November 18, 2003. In January 2004, FERC issued
an Order Approving Contested Settlement Agreement that finds PSEs settlement to be
in the public interest. On February 23, 2004, motions for rehearing were filed by the Port
of Seattle and the California parties (the California Attorney General, the California
Public Utilities Commission, the California Electricity Oversight Board, PG&E and
Southern California Edison). PSE continues to believe that the orders to show cause do not
raise new issues or concerns nor will they have a material adverse impact on the financial
condition, results of operations or liquidity of the Company.

ANOMALOUS BIDDING INVESTIGATION
        On
June 25, 2003, FERC issued an order commencing a new investigatory proceeding, Docket No.
IN03-10, to be conducted through its Office of Market Oversight and Investigations (OMOI).
That docket is to review each sellers bids into the CAISO or California PX markets
that exceeded $250/MWh during the period of May 1, 2000 to October 1, 2000. The OMOI is to
determine if each such entitys bids show a pattern or an effort to manipulate the
market, and if they do, to consider whether the entity should be required to disgorge any
improper profits earned as a result of such patterns or efforts. PSE received a data
request from the OMOI in this proceeding about its bids and responded on July 24,
2003. PSE has not received further information requests since responding. There is no
established timetable for this proceeding, but FERC has indicated that it expects to work
diligently to review the practices of each seller and to resolve the matter expeditiously.
PSE does not expect any material adverse impacts on the financial condition of the Company
from this FERC investigation.

PORT OF SEATTLE SUIT
        On
May 21, 2003, the Port of Seattle commenced suit in federal court in Seattle, Washington
against 22 energy sellers into the California market, alleging that the conduct of those
sellers during 2000 and 2001 constituted market manipulation, violated antitrust laws and
damaged the Port of Seattle, which had a contract to purchase its complete energy supply
from PSE at the time. The Ports contract with PSE linked the price of the energy
sold to the Port to an index price for energy sold at wholesale at the Mid-Columbia
trading hub. The Port alleged that the Mid-Columbia price was intentionally affected
improperly by the defendants, including PSE. PSE moved to dismiss this case; other
defendants moved to transfer the matter to a multi-district litigation panel in
California. A conditional transfer order was issued in July 2003. After further
proceedings before the judicial panel on multi-district litigation, an order transferring
the case to the Southern District of California was entered on December 15, 2003.
PSEs motion to dismiss remains pending and is scheduled to be heard on March 26,
2004 in San Diego, California. PSE does not expect any material adverse impacts on the
financial condition of the Company from this matter.

CALIFORNIA ATTORNEY GENERAL CASES
        On
May 31, 2002, FERC conditionally dismissed a complaint filed on March 20, 2002 by the
California Attorney General in Docket No. EL02-71 that alleged violations of the FPA by
FERC and all sellers (including PSE) of electric power and energy into California. The
complaint asserted that FERCs adoption and implementation of market rate authority
was flawed and, as a result, individual sellers such as PSE were liable for sales of
energy at rates that were unjust and unreasonable. The condition for dismissal
was that all sellers refile transaction summaries of sales to (and, after a clarifying
order issued on June 28, 2001, purchases from) certain California entities during 2000 and
2001. PSE refiled such transaction summaries on July 1 and July 8, 2002. The order of
dismissal is now on appeal to the Ninth Circuit Court of Appeals. 

        On
the same day as FERCs order of dismissal in Docket No. EL02-71 was entered, the
California Attorney General announced it had filed individual complaints against a number
of sellers, including PSE, in California Superior Court in San Francisco. That complaint
alleged that PSEs sales to California violated the requirements of the FPA and that,
as such, the sales also violated certain sections of the California Business Practices Act
forbidding unlawful business practices. The complaint asserted that each such
violation subjects PSE to a fine of up to $2,500 plus an award of
attorneys fees and asserts that there were thousands of such violations.
PSE removed that suit to federal court and

---

moved to dismiss it on the grounds that the
issues are within the exclusive or primary jurisdiction of FERC. On March 25, 2003, the
court granted the motion for dismissal. The order of dismissal is now on appeal to the
Ninth Circuit Court of Appeals. PSE does not expect any material adverse impacts on the
financial condition of the Company from these matters.

CALIFORNIA CLASS ACTIONS

        During
May 2002, PSE was served with two cross-complaints, by Reliant Energy Services and Duke
Energy Trading & Marketing, respectively, in six consolidated class actions pending in
Superior Court in San Diego, California. The original complaints in the action, which were
brought by or on behalf of electricity purchasers in California, allege that the original
(approximately 40) defendants manipulated the wholesale electricity markets in violation
of various California Business Practices Act or Cartwright Act (antitrust) provisions. The
plaintiffs in the lawsuit seek, among other things, restitution of all funds acquired by
means that violate the law and payment of treble damages, interest and penalties. The
cross-complaints assert essentially that the cross-defendants, including PSE, were also
participants in the energy market in California at the relevant times, and that any
remedies ordered against some market participants should be ordered against all. Reliant
Energy Services and Duke Energy Trading & Marketing also seek indemnity and
conditional relief as a buyer in transactions involving cross-defendants should the
plaintiffs prevail. Those cross-complaints added over 30 new defendants, including PSE, to
litigation that had been pending since 2000 and had been set for trial in state court.
Some of the newly added defendants removed the litigation to federal court. The federal
court in San Diego remanded the case to the California state court in an order issued in
December 2002. PSE and numerous other defendants added by the cross-complaints have moved
to dismiss these claims. Those motions were argued on September 19, 2002, but the federal
judge did not rule on those motions in his order remanding the case to state court. The
remand order is now being reconsidered. PSE and the other defendants that moved to dismiss
the claims intend to submit their motion to the appropriate court at the earliest
practical date. As a result of the various motions, no trial date is set at this time. PSE
does not expect the ultimate resolution of these matters to have a material adverse impact
on the financial condition, results of operations or liquidity of the Company.

CRITICAL ACCOUNTING
POLICIES
        The
preparation of financial statements in conformity with Generally Accepted Accounting
Principles requires that management apply accounting policies and make estimates and
assumptions that affect results of operations and the reported amounts of assets and
liabilities in the financial statements. The following areas represent those that
management believes are particularly important to the financial statements and that
require the use of estimates and assumptions to describe matters that are inherently
uncertain.

REVENUE RECOGNITION
        Utility
revenue is recognized when the basis of service is rendered, including estimates used for
unbilled revenue. Unbilled kWh are determined by taking kWh generated and purchased less
billed kWh and estimated system losses. The estimated system losses are determined by
reviewing historical billed kWh to generated and purchased kWh. This amount is then
multiplied by the estimated average revenue per kWh. Non-utility revenue is recognized
when services are performed, upon the sale of assets, or on a percentage of completion
basis for fixed-price contracts. The recognition of revenue is in conformity with
Generally Accepted Accounting Principles, which requires the use of estimates and
assumptions that affect the reported amounts of revenue.

REGULATORY ACCOUNTING
        Puget
Energys regulated subsidiary, PSE, prepares its financial statements in accordance
with the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation, and in conformity with FERCs uniform system of accounts. The
Washington Commission also requires PSE to use FERCs uniform system of accounts. The
reason PSE prepares its financial statements in accordance with SFAS No. 71 is that its
rates and tariffs are regulated by the Washington Commission and FERC. The rates that are
charged by PSE to its customers are based upon cost base regulation reviewed and approved
by these regulatory commissions. Under the authority of these commissions, PSE has
recorded certain regulatory assets and liabilities in the amount of $461.8 million and
$406.1 million as of December 31, 2003 and 2002, respectively. If at some point in the
future Puget Energy determines that it no longer meets the criteria for continued
application of SFAS No. 71 with respect to PSE, Puget Energy could be required to write
off its regulatory assets and liabilities.

DERIVATIVES
        Puget
Energy uses derivative financial instruments primarily to manage its commodity price
risks. Derivative financial instruments are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138 and SFAS No. 149. Accounting for derivatives continues to evolve through
guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting
Standards Board. To the extent that changes by the DIG modify current guidance, including
the normal purchases and normal sales determination, the accounting treatment for
derivatives may change. 
        To
manage its electric and gas portfolios, Puget Energy enters into contracts to purchase or
sell electricity and gas. These contracts are considered derivatives under SFAS No. 133
unless a determination is made that they qualify for normal purchases and normal sales
exclusion. If the exclusion applies, those contracts are not marked-to-market and are not
reflected in the financial statements until delivery occurs. 

        The
availability of the normal purchases and normal sales exclusion to specific contracts is
based on a determination that a resource is available for a forward sale and similarly a
determination that at certain times existing resources will be insufficient to serve load.
This determination is based on internal models that forecast customer demand and
generation supply. The models include assumptions regarding customer load growth rates,
which are influenced by the economy, weather and the impact of customer choice, and
resource availability. The critical assumptions used in the determination of normal
purchases and normal sales are consistent with assumptions used in the general planning
process. 
        Energy
contracts that are considered derivatives may be eligible for designation as cash flow
hedges. If a contract is designated as a cash

---

flow hedge, the change in its market value
is generally deferred as a component of other comprehensive income until the transaction
it is hedging is completed. Conversely, the change in the market value of derivatives not
designated as cash flow hedges is recorded in current period earnings. 

        When
external quoted market prices are not available for derivative contracts, PSE uses a
valuation model which uses volatility assumptions relating to future energy prices based
on specific energy markets and utilizes externally available forward market price curves.

GOODWILL AND INTANGIBLES (PUGET ENERGY ONLY)
        On
January 1, 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective and as a result Puget Energy ceased amortization of goodwill. During 2001, Puget
Energy recorded approximately $2.8 million of goodwill amortization. Puget Energy performs
an annual impairment review to determine if any impairment exists. In performing the
goodwill impairment test, Puget Energy compares the present value of the future cash flows
of InfrastruX with recorded equity. If goodwill is determined to have an impairment, Puget
Energy will record in the period of determination an impairment charge to earnings. 

        Intangibles
with finite lives are amortized on a straight-line basis over the expected periods to be
benefited. The goodwill and intangibles recorded on the balance sheet of Puget Energy are
the result of acquisition of companies by InfrastruX.

DEFINED BENEFIT PENSION PLAN
        Puget
Energy has a qualified defined benefit pension plan covering substantially all employees
of PSE. For 2003, 2002 and 2001 qualified pension income of $12.9 million, $17.7 million
and $20.0 million, respectively, was recorded in the financial statements. Of these
amounts, approximately 67.0%, 66.8% and 58.0% offset utility operations and maintenance
expense in 2003, 2002 and 2001, respectively, and the remaining amounts were capitalized.
Changes in market values of stocks or interest rates will affect the amount of income that
Puget Energy can record in its financial statements in future years. Qualified pension
income is expected to decline to $8.6 million in 2004 as a result of lower actual returns
on pension assets during the last three years and declining expected rates of return on
pension fund assets. During 2003, PSE made a cash contribution to the qualified defined
benefit plan of $26.5 million and is not expected to make a cash contribution to this
qualified plan in 2004.

STOCK-BASED COMPENSATION
        The
Company has various stock-based compensation plans which prior to 2003 were accounted for
according to APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation. In 2003, the Company adopted the fair value based accounting of SFAS
No. 123 using the prospective method under the guidance of SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. The Company will
apply SFAS No. 123 accounting prospectively to stock compensation awards granted in 2003
and future years, while grants that were made in years prior to 2003 will continue to be
accounted for using the intrinsic value method of APB No. 25.

CALIFORNIA INDEPENDENT SYSTEM OPERATOR RESERVE
        PSE
operates within the western wholesale market and has made sales into the California energy
market. At December 31, 2000, PSEs receivables from the CAISO and other
counterparties, net of reserves, were $41.8 million. PSE received the majority of the
partial payments for sales made in the fourth quarter of 2000 in the first quarter of 2001
and has since received a small amount of payments. At December 31, 2003, such receivables,
net of reserves, were approximately $23.6 million. 

        During
2003, FERC issued an order in the California Refund Proceeding adopting in part and
modifying in part FERCs earlier findings by the Administrative Law Judge. Based upon
the order, PSE has determined that the receivables balance at December 31, 2003 is
collectible from the CAISO. See Proceedings Related to the Western Power
Market under Managements Discussion and Analysis of Financial Condition and
Results of Operations for further discussion.

NEW ACCOUNTING PRONOUNCEMENTS
        In
January 2003, FIN 46, which was further revised in December 2003 with FIN 46R, clarified
the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have controlling
interest or sufficient equity at risk for the entity to finance its activities without
additional financial support. FIN 46R requires that if a business entity has a controlling
financial interest in a variable interest entity, the financial statements must be
included in the consolidated financial statements of the business entity. The adoption of
FIN 46R for all interests in variable interest entities created after January 31, 2003 is
effective immediately. For variable interest entities created before February 1, 2003, it
is effective July 1, 2003. The Company has evaluated its contractual arrangements and
determined PSEs 1995 conservation trust off-balance sheet financing transaction
meets this guidance, and therefore it was consolidated in the third quarter of 2003. As a
result, revenues for 2003 increased $5.7 million, while conservation amortization and
interest expense increased by the corresponding amount with no impact on earnings. At
December 31, 2003, the balance sheet assets and liabilities increased by $4.2 million. FIN
46R also impacted the treatment of the Companys mandatorily redeemable preferred
securities of a subsidiary trust holding solely junior subordinated debentures of the
corporation (trust preferred securities). Previously, these trust preferred securities
were consolidated into the Companys operations. As a result of FIN 46R, these
securities have been deconsolidated and were classified as junior subordinated debentures
of the corporation payable to a subsidiary trust holding mandatorily redeemable preferred
securities (junior subordinated debt) in the fourth quarter of 2003. This change had no
impact on the Companys results of operations for 2003. The Company is evaluating its purchase
power agreements and any other agreements to determine if FIN 46R will have an
impact on the financial statements. 

        In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes the
requirements for classifying and measuring as liabilities certain financial instruments
that embody

---

obligations to redeem the financial instruments by the issuer. The adoption of
SFAS No. 150 is effective with the first fiscal year or interim period beginning after
June 15, 2003. However, on November 5, 2003, the FASB deferred for an indefinite period
certain mandatorily redeemable noncontrolling interests associated with finite-lived
subsidiaries. The Company does not have any noncontrolling interest in finite-lived
subsidiaries and, therefore, is not affected by the deferral. Prior periods are not
restated for the new presentation. 

        SFAS
No. 150 requires the Company to classify its mandatorily redeemable preferred stock as
liabilities. As a result, the corresponding dividends on the mandatorily redeemable
preferred stock are classified as interest expense on the income statement with no impact
on income for common stock. 

        In
December 2003, SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132R), was revised to include various additional
disclosure requirements. SFAS No. 132R is effective for fiscal years ending after December
15, 2003. 

        In
June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost should be
capitalized as part of the related long-lived asset and allocated to expense over the
useful life of the asset. The Company adopted the new rules on asset retirement
obligations on January 1, 2003. As a result, the Company recorded a $0.2 million charge to
income for the cumulative effect of this accounting change. In addition, the Company
reclassified $124.9 million and $114.6 million in 2003 and 2002, respectively, from
accumulated depreciation to a regulatory liability. 

        The
Emerging Issues Tax Force of the Financial Accounting Standards Board (EITF) at its July
2003 meeting came to a consensus concerning EITF Issue No. 03-11, Reporting Realized
Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and
Not Held for Trading Purposes as Defined in Issue No. 02-03. The
consensus reached was that determining whether realized gains and losses on physically
settled derivative contracts not held for trading purposes reported in the income
statement on a gross or net basis is a matter of judgment that depends on the relevant
facts and circumstances. Based on the guidance in EITF No. 03-11, the Company determined
that its non-trading derivative instruments should be reported net and implemented this
treatment effective January 1, 2004. Consequently, revenue and purchased electricity will
be reduced as a result of netting any non-trading derivative instruments that meet the
EITF 03-11 criteria.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
Company is exposed to market risks, including changes in commodity prices and interest
rates.



PORTFOLIO MANAGEMENT
        The
nature of serving regulated electric customers with its wholesale portfolio of owned and
contracted resources exposes the Company and its customers to some volumetric and
commodity price risks within the sharing mechanism of the PCA. The Companys energy
risk management function monitors and manages these risks using analytical models and
tools. The Company manages its energy supply portfolio to achieve three primary
objectives:

| | Ensure
that physical energy supplies are available to serve retail customer requirements;
|- | -----------------------------------------------------------------------------------------

| | Manage
portfolio risks to limit undesired impacts on the Companys costs; and
|- | -----------------------------------------------------------------------------

| | Maximize
the value of the Companys energy supply assets.
|- | ---------------------------------------------------------

The
portfolio is subject to major sources of variability (e.g., hydro generation, outage risk,
regional economic factors, temperature-sensitive retail sales, and market prices for gas
and power supplies). At certain times, these sources of variability can mitigate portfolio
imbalances; at other times they can exacerbate portfolio imbalances. 

        The
Companys energy risk management staff develops hedging strategies for the
Companys energy supply portfolio. The first priority is to obtain reliable supply
for delivery to the Companys retail customers. The second priority is to protect
against unwanted risk exposure. The third priority is to optimize excess capacity or
flexibility within the wholesale portfolio. Most hedges can be implemented in ways that
retain the Companys ability to use its energy supply optimization opportunities.
Other hedges are structured similarly to insurance instruments, where PSE pays an
insurance premium to protect against certain extreme conditions. 

        Portfolio
exposure is managed in accordance with Company polices and procedures. The Risk Management
Committee, which is composed of Company officers, provides policy-level and strategic
direction for management of the energy portfolio. The Audit Committee of the
Companys Board of Directors has oversight of the Risk Management Committee. 

        The
prices of energy commodities are subject to fluctuations due to unpredictable factors
including weather, generation outages and other factors which impact supply and demand.
The volumetric and commodity price risk is a consequence of purchasing energy at fixed and
variable prices and providing deliveries at different tariffs and variable prices. Costs
associated with ownership and operation of production facilities are another component of
this risk. The Company may use forward physical delivery agreements and financial
derivatives for the purpose of hedging commodity price risk. Without jeopardizing the
security of supply within its portfolio, the Company will also engage in optimizing the
portfolio. Optimization may take the form of utilizing excess capacity, shaping flexible
resources to capture their highest value, utilizing transmission capacity or capitalizing
on market price movement. As a result, portions of the Companys energy portfolio are
monetized through the use of forward price instruments. 

        The
regulatory mechanisms of the PGA and the PCA mitigate the impact of commodity price
volatility upon the Company. The PGA mechanism passes through to customers increases and
decreases in the cost of natural gas supply. The PCA mechanism provides for a sharing of
costs and benefits that are graduated over four levels of power cost variances with an
overall cap of $40 million (+/-) plus 1% of the excess over the $40 million cap over the
four-year period ending June 30, 2006.

---

Transactions
that qualify as hedge transactions under SFAS No. 133 are recorded on the balance sheet at
fair value. Changes in fair value of the Companys derivatives are recorded each
period in current earnings or other comprehensive income. Short-term derivative contracts
for the purchase and sale of electricity are valued based upon daily quoted prices from an
independent energy brokerage service. Valuations for short-term and medium-term natural
gas financial derivatives are derived from a combination of quotes from several
independent energy brokers and are updated daily. Long-term gas financial derivatives are
valued based on published pricing from a combination of independent brokerage services and
are updated monthly. Option contracts are valued using market quotes and a Monte Carlo
simulation-based model approach. 

        At
December 31, 2003, the Company had an after-tax net asset of approximately $16.2 million
of energy contracts designated as qualifying cash flow hedges and a corresponding
unrealized gain recorded in other comprehensive income. Of the amount in other
comprehensive income, 99% has been reclassified out of other comprehensive income to a
deferred account due to the Company reaching the $40 million cap under the PCA mechanism.
The Company also had energy contracts that were marked-to-market at a loss through current
earnings for 2003 of $0.1 million. A hypothetical 10% increase in the market prices of
natural gas and electricity would increase the fair value of qualifying cash flow hedges
by approximately $5.2 million after-tax and would increase current earnings for those
contracts marked-to-market in earnings by an immaterial amount.

|DERIVATIVE CONTRACTS (DOLLARS IN MILLIONS)               | Amounts
|-------------------------------------------------------- | -------
|Fair value of contracts outstanding December 31, 2002    |        
|Contracts realized or otherwise settled during 2003      |        
|Changes in fair values of derivatives                    |        
|                                                         |        
|Fair value of contracts outstanding at December 31, 2003 |        
|                                                         |        

|                                                   | Fair Value of Contracts with Settlement During Year
|-------------------------------------------------- | ---------------------------------------------------
|SOURCE OF FAIR VALUE (DOLLARS IN MILLIONS)         | 2004                                               
|Prices based on models and other valuation methods |                                                    



INTEREST RATE RISK
        The
Company believes its interest rate risk primarily relates to the use of short-term debt
instruments, variable rate leases and long-term debt financing needed to fund capital
requirements. The Company manages its interest rate risk through the issuance of mostly
fixed-rate debt of various maturities. The Company utilizes bank borrowings, commercial
paper, line of credit facilities and accounts receivable securitization to meet short-term
cash requirements. These short-term obligations are commonly refinanced with fixed-rate
bonds or notes when needed and when interest rates are considered favorable. The Company
may enter into swap instruments to manage the interest rate risk associated with these
debts. The Company did not have any swap instruments outstanding as of December 31, 2003
or 2002. The carrying amounts and fair values of Puget Energys fixed-rate debt
instruments are:

|                       | 2003            | 2002        
|---------------------- | --------------- | ------------
|(DOLLARS IN MILLIONS)  | CARRYING
AMOUNT | FAIR
VALUE  
|Financial liabilities: |                 |             
|Short-term debt        |                 | $         13
|Long-term debt         |                 | 2,216       
|                      

ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

See
index on page 64.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND
FINANCIAL DISCLOSURE

None.

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ITEM 9A. CONTROLS AND
PROCEDURES

EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURES
        Under
the supervision and with the participation of Puget Energys and PSEs
management, including the Companies President and Chief Executive Officer and Senior
Vice President Finance and Chief Financial Officer, Puget Energy and PSE have evaluated
the effectiveness of the Companies disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934) as of the end of the period
covered by this annual report. Based upon that evaluation, the President and Chief
Executive Officer and Senior Vice President Finance and Chief Financial Officer of Puget
Energy and PSE concluded that these disclosure controls and procedures are effective.

CHANGES IN INTERNAL
CONTROLS
        There
have been no significant changes in Puget Energys or PSEs internal control
over financial reporting during the quarter ended December 31, 2003 that have materially
affected, or are reasonably likely to materially affect, Puget Energys or PSEs
internal control over financial reporting.

PART III

ITEM 10.  DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANTS

PUGET ENERGY
        The
information required by this item with respect to Puget Energy is incorporated herein by
reference to the material under Available Information in Part I of this report
and Proposal  Election of Directors, Directors Continuing in
Office, Board of Directors and Corporate Governance and Security
Ownership of Directors and Executive Officers  Section 16(a) Beneficial Ownership
Reporting Compliance in Puget Energys proxy statement for its 2004 Annual
Meeting of Shareholders (Commission File No. 1-16305). Reference is also made to the
information regarding Puget Energys executive officers set forth in Part I of this
report.

PUGET SOUND ENERGY
        The
information called for by Item 10 with respect to PSE is omitted pursuant to General
Instruction I(2)(c) to Form 10-K (omission of information by certain wholly owned
subsidiaries).

ITEM 11. EXECUTIVE
COMPENSATION

PUGET ENERGY
        The
information required by this item with respect to Puget Energy is incorporated herein by
reference to the material under Director Compensation, Executive
Compensation and Employment Contracts, Termination of Employment and
Change-In-Control Arrangements in Puget Energys proxy statement for its 2004
Annual Meeting of Shareholders (Commission File No. 1-16305).

PUGET SOUND ENERGY
        The
information called for by Item 11 with respect to PSE is omitted pursuant to General
Instruction I(2)(c) to Form 10-K (omission of information by certain wholly owned
subsidiaries).

ITEM 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN
INFORMATION
        The
following table sets forth information regarding the common stock that may be issued upon
the exercise of options, warrants and other rights granted to employees, consultants or
directors under all of the Puget Energy existing equity compensation plans, as of December
31, 2003.

---

|                                                             |                                                                                                                                                                                                                                                                                                                                                                |     |                                                                                                                                                                                                                                                                                                                                                |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |           |          
|------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ---------
|                                                             | (a)                                                                                                                                                                                                                                                                                                                                                            |     | (b)                                                                                                                                                                                                                                                                                                                                            |        | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Plan Category                                                | Number of securities to be
                                                                                      issued upon exercise of
                                                                                       outstanding options,
                                                                                      warrants and rights |     | Weighted-average
                                                                                        exercise price of
                                                                                      outstanding options,
                                                                                     warrants and rights |        | Number of securities   
                                                                                      remaining available for 
                                                                                     issuance under equity    
                                                                                         compensation plans    
                                                                                       (excluding securities   
                                                                                      reflected in column (a))
|Equity compensation plans   approved by security holders     | 40,000                                                                                                                                                                                                                                                                                                                                                         |     |                                                                                                                                                                                                                                                                                                                                                | $22.51 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 1,194,480 | (1)(2)(3)
|Equity compensation plans not    aproved by security holders | 260,000                                                                                                                                                                                                                                                                                                                                                        | (4) |                                                                                                                                                                                                                                                                                                                                                | $22.51 | (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 41,879    | (5)      
|Total                                                        | 300,000                                                                                                                                                                                                                                                                                                                                                        |     |                                                                                                                                                                                                                                                                                                                                                | $22.51 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 1,236,359 |          

The
table does not include 43,554 deferred stock units in the Companys deferred
compensation plans that are payable in stock, plus cash for any fractional shares, of
which all are currently vested.

|(1) | Includes
259,662 shares remaining available for issuance under Puget           Energys
Employee Stock Purchase Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | Includes
934,818 shares remaining available for issuance under Puget Energys Amended and
Restated           1995 Long-Term Incentive Plan (performance shares). Depending on the
level of achievement of performance goals, the performance shares may be paid out at zero
shares at minimum achievement level, 790,922 shares at target level, or 1,181,103 at
maximum level. Because there is no exercise price associated with performance shares,
such shares are not included in the weighted-average price calculation.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In
addition to stock options, Puget Energy may also grant stock awards, performance awards
and other stock-based awards under the Puget Energy Amended           and Restated 1995
Long-Term Incentive Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Does
not include stock options that were assumed by PSE in connection with its
          acquisition of Washington Energy Company. The assumed options are for the
          purchase of 11,301 shares of Puget Energy common stock and have a
          weighted-average exercise price of $20.21 per share. In the event that any
          assumed option is not exercised, no further option to purchase shares of common
          stock will be issued in place of such unexercised option.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Represents
41,879 shares available for issuance under Puget Energys           Nonemployee
Director Stock Plan (Director Stock Plan). The Director Stock Plan           provides for
automatic stock payments to each of Puget Energys nonemployee           directors.
Each nonemployee director who is a nonemployee director at any time           during a
calendar year receives a stock payment as a portion of the quarterly           retainer
paid to such director. Effective July 1, 2003, the number of shares           that will
be issued to each nonemployee director as a stock payment under the           Director
Stock Plan is determined by dividing two-thirds of the quarterly           retainer
payable to such director for a fiscal quarter by the fair market value           of Puget
Energys common stock on the last business day of that fiscal           quarter.
Prior to July 1, 2003, 40% of the quarterly retainer was payable in           stock. A
nonemployee director may elect to increase the percentage of his or her
          quarterly retainer that is paid in stock, up to 100%. A nonemployee director
may           also elect to defer the issuance of shares under the Director Stock Plan in
          accordance with the terms of the plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SUMMARY OF EQUITY
COMPENSATION PLANS NOT APPROVED BY SHAREHOLDERS

NON-PLAN GRANTS
        On
January 7, 2002, Puget Energy granted Stephen P. Reynolds, President and Chief Executive
Officer of Puget Energy and PSE, two non-qualified stock option grants outside of any
equity incentive plan adopted by Puget Energy (the Non-Plan Grants). These
stock option grants were an inducement to Mr. Reynolds employment and in lieu of
participation in the Companies Supplemental Executive Retirement Plan. One of the
Non-Plan Grants made to Mr. Reynolds is for 150,000 shares of Puget Energy common stock
and vests at a rate of 20% per year, for full vesting after five years. The other Non-Plan
Grant made to Mr. Reynolds is for 110,000 shares of Puget Energy common stock and vests at
a rate of 25% per year, for full vesting after four years. The exercise price of both
Non-Plan Grants is $22.51 per share, equal to 100% of the fair market value of Puget
Energy common stock on the date of grant. As of December 31, 2003, all of the 260,000
shares subject to the Non-Plan Grants remained outstanding. Except as expressly provided
in the option agreement relating to each of the Non-Plan Grants, the Non-Plan Grants are
subject to the terms and conditions of the Companys Amended and Restated 1995
Long-Term Incentive Plan. 

        Upon
a change of control (as defined in the Employment Agreement between Puget Energy and Mr.
Reynolds, dated January 7, 2002), both Non-Plan Grants will become fully vested and
immediately exercisable. If Mr. Reynolds employment or service relationship with
Puget Energy is terminated by Puget Energy without cause or by Mr. Reynolds with good
reason, the vesting and exercisability of the Non-Plan Grants will be accelerated as
follows: (1) the vesting and exercisability of the 150,000-share Non-Plan Grant will be
accelerated such that the total number of shares vested and exercisable will be calculated
as if the option had vested on a daily basis over the four-year period through the date of
termination and (2) the vesting and exercisability of the 110,000-share Non-Plan Grant
will be accelerated by two years. For purposes of the Non-Plan Grants, the terms
cause and good reason have the meanings given to them in the
Employment Agreement between Puget Energy and Mr. Reynolds, dated January 1, 2002. 

        Subject
to the provisions regarding a change of control and termination of employment or service
relationship by Puget Energy without cause or by Mr. Reynolds for good reason, as
described above, upon termination of Mr. Reynolds employment or service relationship
with

---

Puget Energy for any reason, the unvested portion of the Non-Plan Grants will
terminate automatically and the vested portion may be exercised as follows: (1) generally,
on or before the earlier of three months after termination and the expiration date of the
option, (2) if termination is due to retirement, disability or death, on or before the
earlier of one year after termination and the expiration date of the option, or (3) if
death occurs after termination, but while the option is still exercisable, on or before
the earlier of one year after the date of death and the expiration date of the option. 

        The
Non-Plan Grants provide for the payment of the exercise price of options by any of the
following means: (1) cash, (2) check, (3) tendering shares of Puget Energys common
stock, either actually or by attestation, already owned for at least six months (or any
shorter period necessary to avoid a charge to Puget Energys earnings for financial
reporting purposes) that on the day prior to the exercise date have a fair market value
equal to the aggregate exercise price of the shares being purchased, (4) delivery of a
properly executed exercise notice, together with irrevocable instructions to a brokerage
firm designated by Puget Energy to deliver promptly to Puget Energy the aggregate amount
of sale or loan proceeds to pay the option exercise price and any withholding tax
obligations that may arise in connection with the exercise or (5) any other method
permitted by the plan administrator.

BENEFICIAL OWNERSHIP OF PUGET SOUND ENERGY
        As
of December 31, 2003, all of the issued and outstanding shares of PSEs common stock
were held beneficially and of record by Puget Energy.

ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

None

ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The
aggregate fees billed by PricewaterhouseCoopers LLP, the Companys independent
auditors, for the year ended December 31 were as follows:

|                       | 2003         | 2002
|---------------------- | ------------ | ----
|(DOLLARS IN THOUSANDS) | PUGET ENERGY | PSE 
|Audit fees 1           |              | $   
|Audit related fees 2   |              |     
|Tax fees 3             |              |     
|All other fees 4       |              |     
|                      
|Total                  |              | $   
|                      

---

|1 | For
professional services rendered for the audit of Puget Energy's and PSE's annual financial
statements, reviews of financial statements included in the Companies' Forms 10-Q, and
consents and reviews of documents filed with the Securities and Exchange Commission.
The 2003 fees are estimated and include an aggregate amount of approximately $167,000
and $277,000 billed to Puget Energy and PSE, respectively, through December 31, 2003.
The 2002 fees include an aggregate amount of $100,000 and $297,000 billed to Puget
Energy and PSE, respectively, through December 31, 2002.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Consists
of employee benefit plan audits, due diligence reviews and assistance with Sarbanes-Oxley
readiness
|- | ------------------------------------------------------------------------------------------------------------

|3 | Consists
of tax planning, consulting and tax return reviews.
|- | ------------------------------------------------------------

|4 | For
2002, other fees consisted of financial information systems design and implementation
fees relating to the final portion of work on the implementation of Puget Sound
Energy's ConsumerLinX customer information system, initiated in 2001 and completed in
February 2002.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

The
Audit Committees of the Company have adopted policies for the pre-approval of all audit
and non-audit services provided by the Companys independent auditor. The policies
are designed to ensure that the provision of these services does not impair the
auditors independence. Under the policies, unless a type of service to be provided
by the independent auditor has received general pre-approval, it will require specific
pre-approval by the Audit Committee. In addition, any proposed services exceeding
pre-approved cost levels will require specific pre-approval by the Audit Committee. 

        The
annual audit services engagement terms and fees, as well as any changes in terms,
conditions and fees relating to the engagement, are subject to specific pre-approval by
the Audit Committees. In addition, on an annual basis, the Audit Committees grant general
pre-approval for specific categories of audit, audit-related, tax and other services,
within specified fee levels, that may be provided by the independent auditor. With respect
to each proposed pre-approved service, the independent auditor is required to provide
detailed back-up documentation to the Audit Committees regarding the specific services to
be provided. Under the policies, the Audit Committees may delegate pre-approval authority
to one or more of their members. The member or members to whom such authority is delegated
shall report any pre-approval decisions to the Audit Committees at their next scheduled
meeting. The Audit Committees do not delegate responsibilities to pre-approve services
performed by the independent auditor to management. 

        For
2003 all audit and non-audit services were pre-approved.

ITEM 15.  EXHIBITS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON 
                FORM 8-K

| | (a) | Documents
filed as part of this report:
| | --- | ---------------------------------------

| | 1) | Financial
statement schedules see index on page 64.
| | -- | ----------------------------------------------------

| | 2) | Exhibits
 see index on page 111.
| | -- | ---------------------------------

| | (b) | Reports
on Form 8-K:
| | --- | --------------------

| |  | Puget
Energy and Puget Sound Energy
| |  | -----------------------------------

| | 1) | Form
8-K dated on October 24, 2003  Item 5 Other Events and Item 7
               Exhibits, related to PSEs acquisition of a 49.85% share of the
               Frederickson Power LPs generation facility.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Form
8-K dated November 4, 2003  Item 5 Other Events, related to Puget
               Energys sale of common stock.
| | -- | ---------------------------------------------------------------------------------------------------------------------

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                                      |  |                                      
|------------------------------------- |  | -------------------------------------
|PUGET ENERGY, INC.                    |  | PUGET SOUND ENERGY, INC.             
|/s/ Stephen P. Reynolds               |  | /s/ Stephen P. Reynolds              
|Stephen P. Reynolds                   |  | Stephen P. Reynolds                  
|President and Chief Executive Officer |  | President and Chief Executive Officer
|                                      |  |                                      
|Date: March 9, 2004                   |  | Date: March 9, 2004                  
|                                      |  |                                      

---

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of each registrant and in the capacities and on
the dates indicated.

|                            |  |                                                           |  |              
|--------------------------- |  | --------------------------------------------------------- |  | -------------
|SIGNATURE                   |  | TITLE                                                     |  | DATE         
|                            |  | (Puget Energy and PSE unless otherwise noted)             | 
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Douglas P. Beighle      |  | Chairman of the Board                                     |  | March 9, 2004
|(Douglas P. Beighle)        |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Stephen P. Reynolds     |  | President, Chief Executive Officer and Director           |  |              
|(Stephen P. Reynolds)       |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Bertrand A. Valdman     |  | Senior Vice President Finance and Chief Financial Officer |  |              
|(Bertrand A. Valdman)       |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ James W. Eldredge       |  | Corporate Secretary and Chief Accounting Officer          |  |              
|(James W. Eldredge)         |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Charles W. Bingham      |  | Director                                                  |  |              
|(Charles W. Bingham)        |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Phyllis J. Campbell     |  | Director                                                  |  |              
|(Phyllis J. Campbell)       |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Craig W. Cole           |  | Director                                                  |  |              
|(Craig W. Cole)             |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Robert L. Dryden        |  | Director                                                  |  |              
|(Robert L. Dryden)          |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Stephen E. Frank        |  | Director                                                  |  |              
|(Stephen E. Frank)          |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Tomio Moriguchi         |  | Director                                                  |  |              
|(Tomio Moriguchi)           |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Dr. Kenneth P. Mortimer |  | Director                                                  |  |              
|(Dr. Kenneth P. Mortimer)   |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Sally G. Narodick       |  | Director                                                  |  |              
|(Sally G. Narodick)         |  |                                                           |  |              

---

REPORT OF MANAGEMENTPUGET ENERGY, INC.
           and 
         PUGET SOUND ENERGY, INC.

The
accompanying consolidated financial statements of Puget Energy, Inc. and Puget Sound
Energy, Inc. have been prepared under the direction of management, which is responsible
for their integrity and objectivity. The statements have been prepared in accordance with
generally accepted accounting principles and include amounts based on judgments and
estimates by management where necessary. Management also prepared the other information in
the Annual Report on Form 10-K and is responsible for its accuracy and consistency with
the financial statements. 

        Puget
Energy and Puget Sound Energy maintain a system of internal control which, in
managements opinion, provides reasonable assurance that assets are properly
safeguarded and transactions are executed in accordance with managements
authorization and properly recorded to produce reliable financial records and reports. The
system of internal control provides for appropriate division of responsibility and is
documented by written policy and updated as necessary. Puget Sound Energys internal
audit staff assesses the effectiveness and adequacy of the internal controls on a regular
basis and recommends improvements when appropriate. Management considers the internal
auditors and independent auditors recommendations concerning Puget
Energys and Puget Sound Energys internal controls and takes steps to implement
those that they believe are appropriate in the circumstances. 

        In
addition, PricewaterhouseCoopers LLP, the independent auditors, have performed audit
procedures deemed appropriate to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 

        The
Board of Directors pursues its oversight role for the financial statements through the
audit committee, which is composed solely of outside Directors and two of those Directors
qualify as financial experts under the rules adopted by the Securities and Exchange
Commission. The audit committee meets regularly with management, the internal auditors and
the independent auditors, jointly and separately, to review managements process of
implementation and maintenance of internal accounting controls and auditing and financial
reporting matters. The internal and independent auditors have unrestricted access to the
audit committee.

|                                      |  |                                                          |  |                                                
|------------------------------------- |  | -------------------------------------------------------- |  | -----------------------------------------------
|/s/ Stephen P. Reynolds               |  | /s/ Bertrand A. Valdman                                  |  | /s/ James W. Eldredge                          
|Stephen P. Reynolds                   |  | Bertrand A. Valdman                                      |  | James W. Eldredge                              
|President and Chief Executive Officer |  | Senior Vice President Finance andChief Financial Officer |  | Corporate Secretary andChief Accounting Officer

---

REPORT OF INDEPENDENT
AUDITORS

To the Shareholders of
Puget Energy, Inc.:

In
our opinion, the consolidated financial statements listed in the accompanying index of
this Annual Report on Form 10-K present fairly, in all material respects, the financial
position of Puget Energy, Inc. and its subsidiaries at December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index of the document presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. 

        As
described in Note 15 to the consolidated financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative instruments and hedging
activities as required by Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities. 

        As
described in Note 2 to the consolidated financial statements, effective January 1, 2003,
the Company changed its method of accounting for asset retirement obligations as required
by Statement of Financial Accounting Standards No. 143 Accounting for
Asset Retirement Obligations.

PricewaterhouseCoopers LLP
Seattle, Washington 
March 5, 2004

---

REPORT OF INDEPENDENT
AUDITORS

To the Shareholder of Puget Sound
Energy, Inc.:

In
our opinion, the consolidated financial statements listed in the accompanying index of
this Annual Report on Form 10-K present fairly, in all material respects, the financial
position of Puget Sound Energy, Inc. and its subsidiaries at December 31, 2003 and 2002,
and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index of the document presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. 
        As
described in Note 15 to the consolidated financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative instruments and hedging
activities as required by Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities. 

        As
described in Note 2 to the consolidated financial statements, effective January 1, 2003,
the Company changed its method of accounting for asset retirement obligations as required
by Statement of Financial Accounting Standards No. 143 Accounting for
Asset Retirement Obligations.

PricewaterhouseCoopers LLP
Seattle, Washington
March 5, 2004

---

Consolidated Financial
Statements, Financial Statement Schedule Covered by the Foregoing Report of
Independent Accountants and Exhibits

| | CONSOLIDATED FINANCIAL STATEMENTS:PUGET ENERGY:
        Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
Balance Sheets, December 31, 2003 and 2002
| | -------------------------------------------------------

| | Consolidated
Statements of Capitalization, December 31, 2003 and 2002
| | ---------------------------------------------------------------------

| | Consolidated
Statements of Common Shareholders' Equity

           for the years ended December 31, 2003, 2002 and 2001
| | -----------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Comprehensive Income for the years 
            ended December 31, 2003, 2002 and 2001
| | -----------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows for the years
          ended December 31, 2003, 2002 and 2001
| | ----------------------------------------------------------------------------------------------------

| | PUGET
SOUND ENERGY:
        Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001
| | ------------------------------------------------------------------------------------------------------------------

| | Consolidated
Balance Sheets, December 31, 2003 and 2002
| | -------------------------------------------------------

| | Consolidated
Statements of Capitalization, December 31, 2003 and 2002
| | ---------------------------------------------------------------------

| | Consolidated
Statements of Common Shareholders' Equity
          for the years ended December 31, 2003, 2002 and 2001
| | ---------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Comprehensive Income for the years
           ended December 31, 2003, 2002 and 2001
| | ---------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows for the years 
          ended December 31, 2003, 2002 and 2001
| | -----------------------------------------------------------------------------------------------------

| | NOTES:
        Combined Puget Energy and Puget Sound Energy Notes to Consolidated Financial
Statements
| | ------------------------------------------------------------------------------------------------------

| | SUPPLEMENTAL QUARTERLY FINANCIAL DATA:
| | --------------------------------------

| | SCHEDULE:
| | ---------

|II. |  | Valuation
and Qualifying Accounts and Reserves for the years ended December 31, 2003, 2002 and 2001
|--- |  | ---------------------------------------------------------------------------------------------------

| | All
other schedules have been omitted because of the absence of the conditions under which they are required, 
        or because the information required is included          in the
financial statements or the notes thereto.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
statements of PSE's subsidiaries are not filed herewith inasmuch as the assets,
revenues, earnings        and earnings reinvested in the business of the subsidiaries
are not material in relation to those of PSE.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EXHIBITS:
        Exhibit Index
| | -------------------------------

|                                       
|---------------------------------------
|Puget Energy Consolidated Statements of

|      
|------
|INCOME

|(Dollars in thousands, except per share amounts)
FOR YEARS ENDED DECEMBER 31 | 2003 | 2002 | 2001
|---------------------------------------------------------------------------- | ---- | ---- | ----
|Operating revenues:                                                          |      |      |     
|Electric                                                                     |      |      | $   
|Gas                                                                          |      |      |     
|Non-utility construction services                                            |      |      |     
|Other                                                                        |      |      |     
|                                                                            
|Total operating revenues                                                     |      |      |     
|                                                                            
|Operating expenses:                                                          |      |     
|Energy costs:                                                                |      |     
|Purchased electricity                                                        |      |      |     
|Residential exchange                                                         |      |      |     
|Purchased gas                                                                |      |      |     
|Electric generation fuel                                                     |      |      |     
|Unrealized (gain) loss on derivative instruments                             |      |      |     
|Utility operations and maintenance                                           |      |      |     
|Other operations and maintenance                                             |      |      |     
|Depreciation and amortization                                                |      |      |     
|Conservation amortization                                                    |      |      |     
|Taxes other than income taxes                                                |      |      |     
|Income taxes                                                                 |      |      |     
|                                                                            
|Total operating expenses                                                     |      |      |     
|                                                                            
|Operating income                                                             |      |      |     
|Other income                                                                 |      |      |     
|                                                                            
|Income before interest charges                                               |      |      |     
|                                                                            
|Interest charges:                                                            |      |     
|AFUDC                                                                        |      |      |     
|Interest expense                                                             |      |      |     
|Mandatorily redeemable securities interest expense                           |      |      |     
|                                                                            
|Total interest charges                                                       |      |      |     
|                                                                            
|Minority interest in earnings of consolidated subsidiary                     |      |      |     
|                                                                            
|Net income before cumulative effect of accounting change                     |      |      |     
|Cumulative effect of implementation of accounting change (net of tax)        |      |      |     
|                                                                            
|Net income                                                                   |      |      |     
|Less: preferred stock dividends accrual                                      |      |      |     
|                                                                            
|Income for common stock                                                      |      |      | $   
|                                                                            
|Common shares outstanding weighted average                                   |      |      |     
|                                                                            
|Diluted shares outstanding weighted average                                  |      |      |     
|                                                                            
|Basic earnings per common share before                                       |      |     
|cumulative effect of accounting change                                       |      |      | $   
|Basic earnings for cumulative effect of accounting change                    |      |      |     
|                                                                            
|Basic earnings per common share                                              |      |      | $   
|                                                                            
|Diluted earnings per common share before                                     |      |     
|cumulative effect of accounting change                                       |      |      | $   
|Diluted earnings for cumulative effect of accounting change                  |      |      |     
|                                                                            
|Diluted earnings per common share                                            |      |      | $   
|                                                                            

The
accompanying notes are an integral part of the consolidated financial statements.

|                                        
|----------------------------------------
|Puget Energy Consolidated Balance Sheets

|      
|------
|ASSETS

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                        | 2003 | 2002
|------------------------------------------------------------ | ---- | ----
|Utility plant:                                               |      |     
|Electric plant                                               |      |     
|Gas plant                                                    |      |     
|Common plant                                                 |      |     
|Less: Accumulated depreciation and amortization              |      |     
|                                                            
|Net utility plant                                            |      |     
|                                                            
|Other property and investments:                              |      |     
|Investment in Bonneville Exchange Power Contract             |      |     
|Goodwill, net                                                |      |     
|Intangibles, net                                             |      |     
|Non-utility property, net                                    |      |     
|Other                                                        |      |     
|                                                            
|Total other property and investments                         |      |     
|                                                            
|Current assets:                                              |      |     
|Cash                                                         |      |     
|Restricted cash                                              |      |     
|Accounts receivable, net of allowance for doubtful accounts  |      |     
|Unbilled revenues                                            |      |     
|Materials and supplies, at average cost                      |      |     
|Current portion of unrealized gain on derivative instruments |      |     
|Prepayments and other                                        |      |     
|                                                            
|Total current assets                                         |      |     
|                                                            
|Other long-term assets:                                      |      |     
|Regulatory asset for deferred income taxes                   |      |     
|Regulatory asset for PURPA buyout costs                      |      |     
|Unrealized gain on derivative instruments                    |      |     
|PCA mechanism                                                |      |     
|Other                                                        |      |     
|                                                            
|Total other long-term assets                                 |      |     
|                                                            
|Total assets                                                 |      |     
|                                                            

The accompanying notes are an
integral part of the consolidated financial statements.

|                                        
|----------------------------------------
|Puget Energy Consolidated Balance Sheets

|                              
|------------------------------
|CAPITALIZATION AND LIABILITIES

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                          | 2003 | 2002     
|-------------------------------------------------------------- | ---- | ---------
|Capitalization:                                                |      |          
|(See Consolidated Statements of Capitalization):               |     
|Common equity                                                  | $    | 1,655,046
|Preferred stock not subject to mandatory redemption            |      | --       
|                                                              
|Total shareholders' equity                                     |      | 1,655,046
|                                                              
|Redeemable securities and long-term debt:                      |     
|Preferred stock subject to mandatory redemption                |      | 1,889    
|Corporation obligated, mandatorily redeemable preferred        |     
|securities of subsidiary trust holding solely junior           |     
|subordinated debentures of the corporation                     |      | --       
|Junior subordinated debentures of the corporation payable to a |     
|subsidiary trust holding mandatorily redeemable preferred      |     
|securities                                                     |      | 280,250  
|Long-term debt                                                 |      | 1,969,489
|                                                              
|Total redeemable securities and long-term debt                 |      | 2,251,628
|                                                              
|Total capitalization                                           |      | 3,906,674
|                                                              
|Minority interest in consolidated subsidiary                   |      | 11,689   
|                                                              
|Current liabilities:                                           |     
|Accounts payable                                               |      | 214,357  
|Short-term debt                                                |      | 13,893   
|Current maturities of long-term debt                           |      | 246,829  
|Purchased gas liability                                        |      | 11,984   
|Accrued expenses:                                              |     
|Taxes                                                          |      | 77,451   
|Salaries and wages                                             |      | 12,712   
|Interest                                                       |      | 32,954   
|Current portion of unrealized loss on derivative instruments   |      | 3,636    
|Other                                                          |      | 46,378   
|                                                              
|Total current liabilities                                      |      | 660,194  
|                                                              
|Long-term liabilities:                                         |     
|Deferred income taxes                                          |      | 755,235  
|Other deferred credits                                         |      | 340,893  
|                                                              
|Total long-term liabilities                                    |      | 1,096,128
|                                                              
|Commitments and contingencies                                  |      | --       
|                                                              
|Total capitalization and liabilities                           | $    | 5,674,685
|                                                              

The
accompanying notes are an integral part of the consolidated financial statements.

|                                       
|---------------------------------------
|Puget Energy Consolidated Statements of

|              
|--------------
|CAPITALIZATION

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                                                | 2003 |  | 2002
|------------------------------------------------------------------------------------ | ---- |  | ----
|Common equity:                                                                       |      |  |     
|Common stock $0.01 par value, 250,000,000 shares authorized, 99,074,070 and          |      | 
|93,642,659 shares outstanding at December 31, 2003 and 2002                          |      |  | $   
|Additional paid-in capital                                                           |      |  |     
|Earnings reinvested in the business                                                  |      |  |     
|Accumulated other comprehensive income (loss) - net of tax                           |      |  |     
|                                                                                    
|Total common equity                                                                  |      |  |     
|                                                                                    
|Preferred stock not subject to mandatory  redemption - cumulative  - $25 par value:* |      | 
|7.45% series II - 2,400,000 shares authorized, 0 and 2,400,000 shares outstanding at |      | 
|December 31, 2003 and 2002                                                           |      |  |     
|                                                                                    
|Total preferred stock not subject to mandatory redemption                            |      |  |     
|                                                                                    
|Preferred stock subject to mandatory redemption - cumulative - $100 par value: *     |      | 
|4.84% series - 150,000 shares authorized,                                            |      | 
|14,583 and 14,808 shares outstanding at December 31, 2003 and 2002                   |      |  |     
|4.70% series - 150,000 shares authorized,                                            |      | 
|4,311 shares outstanding at December 31, 2003 and 2002                               |      |  |     
|7.75% series - 750,000 shares authorized,                                            |      | 
|0 and 412,500 shares outstanding at December 31, 2003 and 2002                       |      |  |     
|                                                                                    
|Total preferred stock subject to mandatory redemption                                |      |  |     
|                                                                                    
|Corporation obligated mandatorily redeemable preferred securities of                 |      | 
|subsidiary trust holding solely junior subordinated debentures of the                |      |  |     
|corporation                                                                          |      | 
|Junior subordinated debentures of the corporation payable to a subsidiary trust      |      | 
|holding mandatorily redeemable preferred securities                                  |      |  |     
|                                                                                    
|Long-term debt:                                                                      |      | 
|First mortgage bonds and senior notes                                                |      |  |     
|Pollution control revenue bonds:                                                     |      | 
|Revenue refunding 1991 series, due 2021                                              |      |  |     
|Revenue refunding 1992 series, due 2022                                              |      |  |     
|Revenue refunding 1993 series, due 2020                                              |      |  |     
|Revenue refunding 2003 series, due 2031                                              |      |  |     
|Other notes                                                                          |      |  |     
|Unamortized discount - net of premium                                                |      |  |     
|Long-term debt due within one year                                                   |      |  |     
|                                                                                    
|Total long-term debt excluding current maturities                                    |      |  |     
|                                                                                    
|Total capitalization                                                                 |      |  | $   
|                                                                                    

*
Puget Energy has 50,000,000 shares authorized for $0.01 par value preferred stock. PSE
has 13,000,000 shares authorized for $25 par value preferred stock and 3,000,000 shares
authorized for $100 par value preferred stock.

The
accompanying notes are an integral part of the consolidated financial statements.

|                                       
|---------------------------------------
|Puget Energy Consolidated Statements of

|                           
|---------------------------
|COMMON SHAREHOLDERS EQUITY

|                                                                   | Common Stock | Additional |                 | Accumulated
Other |                     
|------------------------------------------------------------------ | ------------ | ---------- | --------------- | ----------------- | --------------------
|(DOLLARS IN THOUSANDS)YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 | Shares       | Amount     | Paid-in
Capital | Retained
Earnings | Comprehensive
Income
|Balance at December 31, 2000                                       |              |            |                 | 85,903,791        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend declared                                  |              |            |                 | --                |                     
|Common stock dividend declared                                     |              |            |                 | --                |                     
|Reclassification of par value in connection                        |              |            |                 | --                |                     
|with the formation of Puget Energy                                 |              |            |                 | --                |                     
|Common stock issued on dividend 
     reinvestment plan            |              |            |                 | 1,119,568         |                     
|Other                                                              |              |            |                 | (149              | )                   
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2001                                       |              |            |                 | 87,023,210        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend  declared                                 |              |            |                 | --                |                     
|Common stock dividend  declared                                    |              |            |                 | --                |                     
|Common stock issued:                                               |              |           
|New issuance                                                       |              |            |                 | 5,750,000         |                     
|Dividend reinvestment plan                                         |              |            |                 | 801,205           |                     
|Employee plans                                                     |              |            |                 | 68,252            |                     
|Other                                                              |              |            |                 | (8                | )                   
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2002                                       |              |            |                 | 93,642,659        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend  declared                                 |              |            |                 | --                |                     
|Common stock dividend  declared                                    |              |            |                 | --                |                     
|Common stock issued:                                               |              |           
|New issuance                                                       |              |            |                 | 4,650,600         |                     
|Dividend reinvestment plan                                         |              |            |                 | 721,340           |                     
|Employee plans                                                     |              |            |                 | 59,475            |                     
|Other                                                              |              |            |                 | (4                | )                   
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2003                                       |              |            |                 | 99,074,070        |                     
|                                                                  

The
accompanying notes are an integral part of the consolidated financial statements.

|                                       
|---------------------------------------
|Puget Energy Consolidated Statements of

|                    
|--------------------
|COMPREHENSIVE INCOME

|(DOLLARS IN THOUSANDS)
FOR YEARS ENDED DECEMBER 31                    | 2003 | 2002 | 2001
|--------------------------------------------------------------------- | ---- | ---- | ----
|Net income                                                            |      |      | $   
|                                                                     
|Other comprehensive income, net of tax:                               |      |     
|Unrealized holding losses on marketable securities during the period  |      |      |     
|Reclassification adjustment for realized gains on marketable securiti |      |      |     
|included in net income                                                |      |      |     
|Foreign currency translation adjustment                               |      |      |     
|Minimum pension liability adjustment                                  |      |      |     
|Transition adjustment for unrealized gain on derivative instruments a |      |      |     
|of January 1, 2001                                                    |      |      |     
|Unrealized gains (losses) on derivative instruments during the period |      |      |     
|Reversal of unrealized (gains) losses on derivative instruments settl |      |      |     
|during the period                                                     |      |      |     
|Deferral related to PCA                                               |      |      |     
|                                                                     
|Other comprehensive income (loss)                                     |      |      |     
|                                                                     
|Comprehensive income                                                  |      |      | $   
|                                                                     

The
accompanying notes are an integral part of the consolidated financial statements.

|                                       
|---------------------------------------
|Puget Energy Consolidated Statements of

|          
|----------
|CASH FLOWS

|(DOLLARS IN THOUSANDS)
FOR YEARS ENDED DECEMBER 31           | 2003 | 2002 | 2001
|------------------------------------------------------------ | ---- | ---- | ----
|Operating activities:                                        |      |      |     
|Net income                                                   |      |      | $   
|Adjustments to reconcile net income to net cash              |      |     
|provided by operating activities:                            |      |     
|Depreciation and amortization                                |      |      |     
|Deferred income taxes and tax credits - net                  |      |      |     
|Gain from sale of securities                                 |      |      |     
|Net unrealized (gains) losses on derivative instrument       |      |      |     
|Other (including conservation amortization)                  |      |      |     
|Cash collateral received from (returned to) energy supplier  |      |      |     
|Pension plan funding                                         |      |      |     
|Change in certain current assets and liabilities             |      |     
|Accounts receivable and unbilled revenue                     |      |      |     
|Materials and supplies                                       |      |      |     
|Prepayments and other                                        |      |      |     
|Purchased gas receivable (liability)                         |      |      |     
|Accounts payable                                             |      |      |     
|Taxes payable                                                |      |      |     
|Accrued expenses and other                                   |      |      |     
|                                                            
|Net cash provided by operating activities                    |      |      |     
|                                                            
|Investing activities:                                        |      |     
|Construction and capital expenditures - excluding equity AFU |      |      |     
|Energy conservation expenditures                             |      |      |     
|Restricted cash                                              |      |      |     
|Proceeds from sale of securities                             |      |      |     
|Investments by InfrastruX                                    |      |      |     
|Repayment from Schlumberger                                  |      |      |     
|Other                                                        |      |      |     
|                                                            
|Net cash used by investing activities                        |      |      |     
|                                                            
|Financing activities:                                        |      |     
|Increase (decrease) in short-term debt - net                 |      |      |     
|Dividends paid                                               |      |      |     
|Issuance of common stock                                     |      |      |     
|Issuance of trust preferred stock                            |      |      |     
|Issuance of bonds and long-term debt                         |      |      |     
|Redemption of preferred stock                                |      |      |     
|Redemption of mandatorily redeemable preferred stock         |      |      |     
|Redemption of trust preferred stock                          |      |      |     
|Redemption of bonds and notes                                |      |      |     
|Other                                                        |      |      |     
|                                                            
|Net cash provided (used) by financing activities             |      |      |     
|                                                            
|Increase (decrease) in cash from net income                  |      |      |     
|Cash at beginning of year                                    |      |      |     
|                                                            
|Cash at end of year                                          |      |      | $   
|                                                            
|Supplemental Cash Flow Information:                          |      |     
|Cash payments for:                                           |      |     
|Interest (net of capitalized interest)                       |      |      | $   
|Income taxes (net of refunds)                                |      |      |     
|                                                            

The
accompanying notes are an integral part of the consolidated financial statements.

|                                             
|---------------------------------------------
|Puget Sound Energy Consolidated Statements of

|      
|------
|INCOME

|(DOLLARS IN THOUSANDS)
FOR YEARS ENDED DECEMBER 31                  | 2003 | 2002 | 2001
|------------------------------------------------------------------- | ---- | ---- | ----
|Operating revenues:                                                 |      |      |     
|Electric                                                            |      |      | $   
|Gas                                                                 |      |      |     
|Other                                                               |      |      |     
|                                                                   
|Total operating revenues                                            |      |      |     
|                                                                   
|Operating expenses:                                                 |      |     
|Energy costs:                                                       |      |     
|Purchased electricity                                               |      |      |     
|Residential exchange                                                |      |      |     
|Purchased gas                                                       |      |      |     
|Electric generation fuel                                            |      |      |     
|Unrealized (gain) loss on derivative instruments                    |      |      |     
|Utility operations and maintenance                                  |      |      |     
|Other operations and maintenance                                    |      |      |     
|Depreciation and amortization                                       |      |      |     
|Conservation amortization                                           |      |      |     
|Taxes other than income taxes                                       |      |      |     
|Income taxes                                                        |      |      |     
|                                                                   
|Total operating expenses                                            |      |      |     
|                                                                   
|Operating income                                                    |      |      |     
|Other income                                                        |      |      |     
|                                                                   
|Income before interest charges                                      |      |      |     
|                                                                   
|Interest charges:                                                   |      |     
|AFUDC                                                               |      |      |     
|Interest expense                                                    |      |      |     
|Mandatorily redeemable securities interest expense                  |      |      |     
|                                                                   
|Total interest charges                                              |      |      |     
|                                                                   
|Net income before cumulative effect of accounting change            |      |      |     
|Cumulative effect of implementation of accounting change (net of ta |      |      |     
|                                                                   
|Net income                                                          |      |      |     
|Less preferred stock dividends accrual                              |      |      |     
|                                                                   
|Income for common stock                                             |      |      | $   
|                                                                   

The
accompanying notes are an integral part of the consolidated financial statements.

|                                              
|----------------------------------------------
|Puget Sound Energy Consolidated Balance Sheets

|      
|------
|ASSETS

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                      | 2003 | 2002
|---------------------------------------------------------- | ---- | ----
|Utility plant:                                             |      |     
|Electric plant                                             |      |     
|Gas plant                                                  |      |     
|Common plant                                               |      |     
|Less: Accumulated depreciation and amortization            |      |     
|                                                          
|Net utility plant                                          |      |     
|                                                          
|Other property and investments:                            |      |     
|Investment in Bonneville Exchange Power Contract           |      |     
|Non-utility property, net                                  |      |     
|Other                                                      |      |     
|                                                          
|Total other property and investments                       |      |     
|                                                          
|Current assets:                                            |      |     
|Cash                                                       |      |     
|Restricted cash                                            |      |     
|Accounts receivable, net of allowance for doubtful account |      |     
|Unbilled revenues                                          |      |     
|Materials and supplies, at average cost                    |      |     
|Current portion of unrealized gain on derivative instrumen |      |     
|Prepayments and other                                      |      |     
|                                                          
|Total current assets                                       |      |     
|                                                          
|Other long-term assets:                                    |      |     
|Regulatory asset for deferred income taxes                 |      |     
|Regulatory asset for PURPA buyout costs                    |      |     
|Unrealized gain on derivative instruments                  |      |     
|PCA mechanism                                              |      |     
|Other                                                      |      |     
|                                                          
|Total other long-term assets                               |      |     
|                                                          
|Total assets                                               |      |     
|                                                          

The
accompanying notes are an integral part of the consolidated financial statements.

|                                              
|----------------------------------------------
|Puget Sound Energy Consolidated Balance Sheets

|                              
|------------------------------
|CAPITALIZATION AND LIABILITIES

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                              | 2003 | 2002
|------------------------------------------------------------------ | ---- | ----
|Capitalization:                                                    |      |     
|(See Consolidated Statements of Capitalization):                   |      |     
|Common equity                                                      |      |     
|Preferred stock not subject to mandatory redemption                |      |     
|                                                                  
|Total shareholders' equity                                         |      |     
|                                                                  
|Redeemable securities and long-term debt:                          |      |     
|Preferred stock subject to mandatory redemption                    |      |     
|Corporation obligated mandatorily redeemable preferred             |      |     
|securities of subsidiary trust holding solely junior               |      |     
|subordinated debentures of the corporation                         |      |     
|Junior subordinated debentures of the corporation payable to a     |      |     
|subsidiary trust holding mandatorily redeemable preferred securiti |      |     
|Long-term debt                                                     |      |     
|                                                                  
|Total redeemable securities and long-term debt                     |      |     
|                                                                  
|Total capitalization                                               |      |     
|                                                                  
|Current liabilities:                                               |      |     
|Accounts payable                                                   |      |     
|Short-term debt                                                    |      |     
|Current maturities of long-term debt                               |      |     
|Purchased gas liability                                            |      |     
|Accrued expenses:                                                  |      |     
|Taxes                                                              |      |     
|Salaries and wages                                                 |      |     
|Interest                                                           |      |     
|Current portion of unrealized loss on derivative instruments       |      |     
|Other                                                              |      |     
|                                                                  
|Total current liabilities                                          |      |     
|                                                                  
|Long-term liabilities:                                             |      |     
|Deferred income taxes                                              |      |     
|Other deferred credits                                             |      |     
|                                                                  
|Total long-term liabilities                                        |      |     
|                                                                  
|Commitments and contingencies                                      |      |     
|                                                                  
|Total capitalization and liabilities                               |      |     
|                                                                  

The
accompanying notes are an integral part of the consolidated financial statements.

|                                             
|---------------------------------------------
|Puget Sound Energy Consolidated Statements of

|              
|--------------
|CAPITALIZATION

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31                                              | 2003 | 2002
|---------------------------------------------------------------------------------- | ---- | ----
|Common equity:                                                                     |      |     
|Common stock ($10 stated value) - 150,000,000 shares                               |      |     
|authorized, 85,903,791 shares outstanding                                          |      |     
|Additional paid-in capital                                                         |      |     
|Earnings reinvested in the business                                                |      |     
|Accumulated other comprehensive income (loss) - net                                |      |     
|                                                                                  
|Total common equity                                                                |      |     
|                                                                                  
|Preferred stock not subject to mandatory  redemption - cumulative  - $25 par value |      |     
|7.45% series II - 2,400,000 shares authorized, 0 and 2,400,000 shares outstandi    |      |     
|at December 31, 2003 and 2002                                                      |      |     
|                                                                                  
|Total preferred stock not subject to mandatory redemption                          |      |     
|                                                                                  
|Preferred stock subject to mandatory redemption - cumulative                       |      |     
|$100 par value:*                                                                   |      |     
|4.84% series - 150,000 shares authorized,                                          |      |     
|14,583 and 14,808 shares outstanding at December 31, 2003 and 2002                 |      |     
|4.70% series - 150,000 shares authorized,                                          |      |     
|4,311 shares outstanding at December 31, 2003 and 2002                             |      |     
|7.75% series - 750,000 shares authorized,                                          |      |     
|0 and 412,500 shares outstanding at December 31, 2003 and 2002                     |      |     
|                                                                                  
|Total preferred stock subject to mandatory redemption                              |      |     
|                                                                                  
|Corporation obligated mandatorily redeemable preferred securities of subsidiary    |      |     
|trust holding solely junior subordinated debentures of the corporation             |      |     
|Junior subordinated debentures of the corporation payable to a subsidiary trust    |      |     
|holding mandatorily redeemable preferred securities                                |      |     
|                                                                                  
|Long-term debt:                                                                    |      |     
|First mortgage bonds and senior notes                                              |      |     
|Pollution control revenue bonds:                                                   |      |     
|Revenue refunding 1991 series, due 2021                                            |      |     
|Revenue refunding 1992 series, due 2022                                            |      |     
|Revenue refunding 1993 series, due 2020                                            |      |     
|Revenue refunding 2003 series, due 2031                                            |      |     
|Unamortized discount - net of premium                                              |      |     
|Long-term debt due within one year                                                 |      |     
|                                                                                  
|Total long-term debt excluding current maturities                                  |      |     
|                                                                                  
|Total capitalization                                                               |      |     
|                                                                                  

*13,000,000
shares authorized for $25 par value preferred stock and 3,000,000 shares authorized for
$100 par value 
          preferred stock. 
         The accompanying notes are an
integral part of the consolidated financial statements.

|                                             
|---------------------------------------------
|Puget Sound Energy Consolidated Statements of

|                           
|---------------------------
|COMMON SHAREHOLDERS EQUITY

|                                                                   | Common Stock | Additional |                 | Accumulated
Other |                     
|------------------------------------------------------------------ | ------------ | ---------- | --------------- | ----------------- | --------------------
|(DOLLARS IN THOUSANDS)YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 | Shares       | Amount     | Paid-in
Capital | Retained
Earnings | Comprehensive
Income
|Balance at December 31, 2000                                       |              |            |                 | 85,903,791        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend declared                                  |              |            |                 | --                |                     
|Common stock dividend declared                                     |              |            |                 | --                |                     
|Return of capital to Puget Energy                                  |              |            |                 | --                |                     
|Other                                                              |              |            |                 | --                |                     
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2001                                       |              |            |                 | 85,903,791        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend declared                                  |              |            |                 | --                |                     
|Common stock dividend declared                                     |              |            |                 | --                |                     
|Investment received from Puget Ener                                |              |            |                 | --                |                     
|Other                                                              |              |            |                 | --                |                     
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2002                                       |              |            |                 | 85,903,791        |                     
|Net income                                                         |              |            |                 | --                |                     
|Preferred stock dividend  declared                                 |              |            |                 | --                |                     
|Common stock dividend  declared                                    |              |            |                 | --                |                     
|Investment received from Puget Ener                                |              |            |                 | --                |                     
|Other                                                              |              |            |                 | --                |                     
|Other comprehensive income                                         |              |            |                 | --                |                     
|                                                                  
|Balance at December 31, 2003                                       |              |            |                 | 85,903,791        |                     
|                                                                  

|                                             
|---------------------------------------------
|Puget Sound Energy Consolidated Statements of

|                    
|--------------------
|COMPREHENSIVE INCOME

|(DOLLARS IN THOUSANDS)
FOR YEARS ENDED DECEMBER 31                    | 2003 | 2002 | 2001
|--------------------------------------------------------------------- | ---- | ---- | ----
|Net income                                                            |      |      | $   
|                                                                     
|Other comprehensive income, net of tax:                               |      |     
|Unrealized holding losses on marketable securities during the period  |      |      |     
|Reclassification adjustment for realized gains on marketable securiti |      |      |     
|included in net income                                                |      |      |     
|Minimum pension liability adjustment                                  |      |      |     
|Transition adjustment  for unrealized gain on derivative instruments  |      |      |     
|January 1, 2001                                                       |      |      |     
|Unrealized gains (losses) on derivative instruments during the period |      |      |     
|Reversal of unrealized (gains) losses on derivative instruments settl |      |      |     
|during the period                                                     |      |      |     
|Deferral related to PCA                                               |      |      |     
|                                                                     
|Other comprehensive income (loss)                                     |      |      |     
|                                                                     
|Comprehensive income                                                  |      |      | $   
|                                                                     

The
accompanying notes are an integral part of the consolidated financial statements.

|                                             
|---------------------------------------------
|Puget Sound Energy Consolidated Statements of

|          
|----------
|CASH FLOWS

|(DOLLARS IN THOUSANDS)
FOR YEARS ENDED DECEMBER 31          | 2003 | 2002 | 2001
|----------------------------------------------------------- | ---- | ---- | ----
|Operating activities:                                       |      |      |     
|Net income                                                  |      |      | $   
|Adjustments to reconcile net income                         |      |     
|to net cash provided by operating activities:               |      |     
|Depreciation and amortization                               |      |      |     
|Deferred federal income taxes and tax credits - net         |      |      |     
|Gain from sale of securities                                |      |      |     
|Net unrealized (gains) losses on derivative instrumen       |      |      |     
|Other (including conservation amortization)                 |      |      |     
|Cash collateral received from (returned to) energy supplier |      |      |     
|Pension plan funding                                        |      |      |     
|Change in certain current assets and current liabilities:   |      |     
|Accounts receivable and unbilled revenue                    |      |      |     
|Materials and supplies                                      |      |      |     
|Prepayments and other                                       |      |      |     
|Purchased gas receivable (liability)                        |      |      |     
|Accounts payable                                            |      |      |     
|Taxes payable                                               |      |      |     
|Accrued expenses and other                                  |      |      |     
|                                                           
|Net cash provided by operating activities                   |      |      |     
|                                                           
|Investing activities:                                       |      |     
|Construction expenditures - excluding equity AFUDC          |      |      |     
|Energy conservation expenditures                            |      |      |     
|Restricted cash                                             |      |      |     
|Proceeds from sale of securities                            |      |      |     
|Repayment from Schlumberger                                 |      |      |     
|Other                                                       |      |      |     
|                                                           
|Net cash used by investing activities                       |      |      |     
|                                                           
|Financing activities:                                       |      |     
|Decrease in short-term debt - net                           |      |      |     
|Dividends paid                                              |      |      |     
|Issuance of bonds                                           |      |      |     
|Issuance of trust preferred stock                           |      |      |     
|Redemption of preferred stock                               |      |      |     
|Redemption of mandatorily redeemable preferred stock        |      |      |     
|Redemption of trust preferred stock                         |      |      |     
|Redemption of bonds and notes                               |      |      |     
|Investment from Puget Energy                                |      |      |     
|Other                                                       |      |      |     
|                                                           
|Net cash used by financing activities                       |      |      |     
|                                                           
|Increase (decrease) in cash from net income                 |      |      |     
|Cash at beginning of year                                   |      |      |     
|                                                           
|Cash at end of year                                         |      |      | $   
|                                                           
|Supplemental Cash Flow Information:                         |      |     
|Cash payments for:                                          |      |     
|Interest (net of capitalized interest)                      |      |      | $   
|Income taxes (net of refunds)                               |      |      |     
|                                                           

The
accompanying notes are an integral part of the consolidated financial statements.

---

NOTES
To Consolidated
Financial Statements of Puget Energy and Puget Sound Energy

NOTE 1.Summary of Significant Accounting Policies

BASIS OF PRESENTATION
        Puget
Energy is an exempt public utility holding company under the Public Utility Holding
Company Act of 1935. Puget Energy owns Puget Sound Energy (PSE) and is a majority owner of
InfrastruX Group, Inc. (InfrastruX). PSE is a public utility incorporated in the State of
Washington furnishing electric and gas service in a territory covering 6,000 square miles,
primarily in the Puget Sound region. InfrastruX is a non-regulated construction
service company incorporated in the State of Washington which provides construction services to the
electric and gas utility industries primarily in the south/Texas, north-central and
eastern United States. 
        The
consolidated financial statements of Puget Energy include the accounts of Puget Energy and
its subsidiaries, PSE and InfrastruX. Puget Energy holds all the common shares of PSE and
holds a majority interest in InfrastruX. The results of PSE and InfrastruX are presented
on a consolidated basis. PSEs consolidated financial statements include the accounts
of PSE and its subsidiaries. Puget Energy and PSE are collectively referred to herein as
the Company. The consolidated financial statements are presented after
elimination of all significant intercompany items and transactions. Minority interests of
InfrastruXs operating results are reflected in Puget Energys consolidated
financial statements. Certain amounts previously reported have been reclassified to
conform with current-year presentations with no effect on total equity or net income. 
        The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

UTILITY PLANT
        The
costs of additions to utility plant, including renewals and betterments, are capitalized
at original cost. Costs include indirect costs such as engineering, supervision, certain
taxes, pension and other employee benefits, and an allowance for funds used during
construction. Replacements of minor items of property are included in maintenance expense.
The original cost of operating property is charged to accumulated depreciation and costs
associated with removal of property, less salvage, is charged to the cost of removal
regulatory liability when the property is retired and removed from service.

NON-UTILITY PROPERTY,
PLANT AND EQUIPMENT
        The
costs of other property, plant and equipment are stated at cost. Expenditures for
refurbishment and improvements that significantly add to productive capacity or extend
useful life of an asset are capitalized. Replacement of minor items is expensed, on a
current basis. Gains and losses on assets sold or retired are reflected in earnings.

ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS
        The
Company evaluates impairment of long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes accounting standards for determining if long-lived assets are impaired and how
losses, if any, should be recognized. The Company believes that the net cash flows are
sufficient to cover the carrying value of its assets.

DEPRECIATION AND
AMORTIZATION 
        For
financial statement purposes, the Company provides for depreciation and amortization on a
straight-line basis. Amortization is comprised of software, small tools and office
equipment. The depreciation of automobiles, trucks, power-operated equipment and tools is
allocated to asset and expense accounts based on usage. The annual depreciation provision
stated as a percent of average original cost of depreciable electric utility plant was
2.9% in 2003, 2.9% in 2002 and 3.0% in 2001; depreciable gas utility plant was 3.5% in
2003, 3.3% in 2002 and 3.5% in 2001; and depreciable common utility plant was 4.7% in
2003, 4.3% in 2002 and 3.1% in 2001. Depreciation on other property, plant and equipment
is calculated primarily on a straight-line basis over the useful lives of the assets
ranging from 3 to 50 years.

CASH
        All
liquid investments with maturities of three months or less at the date of purchase are
considered cash. The Company maintains cash deposits in excess of insured limits with
certain financial institutions.

MATERIAL AND SUPPLIES 
        Material
and supplies consists primarily of materials and supplies used in the operation and
maintenance of the electric and gas systems, coal, diesel and natural gas held for
generation, and natural gas and liquefied natural gas held in storage for future sales.
These items are recorded at the lower of cost or market value, primarily using the
weighted average cost method.

---

REGULATORY ASSETS AND
AGREEMENTS
        The
Company accounts for its regulated operations in accordance with SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation. SFAS No. 71
requires the Company to defer certain costs that would otherwise be charged to expense, if
it is probable that future rates will permit recovery of such costs. Accounting under SFAS
No. 71 is appropriate as long as: rates are established by or subject to approval by
independent third-party regulators; rates are designed to recover the specific
enterprises cost of service; and in view of demand for service, it is reasonable to
assume that rates set at levels that will recover costs can be charged to and collected
from customers. In applying SFAS No. 71, the Company must give consideration to changes in
the level of demand or competition during the cost recovery period. In accordance with
SFAS No. 71, the Company capitalizes certain costs in accordance with regulatory authority
whereby those costs will be expensed and recovered in future periods. 

        The
Company is allowed a return on the net regulatory assets and liabilities of 8.76% for
electric rates beginning July 1, 2002 and gas rates beginning September 1, 2002. The 2001
allowed rate of return was 8.94% for electric rates and 9.15% for gas rates. The net
regulatory assets and liabilities at December 31, 2003 and 2002 included the following:

|(DOLLARS IN MILLIONS)                              | REMAINING
AMORTIZATION
PERIOD | 2003 | 2002         
|-------------------------------------------------- | ----------------------------- | ---- | -------------
|PURPA electric energy supply contract buyout costs |                               |      | 5 to 8 years 
|Deferred income taxes                              |                               |      |              
|Investment in Bonneville Exchange Power  contract  |                               |      | 13 years     
|Environmental remediation                          |                               |      | *            
|Deferred AFUDC                                     |                               |      | 30 years     
|Tree watch costs                                   |                               |      | 10 years     
|Storm damage costs - electric                      |                               |      | 4 years      
|White River relicensing and other costs            |                               |      | *            
|Colstrip common property                           |                               |      | 20 years     
|PCA mechanism                                      |                               |      | *            
|Cost of removal                                    |                               |      | **           
|Various other regulatory assets                    |                               |      | 1 to 21 years
|Deferred gains on property sales                   |                               |      | 3 years      
|Purchased gas payable                              |                               |      | 1 year       
|Various other regulatory liabilities               |                               |      | 1 to 17 years
|                                                  
|Net regulatory assets and liabilities              |                               |      |              
|                                                  

*   Amortization period to be
determined. 
** The balance is dependent upon the
cost of removal of underlying assets and the life of utility plant.

If
the Company, at some point in the future, determines that all or a portion of the utility
operations no longer meet the criteria for continued application of SFAS No. 71, the
Company would be required to adopt the provisions of SFAS No. 101, Regulated
Enterprises  Accounting for the Discontinuation of Application of FASB Statement No.
71. Adoption of SFAS No. 101 would require the Company to write off the regulatory
assets and liabilities related to those operations not meeting SFAS No. 71 requirements.
Discontinuation of SFAS No. 71 could have a material impact on the Companys
financial statements. 

        Included
within the regulatory assets are deferred costs associated with gas supply contracts with
Tenaska and Cabot of $216.7 million and $11.0 million, respectively, at December 31, 2003.
These regulatory assets were designed to be recovered in future rates. In the power cost
only rate case, the Washington Commission staff has identified a portion of these assets
as a possible disallowance for future rate recovery based on an interpretation of a 1994
Washington Commission order by the Washington Commission staff. The Company believes the
disallowance proposed by the Washington Commission staff is legally and actually
deficient. The power cost only rate case order from the Washington Commission is expected
in mid-April 2004. 

        In accordance with guidance provided by the Securities and Exchange
Commission, the Company reclassified from accumulated depreciation to a regulatory
liability $124.9 million and $114.6 million in 2003 and 2002, respectively, for non-legal
cost of removal for utility plant. These amounts are collected from PSEs customers
through depreciation expense.

ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 
        The
Allowance for Funds Used During Construction (AFUDC) represents the cost of both the debt
and equity funds used to finance utility plant additions during the construction period.
The amount of AFUDC recorded in each accounting period varies depending principally upon
the level of construction work in progress and the AFUDC rate used. AFUDC is capitalized
as a part of the cost of utility plant and is credited as a non-cash item to other income
and interest charges currently. Cash inflow related to AFUDC does not occur until these
charges are reflected in rates.

---

The
AFUDC rate allowed by the Washington Commission for gas utility plant additions was 8.76%
beginning September 1, 2002 and 9.15% in 2001. The allowed AFUDC rate on electric utility
plant was 8.76% beginning July 1, 2002 and 8.94% in 2001. To the extent amounts calculated
using this rate exceed the AFUDC calculated rate using the Federal Energy Regulatory
Commission (FERC) formula, the Company capitalizes the excess as a deferred asset,
crediting miscellaneous income. The amounts included in income were $1.6 million for 2003,
$2.6 million for 2002 and $2.7 million for 2001. The deferred asset is being amortized
over the average useful life of the Companys non-project utility plant.

REVENUE RECOGNITION
        Operating
utility revenues are recorded on the basis of service rendered, which includes estimated
unbilled revenue. Non-utility subsidiaries recognize revenue when services are performed,
upon the sale of assets or on a percent of completion basis for fixed priced contracts.

ALLOWANCE FOR DOUBTFUL
ACCOUNTS 
        Allowance
for doubtful accounts is calculated based upon historical write-offs as compared to
operating revenues. The Company has also provided for a reserve for fiscal 2000 sales
transactions related to the California Independent System Operator and counterparties
based upon probability of collection. Puget Energys allowance for doubtful accounts
for 2003 and 2002 was $45.8 million and $45.4 million, respectively. PSEs allowance
for doubtful accounts for 2003 and 2002 was $44.0 million and $43.5 million, respectively.

RESTRICTED CASH 
        Restricted
cash represents cash to be used for specific purposes. Approximately $1.1 million in
restricted cash represents funds held by Puget Western, a PSE subsidiary, for a real estate development
project that a city requires to ensure work is completed either by the Company or by the
city. Approximately $1.4 million in restricted cash represents funds held for payment of
principal and interest for conservation trust debt.

SELF-INSURANCE 
        The
Company currently has no insurance coverage for storm damage and is self-insured for a
portion of the risk associated with comprehensive liability, workers
compensation claims and catastrophic property losses other than storm related. With
approval of the Washington Commission, PSE is able to defer for collection in future rates
certain uninsured storm damage costs associated with major storms.

FEDERAL INCOME TAXES
        The
Company normalizes, with the approval of the Washington Commission, certain income tax
items. Deferred taxes have been determined under SFAS No. 109. Investment tax credits are
deferred and amortized based on the average useful life of the related property in
accordance with regulatory and income tax requirements. (See Note 11.)

ENERGY CONSERVATION
        The
Company offers programs designed to help new and existing customers use energy
efficiently. The primary emphasis is to provide information and technical services to
enable customers to make energy efficient choices with respect to building design,
equipment and building systems, appliance purchases and operating practices. 

        Since
May 1997, the Company has recovered electric energy conservation expenditures through a
tariff rider mechanism. The rider mechanism allows the Company to defer the conservation
expenditures and amortize them to expense as PSE concurrently collects the conservation
expenditures in rates over a one-year period. As a result of the rider, there is no effect
on earnings per share. 

        Since
1995, the Company has been authorized by the Washington Commission to defer gas energy
conservation expenditures and recover them through a tariff tracker mechanism. The tracker
mechanism allows the Company to defer conservation expenditures and recover them in rates
over the subsequent year. The tracker mechanism also allows the Company to recover an
Allowance for Funds Used to Conserve Energy (AFUCE) on any outstanding balance that is not
being recovered in rates.

RATE ADJUSTMENT MECHANISMS
        The
Company has a power cost adjustment (PCA) mechanism that provides for an automatic rate
adjustment if PSEs costs to provide customers electricity falls outside
certain bands from a normalized level of power costs established in the electric general
rate case. The Companys cumulative maximum pre-tax earnings exposure due to power
cost variations over the four-year period ending June 30, 2006 is limited to $40 million
plus 1% of the excess. All significant variable power supply cost drivers are included in
the PCA mechanism (hydroelectric generation variability, market price variability for
purchased power and surplus power sales, natural gas and coal fuel price variability,
generation unit forced outage risk and wheeling cost variability). The mechanism
apportions increases or decreases in power costs, on a graduated scale, between PSE and
its customers. Any unrealized gains and losses from derivative instruments accounted for
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, are deferred in proportion to the cost-sharing arrangement under the PCA
once the Company reaches its cap of $40 million.

---

The
differences between the actual cost of the Companys gas supplies and gas
transportation contracts and that currently allowed by the Washington Commission are
deferred and recovered or repaid through the purchased gas adjustment (PGA) mechanism.

The
graduated scale is as follows:

|Annual Power Cost Variability  | Customers Share | Company's Share1
|------------------------------ | ---------------- | ----------------
|+/- $20 million                |                  | 0               
|+/- $20 million - $40 million  |                  | 50              
|+/- $40 million - $120 million |                  | 90              
|+/- $120+ million              |                  | 95              

NATURAL GAS OFF-SYSTEM
SALES AND CAPACITY RELEASE
        The
Company contracts for firm gas supplies and holds firm transportation and storage capacity
sufficient to meet the expected peak winter demand for gas for space heating by its firm
customers. Due to the variability in weather and other factors, however, the Company holds
contractual rights to gas supplies and transportation and storage capacity in excess of
its immediate requirements to serve firm customers on its distribution system for much of
the year which, therefore, are available for third-party gas sales, exchanges and capacity
releases. The Company sells excess gas supplies, enters into gas supply exchanges with
third parties outside of its distribution area and releases to third parties excess
interstate gas pipeline capacity and gas storage rights on a short-term basis to mitigate
the costs of firm transportation and storage capacity for its core gas customers. The
proceeds from such activities, net of transactional costs, are accounted for as reductions
in the cost of purchased gas and passed on to customers through the PGA mechanism, with no
direct impact on net income. As a result, the Company nets the sales revenue and
associated cost of sales for these transactions in purchased gas.

ENERGY RISK MANAGEMENT
        The
Companys energy related businesses are exposed to risks related to changes in
commodity prices and volumetric changes in its loads and resources. The Companys
energy risk management function manages the Companys core electric and gas supply
portfolios to achieve three primary objectives:

| |  | Ensure
that physical energy supplies are available to serve retail customer requirements;
| | - | -----------------------------------------------------------------------------------------

| |  | Manage
portfolio risks to limit undesired impacts on the Companys costs; and
| | - | -----------------------------------------------------------------------------

| |  | Maximize
the value of energy supply assets.
| | - | -------------------------------------------

The
Company enters into physical and financial instruments for the purpose of hedging
commodity price risk. Gains or losses on these derivatives are accounted for pursuant to
SFAS No. 133 as amended by SFAS No. 138 and SFAS No. 149. (See Note 15 for further
discussion.) The Company has established policies and procedures to manage these risks. A
Risk Management Committee separate from the business units that create these risks
monitors compliance with policies and procedures. In addition, the Audit Committee of the
Companys Board of Directors has oversight of the Risk Management Committee.

ACCOUNTING FOR DERIVATIVES
        The
Company follows SFAS No. 133, as amended by SFAS No. 138 and SFAS No. 149, which requires
that all contracts considered to be derivative instruments be recorded on the balance
sheet at their fair value. Under SFAS No. 149, any purchases from trading companies are
now required to be marked-to-market if the party does not have physical plant to back up
the transaction. This adoption did not have a significant effect on the Company in 2003.
Certain contracts that would otherwise be considered derivatives are exempt from SFAS No.
133 if they qualify for a normal purchase and normal sale exception. The Company enters
into both physical and financial contracts to manage its energy resource portfolio. The
majority of these contracts qualify for the normal purchase and normal sale exception.
However, certain of these contracts are derivatives and, pursuant to SFAS No. 133, are
reported at their fair value in the balance sheet. Changes in their fair value are
reported in earnings unless they meet specific hedge accounting criteria, in which case
changes in their fair market value are recorded in comprehensive income until the time the
transaction that they are hedging is recorded as income. The Company designates a
derivative instrument as a qualifying cash flow hedge if the change in the fair value of
the derivative is highly effective at offsetting the changes in the fair value of an
asset, a liability or a forecasted transaction. To the extent that a portion of a
derivative designated as a hedge is ineffective, changes in the fair value of the
ineffective portion of that derivative are recognized currently in earnings. Changes in
the market value of derivative transactions related to obtaining gas for the
Companys retail gas business are deferred as regulatory assets or liabilities as a
result of the Companys PGA mechanism and recorded in earnings as the transactions
are executed. In addition, once the Company reaches the $40 million PCA cap, any
unrealized gains or losses are deferred in proportion to the cost-sharing arrangement
under the PCA.

---

|1 | Over
the four-year period July 1, 2002 through June 30, 2006, the Company's share of per-tax
cost variation is                     capped at a cumulative $40 million plus 1% of the
excess.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

STOCK-BASED COMPENSATION
        The
Company has various stock-based compensation plans which prior to 2003 were accounted for
according to APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation. In 2003, the Company adopted the fair value based accounting of SFAS
No. 123 using the prospective method under the guidance of SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. The Company will
apply SFAS No. 123 accounting prospectively to stock compensation awards granted in 2003
and future years, while grants that were made in years prior to 2003 will continue to be
accounted for using the intrinsic value method of APB No. 25. Had the Company used the
fair value method of accounting specified by SFAS No. 123 for all grants at their grant
date rather than prospectively implementing SFAS No. 123, net income and earnings per
share would have been as follows:

|(Dollars in thousands, except per share amounts)
Years Ended December 31 | 2003 | 2002 | 2001
|------------------------------------------------------------------------ | ---- | ---- | ----
|Income for common stock, as reported                                     |      |      | $   
|Add: Total stock-based employee compensation expense included            |      |     
|in net income, net of tax                                                |      |      |     
|Less: Total stock-based employee compensation expense per the fair       |      |     
|value method of SFAS No. 123, net of tax                                 |      |      |     
|                                                                         |     
|Pro forma income for common stock                                        |      |      | $   
|                                                                         |     
|Earnings per share:                                                      |      |     
|Basic as reported                                                        |      |      | $   
|Diluted as reported                                                      |      |      | $   
|Basic pro forma                                                          |      |      | $   
|Diluted pro forma                                                        |      |      | $   



DEBT RELATED COSTS
        Debt
premiums, discounts and expenses are amortized over the life of the related debt. The
premiums and costs associated with reacquired debt are deferred and amortized over the
life of the related new issuance, in accordance with ratemaking treatment.

GOODWILL AND INTANGIBLES
(PUGET ENERGY ONLY)
        On
January 1, 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective and as a result Puget Energy ceased amortization of goodwill. During 2001, Puget
Energy recorded approximately $2.8 million of goodwill amortization. Puget Energy
performed an initial impairment review of goodwill and an annual impairment review
thereafter. The initial review was completed during the first half of 2002, which did not
result in an impairment charge. Goodwill is reviewed annually to determine if any
impairment exists. If goodwill is determined to have an impairment, Puget Energy would
record in the period of determination an impairment charge to earnings. Intangibles with
finite lives are amortized on a straight-line basis over the expected periods to be
benefited. For those acquisitions occurring subsequent to June 30, 2001, there was no
amortization of goodwill. For acquisitions made prior to June 30, 2001, goodwill and
intangibles were amortized on a straight-line basis over the expected periods to be
benefited, up to 30 years through December 31, 2001. The goodwill and intangibles recorded
on the balance sheet of Puget Energy are the result of several acquisitions of companies
by InfrastruX.

EARNINGS PER COMMON SHARE
(PUGET ENERGY ONLY)
        Basic
earnings per common share has been computed based on weighted average common shares
outstanding of 94,750,000, 88,372,000 and 86,445,000 for 2003, 2002 and 2001,
respectively. Diluted earnings per common share has been computed based on weighted
average common shares outstanding of 95,309,000, 88,777,000 and 86,703,000 for 2003, 2002
and 2001, respectively, which includes the dilutive effect of securities related to
employee stock-based compensation plans.

ACCOUNTS RECEIVABLE SECURITIZATION
PROGRAM 
        Rainier
Receivables, Inc. is a wholly owned, bankruptcy-remote subsidiary of PSE formed in
December 2002 for the purpose of purchasing customers accounts receivable, both
billed and unbilled, of PSE. Rainier Receivables and PSE have an agreement whereby Rainier
Receivables can sell, on a revolving basis, up to $150 million of those receivables. The
current agreement expires in December 2005. Rainier Receivables is obligated to pay fees
that approximate the third-party purchasers cost of issuing commercial paper equal
in value to the interests in receivables sold. At December 31, 2003, Rainier Receivables
sold $111 million of receivables compared to no sales at December 31, 2002.

---

NEW ACCOUNTING
PRONOUNCEMENTS 
        In
January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), which was further
revised in December 2003 with FIN 46R, which clarified the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have a controlling interest or sufficient equity
at risk for the entity to finance its activities without additional financial support.
This Interpretation requires that if a business entity has a controlling financial
interest in a variable interest entity, the financial statements must be included in the
consolidated financial statements of the business entity. The adoption of this
Interpretation for all interests in variable interest entities created after January 31,
2003 is effective immediately. For variable interest entities created before February 1,
2003, it is effective July 1, 2003. The Company has evaluated its contractual arrangements
and determined PSEs 1995 conservation trust off-balance sheet financing transaction
meets this guidance, and therefore it was consolidated in the third quarter of 2003. As a
result, electricity revenues for 2003 increased $5.7 million, while conservation
amortization and interest expense increased by the corresponding amount with no impact on
earnings. At December 31, 2003, the balance sheet assets and liabilities increased by $4.2
million. FIN 46R also impacted the treatment of the Companys mandatorily redeemable
preferred securities of a wholly owned subsidiary trust holding solely junior subordinated
debentures of the corporation (trust preferred securities). Previously, these trust
preferred securities were consolidated into the Companys operations. As a result of
FIN 46R, these securities have been deconsolidated and were classified as junior
subordinated debentures of the corporation payable to a subsidiary trust holding
mandatorily redeemable preferred securities (junior subordinated debt) in the fourth
quarter of 2003. This change had no impact on the Companys results of operations for
2003. The Company is evaluating its purchase power agreements and any other agreements to determine if FIN 46R will have an
impact on the financial statements.

        In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes the
requirements for classifying and measuring as liabilities certain financial instruments
that embody obligations to redeem the financial instruments by the issuer. The adoption of
SFAS No. 150 is effective with the first fiscal year or interim period beginning after
June 15, 2003. However, on November 5, 2003 the FASB deferred for an indefinite period
certain mandatorily redeemable noncontrolling interests associated with finite-lived
subsidiaries. The Company does not have any noncontrolling interest in finite-lived
subsidiaries and therefore, is not affected by the deferral. Prior periods will not be
restated for the new presentation. 

        SFAS
No. 150 requires the Company to classify its mandatorily redeemable preferred stock as
liabilities. As a result, the corresponding dividends on the mandatorily redeemable
preferred stock are classified as interest expense on the income statement with no impact
on income for common stock. 

        In
December 2003, SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132R), was revised to include various additional
disclosure requirements. SFAS No. 132R is effective for fiscal years ending after
December 15, 2003. (See Note 12.) 

        In
June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting
for Asset Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost should be
capitalized as part of the related long-lived asset and allocated to expense over the
useful life of the asset. The Company adopted the new rules on asset retirement
obligations on January 1, 2003. As a result, the Company recorded a $0.2 million charge to
income for the cumulative effect of this accounting change. (See Note 2.) 

        The
Emerging Issues Task Force of the Financial Accounting Standards Board (EITF or Task
Force) at its July 2003 meeting came to a consensus concerning EITF Issue No. 03-11,
Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to
FASB Statement No. 133 and Not Held for Trading Purposes as Defined in Issue
No. 02-03. The consensus reached was that determining whether realized gains and
losses on physically settled derivative contracts not held for trading purposes reported
in the income statement on a gross or net basis is a matter of judgment that depends on
the relevant facts and circumstances. Based on the guidance by EITF No. 03-11, the Company
determined that its non-trading derivative instruments should be reported net and will
implement this treatment effective January 1, 2004.

---

NOTE 2. 
        Utility
and Non-Utility Plant

|UTILITY PLANT
(DOLLARS IN THOUSANDS)
At December 31 | 2003 | 2002
|--------------------------------------------------- | ---- | ----
|Electric, gas and common utility plant classified   |      |     
|prescribed accounts at original cost:               |      |     
|Distribution plant                                  |      |     
|Production plant                                    |      |     
|Transmission plant                                  |      |     
|General plant                                       |      |     
|Construction work in progress                       |      |     
|Plant acquisition adjustment                        |      |     
|Intangible plant (including capitalized software    |      |     
|Underground storage                                 |      |     
|Liquefied natural gas storage                       |      |     
|Plant held for future use                           |      |     
|Other                                               |      |     
|Less accumulated provision for depreciation         |      |     
|                                                   
|Net utility plant                                   |      |     
|                                                   

|NON-UTILITY PLANT
(DOLLARS IN THOUSANDS)
At December 31 | 2003 | 2002
|------------------------------------------------------- | ---- | ----
|Non-utility plant                                       |      |     
|Intangibles                                             |      |     
|Less accumulated depreciation and amortizati            |      |     
|                                                       
|Net non-utility plant and intangibles                   |      |     
|                                                       

The
non-utility plant is composed primarily of the property, plant and equipment of
InfrastruX. The intangibles are composed of patents, contractual customer relationships
and other amortizable intangible assets of InfrastruX. 

        On
January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires legal obligations associated with the retirement
of long-lived assets to be recognized at their fair value at the time that the obligations
are incurred. Upon initial recognition of a liability, that cost is capitalized as part of
the related long-lived asset and allocated to expense over the useful life of the asset.
The Company recorded an after-tax charge to income of $0.2 million in the first quarter of
2003 for the cumulative effect of the accounting change. In accordance with guidance
provided by the Securities and Exchange Commission, the Company reclassified $124.9
million in 2003 and $114.6 million in 2002 for non-legal cost of removal on utility plant
from accumulated depreciation to a regulatory liability. The cost of removal is collected
from PSEs customers through depreciation expense and any excess is recorded as a
regulatory liability. 

        The
Company identified various asset retirement obligations at January 1, 2003, which were
included in the cumulative effect of the accounting change. The Company has an obligation
(1) to dismantle two leased electric generation turbine units and deliver the turbines to
the nearest railhead at the termination of the lease in 2009; (2) to remove certain
structures as a result of renegotiations with the Department of Natural Resources of a
now-expired lease; (3) to replace or line all cast iron pipes in its service territory by
2007 as a result of a 1992 Washington Commission order; and (4) to restore ash holding
ponds at a jointly owned coal-fired electric generating facility in Montana.

---

The
following table describes all changes to the Companys asset retirement obligation
liability during 2003:

|(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 2003      | Amount
|------------------------------------------------ | ------
|Asset retirement obligation at December 31, 2002 |       
|Liability recognized in transition               |       
|Liability settled in the period                  |       
|Accretion expense                                |       
|                                                
|Asset retirement obligation at December 31, 2003 |       
|                                                

The
pro forma asset retirement obligation liability balances as if SFAS No. 143 had been
adopted on January 1, 2000 (rather than January 1, 2003) are as follows:

|(DOLLARS IN THOUSANDS)                                                              | 
|----------------------------------------------------------------------------------- | 
|Pro forma amounts of liability for asset retirement obligation at December 31, 2000 | 
|Pro forma amounts of liability for asset retirement obligation at December 31, 2001 | 
|Pro forma amounts of liability for asset retirement obligation at December 31, 2002 | 

The
pro forma income statement effect as if SFAS No. 143 had been adopted on January 1, 2000
(rather than January 1, 2003) is as follows:

|(Dollars in thousands, except per share amounts)    | 2003 | 2002 | 2001
|--------------------------------------------------- | ---- | ---- | ----
|Income for common stock, as reported                |      |      | $   
|Add: SFAS No. 143 transition adjustment, net of tax |      |      |     
|Less: Pro forma accretion expense, net of tax       |      |      |     
|                                                   
|Pro forma income for common stock                   |      |      | $   
|                                                   
|Earnings per share:                                 |      |     
|Basic as reported                                   |      |      | $   
|Diluted as reported                                 |      |      | $   
|Basic pro forma                                     |      |      | $   
|Diluted pro forma                                   |      |      | $   

NOTE 3.Preferred Stock

On
November 1, 2003, all the outstanding 2.4 million shares of the $25 par value 7.45% Series
preferred stock not subject to mandatory redemption were redeemed at par value plus
accrued dividends. There were no other redemptions or reacquired shares of this preferred
stock series in 2002 or 2001.

NOTE 4.Preferred Share Purchase Right

On
October 23, 2000, the Board of Directors declared a dividend of one preferred share
purchase right (a Right) for each outstanding common share of Puget Energy. The dividend
was paid on December 29, 2000 to shareholders of record on that date. The Rights will
become exercisable only if a person or group acquires 10% or more of Puget Energys
outstanding common stock or announces a tender offer which, if consummated, would result
in ownership by a person or group of 10% or more of the outstanding common stock. Each
Right will entitle the holder to purchase from Puget Energy one one-hundredth of a share
of preferred stock with economic terms similar to that of one share of Puget Energys
common stock at a purchase price of $65, subject to adjustments. The Rights expire on
December 21, 2010, unless earlier redeemed or exchanged by Puget Energy.

---

NOTE 5.
        Dividend
Restrictions

The
payment of dividends on common stock is restricted by provisions of certain covenants
applicable to preferred stock and long-term debt contained in the Companys Articles
of Incorporation and Mortgage Indentures. Under the most restrictive covenants of PSE,
earnings reinvested in the business unrestricted as to payment of cash dividends were
approximately $235.9 million at December 31, 2003. For the years 2003, 2002 and 2001, the
aggregate dividends declared per share were $1.00, $1.21 and $1.84, respectively. 

        Under
the general rate settlement, PSE must rebuild its common equity ratio to at least 39%,
with milestones of 34%, 35% and 39% at the end of 2003, 2004 and 2005, respectively. If
PSE should fail to meet the schedule, it would be subject to a 2% rate reduction penalty.
The common equity ratio for PSE at December 31, 2003 was 40.0%.

NOTE 6.
        Redeemable
Securities

|                                                                                | PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION $100 PAR VALUE
|------------------------------------------------------------------------------- | --------------------------------------------------------------
|                                                                                | 4.70% SERIES                                                  
|SHARES OUTSTANDING DECEMBER 31, 2000                                            |                                                               
|                                                                               
|Acquired for sinking fund                                                       |                                                               
|2001                                                                            |                                                               
|2002                                                                            |                                                               
|2003                                                                            |                                                               
|                                                                               
|Called for redemption or reacquired and canceled:                               |                                                               
|2001                                                                            |                                                               
|2002                                                                            |                                                               
|2003                                                                            |                                                               
|                                                                               
|Shares outstanding December 31, 2003                                            |                                                               
|                                                                               
|See Consolidated Statements of
Capitalization for details on specific series.

PREFERRED STOCK SUBJECT
TO MANDATORY REDEMPTION 
        The
Company is required to deposit funds annually in a sinking fund sufficient to redeem the
following number of shares of each series of preferred stock at $100 per share plus
accrued dividends: 4.70% Series and 4.84% Series, 3,000 shares each and 7.75% Series,
37,500 shares. All previous sinking fund requirements have been satisfied. The $100 par
value 7.75% Series preferred stock subject to mandatory redemption was fully redeemed at
$102.07 per share plus accrued dividends on August 15, 2003. At December 31, 2003, there
were 37,689 shares of the 4.70% Series and 21,192 shares of the 4.84% Series acquired by
the Company and available for future sinking fund requirements. Upon involuntary
liquidation, all preferred shares are entitled to their par value plus accrued dividends. 
        The
preferred stock subject to mandatory redemption may also be redeemed by the Company at the
following redemption prices per share plus accrued dividends: 4.70% Series, $101.00 and
4.84% Series, $102.00.

JUNIOR SUBORDINATED
DEBENTURES OF THE CORPORATION PAYABLE TO A SUBSIDIARY TRUST HOLDING MANDATORILY REDEEMABLE PREFERRED
SECURITIES
        In
1997 and 2001, the Company formed Puget Sound Energy Capital Trust I and Puget Sound
Energy Capital Trust II, respectively, for the sole purpose of issuing and selling common
and preferred securities (Trust Securities). The proceeds from the sale of Trust
Securities were used to purchase Junior Subordinated Debentures (Debentures) from the
Company. The Debentures are the sole assets of the Trusts and the Company owns all common
securities of the Trusts. 
        The
Debentures of Trust I and Trust II have an interest rate of 8.231% and 8.40%,
respectively, and a stated maturity date of June 1, 2027 and June 30, 2041, respectively.
The Trust Securities are subject to mandatory redemption at par on the stated maturity
date of the Debentures. The Trust Securities in the Capital Trust I may be redeemed
earlier, under certain conditions, at the option of the Company. The Capital Trust II
Securities may be redeemed at any time on or after June 30, 2006 at par, under certain
conditions, at the option of the Company. Dividends relating to preferred securities are
included in interest expense for all periods presented. On February 26, 2003, the Company
repurchased 19,750 shares of the 8.231% Trust Securities.

---

NOTE 7.
        Long-Term Debt

FIRST
MORTGAGE BONDS AND SENIOR NOTES AT DECEMBER 31 (DOLLARS IN THOUSANDS)

|SERIES | DUE  | 2003         | 2002      |  | SERIES | DUE  | 2003       | 2002      
|------ | ---- | ------------ | --------- |  | ------ | ---- | ---------- | ----------
|6.20%  | 2003 | $         -- | $   3,000 |  | 7.61%  | 2008 | $  25,000  | $  25,000 
|6.23%  | 2003 | --           | 1,500     |  | 6.46%  | 2009 | 150,000    | 150,000   
|6.24%  | 2003 | --           | 1,500     |  | 6.61%  | 2009 | 3,000      | 3,000     
|6.30%  | 2003 | --           | 20,000    |  | 6.62%  | 2009 | 5,000      | 5,000     
|6.31%  | 2003 | --           | 5,000     |  | 7.12%  | 2010 | 7,000      | 7,000     
|6.40%  | 2003 | --           | 11,000    |  | 7.96%  | 2010 | 225,000    | 225,000   
|7.02%  | 2003 | --           | 30,000    |  | 7.69%  | 2011 | 260,000    | 260,000   
|6.25%  | 2004 | --           | 40,000    |  | 8.20%  | 2012 | --         | 30,000    
|6.07%  | 2004 | 10,000       | 10,000    |  | 8.59%  | 2012 | --         | 5,000     
|6.10%  | 2004 | 8,500        | 8,500     |  | 6.83%  | 2013 | 3,000      | 3,000     
|7.70%  | 2004 | 50,000       | 50,000    |  | 6.90%  | 2013 | 10,000     | 10,000    
|7.80%  | 2004 | 30,000       | 30,000    |  | 7.35%  | 2015 | 10,000     | 10,000    
|6.92%  | 2005 | 11,000       | 11,000    |  | 7.36%  | 2015 | 2,000      | 2,000     
|6.93%  | 2005 | 20,000       | 20,000    |  | 6.74%  | 2018 | 200,000    | 200,000   
|6.58%  | 2006 | 10,000       | 10,000    |  | 9.57%  | 2020 | 25,000     | 25,000    
|8.06%  | 2006 | 46,000       | 46,000    |  | 8.25%  | 2022 | --         | 25,000    
|8.14%  | 2006 | 25,000       | 25,000    |  | 8.39%  | 2022 | --         | 7,000     
|7.02%  | 2007 | 20,000       | 20,000    |  | 8.40%  | 2022 | --         | 3,000     
|7.04%  | 2007 | 5,000        | 5,000     |  | 7.19%  | 2023 | --         | 3,000     
|7.75%  | 2007 | 100,000      | 100,000   |  | 7.35%  | 2024 | 55,000     | 55,000    
|8.40%  | 2007 | --           | 10,000    |  | 7.15%  | 2025 | 15,000     | 15,000    
|3.363% | 2008 | 150,000      | --        |  | 7.20%  | 2025 | 2,000      | 2,000     
|6.51%  | 2008 | 1,000        | 1,000     |  | 7.02%  | 2027 | 300,000    | 300,000   
|6.53%  | 2008 | 3,500        | 3,500     |  | 7.00%  | 2029 | 100,000    | 100,000   
|       |      |              |           |  | Total  |      | $1,887,000 | $1,932,000

In
June 2003, the Company issued $150 million in first mortgage bonds, which are due June
2008. In January 2004, the Company filed a shelf-registration statement with the
Securities and Exchange Commission for the offering, on a delayed or continuous basis, of
up to $500 million of any combination of common stock of Puget Energy and principal amount
of Senior Notes secured by a pledge of first mortgage bonds. The Company called and paid
off 15 series of first mortgage bonds in 2003, totaling $195 million. The Company repaid
the bonds using cash on hand.
        Substantially
all utility properties owned by the Company are subject to the lien of the Companys
electric and gas mortgage indentures. To issue additional first mortgage bonds under these
indentures, PSEs earnings available for interest must be at least twice the annual
interest charges on outstanding first mortgage bonds. At December 31, 2003, the earnings
available for interest were 2.9 times the annual interest charges.

---

POLLUTION CONTROL BONDS 
        The
Company has outstanding two series of Pollution Control Bonds. On February 19, 2003, the
Board of Directors approved the refinancing of all Pollution Control Bonds series. The new
series were issued in March 2003. Amounts outstanding were borrowed from the City of
Forsyth, Montana (the City). The City obtained the funds from the sale of Customized
Pollution Control Refunding Bonds issued to finance pollution control facilities at
Colstrip Units 3 and 4. 
        Each
series of bonds is collateralized by a pledge of PSEs first mortgage bonds, the
terms of which match those of the Pollution Control Bonds. No payment is due with respect
to the related series of first mortgage bonds so long as payment is made on the Pollution
Control Bonds.

|AT DECEMBER 31 (DOLLARS IN THOUSANDS)SERIES | DUE  | 2003     | 2002         | 
|------------------------------------------- | ---- | -------- | ------------ | 
|                                           
|2003A Series - 5.00%                        | 2031 | $138,460 | $         -- | 
|2003B Series - 5.10%                        | 2031 | 23,400   | --           | 
|1993 Series - 5.875%                        | 2020 | --       | 23,460       | 
|1991 Series - 7.05%                         | 2021 | --       | 27,500       | 
|1991 Series - 7.25%                         | 2021 | --       | 23,400       | 
|1992 Series - 6.80%                         | 2022 | --       | 87,500       | 
|                                           
|Total                                       |      | $161,860 | $161,860     | 
|                                           

CONSERVATION TRUST
FINANCINGS
        In
July 2003, FIN 46 required PSE to consolidate the 1995 Conservation Trust Transaction. The
balance of the 6.45% bonds was $4.2 million at December 31, 2003, and they will mature in
2004.

LONG-TERM REVOLVING
CREDIT FACILITY (PUGET ENERGY ONLY) 
        Puget
Energy has a $15.0 million revolving credit facility available through a local bank. At
December 31, 2003, there was $5.0 million outstanding at a weighted average interest rate
of 2.86%, leaving $10.0 million available under the facility. Puget Energy is the
guarantor of this credit facility. 
        InfrastruX
and its subsidiaries have signed credit agreements with several banks for up to $184.7
million, which expire in 2004 and 2005. Under the InfrastruX credit agreement, Puget
Energy is the guarantor of $150.0 million of the line of credit. InfrastruX has borrowed
$155.6 million at a weighted average interest rate of 2.61%, leaving a balance of $29.1
million available under the lines of credit at December 31, 2003. InfrastruX also has
$19.3 million in equipment financing agreements with various vendors. These agreements
mature at various dates from 2004 to 2009 and carry interest rates from 0% to 9.65%.

LONG-TERM DEBT MATURITIES 
        The
principal amounts of long-term debt maturities for the next five years and thereafter are
as follows:

|PUGET ENERGY(DOLLARS IN THOUSANDS) | 2004     | 2005    | 2006    | 2007     | 2008     | Thereafter
|---------------------------------- | -------- | ------- | ------- | -------- | -------- | ----------
|Maturities Of:   Long-term debt    | $246,829 | $37,526 | $90,771 | $127,404 | $179,896 | $1,533,892

|PUGET SOUND ENERGY(DOLLARS IN THOUSANDS) | 2004     | 2005    | 2006    | 2007     | 2008     | Thereafter
|---------------------------------------- | -------- | ------- | ------- | -------- | -------- | ----------
|Maturities Of:   Long-term debt          | $102,658 | $31,000 | $81,000 | $125,000 | $179,500 | $1,533,847

---

NOTE 8.
        Liquidity Facilities and Other Financing Arrangements

At
December 31, 2003, PSE had short-term borrowing arrangements that included a $250 million
unsecured 364-day line of credit with various banks and a $150 million three-year
receivables securitization program. These agreements provide PSE with the ability to
borrow at different interest rate options and include variable fee levels. The line of
credit allows the Company to make floating rate advances at prime plus a spread and
Eurodollar advances at LIBOR plus a spread. The agreement contains credit
sensitive pricing with various spreads associated with various credit rating levels.
The agreement also allows for drawing letters of credit up to $50 million. 
        PSE
has entered into a Receivables Sales Agreement with Rainier Receivables, Inc., a wholly
owned subsidiary of PSE, in December 2002. Pursuant to the Receivables Sales Agreement,
PSE sells all of its utility customer accounts receivable and unbilled utility revenues to
Rainier Receivables. In addition, Rainier Receivables entered into a Receivables Purchase
Agreement with PSE and a third party. The Receivables Purchase Agreement allows Rainier
Receivables to sell the receivables purchased from PSE to the third party. The amount of
receivables sold by Rainier Receivables is not permitted to exceed $150 million at
any time. However, the maximum amount may be less than $150 million depending on the
outstanding amount of PSEs receivables which fluctuate with the seasonality of
energy sales to customers. 
        The
receivables securitization facility is the functional equivalent of a secured revolving
line of credit. In the event Rainier Receivables elects to sell receivables under the
Receivables Purchase Agreement, Rainier Receivables is required to pay the purchasers fees
that are comparable to interest rates on a revolving line of credit. As receivables are
collected by PSE as agent for the receivables purchasers, the outstanding amount of
receivables purchased by the purchasers declines until Rainier Receivables elects to sell
additional receivables to the purchasers. 
        The
receivables securitization facility has a three-year term, but is terminable by PSE and
Rainier Receivables upon notice to the receivables purchasers. During the year ended
December 31, 2003, Rainier Receivables had sold $348.0 million in accounts receivable. At
December 31, 2003, Rainier Receivables had sold $111.0 million in accounts receivable and
the maximum remaining receivables available for sale was $39.0 million.
        In
addition, PSE has agreements with certain banks to borrow on an uncommitted, as available,
basis at money market rates quoted by the banks. There are no costs, other than interest,
for these arrangements. PSE also uses commercial paper to fund its short-term borrowing
requirements. The following table presents the liquidity facilities and other financing
arrangements at December 31, 2003 and 2002.

|                                          |              |             
|----------------------------------------- | ------------ | ------------
|(DOLLARS IN THOUSANDS)                    |              |             
|At December 31                            | 2003         | 2002        
|                                         
|Short-term borrowings outstanding:       
|Commercial paper notes                    | $         -- | $  30,340   
|InfrastruX bank line of credit borrowings | 13,893       | 16,955      
|Weighted average interest rate            | 2.59%        | 2.81%       
|                                         
|Financing arrangements:                  
|Puget Energy line of credit1              | $  15,000    | $         --
|InfrastruX revolving credit facilities2   | 184,725      | 179,750     
|PSE line of credit3                       | 250,000      | 250,000     
|PSE receivables securitization program4   | 150,000      | 150,000     

The
Company has, on occasion, entered into interest rate swap agreements to reduce the impact
of changes in interest rates on portions of its floating-rate debt. There were no such
agreements outstanding at December 31, 2003 and 2002.

|
|

1 Includes  $5.0
million  outstanding  at December 31, 2003,  effectively  reducing the available
 borrowing  capacity to        $10.0 million.

2The revolving  credit  facility
 requires  InfrastruX and its  subsidiaries  to maintain  certain  financial  covenants,
         including  requirements  to maintain  certain levels of net worth and debt
coverage.  The agreement also places certain          restrictions on expenditures,
 other indebtedness and executive compensation.  For 2003 and 2002, InfrastruX
had $155.6 million
         and $144.0 million outstanding under the credit  facilities,  effectively  reducing
 available  borrowing capacity to $29.1 million and          $35.8 million, respectively.

3Provides  liquidity support for PSE's
 outstanding  commercial paper in the amount of $0.5 million and $30.3 million for
         2003 and 2002,  respectively,  effectively reducing the available borrowing
capacity under these credit lines to $249.5          million and $219.7 million,
respectively.

4Provides  liquidity  support for PSE's
 outstanding  letters of credit and commercial  paper.  At December 31, 2003, PSE
         had sold $111.0 million in receivables,  effectively reducing the available
borrowing capacity to $39.0 million.  There          were no receivables sold as of
December 31, 2002.

---

NOTE 9.
        Estimated Fair Value of Financial Instruments

The
following table presents the carrying amounts and estimated fair values of the
Companys financial instruments at December 31, 2003 and 2002:

|                                                 | 2003            | 2002      
|------------------------------------------------ | --------------- | ----------
|(DOLLARS IN MILLIONS)                            | CARRYING
AMOUNT | FAIR
VALUE
|Financial assets:                                |                 |           
|Cash                                             |                 |           
|Restricted cash                                  |                 |           
|Equity securities1                               |                 |           
|Notes receivable and other                       |                 |           
|Energy derivatives                               |                 |           
|                                                
|Financial liabilities:                           |                 |           
|Short-term debt                                  |                 |           
|Preferred stock subject to mandatory redemption  |                 |           
|Corporation obligated, mandatorily redeemable    |                 |           
|preferred securities of subsidiary trust holdin  |                 |           
|solely junior subordinated debentures of the     |                 |           
|corporation                                      |                 |           
|Junior subordinated debentures of the corporatio |                 |           
|payable to a subsidiary trust holding mandatori  |                 |           
|redeemable preferred securities                  |                 |           
|Long-term debt2                                  |                 |           
|Energy derivatives                               |                 |           

The
fair value of equity securities is based on valuations provided by the investment fund
manager. 
        The
fair value of outstanding bonds including current maturities is estimated based on quoted
market prices.  
        The
fair value of the preferred stock subject to mandatory redemption and corporation
obligated, mandatorily redeemable
preferred securities of a subsidiary trust holding solely junior subordinated debentures
of the corporation is estimated based on dealer quotes. 
        The
fair value of the junior subordinated debentures of the corporation payable to a
subsidiary trust holding mandatorily redeemable preferred securities is estimated based on
dealer quotes. 
        The
carrying values of short-term debt and notes receivable are considered to be a reasonable
estimate of fair value. The carrying amount of cash, which includes temporary investments
with original maturities of three months or less, is also considered to be a reasonable
estimate of fair value. 
        Derivative
instruments have been used by the Company on a limited basis and are recorded at fair
value. The Company has a policy that financial derivatives are to be used only to mitigate
business risk.
        In
2003, PSE redeemed the 7.75% mandatorily redeemable preferred stock. 75,000 shares were
redeemed in February 2003 at the par value of $100 per share and the remaining 337,500
shares were redeemed in August 2003 at $102.07 per share. Also in 2003, 19,750 shares of
the 8.231% Capital Trust I preferred stock were redeemed at $990 per share, leaving 80,250
shares still outstanding.

|
|

1 The 2002 carrying  amount
 includes an adjustment of $2.4 million,  to report the  available-for-sale  securities
at      market  value.  This amount (or  unrealized  gain) was  included as a component
of other  comprehensive  income net of      deferred taxes of $0.8 million for 2002. 2 PSE's carrying and fair value of
long-term debt for 2003 was $2,053.0 million and $2,250.4 million, respectively.

---

NOTE 10.
        Leases

All
of PSEs leases are operating leases. Certain leases contain purchase options and
renewal and escalation provisions. Operating and capital lease payments net of sublease
receipts were:

|(DOLLARS IN THOUSANDS) | PUGET ENERGY | PSE     |          
|---------------------- | ------------ | ------- | ---------
|At December 31         | Operating    | Capital | Operating
|                      
|2003                   | $26,842      | $2,696  | $19,301  
|2002                   | 26,368       | 2,486   | 20,176   
|2001                   | 25,373       | 1,966   | 20,135   

Payments
received for the subleases of properties were approximately $1.4 million, $2.6 million and
$2.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
        Future
minimum lease payments for non-cancelable leases net of sublease receipts are:

|(DOLLARS IN THOUSANDS)       | PUGET ENERGY | PSE     |          
|---------------------------- | ------------ | ------- | ---------
|At December 31               | Operating    | Capital | Operating
|                            
|2004                         | $17,967      | $1,611  | $10,651  
|2005                         | 13,858       | 1,522   | 8,939    
|2006                         | 11,278       | 1,391   | 8,763    
|2007                         | 9,660        | 913     | 8,696    
|2008                         | 9,355        | 1,051   | 8,132    
|Thereafter                   | 10,346       | --      | 10,346   
|                            
|Total minimum lease payments | $72,464      | $6,488  | $55,527  
|                            

Future
minimum sublease receipts for non-cancelable subleases are $0.1 million for 2004.

---

NOTE 11.
        Income Taxes

The
details of income taxes are as follows:

|                                       | 2003 | 2002 | 2001
|-------------------------------------- | ---- | ---- | ----
|(DOLLARS IN THOUSANDS)                 |      |      |     
|                                      
|Charged to operating expense:          |      |     
|Current - federal                      |      |      | $   
|Current - state                        |      |      |     
|Deferred - net federal                 |      |      |     
|Deferred -net state                    |      |      |     
|Deferred investment tax credits        |      |      |     
|                                      
|Total charged to operations            |      |      |     
|                                      
|Charged to miscellaneous income:       |      |     
|Current                                |      |      |     
|Deferred - net                         |      |      |     
|                                      
|Total charged to miscellaneous income  |      |      |     
|                                      
|Cumulative effect of accounting change |      |      |     
|                                      
|Total income taxes                     |      |      | $   
|                                      

The following
is a reconciliation of the difference between the amount of income taxes computed by
multiplying pre-tax book income by the statutory tax rate and the amount of income taxes
in the Consolidated Statements of Income for the Company:

|                                   | 2003 | 2002 | 2001
|---------------------------------- | ---- | ---- | ----
|(DOLLARS IN THOUSANDS)             |      |      |     
|                                  
|Income taxes at the statutory rate |      |      | $   
|                                  
|Increase (decrease):               |      |     
|Depreciation expense deducted in   |      |     
|the financial statements in exce   |      |      |     
|of tax depreciation, net of        |      |     
|depreciation treated as a          |      |     
|temporary difference               |      |      |     
|AFUDC included in income in the    |      |     
|financial statements but exclude   |      |      |     
|from taxable income                |      |      |     
|Accelerated benefit on early       |      |     
|retirement of depreciable assets   |      |      |     
|Investment tax credit amortizatio  |      |      |     
|Energy conservation expenditures   |      |      |     
|net                                |      |      |     
|Tax benefit of reduced salvage     |      |     
|values                             |      |      |     
|IRS issue resolution               |      |      |     
|State income taxes net of the      |      |     
|federal income tax benefit         |      |      |     
|Other - net                        |      |      |     
|                                  
|Total income taxes                 |      |      | $   
|                                  
|Effective tax rate                 |      |      |     
|                                  

The
Companys deferred tax liability at December 31, 2003, 2002 and 2001 is composed of
amounts related to the following types of temporary differences:

|                                     | 2003 | 2002 | 2001
|------------------------------------ | ---- | ---- | ----
|(DOLLARS IN THOUSANDS)               |      |      |     
|                                    
|Utility plant                        |      |      | $   
|Energy conservation charges          |      |      |     
|Contributions in aid of construction |      |      |     
|Bonneville Exchange Power            |      |      |     
|Cabot gas contract purchase          |      |      |     
|Deferred revenue                     |      |      |     
|Software amortization                |      |      |     
|Capitalized overhead costs           |      |      |     
|Other                                |      |      |     
|                                    
|Total                                |      |      | $   
|                                    

Puget
Energys totals of $755.2 million and $730.7 million for 2003 and 2002 consist of
deferred tax liabilities of $876.5 million and $841.7 million net of deferred tax assets
of $121.3 million and $111.0 million, respectively. 
        PSEs
totals of $731.9 million and $715.6 million for 2003 and 2002 consist of deferred tax
liabilities of $852.4 million and $824.2 million net of deferred tax assets of $120.5
million and $108.6 million, respectively. 
        Deferred
tax amounts shown above result from temporary differences for tax and financial statement
purposes. Deferred tax provisions are not recorded in the income statement for certain
temporary differences between tax and financial statement purposes because they are not
allowed for ratemaking purposes. 
        The
Company calculates its deferred tax assets and liabilities under SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recording deferred tax
balances, at the currently enacted tax rate, for all temporary differences between the
book and tax bases of assets and liabilities, including temporary differences for which no
deferred taxes had been previously provided because of use of flow-through tax accounting
for ratemaking purposes. Because of prior and expected future ratemaking treatment for
temporary differences for which flow-through tax accounting has been utilized, a
regulatory asset for income taxes recoverable through future rates related to those
differences has also been established by PSE. At December 31, 2003, the balance of this
asset was $142.8 million.

NOTE 12.
        Retirement Benefits

The
Company has a defined benefit pension plan with a cash balance feature covering
substantially all of its utility employees. Benefits are a function of age, salary and
service. Additionally, Puget Energy maintains a non-qualified supplemental retirement plan
for officers and certain director-level employees. The annual measurement date is December
31 of each year.
        In
addition to providing pension benefits, the Company provides certain health care and life
insurance benefits for retired employees. These benefits are provided principally through
an insurance company whose premiums are based on the benefits paid during the year.

---

|                                        | PENSION BENEFITS | OTHER BENEFITS
|--------------------------------------- | ---------------- | --------------
|(DOLLARS IN THOUSANDS)                  |                  |               
|                                       
|Change in benefit obligation:           |                  |               
|Benefit obligation at beginning of year |                  |               
|Service cost                            |                  |               
|Interest cost                           |                  |               
|Amendments1                             |                  |               
|Actuarial loss                          |                  |               
|Plan curtailment2                       |                  |               
|Special adjustments2                    |                  |               
|Benefits paid                           |                  |               
|                                       
|Benefit obligation at end of year       |                  |               
|                                       
|Change in plan assets:                  |                  |               
|Fair value of plan assets at beginning  |                  |               
|Actual return on plan assets            |                  |               
|Employer contribution                   |                  |               
|Benefits paid                           |                  |               
|                                       
|Fair value of plan assets at end of yea |                  |               
|                                       
|Funded status                           |                  |               
|Unrecognized actuarial gain (loss)      |                  |               
|Unrecognized prior service cost         |                  |               
|Unrecognized net initial (asset) obliga |                  |               
|                                       
|Net amount recognized                   |                  |               
|                                       
|Amounts recognized on statement of      |                  |               
|financial position consist of:          |                  |               
|Prepaid benefit cost                    |                  |               
|Accrued benefit liability               |                  |               
|Intangible asset                        |                  |               
|Accumulated other comprehensive income  |                  |               
|                                       
|Net amount recognized                   |                  |               
|                                       

|
|

1 In 2002,  the Company had $3.1
million in pension  benefit plan  amendments  due to changes in  employment  contracts,
        the addition of new entrants to the plan and the vesting of certain  non-vested
 participants who were affected by the         transition of service jobs to service
 providers.  The Company had $3.5 million in other benefit plan  amendments  due
        to an increase in the Company's contribution to the retiree medical plan. 2 In 2002,  the Company had a $9.5
 million  curtailment  credit and $9.2 million in special  adjustments  to the pension
        benefit  plan related to the  transition  of service  jobs to service  providers.
 The Company also had a $1.7 million         special  adjustment to the pension benefit
plan related to the non-qualified  pension benefit plan required to reflect         the
special benefit agreement given upon termination of a plan participant.

In
accounting for pension and other benefit costs under the plans, the following weighted
average actuarial assumptions were used:

|                            | PENSION BENEFITS | OTHER BENEFITS
|--------------------------- | ---------------- | --------------
|                            | 2003             | 2002          
|                           
|Discount rate               | 6.25%            | 6.75%         
|Return on plan assets       | 8.25%            | 8.25%         
|Rate of compensation increa | 4.50%            | 4.50%         
|Medical trend rate          | --               | --            
|                           

---

The
Company has used the expected return on plan assets based on an analysis of rates of
return over the past 50 years relevant to the Companys investment mix, market
conditions, inflation and other factors. The expected rate of return is reviewed annually
based on these factors and adjusted accordingly.

|                                              | PENSION BENEFITS | OTHER BENEFITS
|--------------------------------------------- | ---------------- | --------------
|(DOLLARS IN THOUSANDS)                        |                  |               
|                                             
|Components of net periodic benefit cost:      |                  |               
|Service cost                                  |                  |               
|Interest cost                                 |                  |               
|Expected return on plan assets                |                  |               
|Amortization of prior service cost            |                  |               
|Recognized net actuarial gain                 |                  |               
|Amortization of transition (asset) obligation |                  |               
|Plan curtailment                              |                  |               
|Special recognition of prior service costs    |                  |               
|                                             
|Net pension benefit cost (income)             |                  |               
|                                             

The
projected benefit obligation, accumulated benefit obligation and fair value of plan assets
for the non-qualified pension plan, which has accumulated benefit obligations in excess of
plan assets, were $45.0 million, $38.6 million and $0, respectively, as of December 31,
2003. For the qualified pension plan the projected benefit obligation, accumulated benefit
obligation and fair value of plan assets were $355.1 million, $339.7 million and $428.6
million, respectively, as of December 31, 2003.
        The
aggregate expected contributions by the Company to fund the pension and other benefit
plans for the year ended December 31, 2004 are $11.1 million and an insignificant amount,
respectively. The full amount of the pension funding for 2004 is for the Companys
non-qualified supplemental retirement plan.

        The
fair value of the plan assets of the pension benefits and other benefits are invested as
follows at December 31:

|                                | 2003            | 2002         
|------------------------------- | --------------- | -------------
|                                | PENSIONBENEFITS | OTHERBENEFITS
|                               
|Short-term investments and cash | 3.0%            | 100.0%       
|Equity securities               | 63.8%           | --           
|Fixed income securities         | 22.9%           | --           
|Mutual funds                    | 10.3%           | --           
|                               

The
expected total benefits to be paid under both plans for the next five years and the
aggregate total to be paid for the five years thereafter is as follows:

|(DOLLARS IN THOUSANDS) | 2004     | 2005     | 2006     | 2007     | 2008     | 2009-2013
|---------------------- | -------- | -------- | -------- | -------- | -------- | ---------
|                      
|Total benefits         | $ 35,697 | $ 25,940 | $ 26,939 | $ 28,806 | $ 28,202 | $157,821 

The
assumed medical inflation rate is 9.0% in 2004 decreasing to 6.0% in 2007. A 1% change in
the assumed medical inflation rate would have the following effects:

|                                               | 2003        | 2002       
|---------------------------------------------- | ----------- | -----------
|(DOLLARS IN THOUSANDS)                         | 1%
INCREASE | 1%
DECREASE
|Effect on post-retirement benefit obligation   |             |            
|Effect on service and interest cost components |             |            

---

The
Company has a Retirement Committee that establishes investment policies, objectives and
strategies for the purpose of obtaining the optimum return for the pension benefit plans,
while also keeping with the assumption of prudent risk and the Retirement Committees
total return objectives. All changes to the investment policies are reviewed and approved
by the Retirement Committee prior to being implemented. 
        The
Retirement Committee contracts with investment managers who have historically achieved
above-median long-term investment performance within the risk and asset allocation limits
that have been established. Interim evaluations are routinely performed with the
assistance of an outside investment consultant. To obtain the desired return needed to
fund the pension benefit plans, the Retirement Committee has established investment
allocation percentages by asset classes as follows:

|                                                | ALLOCATION
|----------------------------------------------- | ----------
|                                                |           
|ASSET CLASS                                     | MINIMUM   
|                                               
|Domestic large capitalization equity securities | 30%       
|Domestic small capitalization equity securities | --        
|Fixed-income securities                         | 20%       
|Foreign equity securities                       | 10%       
|Real estate                                     | --        
|Short-term investments and cash                 | --        

NOTE 13.
        Employee Investment Plans

The
Company has qualified Employee Investment Plans under which employee salary deferrals and
after-tax contributions are used to purchase several different investment fund options. 
        Puget
Energys contributions to the Employee Investment Plans were $7.1 million, $6.9
million and $8.0 million for the years 2003, 2002 and 2001, respectively. 
        PSEs
contributions to the Employee Investment Plan were $6.1 million, $6.1 million and $6.8
million for the years 2003, 2002 and 2001, respectively. The Employee Investment Plan
eligibility requirements are set forth in the plan documents.

NOTE 14.
        Stock-based Compensation Plans

The
Company has various stock compensation plans which prior to 2003 were accounted for
according to APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation. In 2003 the Company adopted the fair value based accounting of SFAS
No. 123 using the prospective method under the guidance of SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. The Company will
apply SFAS No. 123 accounting prospectively to stock compensation awards granted in 2003
and future years, while grants that were made in years prior to 2003 will continue to be
accounted for using the intrinsic value method of APB No. 25. Total compensation expense
related to the plans was $6.4 million, $6.3 million and $2.1 million in 2003, 2002 and
2001, respectively.
        The
Companys shareholder-approved Long-Term Incentive Plan (LTI Plan) encompasses many
of the awards granted to employees. Established in 1995 and amended and restated in 1997,
the LTI Plan applies to officers and key employees of the Company. Awards granted under
this plan include stock awards, performance awards or other stock-based awards as defined
by the plan. Any shares awarded are purchased on the open market. The maximum number of
shares that may be purchased for the LTI Plan is 1,200,000.

PERFORMANCE SHARE GRANTS
        Each
year the Company awards performance share grants under the LTI Plan. These are granted to
key employees and vest at the end of four years with the final number of shares awarded
depending on a performance measure. The Company records compensation expense related to
the shares based on the performance measure and changes in the market price of the stock.
Compensation expense related to performance share grants was $5.1 million, $5.5 million
and $2.3 million for 2003, 2002 and 2001, respectively. The fair value of the performance
awards granted in 2003, 2002 and 2001 was $17.29, $14.82 and $17.86, respectively. There
were a total of 334,608 performance awards granted in 2003, 247,184 in 2002 and 183,881 in
2001. As of December 31, 2003, there are four active grant cycles for a total of 790,922
share grants outstanding although they may not all be awarded.

STOCK OPTIONS 
        In
2002, Puget Energys Board of Directors granted 40,000 stock options under the LTI
Plan and an additional 260,000 options outside of the LTI Plan (for a total of 300,000
non-qualified stock options) to the president and chief executive officer. These options
can be exercised at the grant date market price of $22.51 per share and vest yearly over four and five
years although vesting is accelerated under certain conditions. The options expire 10
years from the grant date. All 300,000 options remained outstanding at December 31, 2003,
with 67,500 options exercisable. No options were exercisable at December 31, 2002. The
fair value of the options at the grant date was $3.37 per share. Following the intrinsic value method of
APB 25, no compensation expense was recorded for these options. No additional options were
granted in 2003.

---

RESTRICTED STOCK 
        In
2003 and 2002, the Company granted 11,000 shares and 30,000 shares, respectively, of
restricted stock under the LTI Plan to be purchased on the open market. Of the 2003 shares
issued, 1,000 shares vested in 2003. The remaining shares will vest evenly over the next
five years. The 2002 shares were fully vested as of December 2003. In 2002 the Company
also issued 50,000 shares of restricted stock outside of the LTI Plan as approved by the
Puget Energy Board of Directors. These shares were recorded as a separate component of
stockholders equity and vest evenly over a five-year period. Compensation expense
related to the restricted shares was $0.6 million and $0.5 million in 2003 and 2002,
respectively. No restricted shares were issued in 2001. Dividends are paid on all
outstanding restricted stock and are accounted for as a Puget Energy stock dividend, not
as compensation expense. The weighted average grant date fair value for all outstanding
shares of restricted stock granted in 2003 and 2002 was $23.29 and $21.94, respectively.

EMPLOYEE STOCK PURCHASE
PLAN 
        The
Company has a shareholder-approved Employee Stock Purchase Plan (ESPP) open to all
employees. Offerings occur at six-month intervals at the end of which the participating
employees receive shares for 85% of the lower of the stocks fair market price at the
beginning or the end of the six-month period. A maximum of 500,000 shares may be sold to
employees under the plan. Prior to 2002, the Company purchased shares for the plan on the
open market. As of the second offering of 2002, the Company began issuing common stock for
the ESPP rather than purchasing stock. In 2003, 38,940 shares were issued for the ESPP. In
2002, 18,252 shares were issued and 19,407 shares were purchased for the plan,
and in 2001,
45,659 shares were purchased. At December 31, 2003, 259,662 shares may still be sold to
employees under the plan. Under the SFAS No. 123 accounting that the Company adopted in
2003, ESPP is considered to be compensation expense. Total compensation expense related to
the ESPP was $0.2 million in 2003. Dividends are not paid on ESPP shares until they are
purchased by employees and thus are accounted for as dividends, not compensation expense.
The weighted average fair value of the purchase rights granted in 2003, 2002 and 2001 was
$4.25, $4.19 and $4.35, respectively.

INFRASTRUX STOCK OPTION
PLAN 
        The
InfrastruX stock option plan, established in 2000, has 3,862,500 shares of InfrastruX
stock authorized to be granted to officers, key employees and non-employee directors of
InfrastruX. The options generally vest within four years and expire 10 years from the
grant date. The following summarizes InfrastruX option information for 2003, 2002 and
2001:

|                                                               | 2003                 | 2002                          | 2001                
|-------------------------------------------------------------- | -------------------- | ----------------------------- | --------------------
|                                                               | Shares(in thousands) | WeightedAverageExercise Price | Shares(in thousands)
|                                                               |                      |                               |                     
|Outstanding at beginning of year                               |                      | 2,643                         |                     
|Granted                                                        |                      | 176                           |                     
|Exercised                                                      |                      | --                            |                     
|Canceled                                                       |                      | (201                          | )                   
|                                                               |                      |                               |                     
|Outstanding at end of year                                     |                      | 2,618                         |                     
|Options exercisable at year end                                |                      | 1,837                         |                     
|                                                               |                      |                               |                     
|Weighted average fair value of options granted during the year |                      | $2.41                         | $2.23               

The
following summarizes InfrastruX's outstanding option information at December 31, 2003:

|                | SharesOutstanding(in thousands) | WeightedAverageContractual Life(in years) | WeightedAverageExercise Price
|--------------- | ------------------------------- | ----------------------------------------- | -----------------------------
|                |                                
|Exercise Prices |                                 |                                           |                              
|$4.00           | 1,666                           |                                           | 7.11                         
|$5.00           | 952                             |                                           | 8.42                         
|                |                                
|                | 2,618                           |                                           | 7.59                         
|                |                                

---

Stock
options awarded under the InfrastruX plan were generally granted at the InfrastruX market
price on the date of grant although some options have been granted at a discount requiring
InfrastruX to record compensation expense. With the prospective adoption of SFAS No. 123
fair value accounting in 2003, InfrastruX also recorded compensation expense related to
options granted in 2003. Compensation expense of $0.2 million and $0.1 million related to stock options was
recorded in 2003 and 2002, respectively.

NON-EMPLOYEE DIRECTOR
STOCK PLAN 
        The
Company has a director stock plan created in 1998 for all non-employee directors of Puget
Energy and PSE. Under the plan which has a 10-year term, non-employee directors receive a
minimum of two-thirds of their quarterly retainer fees in Company stock except that 100%
of quarterly retainers are paid in Company stock until the director holds a number of
shares equal to two years of common stock in value of their retainer. Directors may
optionally receive their entire retainer in Company stock. The compensation expense
related to the director stock plan was $0.4 million, $0.2 million and $0.1 million in
2003, 2002 and 2001, respectively. The Company issues new shares or purchases stock for
this plan on the open market up to a maximum of 100,000 shares. As of December 31, 2003,
9,902 shares had been purchased for the director stock plan and 48,219 deferred, for a
total of 58,121 shares.

OTHER PLANS 
        In
addition to current stock compensation plans, the Company also has outstanding shares
related to two plans that were in effect prior to the 1997 merger between Puget Sound
Power and Light (PSP&L) and Washington Energy Company (WECO). There are 2,400 vested,
unexercised stock appreciation rights from the PSP&L Incentive Plan Awards granted to
executives of PSP&L. These were granted in 1994, have an exercise price of $20.75 and
expire 10 years after the grant date. There are also 11,301 vested, unexercised options
from the WECO Incentive Stock Option Plan granted to key employees of WECO. The options
were granted between 1994 and 1996 with exercise prices ranging from $15.55 to $23.11 and
expire 10 years from the date of grant. These are generally paid out as stock appreciation
rights at the discretion of the grantees. The Company records compensation expense each
quarter related to the PSP&L and WECO shares as the difference between the exercise
price and the current market price. Compensation expense related to the WECO plan was
immaterial in 2003 and 2002, and $(0.2) million in 2001. Compensation expense related to
the PSP&L plan was immaterial in 2003 and 2002, and $(0.1) million in 2001.

The
Company used the Black-Scholes option pricing model to determine the fair value of certain
stock-based awards to employees. The following assumptions were used for awards granted in
2003, 2002 and 2001:

|                             | 2003 | 2002 | 2001
|---------------------------- | ---- | ---- | ----
|                            
|Stock options                |     
|Risk-free interest rate      |      |      | --  
|Expected lives - years       |      |      | --  
|Expected stock volatility    |      |      | --  
|Dividend yield               |      |      | --  
|                            
|InfrastruX stock option plan |     
|Risk-free interest rate      |      | 2    | .80%
|Expected lives - years       |      | 4    | .00 
|Expected stock volatility    |      | 60   | .00%
|                            
|Performance awards           |     
|Risk-free interest rate      |      | 2    | .35%
|Expected lives - years       |      | 4    | .00 
|Expected stock volatility    |      | 23   | .85%
|Dividend yield               |      | 4    | .86%
|                            
|Employee Stock Purchase Plan |     
|Risk-free interest rate      |      | 1    | .07%
|Expected lives - years       |      | 0    | .50 
|Expected stock volatility    |      | 19   | .47%
|Dividend yield               |      | 4    | .39%
|                            

---

NOTE 15.
        Accounting for Derivative Instruments and Hedging Activities

The
Company has adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138 and SFAS No. 149. SFAS No. 133 requires that
all contracts considered to be derivative instruments be recorded on the balance sheet at
their fair value. The Company enters into both physical and financial contracts to manage
its energy resource portfolio including forward physical and financial contracts, option
contracts and swaps. The majority of these contracts qualify for the normal purchase and
normal sale exception.
        For
the year ended December 31, 2003, the Company recorded a decrease in earnings of
approximately $0.1 million compared to an increase of $11.6 million for 2002. Of the 2002
gain, $10.5 million represented the reversal of unrealized losses on gas hedge contracts
that were de-designated in the fourth quarter of 2001 and the reversal of the
mark-to-market unrealized loss on physical electric contracts at December 31, 2001 that
were settled in 2002. As of December 31, 2003, the Company had an unrealized gain recorded
in other comprehensive income of $0.2 million after-tax related to contracts which meet
the criteria for designation as cash flow hedges under SFAS No. 133. The amount of cash
flow hedges that will reverse and be settled into the income statement during 2004 will be
immaterial. As of December 31, 2002, the Company had a long-term unrealized gain recorded
in other comprehensive income of $9.9 million after-tax and a short-term unrealized loss
of $2.4 million after-tax related to contracts which meet the criteria for designation as
cash flow hedges under SFAS No. 133. 
        In
addition, the Company has adopted SFAS No. 149, which is effective for all contracts
entered into or modified after June 30, 2003 except for certain hedging relationships
designated after June 30, 2003. SFAS No. 149 clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in contracts
and for hedging activities under SFAS No. 133. The Company implemented SFAS No. 149 in the
third quarter of 2003 with no significant impact on the financial statements. 
        On
January 1, 2001, the Company recognized the cumulative effect of adopting SFAS No. 133 by
recording a liability and an offsetting after-tax decrease to current earnings of
approximately $14.7 million for the fair value of electric derivatives that did not meet
hedge criteria. The Company also recorded an asset and an offsetting increase to other
comprehensive income of approximately $286.9 million for the fair value of derivative
instruments that did meet hedge criteria on the implementation date. 
        PSE
has had two contracts with a counterparty whose debt ratings were below investment grade
since 2002. The first contract is a fixed for floating price natural gas swap contract for
one of its electric generating facilities. In the fourth quarter of 2003, PSE agreed to a
novation of this contract to a new counterparty which has strong credit ratings. As a
result of the novation, the collateral that was held by the original counterparty was
returned. The fixed for floating price natural gas swap contract has been designated since
inception in 2000 as a qualifying cash flow hedge. The second contract, a physical gas
supply contract for one of PSEs electric generating facilities was marked-to-market
in the fourth quarter of 2003. This contract was previously designated as a normal purchase
under SFAS No. 133. PSE has concluded that it is appropriate to reserve the marked-to-market
gain on this contract due to the credit quality of the counterparty in accordance with
SFAS No. 133 guidance, as delivery is not probable through the term of the contract, which
expires in December 2008.

NOTE 16.
        Acquisitions and Intangibles  (Puget Energy Only)

During
2002, InfrastruX acquired 100% of three companies based in Texas for a total price of
$49.7 million, and during the second quarter of 2003 acquired 100% of one additional
company based in New Mexico for $11.8 million. All purchases were funded in the form of
cash and preferred or common stock. The 2003 acquisition includes a contingency which
requires InfrastruX to make additional payments if certain 2003 and 2004 earnings measures
are met. If these earnings measures are met, InfrastruX would record the additional
amount as goodwill. As of December 31, 2003, no payments were required. 
        These
companies provide utility infrastructure services which are relevant to InfrastruXs
operating strategy including: installing, replacing and restoring underground cables and
pipes for utilities and telecommunications providers; pipeline construction, maintenance
and rehabilitation services for the natural gas and petroleum industries, including
directional drilling and vacuum excavation; and distribution and transmission-oriented
overhead electric construction services to electric utilities and cooperatives. 
        The
acquisitions have been accounted for using the purchase method of accounting and,
accordingly, the operating results of these companies have been included in Puget
Energys consolidated financial statements since their acquisition dates. Goodwill
additions representing the excess of cost over the net tangible and identifiable
intangible assets at the time of purchase were approximately $7.7 million in 2003 and
$23.5 million in 2002. 
        During
2001, goodwill was being amortized on a straight-line basis using a 30-year life except
for goodwill on two acquisitions made after June 30, 2001, which were not amortized per
SFAS No. 142. With the implementation of SFAS No. 142 on January 1, 2002, Puget Energy
discontinued amortizing goodwill and reclassified $5.2 million of intangible assets that
no longer met the criteria of identifiable intangible assets to goodwill. As required by
SFAS No. 142, Puget Energy performed an initial impairment review of goodwill in the first
quarter of 2002 and annual fourth-quarter impairment reviews thereafter and determined
that no impairment had taken place. In addition to the annual review, Puget Energy will
perform an impairment review at the time an event or circumstance arises that would
indicate the fair value would be below its carrying value. Goodwill amortization for 2001,
including amortization on the intangible assets that were reclassified to goodwill in
2002, was approximately $3.4 million. The income statement effects of discontinuing
amortization of goodwill for the comparative periods are as follows for Puget Energy:

---

|(DOLLARS IN THOUSANDS)                     | 2003               | 2002               | 2001              
|------------------------------------------ | ------------------ | ------------------ | ------------------
|                                          
|Reported income for common stock           | $      116,197     | $      110,052     | $       98,426    
|Add back goodwill amortization, net of tax | --                 | --                 | 2,826             
|                                           |                   
|Adjusted income for common stock           | $      116,197     | $      110,052     | $      101,252    
|                                           |                   
|Basic earnings per share                  
|Reported income for common stock           | $             1.23 | $             1.24 | $             1.14
|Add back goodwill amortization             | --                 | --                 | 0.03              
|                                           |                   
|Adjusted income for common stock           | $             1.23 | $             1.24 | $             1.17
|                                           |                   
|Diluted earnings per share                
|Reported income for common stock           | $             1.22 | $             1.24 | $             1.14
|Add back goodwill amortization             | --                 | --                 | 0.03              
|                                           |                   
|Adjusted income for common stock           | $             1.22 | $             1.24 | $             1.17
|                                           |                   

Identifiable
intangible assets acquired as a result of acquisitions of companies are amortized over the
expected useful lives of the assets, which range from 5 to 20 years. In 2003 a total of
$2.1 million was added to intangible assets  assigned $0.1 million to patents with
an amortization period of 17.0 years, $1.7 million to contractual customer relationships
with an amortization period of 10.0 years and $0.3 million to covenant not to compete with
an amortization period of five years. The total weighted average amortization period for
the 2003 additions is 9.6 years. In 2002, a total of $4.5 million was added to intangible
assets  assigned $0.3 million to patents, $3.1 million to contractual customer
relationships and $1.1 million to covenant not to compete. The total weighted average
amortization period for the 2002 additions is eight years.

|                                           |                  
|------------------------------------------ | -----------------
|AT DECEMBER 31, 2003(DOLLARS IN THOUSANDS) | Gross Intangibles
|                                          
|Covenant not to compete                    | $  4,178         
|Developed technology                       | 14,190           
|Contractual customer relationships         | 4,702            
|Patents                                    | 915              
|                                          
|Total                                      | $23,985          
|                                           |                  

|                                           |                  
|------------------------------------------ | -----------------
|AT DECEMBER 31, 2002(DOLLARS IN THOUSANDS) | Gross Intangibles
|                                          
|Covenant not to compete                    | $  3,908         
|Developed technology                       | 14,190           
|Contractual customer relationships         | 3,042            
|Patents                                    | 793              
|                                          
|Total                                      | $21,933          
|                                           |                  

The
identifiable intangible amortization expense for the year ended December 31, 2003 was $2.1
million compared to $1.9 million and $1.1 million for 2002 and 2001, respectively. The
identifiable intangible assets amortization for future periods based on the current
acquisitions will be:

|(DOLLARS IN THOUSANDS)         | 2004    | 2005    | 2006    | 2007    | 2008   
|------------------------------ | ------- | ------- | ------- | ------- | -------
|                              
|Future intangible amortization | $ 2,101 | $ 2,075 | $ 1,746 | $ 1,363 | $ 1,340

---

The
pro forma combined revenues, net income and earnings per common share of Puget Energy
presented below give effect to the acquisitions as if they had occurred on January 1,
2001. These results are not necessarily indicative of the results of operations that would
have occurred had the acquisitions of these companies been consummated for the period for
which they are being given effect.

|(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED)FOR THE YEARS ENDED DECEMBER 31 | 2003            | 2002            | 2001           
|------------------------------------------------------------------------------------------ | --------------- | --------------- | ---------------
|                                                                                          
|Operating revenues                                                                         | $     2,505,523 | $     2,469,122 | $     3,056,824
|Net income for common                                                                      | 116,636         | 112,813         | 104,338        
|Basic earnings per common share                                                            | $  1.23         | $  1.28         | $  1.21        
|Diluted earnings per common share                                                          | $  1.22         | $  1.27         | $  1.20        

NOTE 17.
        Other

PSE
has minority ownership interests in two venture capital funds established as limited
liability corporations that seek long-term capital appreciation by making capital
investments in energy sector related businesses. The Companys investment in these
two venture capital funds totaled $3.6 million at December 31, 2003. The Companys
ownership interest in both funds is less than 20% and the managing members of the limited
liability corporations have sole discretion over fund operations, management and
investment decisions. Under the terms of the limited liability corporation agreements
establishing the funds, one fund terminated December 31, 2003 and the other terminates
December 31, 2007. The Companys recorded investment in the fund that terminated on
December 31, 2003, and is in the process of distributing assets to investing members, was
$1.5 million at December 31, 2003. Subsequent to December 31, 2003, the Company has
realized a total of $1.2 million in cash proceeds and anticipates realizing the remaining
balance of $0.3 million by the end of 2004.
        The
carrying value of the Companys investment in the fund that will terminate on
December 31, 2007 was $2.1 million at December 31, 2003, which reflects the impact of
recording a $6.1 million pre-tax loss on the Companys original cost basis in the
fourth quarter of 2003. The Companys future funding obligation to this fund is $0.4
million. The fund manager advised investors that it intended to record unrealized losses
of certain portfolio assets in its calendar year 2003 financial statements. As a result of
this action, the Company adjusted its carrying basis to the $2.1 million fair value of the
Companys capital account as provided by the fund manager as of December 31, 2003. 
        In
the power cost only rate case, Washington Commission staff and other parties, including
the group Industrial Customers of the Northwest Utilities (ICNU), filed testimony seeking
downward adjustments to PSEs proposed electric rate increase of $64.4 million. Among
other things, they propose that a significant amount of PSEs future fuel costs
associated with an electric generating facility be disallowed for recovery in electric
rates based upon their interpretation of a 1994 Commission Order and a contention that PSE
should have secured fixed-price fuel supply options that were available in late 1997.
After factoring in such proposed fuel supply disallowances and certain lower estimates of
future power costs which would be trued-up to incurred actuals through PSEs PCA
mechanism, the Washington Commission staff recommends a net rate increase of $7.5 million
as compared to PSEs requested $64.4 million. If, after hearings on the matter, the
Commission were to adopt the Washington Commission staffs or ICNUs
recommendations, the proposed fuel cost disallowances would adversely affect PSEs
future financial performance. 
        PSE
believes that the fuel cost disallowances proposed by the Washington Commission staff are
legally and factually deficient, and PSE filed its rebuttal case on February 13, 2004.
The Washington Commission staff is independent from the Washington Commission in such a
litigated proceeding and its positions do not represent an indication of the final
outcome of the proceeding. The hearing was held in late February and the resolution of the
power only rate case is expected by mid-April 2004. 
        In
December 2003, PSE notified FERC that it rejected the 1997 license for the White River
Project. As a result, generation of electricity ceased at the White River Project on
January 15, 2004. The 1997 license would have made the Whiter River generation project
uneconomical to produce electricity. In the same proceeding described above, the Washington
Commission will be ruling on an Accounting Order that will allow for rate recovery of the
unrecovered investment in the White River generating project. The Washington Commission
staffs testimony in PSEs power cost only rate case supports PSEs
petition for recovery of the investment in the White River Project. At December 31, 2003,
the White River Project net book value totaled $68.4 million, which included $47.9 million
of net utility plant, $15.2 million of capitalized FERC licensing costs and $5.3 million
of costs related to construction work in progress. The FERC licensing costs and
construction work in progress charges were deferred to a regulatory asset.

---

NOTE 18.
        Commitments and Contingencies

COMMITMENTS 
ELECTRIC 
        For
the year ended December 31, 2003, approximately 19.9% of the Companys energy output
was obtained at an average cost of approximately $0.01641 per kWh through long-term
contracts with several of the Washington Public Utility Districts (PUDs) owning
hydroelectric projects on the Columbia River. 
        The
purchase of power from the Columbia River projects is on a cost-of-service
basis under which the Company pays a proportionate share of the annual cost of each
project in direct proportion to the amount of power annually purchased by the Company from
such project. Such payments are not contingent upon the projects being operable. These
projects are financed through substantially level debt service payments, and their annual
costs should not vary significantly over the term of the contracts unless additional
financing is required to meet the costs of major maintenance, repairs or replacements, or
license requirements. The Companys share of the costs and the output of the projects
is subject to reduction due to various withdrawal rights of the PUDs and others over the
lives of the contracts. 
        As
of December 31, 2003, the Company was entitled to purchase portions of the power output of
the PUDs projects as set forth in the following tabulation:

|                 | BONDSOUTSTANDING  | COMPANY'S ANNUAL AMOUNTPURCHASABLE (APPROXIMATE)
|---------------- | ----------------- | ------------------------------------------------
|PROJECT          | CONTRACTEXP. DATE | LICENSE1EXP. DATE                               
|                
|Rock Island      |                   |                                                 
|Original units   |                   | 2012                                            
|Additional units |                   | 2012                                            
|Rocky Reach      |                   | 2011                                            
|Wells            |                   | 2018                                            
|Priest Rapids 4  |                   | 2005                                            
|Wanapum 4        |                   | 2009                                            
|                
|Total            |                   |                                                 
|                

The
Companys estimated payments for power purchases from the Columbia River are $84.6
million for 2004, $81.4 million for 2005, $78.4 million for 2006, $81.4 million for 2007,
$82.6 million for 2008 and in the aggregate, $123.5 million thereafter through 2018. 
        The
Company also has numerous long-term firm purchased power contracts with other utilities in
the region. The Company is generally not obligated to make payments under these contracts
unless power is delivered. The Companys estimated payments for firm power purchases
from other utilities, excluding the Columbia River projects, are $76.0 million for 2004,
$77.7 million for 2005, $78.6 million for 2006, $80.7 million for 2007, $82.6 million for
2008 and in the aggregate, $433.3 million thereafter through 2037. These contracts have
varying terms and may include escalation and termination provisions. 
        As
required by the federal Public Utility Regulatory Policies Act (PURPA), PSE entered into
long-term firm purchased power contracts with non-utility generators. The Company
purchases the net electrical output of four significant projects at fixed and annually
escalating prices, which were intended to approximate the Companys avoided cost of
new generation projected at the time these agreements were made. The Companys
estimated payments under these contracts are $211.4 million for 2004, $217.3 million for
2005, $232.9 million for 2006, $211.9 million for 2007, $212.1 million for 2008 and in the
aggregate, $746.0 million thereafter through 2012. 
        The
following table summarizes the Companys estimated obligations for future power
purchases:

---

|(DOLLARS IN MILLIONS)   | 2004      | 2005       | 2006       | 2007       | 2008       | 2009 &  THERE-AFTER | TOTAL      
|----------------------- | --------- | ---------- | ---------- | ---------- | ---------- | ------------------- | -----------
|                       
|Columbia River projects | $    84.6 | $     81.4 | $     78.4 | $     81.4 | $     82.6 | $       123.5       | $     531.9
|Other utilities         | 76.0      | 77.7       | 78.6       | 80.7       | 82.6       | 433.3               | 828.9      
|Non-utility generators  | 211.4     | 217.3      | 232.9      | 211.9      | 212.1      | 746.0               | 1,831.6    
|                       
|Total                   | $   372.0 | $   376.4  | $   389.9  | $   374.0  | $   377.3  | $    1,302.8        | $   3,192.4
|                       

---

|1 | The
Company is unable to predict  whether  the  licenses  under the  Federal  Power Act will
be renewed to the current licensees.  FERC has issued orders for the Rocky Reach, Wells
and Priest  Rapids/Wanapum  projects under Section 22 of the Federal  Power Act,  which
affirm the Company's  contractual  rights to receive  power under  existing  terms and
conditions even if a new licensee is granted a license prior to expiration of the
contract term.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | The
contracts for purchases  initially  were  generally  coextensive  with the term of the
PUD bonds  associated  with the project.  Under the terms
of some  financings  and  refinancings,  however,  long-term  bonds were sold to finance
certain assets whose estimated  useful lives extend beyond the expiration date of the power sales  contracts.
 Of the total  outstanding bonds sold for each project,  the percentage of principal
amount of bonds which mature beyond the contract  expiration date are: 43.7% at
Rock Island;  58.3% at Rocky Reach; 94.5% at Priest Rapids;  79.6% at Wanapum; and
6.2% at Wells.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The
 components of 2003 costs  associated  with the interest  portion of debt service are:
Rock Island,  $22.6 million      for all units;  Rocky Reach,  $9.4 million;  Wells,
 $8.2 million;  Priest Rapids,  $0.8 million;  and Wanapum,  $0.6 million.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | On
 December  28,  2001,  PSE  signed  a  contract  offer  for  new  contracts  for  the
 Priest  Rapids  and  Wanapum    Developments.  On April 12, 2002, PSE signed  amendments
to those  agreements  which are technical  clarifications  of    certain  sections of the
 agreements.  Under the terms of these  contracts,  PSE will continue to obtain  capacity
and    energy  for the  term of any new  FERC  license  to be  obtained  by Grant  County
 PUD.  Grant  County  PUD  filed an    "Application  for New License for the Priest
 Rapids  Project" on October 29, 2003.  The new  contract  terms begin in    November of
2005 for the Priest Rapids  Development  and in November of 2009 for the Wanapum
 Development.  Unlike the    current contracts,  in the new contracts PSE's share of
power from the developments declines over time as Grant County    PUD's load  increases.
 On March 8, 2002,  the Yakama  Nation  filed a complaint  with FERC which  alleged  that
Grant    County PUD's new  contracts  unreasonably  restrain  trade and violate  various
 sections of the Federal Power Act and    Public Law 83-544.  On November 21, 2002,  FERC
 dismissed the complaint  while  agreeing that certain  aspects of the    complaint had
merit. As a result,  it has ordered Grant County PUD to remove  specific  sections of the
contract which    constrain  the parties to the Grant County PUD contracts  from
 competing  with Grant County PUD for a new license.  A    rehearing has been requested.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total
purchased power contracts provided the Company with approximately 11.0 million, 12.1
million and 11.9 million MWh of firm energy at a cost of approximately $479.2 million,
$466.1 million and $496.3 million for the years 2003, 2002 and 2001, respectively.
        The
following table indicates the Companys percentage ownership and the extent of the
Companys investment in jointly owned generating plants in service at December 31,
2003:

|                      |                     |                          | COMPANY'S SHARE        
|--------------------- | ------------------- | ------------------------ | -----------------------
|(DOLLARS IN MILLIONS) | ENERGYSOURCE (FUEL) | COMPANY'SOWNERSHIP SHARE | PLANT IN SERVICEAT COST
|                     
|Colstrip 1 & 2        |                     |                          |                        
|Colstrip 3 & 4        |                     |                          |                        

Financing
for a participants ownership share in the projects is provided for by such
participant. The Companys share of related operating and maintenance expenses is
included in corresponding accounts in the Consolidated Statements of Income. 
        PSE
and PPL Montana, the other owner of Colstrip Units 1 & 2, are engaged in a dispute
with Western Energy Company, a subsidiary of Westmoreland Coal Company, the supplier of
coal to the Colstrip power plants. The dispute is in the binding arbitration process and
concerns the price that PSE and PPL Montana will pay for coal under the contract for
Colstrip Units 1 & 2 through the end of the contract in 2009. This arbitration is
contemplated as a price adjustment mechanism in that contract. The present arbitration
schedule would resolve the dispute in the second quarter of 2004. Any price adjustment
could be retroactive to July 30, 2001 and would apply through the rest of the term. Fuel
supply costs for electric generation after July 1, 2002 are part of PSEs PCA
mechanism. 
        On
October 13, 2003, PSE received a letter from Western Energy Company that enclosed an Audit
Issue Letter dated July 25, 2003 from the Montana Department of Revenue, pertaining to
some allegedly underpaid royalties on coal purchased by PSE from Western Energy Company
between February 1997 and June 2000. PSE used the coal as fuel for its share of Units 3
& 4 of the Colstrip generating plant. PSEs coal price for that period was
reduced by a settlement PSE and Western Energy Company had entered into in 1997. Western
Energy Company takes the position that PSE must reimburse Western Energy Company for any
additional charges that result from the Audit Issue Letter. The Audit Issue Letter seeks
payment of over $1.1 million for royalties for the federal government. If that position is
correct, it could raise issues of other royalties and taxes that might apply. PSE will
investigate and defend this claim vigorously. PSE cannot predict the outcome of this
issue. 
        As
part of its electric operations and in connection with the 1997 restructuring of the
Tenaska Power Purchase Agreement, PSE is obligated to deliver to Tenaska up to 48,000
MMBtu per day of natural gas for operation of Tenaskas cogeneration facility. This
obligation continues for the remaining term of the agreement, provided that no deliveries
are required during the month of May. The price paid by Tenaska for this gas is reflective
of the daily price of gas at the United States/Canada border near Sumas, Washington. PSE
has entered into a financial arrangement to hedge a portion, 5,000 MMBtu to 10,000 MMBtu per
day, of future gas supply costs associated with this obligation. The Company has a maximum
financial obligation under this hedge agreement of $22.0 million in 2004. 
        As
part of its electric operations and in connection with the 1999 buyout of the Cabot gas
supply contract, PSE is obligated to deliver to Encogen up to 21,800 MMBtu per day of
natural gas for operation of the Encogen cogeneration facility. This obligation continues
for the remaining term of the original Cabot agreement. The Company entered into a
financial arrangement to hedge a portion of future gas supply

---

costs associated with this
obligation, 10,000 MMBtu per day, for the remaining term of the agreement. The Company has
a maximum financial obligation under this hedge agreement of $8.5 million in 2004, $8.7
million in 2005, $9.0 million in 2006, $9.2 million in 2007 and $9.6 million thereafter.
Depending on actual market prices, these costs will be partially, or perhaps entirely,
offset by floating price payments received under the hedge arrangement. Encogen has two
gas supply agreements that comprise 40% of the plants requirements with remaining
terms of 6.5 years. The obligations under these contracts are $15.9 million in 2004, $16.7
million in 2005, $17.5 million in 2006, $18.4 million in 2007 and $12.9 million in the
aggregate thereafter. 
        PSE
enters into short-term energy supply contracts to meet its core customer needs. These
contracts are generally classified as normal purchases and normal sales or in some cases
recorded at fair value in accordance with SFAS No. 133. Commitments under these contracts
are $3.0million in 2004, $10.3 million in 2005, $1.1 million in 2006, $0.4 million in 2007
and $0.1 million thereafter.

GAS SUPPLY 
        The
Company has also entered into various firm supply, transportation and storage service
contracts in order to ensure adequate availability of gas supply for its firm customers.
Many of these contracts, which have remaining terms from less than 1 year to 20 years,
provide that the Company must pay a fixed demand charge each month, regardless of actual
usage. Two of PSEs long-term firm gas supply agreements, that expire November 2004,
obligate the Company to purchase a minimum annual quantity at market-based contract
prices. If the minimum volumes are not purchased and taken during the year, the Company is
obligated to either: 1) pay a monthly or annual gas inventory charge calculated as a
percentage of the then-current contract commodity price times the minimum quantity not
taken; or 2) pay for gas not taken. PSE didnt incur such charges in 2003. The
Company incurred demand charges in 2003 for firm gas supply, firm transportation service
and firm storage and peaking service of $24.7 million, $47.9 million and $5.3 million,
respectively. WNG Cap I incurred demand charges in 2003 for firm transportation service of
$9.4 million. 
        The
following table summarizes the Companys obligations for future demand charges
through the primary terms of its existing contracts. The quantified obligations are based
on current contract prices and FERC authorized rates, which are subject to change.

|DEMAND CHARGE OBLIGATIONS(DOLLARS IN MILLIONS) | 2004      | 2005      | 2006      | 2007      | 2008      | 2009 &  THERE-AFTER | TOTAL      
|---------------------------------------------- | --------- | --------- | --------- | --------- | --------- | ------------------- | -----------
|                                              
|Firm gas supply                                | $    18.7 | $     1.5 | $     1.0 | $     0.5 | $     0.5 | $       1.5         | $      23.7
|Firm transportation service                    | 66.6      | 58.8      | 57.0      | 57.0      | 48.0      | 122.7               | 410.1      
|Firm storage service                           | 11.3      | 11.6      | 7.8       | 7.7       | 7.7       | 48.2                | 94.3       
|                                              
|Total                                          | $    96.6 | $    71.9 | $    65.8 | $    65.2 | $    56.2 | $    172.4          | $    528.1 
|                                              

SERVICE CONTRACT 
        On
August 30, 2001, PSE and Alliance Data Systems Corp. announced a contract under which
Alliance Data will provide data processing and billing services for PSE. In providing
services to PSE under the 10-year agreement, Alliance Data will use ConsumerLinX software,
PSEs customer-information software developed by its ConneXt subsidiary. Alliance
Data acquired the assets of ConneXt, including the exclusive use of the ConsumerLinX
software for five years with an option for renewal. Alliance Data will offer ConsumerLinX
as part of its integrated, single-source customer relationship management solution for
large-scale, regulated utility clients. The obligations under the contract are $21.7
million in 2004, $22.2 million in 2005, $22.8 million in 2006, $23.4 million in 2007,
$24.0 million in 2008 and $66.9 million in the aggregate thereafter.

SURETY BOND 
        The
Company has a self-insurance surety bond in the amount of $5.9 million guaranteeing
compliance with the Industrial Insurance Act (workers compensation) and nine
self-insurers pension bonds totaling $1.4 million.

ENVIRONMENTAL
        The
Company is subject to environmental laws and regulations by federal, state and local
authorities and has been required to undertake certain environmental investigative and
remedial efforts as a result of these laws and regulations. The Company has also been
named by the Environmental Protection Agency, the Washington State Department of Ecology,
and/or other third parties as potentially responsible at several contaminated sites and
manufactured gas plant sites. PSE has implemented an ongoing program to test, replace and
remediate certain underground storage tanks (UST) as required by federal and state laws.
The UST replacement component of this effort is finished, but PSE continues its work
remediating and/or monitoring these sites. Remediation and testing of Company vehicle
service facilities and storage yards is also continuing. 
        During
1992, the Washington Commission issued orders regarding the treatment of costs incurred by
the Company for certain sites under its environmental remediation program. The orders
authorize the Company to accumulate and defer prudently incurred cleanup costs paid to
third parties for recovery in rates established in future rate proceedings. The Company
believes a significant portion of its past and future environmental remediation costs are
recoverable from insurance companies, from third parties or under the Washington
Commissions order. 
        The
information presented here as it relates to estimates of future liability is as of
December 31, 2003.

---

ELECTRIC SITES
        The
Company has expended approximately $18.1 million related to the remediation activities
covered by the Washington Commissions order and has accrued approximately $1.6
million as a liability for future remediation costs for these and other remediation
activities. To date, the Company has recovered approximately $18.8 million from insurance
carriers. 
        Based
on all known facts and analyses, the Company believes it is not likely that the identified
environmental liabilities will result in a material adverse impact on the Companys
financial position, operating results or cash flow trends.

GAS SITES 
        The
Company has expended approximately $65.9 million related to the remediation activities
covered by a Washington Commission order and has accrued approximately $32.3
million for future remediation costs for these and other remediation sites. To date, the
Company has recovered approximately $59.6 million from insurance carriers and other third
parties. The Company expects to recover legal and remediation activities from either
insurance companies or customers per Washington Commission orders.
        Based
on all known facts and analyses, the Company believes it is not likely that the identified
environmental liabilities will result in a material adverse impact on the Companys
financial position, operating results or cash flow trends.

LITIGATION 
        There
are several actions in the U.S. Ninth Circuit Court of Appeals against Bonneville Power
Administration (BPA), in which the petitioners assert or may assert that BPA acted
contrary to law or without authority in deciding to enter into, or in entering into or
performing, a number of contracts, including the amended settlement agreement regarding
the Residential Purchase and Sale Program and the conditional settlement agreements
between BPA and PSE which modified the payment provisions of the Residential Purchase and
Sale Program. BPA rates used in such amended settlement agreement between BPA and PSE for
determining the amounts of money to be paid to PSE as residential exchange benefits during
the period October 1, 2001 through September 30, 2006 have been confirmed, approved and
allowed to go into effect by FERC. There are also several actions in the U.S. Ninth
Circuit Court of Appeals against BPA, in which petitioners assert that BPA acted contrary
to law in adopting or implementing the rates or rate adjustment clause upon which the
benefits received or to be received from BPA during the October 1, 2001 through September
30, 2006 period are based. It is not clear what impact, if any, review of such rates may
have on PSE. 
        Other
contingencies, arising out of the normal course of the Companys business, exist at
December 31, 2003. The ultimate resolution of these issues is not expected to have a
material adverse impact on the financial condition, results of operations or liquidity of
the Company.

NOTE 19.
        Segment Information

Puget
Energy operates in primarily two business segments: regulated utility operations, or PSE,
and construction services, or InfrastruX. Puget Energys regulated utility operation
generates, purchases and sells electricity and purchases, transports and sells natural
gas. The service territory of PSE covers approximately 6,000 square miles in the State of Washington.
InfrastruX specializes in construction services to other gas and electric utilities
primarily in the south/Texas and the north-central and eastern United States. 
        One minor non-utility business segment,
a PSE subsidiary,  which is a real estate investment and development company
is described as other.  The assets of ConneXt,  the development and marketing of customer  information and billing system
software  segment,  were sold  during the third  quarter of 2001.  The third  quarter  results of 2001  included  an $8.0
million after-tax gain related to the ConneXt sale.  Reconciling items between segments are not significant.

---

Financial
data for business segments are as follows:

|                                                   |            |            |          |             
|-------------------------------------------------- | ---------- | ---------- | -------- | ------------
|(DOLLARS  IN THOUSANDS)                            | REGULATED  |            |          | PUGET ENERGY
|2003                                               | UTILITY    | INFRASTRUX | OTHER    | TOTAL       
|                                                  
|Revenues                                           | $2,143,693 | $341,787   | $  6,043 | $2,491,523  
|Depreciation and amortization                      | 219,851    | 16,779     | 236      | 236,866     
|Income tax                                         | 69,823     | 1,594      | 952      | 72,369      
|Operating income                                   | 295,219    | 7,452      | 2,504    | 305,175     
|Interest charges, net of AFUDC                     | 179,437    | 5,485      | 123      | 185,045     
|Net income                                         | 119,144    | 1,766      | 438      | 121,348     
|Goodwill, net                                      | --         | 133,302    | --       | 133,302     
|Total assets                                       | 5,257,157  | 342,332    | 75,196   | 5,674,685   
|Construction expenditures - excluding equity AFUDC | 269,973    | --         | --       | 269,973     
|Additions to other property, plant and equipment   | --         | 15,536     | --       | 15,536      
|                                                  

|                                                   |            |            |            |             
|-------------------------------------------------- | ---------- | ---------- | ---------- | ------------
|(DOLLARS  IN THOUSANDS)                            | REGULATED  |            |            | PUGET ENERGY
|2002                                               | UTILITY    | INFRASTRUX | OTHER      | TOTAL       
|                                                  
|Revenues                                           | $2,063,040 | $319,529   | $    9,753 | $2,392,322  
|Depreciation and amortization                      | 215,097    | 13,426     | 220        | 228,743     
|Income tax                                         | 50,600     | 6,703      | 1,957      | 59,260      
|Operating income                                   | 289,511    | 15,595     | 4,563      | 309,669     
|Interest charges, net of AFUDC                     | 190,861    | 5,516      | --         | 196,377     
|Net income                                         | 104,044    | 9,455      | 4,384      | 117,883     
|Goodwill, net                                      | --         | 125,555    | --         | 125,555     
|Total assets                                       | 5,323,129  | 319,248    | 129,756    | 5,772,133   
|Construction expenditures - excluding equity AFUDC | 224,165    | --         | --         | 224,165     
|Additions to other property, plant and equipment   | --         | 11,621     | --         | 11,621      
|                                                  

|                                                   |            |            |           |             
|-------------------------------------------------- | ---------- | ---------- | --------- | ------------
|(DOLLARS  IN THOUSANDS)                            | REGULATED  |            |           | PUGET ENERGY
|2001                                               | UTILITY    | INFRASTRUX | OTHER     | TOTAL       
|                                                  
|Revenues                                           | $2,680,298 | $173,786   | $  32,476 | $2,886,560  
|Depreciation and amortization                      | 208,705    | 8,820      | 15        | 217,540     
|Income tax                                         | 68,005     | 2,956      | 8,877     | 79,838      
|Operating income                                   | 273,751    | 8,702      | 14,668    | 297,121     
|Interest charges, net of AFUDC                     | 186,403    | 3,656      | --        | 190,059     
|Net income                                         | 80,137     | 2,518      | 24,184    | 106,839     
|Goodwill, net                                      | --         | 102,151    | --        | 102,151     
|Total assets                                       | 5,300,105  | 229,125    | 139,251   | 5,668,481   
|Construction expenditures - excluding equity AFUDC | 247,435    | --         | --        | 247,435     
|Additions to other property, plant and equipment   | --         | 5,193      | --        | 5,193       
|                                                  

---

NOTE 20.
        Supplementary Income Statement Information

|                                  | 2003         | 2002      | 2001        
|--------------------------------- | ------------ | --------- | ------------
|(DOLLARS IN THOUSANDS)            | PUGET ENERGY | PSE       | PUGET ENERGY
|                                 
|Taxes other than income taxes:   
|Real estate and personal proper   | $  45,660    | $  44,757 | $  48,890   
|State business                    | 75,523       | 75,524    | 77,527      
|Municipal and occupational        | 64,861       | 64,861    | 67,770      
|Other                             | 38,273       | 25,638    | 37,029      
|                                 
|Total taxes other than income tax | $224,317     | $210,780  | $231,216    
|                                 
|Charged to:                      
|Operating expense                 | $208,395     | $194,857  | $215,429    
|Other accounts, including        
|construction work in progress     | 15,922       | 15,923    | 15,787      
|                                 
|Total taxes other than income tax | $224,317     | $210,780  | $231,216    
|                                 

SUPPLEMENTALQUARTERLY
FINANCIAL DATA

The
following unaudited amounts, in the opinion of the Company, include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation of the
results of operations for the interim periods. Quarterly amounts vary during the year due
to the seasonal nature of the utility business.

|PUGET ENERGY                                              
|----------------------------------------------------------
|                                                          
|(Unaudited; dollars in thousands except per share amounts)
|2003 QUARTER                                              
|                                                          
|Operating revenues                                        
|Operating income                                          
|Other income                                              
|Net income before cumulative effect of                    
|accounting change                                         
|Net income                                                
|Basic earnings per common share                           
|Diluted earnings per common share                         
|                                                          
|                                                          
|(Unaudited; dollars in thousands except per share amounts)
|2002 QUARTER                                              
|                                                          
|Operating revenues                                        
|Operating income                                          
|Other income                                              
|Net income                                                
|Basic and diluted earnings per common share               
|                                                          
|                                                          
|(Unaudited; dollars in thousands except per share amounts)
|2001 QUARTER                                              
|                                                          
|Operating revenues                                        
|Operating income                                          
|Other income                                              
|Net income before cumulative effect of                    
|accounting change                                         
|Net income                                                
|Basic earnings per common share                           
|Diluted earnings per common share                         
|                                                          

|PUGET SOUND ENERGY                    
|--------------------------------------
|                                      
|(Unaudited; dollars in thousands)     
|2003 QUARTER                          
|                                      
|Operating revenues                    
|Operating income                      
|Other income                          
|Net income before cumulative effect of
|accounting change                     
|Net income                            
|                                      
|                                      
|(Unaudited; dollars in thousands)     
|2002 QUARTER                          
|                                      
|Operating revenues                    
|Operating income                      
|Other income                          
|Net income                            
|                                      
|                                      
|(Unaudited; dollars in thousands)     
|2001 QUARTER                          
|                                      
|Operating revenues                    
|Operating income                      
|Other income                          
|Net income before cumulative effect of
|accounting change                     
|Net income                            
|                                      

---

SCHEDULE II.Valuation and Qualifying
Accounts and Reserves

|(DOLLARS IN THOUSANDS)                          | BALANCE AT
BEGINNING
OF PERIOD | ADDITIONS
CHARGED TO
COSTS AND
EXPENSES | DEDUCTIONS | BALANCE
AT END
OF PERIOD
|----------------------------------------------- | ------------------------------ | --------------------------------------- | ---------- | ------------------------
|PUGET ENERGY                                    |                                |                                         |            |                         
|                                               
|YEAR ENDED DECEMBER 31, 2001                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 3,863                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Industrial accident reserve                     |                                |                                         |            | 2,000                   
|Gas transportation contracts reserve            |                                |                                         |            | 139                     
|                                               
|                                                |                                |                                        
|YEAR ENDED DECEMBER 31, 2002                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 5,488                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Industrial accident reserve                     |                                |                                         |            | --                      
|Gas transportation contracts reserve            |                                |                                         |            | 139                     
|                                               
|                                                |                                |                                        
|YEAR ENDED DECEMBER 31, 2001                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 1,538                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Gas transportation contracts reserve            |                                |                                         |            | 1,657                   
|                                               
|PUGET SOUND ENERGY                              |                                |                                        
|                                               
|YEAR ENDED DECEMBER 31, 2003                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 1,990                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Industrial accident reserve                     |                                |                                         |            | 2,000                   
|Gas transportation contracts reserve            |                                |                                         |            | 139                     
|                                               
|                                                |                                |                                        
|YEAR ENDED DECEMBER 31, 2002                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 3,666                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Industrial accident reserve                     |                                |                                         |            | --                      
|Gas transportation contracts reserve            |                                |                                         |            | 139                     
|                                               
|                                                |                                |                                        
|YEAR ENDED DECEMBER 31, 2001                    |                                |                                        
|                                                |                               
|Accounts deducted from assets on balance sheet: |                                |                                         |            |                         
|Allowance for doubtful accounts receivable      |                                |                                         | $          | 1,538                   
|Reserve on wholesale sales                      |                                |                                         |            | 41,488                  
|Gas transportation contracts reserve            |                                |                                         |            | 1,657                   
|                                               

---

EXHIBIT INDEX

Certain
of the following exhibits are filed herewith. Certain other of the following exhibits have
heretofore been filed with the Securities and Exchange Commission and are incorporated
herein by reference.

| | 3(i).1 | Restated
 Articles of Incorporation  of Puget Energy  (Incorporated by reference to Exhibit 99.2,
Puget                  Energy's Current Report on Form 8-K filed January 2, 2001,
Commission File No. 333-77491).
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3(i).2 | Restated
Articles of Incorporation of PSE (included as Annex F to the Joint Proxy
 Statement/Prospectus                  filed February 1, 1996, Registration No. 333-617).
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3(ii).1 | Amended
and Restated Bylaws of Puget Energy dated March 7, 2003.
| | ------- | ----------------------------------------------------------------

| | 3(ii).2 | Amended
and Restated Bylaws of PSE dated March 7, 2003.
| | ------- | -------------------------------------------------------

| | 4.1 | Fortieth
 through  Seventy-ninth  Supplemental  Indentures  defining the rights of the holders of
PSE's                  First  Mortgage  Bonds  (Exhibit 2-d to  Registration  No.
 2-60200;  Exhibit 4-c to  Registration  No.                  2-13347;  Exhibits  2-e
 through  and  including  2-k  to  Registration  No.  2-60200;  Exhibit  4-h to
                 Registration  No.  2-17465;  Exhibits 2-l, 2-m and 2-n to  Registration
 No.  2-60200;  Exhibits 2-m to                  Registration No. 2-37645;  Exhibit 2-o
through and including 2-s to Registration  No. 2-60200;  Exhibit                  5-b to
 Registration  No.  2-62883;  Exhibit  2-h to  Registration  No.  2-65831;  Exhibit
 (4)-j-1  to                  Registration No. 2-72061;  Exhibit (4)-a to Registration
No. 2-91516; Exhibit (4)-b to Annual Report on                  Form 10-K for the fiscal
year ended December 31, 1985,  Commission File No. 1-4393;  Exhibits (4)-b and
                 (4)-c to Registration  No.  33-45916;  Exhibit (4)-c to  Registration
 No.  33-50788;  Exhibit (4)-a to                  Registration No. 33-53056;  Exhibit
4.3 to Registration No. 33-63278;  Exhibit 4.25 to Registration No.
                 333-41181;  Exhibit 4.27 to Current  Report on Form 8-K dated March 5,
1999; Exhibit 4.2 to Current                  Report on form 8-K dated  November 2,
2000; and Exhibit 4.2 to Current Report on Form 8-K dated June 3,                  2003.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Indenture
 defining the rights of the holders of PSE's senior notes  (incorporated  herein by
reference                  to Exhibit 4-a to PSE's Quarterly  Report on Form 10-Q for the
quarter ended June 30, 1998,  Commission                  File No. 1-4393).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | First
 Supplemental  Indenture  defining  the rights of the  holders of PSE's  Senior  Notes,
 Series A                  (incorporated  herein  by  reference  to  Exhibit  4-b to
PSE's  Quarterly  Report on Form 10-Q for the                  quarter ended June 30,
1998, Commission File No. 1-4393).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 | Second
 Supplemental  Indenture  defining  the rights of the holders of PSE's  Senior  Notes,
 Series B                  (incorporated herein by reference to Exhibit 4.6 to PSE's
Current  Report on Form 8-K,  dated March 5,                  1999, Commission File No.
1-4393).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | Third
 Supplemental  Indenture  defining  the rights of the  holders of PSE's  Senior  Notes,
 Series C                  (incorporated  herein by reference to Exhibit 4.1 to PSE's
Current  Report on Form 8-K,  dated November                  2, 2000, Commission File
No. 1-4393).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | Fourth
 Supplemental  Indenture defining the rights of the holders of PSE's Senior Notes
 (incorporated                  herein by reference to Exhibit 4.1 to PSE's Current
Report on Form 8-K, dated June 3, 2003,  Commission                  File No. 1-4393).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.7 | Rights
 Agreement dated as of December 21, 2000 between Puget Energy and Mellon Investor
 Services LLC,                  as Rights Agent  (incorporated  herein by reference to
Exhibit 2.1 to PSE's  Registration  Statement on                  Form 8-A, dated January
2, 2001, Commission File No. 1-16305).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.8 | Indenture
 between PSE and the First National Bank of Chicago dated June 6, 1997  (incorporated
 herein                  by  reference  to Exhibit 4.1 of PSE's  Quarterly  Report on
Form 10-Q for the  quarter  ended June 30,                  1997, Commission File No.
1-4393).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.9 | Amended
and  Restated  Declaration  of Trust  between  Puget Sound Energy  Capital  Trust and the
First                  National Bank of Chicago dated June 6, 1997  (incorporated  herein
by reference to Exhibit 4.2 of PSE's                  Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 1-4393).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.10 | Series
A Capital  Securities  Guarantee  Agreement  between PSE and the First  National Bank of
Chicago                  dated June 6, 1997  (incorporated  herein by reference to
Exhibit 4.3 of PSE's Quarterly Report on Form                  10-Q for the quarter ended
June 30, 1997, Commission File No. 1-4393).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.11 | First
Supplemental Indenture dated as of October 1, 1959 (Exhibit 4-D to Registration No.
2-17876).
| | ---- | ---------------------------------------------------------------------------------------------------

| | 4.12 | Sixth
Supplemental  Indenture dated as of August 1, 1966 (Exhibit to Form 8-K for month of
August 1966,                  File No. 0-951).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------

| | 4.13 | Seventh
Supplemental Indenture dated as of February 1, 1967 (Exhibit 4-M, Registration No.
2-27038).
| | ---- | ----------------------------------------------------------------------------------------------------

| | 4.14 | Sixteenth
Supplemental Indenture dated as of June 1, 1977 (Exhibit 6-05 to Registration No.
2-60352).
| | ---- | -----------------------------------------------------------------------------------------------------

| | 4.15 | Seventeenth
 Supplemental  Indenture  dated as of August 9, 1978 (Exhibit  5-K.18 to  Registration
 No.                  2-64428).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------

| | 4.16 | Twenty-second
 Supplemental  Indenture  dated as of July 15, 1986 (Exhibit  4-B.20 to Form 10-K for the
                 year ended September 30, 1986, File No. 0-951).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.17 | Twenty-seventh
 Supplemental Indenture dated as of September 1, 1990 (Exhibit 4-B.20, Form 10-K for the
                 year ended September 30, 1998, File No. 10-951).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.18 | Twenty-eighth
 Supplemental Indenture dated as of July 31, 1991 (Exhibit 4-A, Form 10-Q for the quarter
                 ended March 31, 1993, File No. 0-951).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.19 | Twenty-ninth
 Supplemental  Indenture  dated  as of June  1,  1993  (Exhibit  4-A to  Registration
 No.                  33-49599).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------

| | 4.20 | Thirtieth
 Supplemental  Indenture  dated as of August 15, 1995  (incorporated  herein by
 reference to                  Exhibit 4-A of Washington Natural Gas Company's S-3
Registration Statement, Registration No. 33-61859).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.21 | Thirty-first
Supplemental Indenture dated February 10, 1997.
| | ---- | ------------------------------------------------------------

| | 4.22 | Unsecured
 Debt Indenture  between Puget Sound Energy and Bank One Trust Company,  N.A. dated as of
May                  18,  2001,  defining  the  rights  of  the  holders  of  Puget
 Sound  Energy's  unsecured   debentures                  (incorporated  herein by
reference to Exhibit 4.3 to Puget Sound  Energy's  Current Report on Form 8-K,
                 filed May 22, 2001, Commission File No. 1-4393).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.23 | First
 Supplemental  Indenture to the Unsecured  Debt  Indenture  dated as of May 18, 2001
defining the                  rights of 8.40% Subordinated  Deferrable Interest
Debentures due June 30, 2041 (incorporated  herein by                  reference  to
Exhibit 4.4 to Puget  Sound  Energy's  Current  Report on Form 8-K,  filed May 22,  2001,
                 Commission File No. 1-4393)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.24 | Amended
 and  Restated  Declaration  of Trust of Puget Sound  Energy  Trust II dated as of May
18, 2001                  (incorporated  herein by reference to Exhibit 4.2 to Puget
Sound  Energy's  Current Report on Form 8-K,                  filed May 22, 2001,
Commission File No. 1-4393).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.25 | Preferred
Securities  Guarantee  Agreement,  dated May 18, 2001 between Puget Sound Energy and Bank
One                  Trust  Company,  N.A.  for the benefit of the holders of the trust
 preferred  securities  of the Puget                  Sound Energy Trust II (incorporated
 herein by reference to Exhibit 4.5 to Puget Sound Energy's Current
                 Report on Form 8-K, filed May 22, 2001, Commission File No. 1-4393).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.26 | Pledge
 Agreement  dated March 11, 2003  between  Puget  Sound  Energy and Wells Fargo Bank
 Northwest,                  National  Association,  as Trustee  (incorporated  herein by
reference to Exhibit 4.24 to the Company's                  Post-Effective  Amendment No.
1 to Registration  Statement on Form S-3 dated July 11, 2003,  Commission
                 File No. 333-82940-02).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.27 | Loan
Agreement  dated as of March 1, 2003,  between the City of Forsyth,  Rosebud  County,
 Montana and                  Puget Sound Energy  (incorporated  herein by reference to
Exhibit 4.25 to the Company's  Post-Effective                  Amendment  No. 1 to
 Registration  Statement  on Form S-3,  dated July 11,  2003,  Commission  File No.
                 333-82490-02).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | First
 Amendment  dated as of October 4, 1961 to Power Sales Contract  between Public Utility
 District                  No. 1 of Chelan  County,  Washington  and PSE,  relating to
the Rocky Reach  Project  (Exhibit  13-d to                  Registration No. 2-24252).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | First
 Amendment dated February 9, 1965 to Power Sales Contract  between Public Utility
 District No. 1                  of Douglas County,  Washington and PSE, relating to the
Wells Development (Exhibit 13-p to Registration                  No. 2-24252).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Pacific
Northwest  Coordination  Agreement executed as of September 15, 1964 among the United
States of                  America,  PSE and most of the other major electrical
 utilities in the Pacific Northwest (Exhibit 13-gg                  to Registration No.
2-24252).
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Contract
dated November 14, 1957 between  Public  Utility  District No. 1 of Chelan County,
 Washington                  and PSE, relating to the Rocky Reach Project (Exhibit 4-1-a
to Registration No. 2-13979).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Power
Sales  Contract  dated as of November 14, 1957 between  Public  Utility  District No. 1
of Chelan                  County,  Washington and PSE,  relating to the Rocky Reach
Project  (Exhibit 4-c-1 to  Registration  No.                  2-13979).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 | Power
 Sales  Contract  dated May 21, 1956  between  Public  Utility  District  No. 2 of Grant
 County,                  Washington and PSE, relating to the Priest Rapids Project
(Exhibit 4-d to Registration No. 2-13347).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | First
 Amendment  to Power Sales  Contract  dated as of August 5, 1958  between PSE and Public
 Utility                  District No. 2 of Grant County, Washington,  relating to the
Priest Rapids Development (Exhibit 13-h to                  Registration No. 2-15618).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 | Power
Sales  Contract  dated June 22, 1959  between  Public  Utility  District  No. 2 of Grant
 County,                  Washington and PSE, relating to the Wanapum Development
(Exhibit 13-j to Registration No. 2-15618).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 | Agreement
to Amend Power Sales Contracts  dated July 30, 1963 between Public Utility  District No.
2 of                  Grant County,  Washington and PSE,  relating to the Wanapum
 Development  (Exhibit 13-1 to Registration                  No. 2-21824).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 | Power
Sales  Contract  executed as of  September  18, 1963  between  Public  Utility  District
No. 1 of                  Douglas County,  Washington and PSE,  relating to the Wells
 Development  (Exhibit 13-r to Registration                  No. 2-21824).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | Construction
 and Ownership  Agreement  dated as of July 30, 1971 between The Montana Power Company
and                  PSE (Exhibit 5-b to Registration No. 2-45702).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 | Operation
 and  Maintenance  Agreement  dated as of July 30, 1971 between The Montana Power Company
and                  PSE (Exhibit 5-c to Registration No. 2-45702).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 | Coal
Supply  Agreement  dated as of July 30, 1971 among  Northwestern  Resources  formerly
 The Montana                  Power Company, PSE and Western Energy Company (Exhibit 5-d
to Registration No. 2-45702).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Contract
dated June 19, 1974 between PSE and P.U.D. No. 1 of Chelan County  (Exhibit D to Form 8-K
dated                  July 5, 1974).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | Loan
 Agreement  dated as of December 1, 1980 and related  documents  pertaining  to Whitehorn
 turbine                  construction  trust  financing  (Exhibit  10.52 to Annual
Report on Form 10-K for the fiscal year ended                  December 31, 1980,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Coal
Transportation  Agreement dated as of July 10, 1981 (Exhibit 20-a to Quarterly Report on
Form 10-Q                  for the quarter ended September 30, 1981, Commission File No.
1-4393).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 | Settlement
 Agreement and Covenant Not to Sue executed by the United States Department of Energy
acting                  by and through the Bonneville  Power  Administration  and PSE
dated September 17, 1985 (Exhibit (10)-49                  to Annual Report on Form 10-K
for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 | Agreement
to Dismiss Claims and Covenant Not to Sue dated September 17, 1985 between  Washington
Public                  Power Supply System (Energy  Northwest) and PSE (Exhibit  (10)-50
to Annual Report on Form 10-K for the                  fiscal year ended December 31,
1985, Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 | Irrevocable
 Offer of Washington  Public Power Supply System (Energy  Northwest)  Nuclear Project No.
3                  Capability for  Acquisition  executed by PSE dated  September 17, 1985
(Exhibit A of Exhibit (10)-50 to                  Annual Report on Form 10-K for the
fiscal year ended December 31, 1985, Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 | Settlement
 Exchange  Agreement  (Bonneville  Exchange Power Contract) executed by the United States
of                  America  Department of Energy acting by and through the Bonneville
Power  Administration  and PSE dated                  September  17,  1985  (Exhibit B of
Exhibit  (10)-50 to Annual  Report on Form 10-K for the fiscal year
                 ended December 31, 1985, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 | Settlement
 Agreement and Covenant Not to Sue between PSE and Northern  Wasco County  People's
 Utility                  District  dated  October 16, 1985  (Exhibit  (10)-53 to Annual
 Report on Form 10-K for the fiscal year                  ended December 31, 1985,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 | Settlement
 Agreement and Covenant Not to Sue between PSE and Tillamook People's Utility District
dated                  October 16, 1985 (Exhibit  (10)-54 to Annual Report on Form 10-K
for the fiscal year ended December 31,                  1985, Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 | Settlement
 Agreement  and Covenant Not to Sue between PSE and  Clatskanie  People's  Utility
 District                  dated  September  30,  1985  (Exhibit  (10)-55 to Annual
 Report on Form 10-K for the fiscal year ended                  December 31, 1985,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 | Stipulation
 and Settlement  Agreement  between PSE and  Muckleshoot  Tribe of the  Muckleshoot
 Indian                  Reservation,  dated October 31, 1986 (Exhibit (10)-55 to Annual
Report on Form 10-K for the fiscal year                  ended December 31, 1986,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.25 | Transmission
 Agreement  dated  April 17, 1981  between the  Bonneville  Power  Administration  and
PSE                  (Colstrip  Project)  (Exhibit  (10)-55 to Annual Report on Form 10-K
for the fiscal year ended December                  31, 1987, Commission File No. 1-4393).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 | Transmission
 Agreement dated April 17, 1981 between the Bonneville  Power  Administration  and
Montana                  Intertie Users (Colstrip  Project)  (Exhibit  (10)-56 to Annual
Report on Form 10-K for the fiscal year                  ended December 31, 1987,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 | Ownership
and Operation  Agreement dated as of May 6, 1981 between PSE and other Owners of the
Colstrip                  Project  (Colstrip  3 and 4) (Exhibit  (10)-57 to Annual
 Report on Form 10-K for the fiscal year ended                  December 31, 1987,
Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.28 | Colstrip
Project Transmission  Agreement dated as of May 6, 1981 between PSE and Owners of the
Colstrip                  Project  (Exhibit  (10)-58 to Annual  Report on Form 10-K for
the fiscal year ended  December 31, 1987,                  Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 | Common
 Facilities  Agreement dated as of May 6, 1981 between PSE and Owners of Colstrip 1 and
2, and 3                  and 4 (Exhibit  (10)-59 to Annual  Report on Form 10-K for the
fiscal  year ended  December  31,  1987,                  Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.30 | Agreement
 for the Purchase of Power dated as of October 29, 1984  between  South Fork II, Inc. and
PSE                  (Weeks Falls  Hydro-electric  Project)  (Exhibit  (10)-60 to Annual
 Report on Form 10-K for the fiscal                  year ended December 31, 1987,
Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.31 | Agreement
for the Purchase of Power dated as of October 29, 1984,  between South Fork  Resources,
 Inc.                  and PSE (Twin Falls  Hydro-electric  Project)  (Exhibit  (10)-61
to Annual  Report on Form 10-K for the                  fiscal year ended December 31,
1987, Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.32 | Agreement
for Firm Purchase  Power dated as of January 4, 1988 between the City of Spokane,
 Washington                  and PSE (Spokane  Waste  Combustion  Project)  (Exhibit
 (10)-62 to Annual  Report on Form 10-K for the                  fiscal year ended
December 31, 1987, Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.33 | Agreement
 for  Evaluating,  Planning and  Licensing  dated as of February 21, 1985 and  Agreement
 for                  Purchase of Power dated as of February 21, 1985 between  Pacific
 Hydropower  Associates  and PSE (Koma                  Kulshan  Hydro-electric  Project)
 (Exhibit  (10)-63 to Annual  Report on Form 10-K for the fiscal year
                 ended December 31, 1987, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.34 | Amendment
 dated as of June 1, 1968, to Power Sales Contract  between Public Utility  District No.
1 of                  Chelan County,  Washington and PSE (Rocky Reach Project) (Exhibit
(10)-66 to Annual Report on Form 10-K                  for the fiscal year ended December
31, 1987, Commission File No. 1-4393).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.35 | Transmission
 Agreement dated as of December 30, 1987 between the Bonneville Power  Administration
 and                  PSE (Rock  Island  Project)  (Exhibit  (10)-74 to Annual  Report on
Form 10-K for the fiscal year ended                  December 31, 1988, Commission File
No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.36 | Amendment
 dated as of August 10, 1988 to Agreement for Firm Purchase Power dated as of January 4,
1988                  between the City of Spokane,  Washington and PSE (Spokane Waste
Combustion Project) (Exhibit (10)-76 to                  Annual Report on Form 10-K for
the fiscal year ended December 31, 1988, Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.37 | Agreement
 for Firm Power  Purchase  dated October 24, 1988 between  Northern  Wasco  People's
 Utility                  District and PSE (The Dalles Dam North Fishway)  (Exhibit
(10)-77 to Annual Report on Form 10-K for the                  fiscal year ended December
31, 1988, Commission File No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.38 | Agreement
for Firm Power  Purchase  dated as of February 24, 1989 between  Sumas  Energy,  Inc. and
PSE                  (Exhibit (10)-1 to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1989,  Commission File                  No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.39 | Settlement
 Agreement  dated as of April 27, 1989  between  Public  Utility  District  No. 1 of
Douglas                  County, Washington,  Portland General Electric Company (Enron),
 PacifiCorp, The Washington Water Power                  Company  (Avista)  and PSE
 (Exhibit  (10)-1 to  Quarterly  Report on Form 10-Q for the  quarter  ended
                 September 30, 1989, Commission File No. 1-4393).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.40 | Agreement
for Firm Power Purchase  (Thermal  Project) dated as of June 29, 1989 between San Juan
Energy                  Company and PSE (Exhibit  (10)-2 to Quarterly  Report on Form
10-Q for the quarter ended  September 30,                  1989, Commission File No.
1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.41 | Agreement
 for  Verification  of Transfer,  Assignment  and  Assumption  dated as of September 15,
1989                  between San Juan Energy Company,  March Point Cogeneration Company
and PSE (Exhibit (10)-3 to Quarterly                  Report on Form 10-Q for the quarter
ended September 30, 1989, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.42 | Power
Sales Agreement between  Northwestern  Resources formerly The Montana Power Company and
PSE dated                  as of October 1, 1989 (Exhibit (10)-4 to Quarterly  Report on
Form 10-Q for the quarter ended September                  30, 1989, Commission File No.
1-4393).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.43 | Conservation
 Power Sales Agreement dated as of December 11, 1989 between Public Utility District No.
1                  of Snohomish  County and PSE (Exhibit  (10)-87 to Annual  Report on
Form 10-K for the fiscal year ended                  December 31, 1989, Commission File
No. 1-4393).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.44 | Amendment
No. 1 to the Colstrip Project Transmission  Agreement dated as of February 14, 1990 among
The                  Montana Power Company,  The Washington Water Power Company (Avista),
 Portland General Electric Company                  (Enron),  PacifiCorp  and PSE
(Exhibit  (10)-91 to Annual Report on Form 10-K for the fiscal year ended
                 December 31, 1990, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.45 | Settlement
 Agreement  dated as of October  1, 1990  among  Public  Utility  District  No. 1 of
Douglas                  County,  Washington,  PSE,  Pacific Power and Light Company
 (PacifiCorp),  The Washington  Water Power                  Company (Avista),  Portland
General Electric Company (Enron),  the Washington  Department of Fisheries,
                 the Washington Department of Wildlife,  the Oregon Department of Fish
and Wildlife, the National Marine                  Fisheries Service,  the U.S. Fish and
Wildlife Service, the Confederated Tribes and Bands of the Yakama                  Indian
Nation, the Confederated Tribes of the Umatilla Reservation,  and the Confederated Tribes
of the                  Colville  Reservation (Exhibit (10)-95 to Annual Report on Form
10-K for the fiscal year ended December                  31, 1990, Commission File No.
1-4393).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.46 | Agreement
 for Firm Power  Purchase  (Thermal  Project)  dated  December  27,  1990 among  March
 Point                  Cogeneration  Company,  a  California  general  partnership
 comprising  San  Juan  Energy  Company,  a                  California corporation;
 Texas-Anacortes Cogeneration Company, a Delaware corporation; and PSE (Exhibit
                 (10)-4 to  Quarterly  Report on Form 10-Q for the quarter  ended March
31,  1991,  Commission  File No.                  1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.47 | Agreement
for Firm Power Purchase  dated March 20, 1991 between  Tenaska  Washington,  Inc., a
Delaware                  corporation,  and PSE (Exhibit  (10)-1 to Quarterly  Report on
Form 10-Q for the quarter ended June 30,                  1991, Commission File No.
1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.48 | Amendatory
 Agreement  No. 3 dated  August  1, 1991 to the  Pacific  Northwest  Coordination
 Agreement                  executed  September  15,  1964  among the United  States of
 America,  PSE and most of the other  major                  electrical  utilities in the
Pacific Northwest (Exhibit (10)-4 to Quarterly Report on Form 10-Q for the
                 quarter ended June 30, 1991, Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.49 | Agreement
 between the 40 parties to the Western  Systems  Power Pool (PSE being one party)  dated
July                  27, 1991 (Exhibit  (10)-2 to Quarterly  Report on Form 10-Q for the
quarter  ended  September 30, 1991,                  Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.50 | Memorandum
of  Understanding  between PSE and the Bonneville Power  Administration  dated September
18,                  1991  (Exhibit  (10)-3 to  Quarterly  Report on Form 10-Q for the
quarter  ended  September  30,  1991,                  Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.51 | Amendment
of Seasonal  Exchange  Agreement,  dated  December 4, 1991  between  Pacific Gas and
Electric                  Company and PSE (Exhibit  (10)-107 to Annual Report on Form
10-K for the fiscal year ended December 31,                  1991, Commission File No.
1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.52 | Capacity
and Energy  Exchange  Agreement,  dated as of October 4, 1991 between Pacific Gas and
Electric                  Company and PSE (Exhibit  (10)-108 to Annual Report on Form
10-K for the fiscal year ended December 31,                  1991, Commission File No.
1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.53 | Amendment
to Agreement  for Firm Power  Purchase  dated as of September  30, 1991 between Sumas
Energy,                  Inc. and PSE  (Exhibit  (10)-112 to Annual  Report on Form 10-K
for the fiscal year ended  December 31,                  1991, Commission File No.
1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.54 | Letter
 Agreement dated October 12, 1992 between Tenaska  Washington  Partners,  L.P. and PSE
regarding                  clarification of issues under the Agreement for Firm Power
Purchase  (Exhibit (10)-121 to Annual Report                  on Form 10-K for the fiscal
year ended December 31, 1992, Commission File No. 1-4393).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.55 | Consent
and Agreement dated October 12, 1992 between PSE and The Chase  Manhattan Bank,  N.A., as
agent                  (Exhibit  (10)-122  to  Annual  Report  on Form 10-K for the
 fiscal  year  ended  December  31,  1992,                  Commission File No. 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.56 | General
  Transmission   Agreement  dated  as  of  December  1,  1994  between  the  Bonneville
  Power                  Administration  and PSE (BPA Contract No.  DE-MS79-94BP93947)
 (Exhibit 10.115 to Annual Report on Form                  10-K for the fiscal year ended
December 31, 1994, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.57 | PNW
AC Intertie Capacity Ownership  Agreement dated as of October 11, 1994 between the
Bonneville Power                  Administration  and PSE (BPA Contract No.
 DE-MS79-94BP94521)  (Exhibit 10.116 to Annual Report on Form                  10-K for
the fiscal year ended December 31, 1994, Commission File No. 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.58 | Power
 Exchange  Agreement  dated as of September  27, 1995 between  British  Columbia  Power
 Exchange                  Corporation  and PSE (Exhibit  10.117 to Annual Report on Form
10-K for the fiscal year ended  December                  31, 1996, Commission File No.
1-4393).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.59 | Service
Agreement dated April 14, 1993 between Questar Pipeline  Corporation and Washington
Natural Gas                  Company  for FSS-1  firm  storage  service  at Clay  Basin
 (Exhibit  10-B Form 10-K for the year ended                  September 30, 1994, File
No. 11271).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.60 | Firm
Transportation  Service Agreement dated October 1, 1990 between Northwest Pipeline
Corporation and                  Washington  Natural Gas Company  (Exhibit 10-D to Form
10-K for the year ended September 30, 1994, File                  No. 11271).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.61 | Gas
 Transportation  Service  Contract dated June 29, 1990 between  Washington  Natural Gas
Company and                  Northwest  Pipeline  Corporation  (Exhibit 4-A to Form 10-Q
for the quarter ended March 31, 1993,  File                  No. 0-951).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.62 | Gas
 Transportation  Service  Contract dated July 31, 1991 between  Washington  Natural Gas
Company and                  Northwest  Pipeline  Corporation  (Exhibit 4-A to Form 10-Q
for the quarter ended March 31, 1993,  File                  No. 0-951).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.63 | Amendment
to Gas  Transportation  Service Contract dated July 31, 1991 between  Washington  Natural
Gas                  Company and Northwest  Pipeline  Corporation  (Exhibit 10-E.2 to
Form 10-K for the year ended September                  30, 1995, File No. 11271).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.64 | Gas
 Transportation  Service  Contract dated July 15, 1994 between  Washington  Natural Gas
Company and                  Northwest  Pipeline  Corporation  (Exhibit  10-E.3 to Form
10-K for the year ended  September 30, 1995,                  File No. 11271).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.65 | Amendment
to Gas  Transportation  Service Contract dated August 15, 1994 between Washington Natural
Gas                  Company and Northwest  Pipeline  Corporation  (Exhibit 10-E.4 to
Form 10-K for the year ended September                  30, 1995, File No. 11271).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.66 | Firm
 Transportation  Service Agreement dated March 1, 1992 between Northwest Pipeline
 Corporation and                  Washington  Natural Gas Company  (Exhibit 10-O to Form
10-K for the year ended September 30, 1994, File                  No. 1-11271).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.67 | Firm
 Transportation  Service Agreement dated January 12, 1994 between Northwest  Pipeline
 Corporation                  and Washington Natural Gas Company for firm  transportation
 service from Jackson Prairie (Exhibit 10-P                  to Form 10-K for the year
ended September 30, 1994, File No. 1-11271).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.68 | Firm
 Transportation  Service Agreement dated January 12, 1994 between Northwest  Pipeline
 Corporation                  and Washington Natural Gas Company for firm  transportation
 service from Jackson Prairie (Exhibit 10-Q                  to Form 10-K for the year
ended September 30, 1994, File No. 1-11271).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.69 | Firm
 Transportation  Agreement  dated October 27, 1993 between  Pacific Gas  Transmission
 Company and                  Washington Natural Gas Company for firm transportation
 service from Kingsgate (Exhibit 10-T, Form 10-K                  for the year ended
September 30, 1994, File No. 1-11271).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.70 | Firm
Storage Service  Agreement and Amendment dated April 30, 1991 between Questar Pipeline
Company and                  Washington  Natural  Gas Company  for firm  storage  service
at Clay Basin filed under cover of Form SE                  dated December 23, 1991.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.71 | Puget
Energy, Inc. Non-employee Director Stock Plan.  (incorporated herein by reference to
Exhibit 99.1                  to Puget Energy's Post Effective Amendment No. 1 to Form
S-8 Registration  Statement,  dated January 2,                  2001, Commission File No.
333-41157-99).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.72 | Amendment
No. 1 to the Puget Energy,  Inc.  Non-employee  Director Stock Plan,  effective as of
January                  1, 2003.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------

| | 10.73 | Puget
Energy, Inc. Employee Stock Purchase Plan.  (incorporated  herein by reference to Exhibit
99.1 to                  Puget  Energy's Post Effective  Amendment No. 1 to Form S-8
 Registration  Statement,  dated January 2,                  2001, Commission File No.
 333-41113-99).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.74 | 1995
 Long-Term  Incentive  Compensation  Plan.  (Exhibit  10.108 to Annual Report on Form
10-K for the                  fiscal year ended December 31, 2000, Commission File No.
1-4393 and 1-16305).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.75 | 1995
Long-Term Incentive  Compensation Plan (incorporated  herein by reference to Exhibit 99.1
to Puget                  Energy's Post  Effective  Amendment No. 1 to Form S-8
 Registration  Statement,  dated January 2, 2001,                  Commission File No.
 333-61851-99).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.76 | Employment
agreement with S. P. Reynolds, Chief Executive Officer and President dated January 7,
2002.
| | ----- | ------------------------------------------------------------------------------------------------------

| | 10.77 | Credit
 Agreement dated June 29, 2001, among  InfrastruX  Group,  Inc. and various Banks named
therein,                  BankOne, NA as Administrative  Agent.  (Exhibit 10-1, Form 10-Q
for the quarterly period ended June 30,                  2001, Commission File No. 1-4393
and 1-16305).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.78 | Power
Sales  Contract  dated April 15, 2002 between  Public  Utility  District  No. 2 of Grant
 County,                  Washington and PSE,  relating to the Priest Rapids Project.
 (Exhibit 10-1 to Form 10-Q for the quarter                  ended June 30, 2002, File
No. 1-16305 and 1-4393).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.79 | Reasonable
 Portion Power Sales Contract dated April 15, 2002 between Public Utility  District No. 2
of                  Grant County,  Washington and PSE,  relating to the Priest Rapids
 Project.  (Exhibit 10-2 to Form 10-Q                  for the quarter ended June 30,
2002, File No. 1-16305 and 1-4393).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.80 | Additional
 Power Sales Contract  dated April 15, 2002 between  Public Utility  district No. 2 of
Grant                  County,  Washington and PSE, relating to the Priest Rapids
Project.  (Exhibit 10-3 to Form 10-Q for the                  quarter ended June 30,
2002, File No. 1-16305 and 1-4393).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.81 | Credit
Agreement dated December 23, 2002 covering PSE and various banks named therein,  Bank
One, NA as                  administrative agent.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.82 | Receivable
 Purchase Agreement dated December 23, 2002 among PSE, Rainier  Receivables,  Inc., and
Bank                  One, NA as agent.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 10.83 | Receivable
Sale Agreement dated December 23, 2002 among PSE and Rainier Receivables, Inc.
| | ----- | -----------------------------------------------------------------------------------------

| | 10.84 | Employment
 agreement with J.M. Ryan, Vice President  Energy Portfolio  Management,  dated November
30,                  2001.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------

| | 10.85 | Change-in-Control
 Agreement  with J.M.  Ryan,  Vice  President,  Energy  Portfolio  Management,  dated
                 November 30, 2001.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------

|* | 10.86 | Change-in-Control
 Agreement with B. A. Valdman,  Senior Vice  President,  Finance and Chief  Financial
                 Officer, dated November 28, 2003.
|- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 10.87 | Change-in-Control
Agreement with S. McLain, Senior Vice President, Operations, dated March 12, 1999.
|- | ----- | ----------------------------------------------------------------------------------------------------

|* | 10.88 | Change-in-Control
 Agreement with M. T. Lennon,  President and Chief  Executive  Officer of InfrastruX,
                 dated May 6, 2002.
|- | ----- | -------------------------------------------------------------------------------------------------------------------------------------------

|* | 10.89 | Termination
 Agreement with T.J. Hogan, Senior Vice President,  Regional Service and Community
Affairs,                  dated July 31, 2003.
|- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------

|* | 10.90 | Restricted
 Stock Award  Agreement with S. P. Reynolds,  Chief Executive  Officer and President
 dated,                  January 8, 2004.
|- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------

|* | 10.91 | Restricted
 Stock Unit Award  Agreement  with S. P.  Reynolds,  Chief  Executive  Officer and
President                  dated, January 8, 2004.
|- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------

|* | 12.1 | Statement
 setting  forth  computation  of ratios of earnings to fixed  charges of Puget  Energy
 (1999                  through 2003).
|- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------

|* | 12.2 | Statement
 setting  forth  computation  of ratios of  earnings to fixed  charges of Puget Sound
 Energy                  (1999 through 2003).
|- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

|* | 21.1 | Subsidiaries
of Puget Energy.
|- | ---- | -----------------------------

|* | 21.2 | Subsidiaries
of PSE.
|- | ---- | --------------------

|* | 23.1 | Consent
of PricewaterhouseCoopers LLP.
|- | ---- | --------------------------------------

|* | 31.1 | Certification
of Puget Energy - Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant
                 to Section 302 of the Sarbanes-Oxley act of 2002 - Stephen P. Reynolds.
|- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 31.2 | Certification
of Puget Energy - Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant
                 to Section 302 of the Sarbanes-Oxley act of 2002 - Bertrand A. Valdman.
|- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 31.3 | Certification
 of Puget Sound Energy -  Certification  Pursuant to 18 U.S.C.  Section  1350, as Adopted
                 Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Stephen P.
Reynolds.
|- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 31.4 | Certification
 of Puget Sound Energy -  Certification  Pursuant to 18 U.S.C.  Section  1350, as Adopted
                 Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Bertrand A.
Valdman.
|- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 32.1 | Certification
 Pursuant  to 18  U.S.C.  Section  1350,  as  Adopted  Pursuant  to  Section  906  of the
                 Sarbanes-Oxley act of 2002 - Stephen P. Reynolds.
|- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 32.2 | Certification
 Pursuant  to 18  U.S.C.  Section  1350,  as  Adopted  Pursuant  to  Section  906  of the
                 Sarbanes-Oxley act of 2002 - Bertrand A. Valdman.
|- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

*Filed
herewith.