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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2002OR

|/    / |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF   THE
SECURITIES EXCHANGE ACT OF 1934
|------ |  | ------------------------------------------------------------------------------------------

| |                                                          
| | ---------------------------------------------------------
| | For the transition
period from ___________ to ___________

|                     |  |                                                                                                                                        |  |                                      
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------
|CommissionFileNumber |  | Exact name of registrant as specified
in its charter, state of incorporation,
address of principal executive offices,
telephone number |  | I.R.S.Employer Indentification Number
|                     |  |                                                                                                                                        |  |                                      
|1-16305              |  | PUGET ENERGY, INC.                                                                                                                     |  | 91-1969407                           
|                     |  | A Washington Corporation
411 - 108th Avenue N.E.
Bellevue, Washington 98004-5515
(425) 454-6363                                        |  |                                      
|                     |  |                                                                                                                                        |  |                                      
|                     |  |                                                                                                                                        |  |                                      
|1-4393               |  | PUGET SOUND ENERGY, INC.                                                                                                               |  | 91-0374630                           
|                     |  | A Washington Corporation
411 - 108th Avenue N.E.
Bellevue, Washington 98004-5515
(425) 454-6363                                        |  |                                      

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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, $.01 par value    | N.Y.S.E.
| |  |                                 |         
| |  | Preferred Share Purchase Rights | N.Y.S.E.
| |  |                                 |         

| |                          | 
| | ------------------------ | 
| | Puget Sound Energy, Inc. | 

| |  |                                                             |         
| |  | ----------------------------------------------------------- | --------
| |  | 7.45% Series II, Preferred Stock(Cumulative, $25 Par Value) | N.Y.S.E.
| |  |                                                             |         
| |  | 8.4% Capital Securities                                     | N.Y.S.E.

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

| | TITLE OF EACH CLASS      | 
| | ------------------------ | 
| | Puget Sound Energy, Inc. | 

| |  |                                              | 
| |  | -------------------------------------------- | 
| |  | Preferred Stock (Cumulative, $100 Par Value) | 
| |  |                                              | 
| |  | 8.231% Capital Securities                    | 

Indicate
by check mark whether the registrant: (1) has 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 registrant was required to file such reports), and
(2) has 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 the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2).
        Yes/X/  No/ /

The
aggregate market value of the voting stock held by non-affiliates of Puget Energy, Inc. at
June 28, 2002 (the last business day of Puget Energys most recently completed second
fiscal quarter), was approximately $1,807,769,393. The number of shares of Puget Energy,
Inc.s common stock outstanding at February 28, 2003, was 93,827,455.

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 proxy statement for its 2003 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2002 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. (Puget Energy) and Puget Sound Energy, Inc. (PSE). PSE
makes no representation as to the information contained in this report relating to Puget
Energy and the subsidiaries of Puget Energy other than PSE and its subsidiaries.

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INDEX

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

| |    |                                                     |                                      
| | -- | --------------------------------------------------- | -------------------------------------
| | 1. | Business                                            |                                      
| |    |                                                     | General                              
| |    |                                                     | Utility Industry Overview            
| |    |                                                     | Regulation and Rates                 
| |    |                                                     | 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 

|        
|--------
|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. | Controls and Procedures                                                                          
| | 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                  
| |     | Signatures                                                                                       
| |     | Certifications of Puget Energy                                                                   
| |     | Certifications of Puget Sound Energy                                                             
| |     | Exhibit Index                                                                                    

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DEFINITIONS

| |                      
| | ---------------------
| | AFUCE                
| | AFUDC                
| | aMW                  
| | BPA                  
| | CAAA                 
| | CAISO                
| | Cabot                
| | Chelan               
| | Dth                  
| | FERC                 
| | InfrastruX           
| | KW                   
| | kWh                  
| | LNG                  
| | MMBtu                
| | MW                   
| | MWh                  
| | NPC                  
| | PGA                  
| | PG&E                 
| | PGT                  
| | PSE                  
| | PUDs                 
| | Puget Energy         
| | PURPA                
| | RTO                  
| | SFAS                 
| | SMD                  
| | WEGM                 
| | Washington 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, acquisition and disposal of assets and facilities, operation and construction
of hydro, distribution and transmission facilities, recovery of other capital
investments, recovery of power and gas costs and present or prospective wholesale and
retail competition;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
bankruptcy filing by Enron Corporation, financial difficulties by 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;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | default
by counterparties in the wholesale natural gas and electricity markets that owe PSE money
or energy;
|- |  | ------------------------------------------------------------------------------------------------------------

| |  | continued
deterioration of liquidity in the forward markets in which PSE transacts hedges to manage
its energy portfolio risks which can limit PSEs ability to enter into forward
contracts and, therefore, its ability to manage its portfolio risks;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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
stability and liquidity of wholesale energy markets generally, including the effect of
price controls by FERC on the availability and price of wholesale energy purchases and
sales in the western United States;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect of wholesale and possible future retail competition (including, but not limited
to, electric retail wheeling and transmission system access);
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
amount of collection, if any, of PSEs receivable 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;
|- |  | -----------------------------------------------------

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

|                                                                                      
|--------------------------------------------------------------------------------------
|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 with 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 results;
|- |  | ----------------------------------------------------------------------------------

|                                                                 
|-----------------------------------------------------------------
|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 capital for Puget Energy, PSE and InfrastruX;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | changes
in, and  compliance  with,  environmental  and  endangered  species  laws,  regulations,
              decisions, and policies;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

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

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

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.

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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
|------------------ | ------------------ | --------------------- | -----------------
|                   | 2002               | 2001                  | 2000             
|Puget Sound Energy | 86.2%              | 92.9%                 | 98.2%            
|InfrastruX         | 13.4%              | 6.0%                  | 1.4%             
|Other subsidiaries | 0.4%               | 1.1%                  | 0.4%             

Additional
financial data regarding these segments is included in Note 20 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 Washington State, primarily engaged in the business of electricity 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Add
electric generation and delivery infrastructure to meet customer needs.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, assuring stable,
cost-based energy supply is one of PSEs highest priorities. In addition, 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, manage energy portfolio.PSE intends to
focus on the regulated business to provide credit quality, liquidity, and safe and
predictable earnings to attract investors in Puget Energy.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provide
return to Puget Energy investors 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 Washington State.

---

At
December 31, 2002, PSE had approximately 958,000 electric customers, consisting of 845,200
residential, 106,900 commercial, 3,900 industrial and 2,000 other customers; and
approximately 622,000 gas customers, consisting of 572,300 residential, 46,800 commercial,
2,800 industrial and 100 transportation customers. At December 31, 2002 approximately
305,300 customers purchased both forms of energy from PSE. For the year 2002, PSE added
approximately 17,400 electric customers and approximately 16,000 gas customers,
representing annualized growth rates of 1.8% and 2.6%, respectively. During 2002
PSEs billed retail and transportation revenues from electric utility operations,
excluding conservation trust collections, were derived 48% from residential customers, 42%
from commercial customers, 7% from industrial customers and 3% from transportation and
other customers. PSEs retail revenues from gas utility operations were derived 62%
from residential customers, 31% 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 streamflow conditions for the generation of surplus hydroelectric power
after serving customer requirements and the market demand by wholesale customers. PSE has
a Purchased Gas Adjustment mechanism (PGA) in retail gas rates to recover variations in
gas supply and transportation costs. PSE also has a Power Cost Adjustment mechanism (PCA)
in electric rates to recover variations in electricity costs on a shared basis between
customers and PSE. 

        During
the period from January 1, 1998 through December 31, 2002, PSEs gross electric
utility plant additions were $894 million and retirements were $184 million. In the
five-year period ended December 31, 2002, PSEs gross gas utility plant additions
were $565 million and retirements were $72 million. In the same five-year period,
PSEs gross common utility plant additions were $328 million and retirements were $32
million. Gross electric utility plant at December 31, 2002 was approximately $4.2 billion,
which consisted of 59% distribution, 26% generation, 7% transmission and 8% general plant
and other. Gross gas utility plant as of December 31, 2002 was approximately $1.6 billion,
which consisted of 86% distribution, 6% transmission and 8% general plant and other. Gross
common utility general plant as of December 31, 2002 was approximately $379 million.

INFRASTRUX
GROUP, INC. 
        InfrastruX
was incorporated in the State of Washington in 2000 to pursue 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
eleven companies primarily in Texas and 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
InfrastruX construction services business 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.

---

INFRASTRUX
OPERATING STRATEGY
        In InfrastruXs initial three years, InfrastruX focused on acquiring and expanding
business services in the natural gas and electric utility infrastructure market that
have an established regional presence and are positioned to expand their market position.
Implementation of InfrastruXs strategy involved identifying acquisition targets
with established operational experience and customer relationships and a strong management
team. InfrastruXs current operating strategy depends primarily upon generating internal growth
through the addition of new customers and expansion of services offered to existing
customers rather than external growth through acquisitions.

INFRASTRUX
COMPETITION 
        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.

MARKET OUTLOOK 
        In
the near term, InfrastruXs market opportunities will be limited by the general
economic downturn that will result 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 increase, which may reduce profit margins and
adversely impact revenue and operational growth. Puget Energy believes that in the
long-term the opportunities for InfrastruX are excellent given an aging transmission and
distribution infrastructure, forecast for growth in energy demand and the need for greater
network infrastructure construction services.

EMPLOYEES 
        As
of December 31, 2002, Puget Energy and its subsidiaries had approximately 4,660 full-time
employees:

| |                    |      
| | ------------------ | -----
| | Puget Sound Energy | 2,113
| | InfrastruX         | 2,547
| | Total Puget Energy | 4,660

Approximately
1,100 PSE employees are represented by the International Brotherhood of Electrical Workers
Union (IBEW) and the United Association of Plumbers and Pipefitters (UA). PSE has
renegotiated contract extensions with the IBEW and UA through 2007 and 2006, respectively. 

        Approximately
200 InfrastruX employees are represented by the IBEW, UA, United Steelworkers of America
and Laborers International Union of North America. Some unions have annual contract
renewals while others are multiple-year.

CORPORATE LOCATIONS 

        Puget
Energys and PSEs principal executive offices are located at 411 108th Avenue
N.E., Bellevue, Washington 98004, and its telephone number is (425) 454-6363. The
Companys principal executive offices will be relocating in July 2003 to 10885 N.E.
4th Street, Bellevue, Washington 98004.

AVAILABLE INFORMATION 
        The
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended, are available free of charge on Puget Energys
website at www.pse.com.

---

UTILITY INDUSTRY OVERVIEWOn
December 20, 1999, FERC issued Order 2000 to advance the formation of Regional
Transmission Organizations (RTOs). This regulation required each public utility that owns,
operates or controls facilities for the transmission of electric energy in interstate
commerce to file with FERC by October 15, 2000 plans for forming and participating in an
RTO. FERCs goal is to promote efficiency in wholesale electricity markets and to
reduce prices electricity consumers pay to the lowest price possible for reliable service.
On October 16, 2000, PSE and five other utilities filed with FERC their proposal for an
independent transmission company, which would serve six states. The independent
transmission company would be a member of the planned regional transmission organization.
Any final proposal that emerges is subject to approval by FERC and relevant state public
utility commissions. FERC has also issued a 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 to 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) the formation of Regional State Advisory Committees and other
regional entities to coordinate the planning, certification and siting of new transmission
facilities in cooperation with states. 
        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 2002, 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. 

        The
electric utility business in Washington State is fully regulated. There are no proposals
or prospects for retail deregulation in Washington State anticipated in the foreseeable
future.

REGULATION AND RATESPSE
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. (See Managements Discussion
and Analysis of Financial Condition and Results of Operations  Rate Matters.)

ELECTRIC RATES AND REGULATIONS

        On
March 28, 2002, the Washington Commission approved a settlement agreement which resolved
the Companys request for an interim rate increase and significant financial issues
in the Companys electric and gas general rate cases. As a result, an interim
electric rate surcharge of $25 million was in effect for the period April 1, 2002 through
June 30, 2002. The three important financial issues that were resolved for the general
rate case included the equity capital ratio, the return on equity and adoption of an
electric power cost adjustment mechanism.

        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 will generate approximately an additional $59 million in revenue annually
that began July 1, 2002. 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 includes 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. The Company can request a PCA rate surcharge if
for any 12 month period the actual or projected deferred power costs exceeds $30 million.  PSEs  share of the power costs
through December 31, 2002 was $5.2 million.  Because of adverse hydro conditions in 2003,
PSE anticipates reaching the $40 million cumulative cap under the PCA mechanism by the fourth quarter of 2003.  Under
the PCA mechanism, further increases in variable power costs through June 30, 2006 would be apportioned 99% to customers and 1% to PSE.

          The settlement also gives PSE the financial flexibility to rebuild its common equity ratio to
at least 39% over a three and a 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.

        On
June 13, 2001, the Washington Commission approved an amended Residential Purchase and Sale
Agreement (Agreement) between PSE and the BPA, under which PSEs residential and
small farm customers would continue to receive benefits of federal power. Completion of
this agreement enabled PSE to continue to provide, and in fact increase, effective January
1, 2002, the Residential and Farm Energy Exchange Credit to residential and small farm
customers. The 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. On June 17, 2002, PSE entered into an agreement with
the BPA which amended the payment provisions of the Agreement to provide for conditional
deferral of payment by BPA of certain amounts to be paid under the original agreement.

        To
implement this agreement for rate purposes, the Washington Commission approved tariff
revisions  that were intended to (a) transfer the Residential and Farm Energy Exchange
credit in effect since October 1, 1995 in the amount of $0.01085 per kWh, to general rates
effective July 1, 2001 and (b) to provide a supplemental Residential and Farm Exchange
credit for eligible residential and small farm customers. On June 26, 2002, the Washington
Commission then transferred the portion of the credit that had been in general rates back
into Schedule 194.

        The
Residential and Farm Exchange Benefit Supplemental Rider schedule was retitled Residential
and Farm Energy Exchange Benefit, the portion of the credit that had been in general rates
was transferred back into Schedule 194, and the credit was set at $0.01456 per kWh for the
period July 1, 2002 through September 30, 2002, $0.01817 per kWh for the period October 1,
2002 through May 31, 2006 and $0.02302 per kWh for the period June 1, 2006 through
September 30, 2006. The approval of these revised tariffs by the Washington Commission was
effective July 1, 2002.
        In
January 2003, PSE filed tariff sheets with the Washington Commission to reflect a
modification to the agreement between PSE and the BPA that would reduce the Residential
and Farm Energy Exchange Benefit credit. Under the modified agreement, BPA will defer
paying a portion of the benefits it would have otherwise paid. The amount of benefits
deferred will be $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 is entering into other agreements similar to the agreement with
PSE through which other investor-owned utilities and BPA are agreeing to BPAs
deferral of payments in their fiscal year 2003. The total cumulative amount to be deferred
under the agreement with PSE and other such agreements equals $55 million, an amount that
will help BPA address its current financial difficulties. Absent certain adjustments BPA
will begin paying back the amount deferred with interest over the sixty-month period
beginning November 2006. The Washington Commission approved the tariff changes and the
Rider credit was changed to $0.01740 for the period February 15, 2003 through September
30, 2006. The deferral of the BPA benefits will not have any impact on PSE earnings, as it
is a direct pass-through to PSE customers.

---

BPAs
rate case may affect the level of residential exchange benefits for PSEs customers.
For 2002, the benefits of the Residential and Farm Energy Exchange credited to customers
were $152.8 million with a related offset to power costs. PSE received payments from BPA
in the amount of $171.2 million during 2002. The difference between the customers
credit and the amount received from BPA is deferred and credited to customers in later
periods. The difference is recorded on PSEs balance sheet as restricted cash. The
modified Agreement, if it goes into effect, would provide for payments from BPA in the
amount of $630.6 million for the period January 2003 through September 2006 and for
pass-through to eligible residential and farm customers of the same amount. The level of
the BPA credit does not affect PSEs earnings, since the credit is a direct
pass-through to residential customers. The credit does affect the net rates paid by those
customers.
        There
are several actions in the Ninth Circuit Court of Appeals against BPA, in which the
petitioners 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
contract between BPA and the Company described above. BPA rates used in such contract
between BPA and the Company for determining the amounts of money to be paid to the Company
during the period October 1, 2001 through September 30, 2006 have been
confirmed, approved and allowed to go into effect by FERC on an interim basis, subject to
refund with interest. It is not clear what impact, if any, review of such rates and the
above-described Ninth Circuit Court of Appeals actions may have on the Company.

GAS RATES AND REGULATION 
        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 service to customers. This increase
will provide approximately $35.6 million annually in revenues and 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. 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 the change in PGA rates. 

        On
May 24, 2002, the Washington Commission allowed a PGA rate reduction that was filed on May
6, 2002, effective June 1, 2002, lowering overall natural gas rates by 21.2%. This ended a
temporary surcharge that went into effect September 1, 2001.

        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 overall through the
PGA by approximately 12.5% effective November 1, 2002. 

        As
a result of sharp increases in gas costs during 2000 and 2001, PSE filed two PGA and
deferral amortization filings with the Washington Commission which were approved. The PGA
filings allowed PSE to recover increased gas costs. As a result, gas rates to all sales
customers increased by an average of 30.2% on August 1, 2000, and 26.4% on January 12,
2001. Subsequent declines in gas costs led to PSE obtaining approval of another PGA and
deferral amortization filing in 2001 resulting in an average 8.9% reduction in gas rates
on September 1, 2001.

---

ELECTRIC OPERATING STATISTICS

|TWELVE MONTHS ENDED DECEMBER 31                     | 2002 | 2001 | 2000
|--------------------------------------------------- | ---- | ---- | ----
|                                                    |      |      |     
|Generation and Purchased Power-kWh (thousands):     |      |      |     
|Company controlled resources                        |      |      |     
|Contracted resources                                |      |      |     
|Non-firm energy purchased                           |      |      |     
|                                                    |      |      |     
|Total generation and purchased power                |      |      |     
|Less losses and company use                         |      |      |     
|                                                    |      |      |     
|Total energy sold, kWh                              |      |      |     
|                                                    |      |      |     
|Electric energy sales, kWh (thousands):             |      |     
|Residential                                         |      |      |     
|Commercial                                          |      |      |     
|Industrial                                          |      |      |     
|Other customers                                     |      |      |     
|                                                    |      |      |     
|Total energy billed to customers                    |      |      |     
|Unbilled energy sales - net increase (decrease)     |      |      |     
|                                                    |      |      |     
|Total energy sales to customers                     |      |      |     
|Sales to other utilities and marketers              |      |      |     
|                                                    |      |      |     
|Total energy sales, kWh                             |      |      |     
|                                                    |      |      |     
|Less: optimization purchases for sales to other     |      |      |     
|utilities and marketers                             |      |     
|Transportation, including unbilled                  |      |      |     
|                                                    |      |      |     
|Net electric energy sales and transported, kWh      |      |      |     
|                                                    |      |      |     
|Electric operating revenues by classes (thousands): |      |     
|Residential                                         |      |      | $   
|Commercial                                          |      |      |     
|Industrial                                          |      |      |     
|Other customers                                     |      |      |     
|                                                    |      |      |     
|Operating revenues billed to customers1             |      |      |     
|Unbilled revenues - net increase (decrease)         |      |      |     
|                                                    |      |      |     
|Total operating revenues from customers             |      |      |     
|Transportation, including unbilled                  |      |      |     
|Sales to other utilities and marketers              |      |      |     
|Less: optimization purchases for sales to other     |      |      |     
|utilities and marketers                             |      |     
|                                                    |      |      |     
|Total electric operating revenues                   |      |      | $   
|                                                    |      |      |     
|Number of customers served (average):               |      |     
|Residential                                         |      |      |     
|Commercial                                          |      |      |     
|Industrial                                          |      |      |     
|Other                                               |      |      |     
|Transportation                                      |      |      |     
|                                                    |      |      |     
|Total customers (average)                           |      |      |     
|                                                    |      |      |     
|Average retail revenues per kWh sold:               |      |     
|Residential                                         |      |      | $   
|Commercial                                          |      |      |     
|Industrial                                          |      |      |     
|Average retail revenue per kWh sold                 |      |      |     
|                                                    |      |      |     
|Average revenue billed to residential customers     |      |      | $   
|Average kWh used by residential customers           |      |      |     
|                                                    |      |      |     
|Heating degree days                                 |      |      |     
|Percent of normal of 30-year average                |      |      |     
|                                                    |      |      |     
|Load factor                                         |      |      |     
|                                                    |      |      |     

---

|1 | Operating
revenues in 2002, 2001 and 2000 were reduced by $12.7 million, $31.0 million and $35.4
million, respectively, as a result of PSE's sale of $237.7 million of its
investment in customer-owned conservation measures. (See "Operating Revenues -
Electric" in Management's Discussion and Analysis and Note 1 to the Consolidated
Financial Statements.)
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

ELECTRIC SUPPLY
        At
December 31, 2002, PSEs peak electric power resources were approximately 4,577,135
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 2002, PSEs total
electric energy production was supplied 26.2% by its own resources, 22.5% through
long-term contracts with several of the Washington Public Utility Districts (PUDs) that
own hydroelectric projects on the Columbia River, and 22.9% from other firm purchases.
Non-firm purchases, net of resales, accounted for 7.4% of energy purchases in 2002.

        The
following table shows PSEs electric energy supply resources at December 31, 2002 and
2001, and energy production during the year:

| |                                     |                  
| | ----------------------------------- | -----------------
| | PEAK POWER RESOURCESAT DECEMBER 31, | ENERGY PRODUCTION

|                              | 2002 | 2001      | 2002 | 2001
|----------------------------- | ---- | --------- | ---- | ----
|                              |      | KW        |      | %   
|                              |      |           |      |     
|Purchased resources:          |     
|Columbia River PUD contracts  |      | 1,391,000 |      | 30  
|Other hydro1                  |      | 175,660   |      | 3   
|Other producers1              |      | 1,209,675 |      | 26  
|Non-firm energy purchases2    |      | N/A       |      |     
|                              |      |           |      |     
|Total purchased               |      | 2,776,335 |      | 60  
|                              |      |           |      |     
|Company-controlled resources: |     
|Hydro                         |      | 300,000   |      | 6   
|Coal                          |      | 700,000   |      | 15  
|Natural gas/oil               |      | 800,800   |      | 17  
|                              |      |           |      |     
|Total Company controlled      |      | 1,800,800 |      | 39  
|                              |      |           |      |     
|Total                         |      | 4,577,135 |      | 100 
|                              |      |           |      |     

PSE
submitted a preliminary least-cost plan to balance future energy resources with energy
needs to the Washington Commission on December 31, 2002. PSE plans to meet its resource
needs either through asset acquisition, building its own generation, or entering into
additional power purchase agreements, and pursuing energy conservation. PSE will submit
its final least-cost plan to the Washington Commission in the spring of 2003.

COMPANY-CONTROLLED ELECTRIC GENERATION RESOURCES
        In
total PSE has the following plants with an aggregate net generating capability of
1,800,800 KW:

|                            |  |                               | 
|--------------------------- |  | ----------------------------- | 
|Plant Name                  |  | Plant Type                    | 
|Colstrip 1&2 (50% interest) |  | Coal                          | 
|Colstrip 3&4 (25% interest) |  | Coal                          | 
|Upper Baker River           |  | Hydro                         | 
|Lower Baker River           |  | Hydro                         | 
|White River                 |  | Hydro                         | 
|Snoqualmie Falls            |  | Hydro                         | 
|Electron                    |  | Hydro                         | 
|Fredonia 1 & 2              |  | Dual fuel combustion turbines | 
|Fredrickson Units 2 & 3     |  | Dual fuel combustion turbines | 
|Whitehorn Units 2 & 3       |  | Dual fuel combustion turbines | 
|Fredonia 3 & 4              |  | Dual fuel combustion turbines | 
|Encogen                     |  | Natural gas cogeneration      | 
|Crystal Mountain            |  | Internal combustion           | 

|
|

1Power 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.2Non-firm purchases net of
resales of 6,063,076 kWh and 7,494,820 kWh for 2002 and 2001 respectively,
account for 7.4% and (2.4%) of energy purchases.

All of these generating facilities,
except the Colstrip, Montana plants, are located in PSEs service territories.

---

On
December 19, 1997, PSE was issued a 50-year license by FERC for its existing and operating
White River project which includes authorization to install an additional 14,000 KW
generating unit. PSE has filed for a rehearing with FERC on conditions of the license
related to measures designed to enhance salmon runs on the White River, because those
conditions may make the plant uneconomic to operate. On June 30, 1999 FERC issued a stay
in the license proceeding. This additional time allows PSE, federal land agencies, state
agencies, local governments and public interest groups to resolve common issues and
explore alternatives relating to the plants continued operation and economics. The
licensing proceeding is ongoing. In April 2001, PSE gave FERC notice of its intent to
renew the license for its existing and operating 170,000 KW Baker Project. The 50-year
license expires on April 30, 2006 with application due in April 2004. In 2002, PSE
continued working with FERC, federal, state and local governments, Native American tribes,
public interest groups and citizens to define new license terms and conditions through a
collaborative process. The initial license for the existing and operating Snoqualmie Falls
project expired in December 1993, and PSE continues to operate this project under a
temporary license. PSE is continuing the FERC application process to relicense this
project.

COLUMBIA RIVER ELECTRIC ENERGY SUPPLY CONTRACTS
        During
2002, approximately 22.5% of PSEs energy output was obtained at an average cost of
approximately 13.96 mills 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 maintenance, repairs or replacements or license
requirements. 
        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, 2002 PSEs aggregate annual capacity from all units of the Rock Island
Project was 455,340 KW. PSEs share of output of the additional Rock Island units may
be reduced by up to 10% per year which began July 1, 2000, subject to a maximum aggregate
reduction of 50%, upon the exercise of rights of withdrawal by Chelan for use in its local
service area. 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, 2002       | 10%                   | 85%                          
|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, 2002) 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, 2002) of the annual
output of the Wells Project, the percentage of which remains unchanged for the remainder
of the contract which expires in 2018. PSE has contracted to purchase from Grant County
PUD 8.0% (72,000 KW as of December 31, 2002) of the annual output of the Priest Rapids
Development and 10.8% (98,000 KW of peak capacity as of December 31, 2002) of the annual
output of the Wanapum Development, which percentages remain unchanged for the remainder of
the contracts 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. The new contracts 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 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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,
they have 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.

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 from BPA
beginning January 1, 1987, electric power 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 64 MW of exchange energy to
BPA in all months except May, July and August for contract year 2002/2003.

        On
December 31, 2002, a 15 year power contract between Avista Corporation and PSE expired
under the terms of the agreement. The contract provided for the delivery of 100 MW of
capacity and 657,000 MWh of energy from the Avista system annually (75 annual average MW).

        On
October 27, 1988, PSE executed a 15-year contract for the purchase of firm power and
energy from PacifiCorp. Under the terms of the agreement, PSE receives 120 average MW of
energy and 200 MW of peak capacity. This contract expires on October 31, 2003.

        On
October 1, 1989, PSE signed a contract with The Montana Power Company, which subsequently
sold its assets to Northwestern Energy in 2002 under which Northwestern Energy provides
PSE, from its share of Colstrip Unit 4, 71 average MW of energy (97 MW of peak capacity)
over a 21-year period. This contract expires in December 2010.

        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
413,000 MWh of energy are exchanged seasonally every year on a unit-for-unit basis. No
payments are made under this agreement. PG&E is a summer peaking utility and will
provide power during the months of November through February. PSE is a winter peaking
utility and will provide power during the months of June through September. Each party may
terminate the contract for various reasons. 
        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 power 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.

ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH NON-UTILITY GENERATORS
        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 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, 2002 was $231.0 million
which will be recovered in electric rates over the next nine years. In addition, PSE is
responsible for any potential tax indemnification to the seller imposed by the Internal
Revenue Service up to a maximum of $30 million.

        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.

---

GAS OPERATING STATISTICS

|TWELVE MONTHS ENDED DECEMBER 31                                  |  |  |   | 2002      |  |   | 2001      |  |   | 2000      | 
|---------------------------------------------------------------- |  |  | - | --------- |  | - | --------- |  | - | --------- | 
|                                                                 |  |  |  
|Gas operating revenues by classes (thousands):                   |  | 
|Residential                                                      |  |  | $ | 428,569   |  | $ | 486,761   |  | $ | 372,900   | 
|Commercial firm                                                  |  |  |   | 167,434   |  |   | 196,904   |  |   | 144,046   | 
|Industrial firm                                                  |  |  |   | 28,312    |  |   | 37,411    |  |   | 27,832    | 
|Interruptible                                                    |  |  |   | 48,889    |  |   | 71,997    |  |   | 44,485    | 
|                                                                 |  |  |  
|Total retail gas sales                                           |  |  |   | 673,204   |  |   | 793,073   |  |   | 589,263   | 
|Transportation services                                          |  |  |   | 12,851    |  |   | 11,780    |  |   | 12,137    | 
|Other                                                            |  |  |   | 11,100    |  |   | 10,218    |  |   | 10,911    | 
|                                                                 |  |  |  
|Total gas operating revenues                                     |  |  | $ | 697,155   |  | $ | 815,071   |  | $ | 612,311   | 
|                                                                 |  |  |  
|Number of customers served (average):                            |  | 
|Residential                                                      |  |  |   | 565,003   |  |   | 548,497   |  |   | 532,333   | 
|Commercial firm                                                  |  |  |   | 45,916    |  |   | 45,998    |  |   | 44,817    | 
|Industrial firm                                                  |  |  |   | 2,727     |  |   | 2,789     |  |   | 2,863     | 
|Interruptible                                                    |  |  |   | 650       |  |   | 833       |  |   | 835       | 
|Transportation                                                   |  |  |   | 122       |  |   | 112       |  |   | 98        | 
|                                                                 |  |  |  
|Total customers                                                  |  |  |   | 614,418   |  |   | 598,229   |  |   | 580,946   | 
|                                                                 |  |  |  
|Gas volumes, therms (thousands):                                 |  | 
|Residential                                                      |  |  |   | 500,672   |  |   | 494,648   |  |   | 517,561   | 
|Commercial firm                                                  |  |  |   | 218,716   |  |   | 214,713   |  |   | 221,170   | 
|Industrial firm                                                  |  |  |   | 39,142    |  |   | 42,287    |  |   | 48,348    | 
|Interruptible                                                    |  |  |   | 81,045    |  |   | 98,733    |  |   | 103,446   | 
|                                                                 |  |  |  
|Total retail gas volumes, therms                                 |  |  |   | 839,575   |  |   | 850,381   |  |   | 890,525   | 
|Transportation volumes                                           |  |  |   | 207,852   |  |   | 188,196   |  |   | 204,035   | 
|                                                                 |  |  |  
|Total volumes                                                    |  |  |   | 1,047,427 |  |   | 1,038,577 |  |   | 1,094,560 | 
|                                                                 |  |  |  
|Working-gas volumes in storage at year end, therms  (thousands): |  | 
|Jackson Prairie                                                  |  |  |   | 64,583    |  |   | 59,537    |  |   | 67,827    | 
|Clay Basin                                                       |  |  |   | 51,225    |  |   | 73,800    |  |   | 28,275    | 
|                                                                 |  |  |  
|Average therms used by customer:                                 |  | 
|Residential                                                      |  |  |   | 886       |  |   | 902       |  |   | 972       | 
|Commercial firm                                                  |  |  |   | 4,763     |  |   | 4,668     |  |   | 4,935     | 
|Industrial firm                                                  |  |  |   | 14,354    |  |   | 15,162    |  |   | 16,887    | 
|Interruptible                                                    |  |  |   | 124,685   |  |   | 118,527   |  |   | 123,888   | 
|Transportation                                                   |  |  |   | 1,703,705 |  |   | 1,680,321 |  |   | 2,081,989 | 
|                                                                 |  |  |  
|Average revenue per customer:                                    |  | 
|Residential                                                      |  |  | $ | 759       |  | $ | 887       |  | $ | 701       | 
|Commercial firm                                                  |  |  |   | 3,647     |  |   | 4,281     |  |   | 3,214     | 
|Industrial firm                                                  |  |  |   | 10,382    |  |   | 13,414    |  |   | 9,721     | 
|Interruptible                                                    |  |  |   | 75,214    |  |   | 86,431    |  |   | 53,275    | 
|Transportation                                                   |  |  |   | 105,336   |  |   | 105,179   |  |   | 123,846   | 
|                                                                 |  |  |  
|Average revenue per therm sold:                                  |  | 
|Residential                                                      |  |  | $ | 0.855     |  | $ | 0.984     |  | $ | 0.720     | 
|Commercial firm                                                  |  |  |   | 0.766     |  |   | 0.917     |  |   | 0.651     | 
|Industrial firm                                                  |  |  |   | 0.723     |  |   | 0.885     |  |   | 0.576     | 
|Interruptible                                                    |  |  |   | 0.603     |  |   | 0.729     |  |   | 0.430     | 
|Average retail revenue per therm sold                            |  |  |   | 0.802     |  |   | 0.933     |  |   | 0.662     | 
|Transportation                                                   |  |  |   | 0.062     |  |   | 0.063     |  |   | 0.059     | 
|                                                                 |  |  |  

GAS SUPPLY        PSE
currently purchases a blended portfolio of long-term firm, short-term firm and non-firm
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 service its customers. All of
PSEs gas supply is ultimately transported through facilities of Williams/Northwest
Pipeline Corporation (NPC), the sole interstate pipeline delivering directly into the
Western Washington area.

---

|                                    | 2002 | 2001
|----------------------------------- | ---- | ----
|                                    |      |     
|Peak Firm Gas Supply at December 31 |      |     
|                                    |      |     
|Purchased gas supply:               |      |     
|British Columbia                    |      |     
|Alberta                             |      |     
|United States                       |      |     
|                                    |      |     
|Total purchased gas supply          |      |     
|                                    |      |     
|Purchased storage capacity:         |      |     
|Clay Basin                          |      |     
|Jackson Prairie                     |      |     
|LNG                                 |      |     
|                                    |      |     
|Total purchased storage capacity    |      |     
|                                    |      |     
|Owned storage capacity:             |      |     
|Jackson Prairie                     |      |     
|Propane-air injection               |      |     
|                                    |      |     
|Total owned storage capacity        |      |     
|                                    |      |     
|Total peak firm gas supply          |      |     
|                                    |      |     

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 at generally lower prices in months of low market demand for 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. Peaking needs are also met by using PSE owned gas
held in NPCs liquefied natural gas (LNG) facility at Plymouth, Washington, and by
producing propane-air gas at a plant owned by PSE and located on its distribution system.

        In
1998, PSE took assignment from a third party of a peaking gas supply service contract
whereby PSE can divert up to 48,000 Dekatherms per day (one Dekatherm, or Dth, is equal to
one million British thermal units or MMBtu) 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 any additional costs of such operation.

        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 2002-2003 winter heating season, PSE contracted for approximately 18.2% of its
expected peak-day gas supply requirements from sources originating in British Columbia
under a combination of long-term and winter-peaking purchase agreements. Long-term gas
supplies from Alberta represent approximately 8.1% of the peak-day requirements. Long-term
and winter peaking arrangements with U.S. suppliers and gas stored at Clay Basin make up
approximately 22.1% 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 NPCs Plymouth
facility and propane-air resources, which represent approximately 39.0%, 8.8% and 3.8%,
respectively, of expected peak-day requirements.
        During
2002, approximately 40% of gas supplies purchased by PSE originated in British Columbia
while 21% originated in Alberta and 39% originated in the United States.

        The
current firm, long-term gas supply portfolio consists of arrangements with 17 producers
and gas marketers, with no single supplier representing more than 11% of expected peak-day
requirements. Contracts have remaining terms ranging from less than 1 year to 9 years,
with an average term of less than one year. With the exception of fixed price hedges for
the period November 2002 through October 2003 making up a portion of the minimum planned
customer requirements, gas supply contracts contain market-sensitive pricing provisions
based on several published indices.

        PSEs
firm gas supply portfolio is structured to capitalize on regional price differentials when
they arise. 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 a high 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 NPC and PG&E Gas
Transmission-Northwest (PGT). 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
holds firm year-round capacity on NPCs pipeline totaling 447,493 Dth per day,
acquired under several agreements at various times. PSE has exchanged certain segments of
its firm capacity with third parties to effectively lower transportation costs. PSEs
firm transportation capacity contracts with NPC have remaining terms ranging from 2 to
13.8 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 PGTs pipeline, totaling
90,392 Dth per day, has a remaining term of 21 years.

        WNG
CAP I, a wholly-owned subsidiary of PSE, holds firm year-round capacity on NPCs
pipeline totaling 75,494 Dth per day, acquired under several agreements. WNG CAP Is
firm transportation capacity contracts with NPC have remaining terms ranging from 1 year
to 13.5 years.
GAS STORAGE CAPACITY
        PSE
holds storage capacity in the Jackson Prairie and Clay Basin underground gas storage
facilities adjacent to NPCs pipeline. The Jackson Prairie facility, operated and
one-third owned by PSE, is used primarily for intermediate peaking purposes, able to
deliver a large volume of gas over a relatively short time period. Combined with capacity
contracted from NPCs one-third stake in Jackson Prairie, PSE has peak, firm delivery
capacity of over 318,000 Dth per day and total firm storage capacity exceeding 7,500,000
Dth at the facility. The location of the Jackson Prairie facility in PSEs market
area provides significant cost savings by reducing the amount of annual pipeline capacity
required to meet peak-day gas requirements. The Clay Basin storage facility is supply area
storage and is utilized for withdrawals over the entire winter, capturing savings due to
injecting lower cost gas supplies during the summer. After the release of capacity, PSE
has maximum firm withdrawal capacity of over 64,000 Dth per day from the facility with
total storage capacity of almost 6,700,000 Dth. The capacity is held under two contracts
with remaining terms of 11 and 17 years. PSE has capacity release contracts with multiple
parties at the Clay Basin storage facility with remaining terms ranging from 3 to 15
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
long-term contracts for storage of approximately 240,000 Dth of PSE owned gas as LNG at
NPCs Plymouth facility, which equates to approximately three and one-half days
supply at maximum daily deliverability of 72,000 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 NPC
pipeline capacity not utilized during off-peak periods through capacity release. WNG CAP
I, a wholly-owned subsidiary of PSE, 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 (AFUCE) on any outstanding balance that is not being recovered in
rates. ENVIRONMENT
        Puget
Energys operations are subject to environmental 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
16 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 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 the 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
measurement 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 listing of spring Chinook salmon for the
upper Columbia River should not 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 process 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. The consultation with
the federal agencies is ongoing.

---

EXECUTIVE OFFICERS OF THE
REGISTRANTS 
        The
executive officers of Puget Energy as of February 28, 2003 are listed below. 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 | 55  | President and Chief Executive Officer since January 2002.  Director since January 2002.                                                                                                                                                                                                                                                                                                                          
|J. D. Durbin   | 67  | Chairman and Chief Executive Officer of InfrastruX since 2002; President and
                                       Chief  Executive  Officer  of  InfrastruX,  2000 -  2002.  Prior  to  joining
                                       InfrastruX,  he was Executive  Director of Emerge  Corporation,  1999 - 2000;
                                       Principal in Olympic Capital Partners, 1996 - 1999.
|J. W. Eldredge | 52  | Corporate Secretary and Chief Accounting Officer since April 1999.                                                                                                                                                                                                                                                                                                                                               
|D. E. Gaines   | 46  | Vice President Finance and Treasurer since March 2002.                                                                                                                                                                                                                                                                                                                                                           
|S. A. McKeon   | 57  | Senior Vice  President  Finance and Chief  Financial  Officer  since  January
                                       2003;  Senior Vice President  Finance and Legal and Chief Financial  Officer,
                                       2002; Vice President and General Counsel, 1999 - 2002.                                                                                                                 
|J. L. O'Connor | 46  | Vice President and General Counsel since January 2003.                                                                                                                                                                                                                                                                                                                                                           

The
executive officers of Puget Sound Energy as of February 28, 2003 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 | 55  | President and Chief Executive Officer since January 2002; President and
                                       Chief Executive Officer of Reynolds Energy International, 1998 - 2002; Chief
                                       Executive Officer of PG&E Gas Transmission Texas, 1997 - 1998; President and
                                       Chief Executive Officer of Pacific Gas Transmission Company, 1987 - 1998.
                                       Director since January 2002.                                                                                          
|D.P. Brady    | 39  | 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.
|J.W. Eldredge | 52  | 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 Presidentand
                                       Treasurer, 2001 - 2002; Treasurer, 1994 - 2001. Mr. Gaines is the brother
                                       of W. A. Gaines, Vice President Energy Supply.                                                                                                                                                                                                                                                                                                               
|W.A. Gaines   | 47  | Vice President Energy Supply since February 1997. Mr. Gaines is the brother
                                       of D. E. Gaines, Vice President Finance and Treasurer.                                                                                                                                                                                                                                                                                                                                                                                                                     
|D.A. Graham   | 62  | Vice President Human Resources since April 1998; Director Human Resources,
                                       1989 - 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|K.J. Harris   | 38  | 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.  For more than four years prior to that time, she was an attorney
                                       with the law firm of Perkins Coie LLP.                                                                          
|J.L.Henry     | 57  | Senior Vice President Energy Efficiency and Customer Services since February
                                       2003; Director Major  Accounts, 2001 -  2003; Director Construction and
                                       Technical Field Services 2000 - 2001; Director Major Projects, 1997 - 2000.                                                                                                                                                                                                                                                                                
|T.J. Hogan    | 51  | Senior Vice President Regional Services and Community Affairs since February
                                       2003; Senior Vice President External Affairs 2002 - 2003; Vice President
                                       External Affairs, 2000 - 2002; Vice President  Systems  Operations,  1997 -
                                       2000.                                                                                                                                                                                                                                  
|E.M. Markell  | 51  | 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 andChief
                                      Financial Officer, United American Energy Corp., 1990 - 2000.                                                                                                                                                                                    
|S.A. McKeon   | 57  | Senior Vice President Finance and Chief Financial Officer since January
                                       2003; Senior Vice President Finance and Legal and Chief Financial Officer,
                                       2002; Vice President and General Counsel, 1997 - 2002.                                                                                                                                                                                                                                                                                                       
|S. McLain     | 46  | Senior Vice President Operations since February 2003; Vice President
                                       Operations - Delivery, 1999 - 2003; Vice President Corporate Performance,
                                       1997 - 1999.                                                                                                                                                                                                                                                                                                                                                     
|J.L. O'Connor | 46  | 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     | 41  | 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.                                                                                                                                                                                                         
|G.B. Swofford | 61  | Senior Vice President and Chief Operating Officer since March 2002; Vice
                                       President and Chief Operating Officer  -  Delivery, 1999  -  2002; Vice
                                       President Customer Operations, 1997 - 1999.                                                                                                                                                                                                                                                                                                                    
|P.M. Wiegand  | 50  | Vice President Corporate Planning since February 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; Director of Information Technology,
                                       1997 - 1999.                                                                                                                       

---

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 machines that it uses in its utility construction
business. Its fleet is comprised 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 Conditions and Results of
Operations and the Litigation section of Note 16 of this Annual Report
on Form 10-K. 
        Contingencies
arising out of the normal course of the Companys business exist at December 31,
2002. 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. As of December 31, 2002 there were
approximately 45,200 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 2002 and 2001. Puget Energy and
its predecessor companies have paid dividends on common stock each year since 1943 when
such stock first became publicly held.

| | 2002 |  | 2001 | 
| | ---- |  | ---- | 

|              | Price Range | Dividends | Price Range | Dividends
|------------- | ----------- | --------- | ----------- | ---------
|Quarter Ended | High        | Low       | Paid        | High     
|March 31      |             | $23       | .60         | $19      
|June 30       |             | 21        | .23         | 19       
|September 30  |             | 22        | .50         | 16       
|December 31   |             | 22        | .64         | 18       

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 policy is
anticipated 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 $202.7 million at December 31, 2002.

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
Summary of Operations (Dollars in thousands except per
share data)

|                                            |  |  |   |           | 
|------------------------------------------- |  |  | - | --------- | 
|YEARS ENDED DECEMBER 31                     |  |  |   | 2002      | 
|                                            |  |  |   |           | 
|Operating revenue                           |  |  | $ | 2,392,322 | 
|Operating income                            |  |  |   | 309,669   | 
|Income before cumulative effect of          |  |  |   | 117,883   | 
|accounting change                           |  | 
|Income for common stock from continuing     |  |  |   | 110,052   | 
|operations                                  |  | 
|Basic and diluted earnings per common share |  |  |   | 1.24      | 
|from continuing operations                  |  | 
|Dividends per common share                  |  |  |   | 1.21      | 
|Book value per common share                 |  |  |   | 16.27     | 
|                                            |  |  |   |           | 
|Total assets at year-end                    |  |  | $ | 5,657,491 | 
|Long-term obligations                       |  |  |   | 2,149,733 | 
|Preferred stock not subject to mandatory    |  |  |   | 60,000    | 
|redemption                                  |  | 
|Preferred stock subject to mandatory        |  |  |   | 43,162    | 
|redemption                                  |  | 
|Corporation obligated, mandatorily          |  |  |   | 300,000   | 
|redeemable preferred securities of          |  | 
|subsidiary trust holding solely junior      |  | 
|subordinated debentures of the              |  | 
|corporation                                 |  | 

---

Puget Sound Energy
Summary of Operations (Dollars in thousands)

|                                         |  |  |   |           | 
|---------------------------------------- |  |  | - | --------- | 
|YEARS ENDED DECEMBER 31                  |  |  |   | 2002      | 
|                                         |  |  |   |           | 
|Operating revenue                        |  |  | $ | 2,072,793 | 
|Operating income                         |  |  |   | 294,593   | 
|Income before cumulative effect of       |  |  |   | 108,948   | 
|accounting change                        |  | 
|Income for common stock from continuing  |  |  |   | 101,117   | 
|operations                               |  | 
|                                         |  |  |   |           | 
|Total assets at year-end                 |  |  | $ | 5,338,748 | 
|Long-term obligations                    |  |  |   | 2,021,832 | 
|Preferred stock not subject to mandatory |  |  |   | 60,000    | 
|redemption                               |  | 
|Preferred stock subject to mandatory     |  |  |   | 43,162    | 
|redemption                               |  | 
|Corporation obligated, mandatorily       |  |  |   | 300,000   | 
|redeemable preferred securities of       |  | 
|subsidiary trust holding solely junior   |  | 
|subordinated debentures of the           |  | 
|corporation                              |  | 

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.

---

FINANCIAL CONDITION AND RESULTS OF OPERATIONS        PUGET ENERGYNet
income in 2002 was $117.9 million on operating revenues of $2.4 billion, compared to
$106.8 million on operating revenues of $2.9 billion in 2001 and $193.8 million on
operating revenues of $3.3 billion in 2000. Income for common stock was $110.1 million in
2002, compared to $98.4 million in 2001 and $184.8 million in 2000. 
        Basic
and diluted earnings per share in 2002 were $1.24 on 88.4 million weighted average common
shares outstanding compared to $1.14 on 86.4 million weighted average common shares
outstanding in 2001 and $2.16 on 85.4 million weighted average common shares outstanding
in 2000. 
        Net
income in 2002 was positively impacted by an increase in utility net income of $23.9
million from 2001 due to increased electric and gas margins resulting from general tariff
rate increases. In addition, net income was positively impacted by $10.9 million of
one-time federal tax refunds in 2002. Net income in 2002 was negatively impacted by a
decrease in non-utility net income of $19.8 million primarily due to a decline in property
sales from 2001 at PSEs real estate investment and development subsidiary, Puget
Western, Inc., and a $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 at InfrastruX. 
        Total
kilowatt-hour energy sales to retail consumers in 2002 were 19.3 billion compared with
19.9 billion in 2001 and 21.9 billion in 2000. Kilowatt-hour sales to wholesale customers
were 3.5 billion in 2002, 5.0 billion in 2001 and 14.2 billion in 2000. Kilowatt-hours
transported to transportation customers under a new tariff established in 2001 were 2.3
billion in 2002 and 364 million in 2001. Kilowatt-hours transported to transportation
customers under a terminated pilot program were 164 thousand in 2000. 
        Total
gas sales to retail consumers in 2002 were 839.6 million therms compared with 850.4
million therms in 2001 and 890.5 million therms in 2000. Total gas sales to transportation
customers in 2002 were 207.9 million therms compared with 188.2 million therms in 2001 and
204.0 million therms in 2000.

| | RESULTS
OF OPERATION OF PUGET ENERGY
| | ------------------------------------

|INCREASE (DECREASE) OVER PRECEDING YEAR
YEARS ENDED DECEMBER 31
(Dollars in millions) | 2002 | 2001
|------------------------------------------------------------------------------------- | ---- | ----
|                                                                                      |      |     
|Operating revenue changes:                                                            |      |     
|Electric interim rate increase                                                        |      |     
|Electric general rate increases                                                       |      |     
|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                                                       |      |     
|Optimization sales and purchases to other utilities                                   |      |     
|Electric conservation incentive credit                                                |      |     
|Electric load and other                                                               |      |     
|                                                                                      |      |     
|Total electric operating change                                                       |      |     
|                                                                                      |      |     
|Gas retail revenue change                                                             |      |     
|Gas general rate increase                                                             |      |     
|Gas transportation revenue and other                                                  |      |     
|                                                                                      |      |     
|Total gas operating change                                                            |      |     
|                                                                                      |      |     
|InfrastruX revenue                                                                    |      |     
|Other revenue                                                                         |      |     
|                                                                                      |      |     
|Total other operating revenue change                                                  |      |     
|                                                                                      |      |     
|Total operating revenue change                                                        |      |     
|                                                                                      |      |     
|Operating expense changes:                                                            |      |     
|Energy costs:                                                                         |      |     
|Purchased electricity                                                                 |      |     
|Residential exchange credit                                                           |      |     
|Purchased gas                                                                         |      |     
|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                                              |      |     
|InfrastruX 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                                                               |      |     
|Minority interest in earnings of consolidated subsidiary change                       |      |     
|                                                                                      |      |     
|Cumulative effect of implementation of accounting                                     |      |     
|change  (net of tax)                                                                  |      |     
|                                                                                      |      |     
|Net income change                                                                     |      |     
|                                                                                      |      |     

The
following information pertains to the changes outlined in the table above:

---

PUGET SOUND ENERGY
2002 COMPARED TO 2001
OPERATING REVENUES 
ELECTRIC
        Electric
operating revenues decreased $499.3 million in 2002 compared to 2001 due primarily to a
decrease of $443.2 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.
        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. PSEs Risk Management
Committee oversees energy price risk matters.
        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 had 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. PSE established a
PCA mechanism in the rate case settlement. The PCA mechanism will account for differences
in PSEs modified actual power costs relative to a power cost baseline. The mechanism
would 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. PSEs share of the cost through December 31, 2002
was $5.2 million. The factors influencing the variability of power costs included in the
proposal are primarily weather or market related. PSE will be allowed to file for rate
increases to implement limited power supply cost increases related to new resources.

---

On
June 13, 2001, the Washington Commission approved an amended Residential Purchase and Sale
Agreement between PSE and the BPA, under which PSEs residential and small farm
customers would continue to receive benefits of federal power. Completion of this
agreement enabled PSE to continue to provide, and in fact increase, effective January 1,
2002, the Residential and Farm Energy Exchange 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. On June 17, 2002 PSE entered into
an agreement with the BPA which amended 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.
        To
implement this agreement for rate purposes, the Washington Commission approved tariff
revisions that were intended (a) to transfer the Residential and Farm Energy Exchange
credit in effect since October 1, 1995 in the amount of $0.01085 per kWh, to general rates
effective July 1, 2001 and (b) to provide a supplemental Residential and Farm Exchange
credit for eligible residential and small farm customers. On June 26, 2002, the Washington
Commission then transferred the portion of the credit that had been in general rates back
into Schedule 194. 
        The
Residential and Farm Exchange Benefit Supplemental Rider schedule was retitled Residential
and Farm Energy Exchange Benefit, the portion of the credit that had been in general rates
was transferred back into Schedule 194, and the credit was set at $0.01456 per kWh for the
period July 1, 2002 through September 30, 2002, $0.01817 per kWh for the period October 1,
2002 through May 31, 2006 and $0.02302 per kWh for the period June 1, 2006 through
September 30, 2006. The approval of these revised tariffs by the Washington Commission was
effective July 1, 2002. 
        In
January 2003, PSE filed tariff sheets with the Washington Commission to reflect a
modification to the agreement between PSE and the BPA that would reduce the Residential
and Farm Energy Exchange Benefit credit. Under the modified agreement, BPA will defer
paying a portion of the benefits it would have otherwise paid. The amount of benefits
deferred will be $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 is entering into other agreements similar to the agreement with
PSE through which other investor-owned utilities and BPA are agreeing to BPAs
deferral of payments in their fiscal year 2003. The total cumulative amount to be deferred
under the agreement with PSE and other such agreements equals $55 million, an amount that
will help BPA address its current financial difficulties. Absent certain adjustments, BPA
will begin paying back the amount deferred with interest over the sixty-month period
beginning November 2006. The Washington Commission approved the tariff changes and the
Rider credit was changed to $0.01740 for the period February 15, 2003 through September
30, 2006. 
        BPAs
rate case may affect the level of residential exchange benefits for PSEs customers.
For 2002, the benefits of the Residential and Farm Energy Exchange credited to customers
were $152.8 million with a related offset to power costs. PSE received payments from BPA
in the amount of $171.2 million during 2002. The difference between the customers
credit and the amount received from BPA is deferred and will be credited to customers in
later periods. The difference is recorded on PSEs balance sheet as restricted cash.
The modified Agreement will provide for payments from BPA in the amount of $630.6 million
for the period January 2003 through September 2006 and for pass-through to eligible
residential and farm customers of the same amount. 
        There
are several actions in the Ninth Circuit Court of Appeals against BPA, in which the
petitioners 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
contract between BPA and the Company described above. BPA rates used in such contract
between BPA and the Company for determining the amounts of money to be paid to the Company
during the period October 1, 2001 through September 30, 2006 have been
confirmed, approved and allowed to go into effect by FERC on an interim basis, subject to
refund with interest. It is not clear what impact, if any, review of such rates and the
above-described Ninth Circuit Court of Appeals actions may have on the Company.         In
2002, PSE collected and remitted to a grantor trust $12.7 million as a result of
PSEs sale of future electric revenues associated with its investment in conservation
assets in its electric general rate tariff. The impact of the sale of revenue was offset
by reductions in conservation amortization and interest expenses. The principal amounts
owed by the trust to its bondholders was $18.9 million December 31, 2002.

---

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 $22.7 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. 
        PSEs
hydroelectric production and related power costs in 2003 are expected to be impacted
negatively by drought conditions in the Pacific Northwest region associated with El Nino
weather conditions. The Northwest Rivers Forecast Center on February 6, 2003 predicted
that streamflows in the Columbia River Basin above Grand Coulee Dam would be only 76
percent of normal. In a normal water year, PSE obtains about 38 percent of its energy
supply from low-cost hydroelectric facilities, primarily from dams below Grand Coulee on
the Columbia River. If the forecasted streamflow reductions occur, PSE will need to
replace that low-cost hydropower with more expensive thermally-generated and purchased
power. PSEs share of the power costs through December 31, 2002 was $5.2 million.
Because of adverse hydro conditions in 2003, PSE anticipates reaching the
$40 million cumulative cap under the PCA mechanism by the frouth quarter of 2003.
Under the PCA mechanism, further increases in variable power costs through June 30,
2006 would be apportioned 99% to cutomers and 1% to PSE.
        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 as discussed in Operating Revenues  Electric
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 pre-tax ($0.3 million after-tax). 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 133 was adopted on
January 1, 2001, and as a result, a one-time $14.7 million after-tax transition loss was
recorded in 2001 from recognizing the cumulative effect of this change in accounting
principle. (For further discussion see Note 17).
        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 ManagementTM energy-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 for 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 65.9% of the annual qualified pension income of $17.7 million for 2002 was
recorded as a reduction in operation and maintenance expense compared to 58% of $20.0
million for 2001. Qualified pension income is expected to decline to $9.6 million in 2003
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. 
        PSEs
other operations and maintenanceexpenses decreased $6.2 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 $11.2 million in 2002 compared to 2001, of which $6.6
million is 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 taxesincreased $2.8 million, of which PSEs decreased $5.0 million
in 2002 compared to 2001 due primarily to a decrease in revenue based Washington State
excise tax and municipal tax. This is 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 State of Oregon property tax bills on PSEs long-term Third AC Transmission Intertie contract.
        Income
taxesdecreased $20.5 million in 2002 compared to 2001, of which PSEs income taxes
decreased by $24.1 million. The decrease in 2002 includes a total of $10.3 million in one-time refunds at PSE of which $4.7
million was recorded in the second quarter of 2002 related to the audit of the
Companys 1998 and 1999 federal income tax returns. Of this amount, $4.1 million
reduced current tax expense and the balance, $0.6 million, was recorded as a deferred
income tax liability. The decrease at PSE also includes a $3.5 million reduction to
expense representing an adjustment to 2001 federal income tax based on the 2001 federal
tax return filed in the third quarter of 2002. The decrease in 2002 also includes
flow-through benefits reducing federal income taxes of $2.7 million 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 $9.1 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 $6.3 million in 2002 compared to 2001 of which PSEs increased $4.4 million
as a result primarily 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 $127.0
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
operation 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 operation 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 the company 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
have been completed.
        Income
taxesincreased $3.7 million in 2002 compared to 2001 due primarily to the acquisition of
companies acquired 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 its revolving credit facilities primarily used for funding acquisitions.
        Other
incomeincreased $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. PUGET SOUND ENERGY
2001 COMPARED TO
2000
OPERATING REVENUES 
ELECTRIC 
        Electric
operating revenues decreased $767.1 million in 2001 compared to 2000 due to an overall
average 0.9% general rate increase effective January 1, 2001 offset by sales to other
utilities and marketers which decreased $587.0 million in 2001 due primarily to lower
wholesale power volumes of 9.3 billion kWh and lower surplus capacity.
        Electric
revenues in 2001 decreased due to lower regulated sales to customers, decreased prices and
kilowatt-hours sold related to electric energy sales to other utilities and marketers and
lower prices on market-index sales. This latter group of customers can choose another
supplier or self-generate their energy needs. Several index rate customers switched to
transportation rate tariffs beginning in July 2001 as allowed by a Washington Commission
order dated April 5, 2001 authorizing the establishment of a transportation tariff. On
June 19, 2001, FERC implemented price controls on wholesale electricity in the western
states. Several factors contributed to the dramatic decline in wholesale electric prices
by the end of the second quarter of 2001 and, therefore, greatly diminished the value of
PSEs excess electric energy during that period and into the foreseeable future. PSE
and other western utilities filed an appeal asking FERC to review its June 19, 2001 order
and make modifications to the price controls to stabilize wholesale prices in California
and prevent the energy problems from spreading to other states. On December 19, 2001, FERC
issued an order on clarification and rehearing addressing, in part, PSEs petition
for rehearing on the June 19, 2001 order. PSE and other entities have sought further
rehearing and clarification of the December 19, 2001 order.

---

Electric
revenues were reduced by approximately $19.5 million in 2001 compared to 2000 related to a
customer conservation incentive credit which was approved by the Washington Commission on
April 25, 2001. The conservation incentive credit was to reduce customers bills by
$0.05 per kWh for each kWh reduction in excess of 10% from the same billing period in the
prior year through December 31, 2001. On November 7, 2001, the Washington Commission
approved PSEs request to terminate the conservation incentive credit program
effective November 8, 2001.
        Revenues
from electric customers in 2001 were reduced by a Residential and Farm Energy Exchange
credit tariff in place since October 1, 1995. Under the rate plan approved by the
Washington Commission in its merger order, PSE reflected in customers bills the
level of Residential Exchange benefits in place at the time of the merger with Washington
Energy Company in 1997. On January 29, 1997, PSE and BPA signed an agreement under which
PSE received payments from BPA of approximately $235 million over an approximate five-year
period that ended June 2001. These payments were recorded as a reduction of purchased
electricity expenses. As a result of lower usage by residential and farm customers in
2001, the residential and farm exchange credit decreased by $11.2 million as compared to
2000. For calendar 2001, the benefits of the Residential and Farm Energy Exchange credited
to customers was $103.1 million as compared to an offsetting reduction in Purchased
Electricity Expense of $75.9 million. Eligible residential and small farm customers
received credits to their bills in the same amount.
        In
2001, PSE collected and remitted to two grantor trusts $31.0 million as a result of
PSEs sale of future electric revenues associated with its investment in conservation
assets in its electric general rate tariff. The impact of the sale of revenue was offset
by reductions in conservation amortization and interest expenses. The principal amounts
owed by the trusts to its bondholders were $31.8 million at December 31, 2001.
        On
April 15, 2001, the Washington Commission issued an order allowing PSEs large
industrial customers whose rates were linked to a market index to choose their supplier of
electricity or to self-generate. If an industrial customer chooses an alternate supplier,
PSE will provide the transportation of electricity to the customers premises and
charge that customer for the service. OPERATING REVENUES 
GAS        Regulated
gas utility sales revenue in 2001 compared to 2000 increased by $202.7 million from the
prior year due primarily to higher natural gas prices which are passed through to
customers in the PGA. Total gas volumes, including transported gas, decreased 5.1% in 2001
from 2000. Transportation and other revenue decreased $1.1 million or 15.8 million therms
as industrial customers curtailed usage due to higher natural gas prices and water heater
rental revenue declined. OTHER REVENUES        Other
revenues increased $19.8 million in 2001 compared to 2000 due primarily to increased gross
margins on property sales at PSEs real estate investment and development subsidiary
Puget Western, Inc. OPERATING EXPENSES        Purchased
electricityexpenses decreased $708.6 million in 2001 compared to 2000. The decrease in
2001 was due primarily to lower volumes and significantly lower prices for non-firm power
purchases from other utilities and marketers due to declining prices in the West Coast
power market beginning in the second half of 2001.
        Residential
exchange creditsassociated with the Residential Purchase and Sale Agreement with BPA
increased $34.8 million in 2001 compared to 2000 due to the terms set out in the 1997
Residential Exchange Termination Agreement and the 2001 Residential Purchase and Sale
Agreement between PSE and BPA discussed in Operating Revenues  Electric. Beginning
July 2001, all residential exchange credits are passed through to eligible residential and
small farm customers by a corresponding reduction in revenues.
        Purchased
gasexpenses increased $204.5 million in 2001 compared to 2000 primarily due to the impact
of increased gas costs, which are passed through to customers through the PGA mechanism,
offset by a 5.1% decrease in sales volumes.
        Electric
generation fuelexpense increased $98.4 million in 2001 compared to 2000 as a result of
increased generation and higher fuel costs at combustion turbine facilities. These
facilities operated at much higher levels in 2001 compared to the same period in 2000 due
to adverse hydroelectric conditions.

---

Unrealized
gains/losses on derivative instruments During 2001, an increase to operating
earnings of approximately $11.2 million pre-tax ($7.3 million after-tax) was recognized
for unrealized gains associated with electric derivative transactions and a $14.7 million
after-tax transition adjustment loss was recorded from recognizing the cumulative effect
of this change in accounting principle. (For further discussion see Note 17.)
        Production
operations and maintenancecosts increased $2.8 million in 2001 compared to 2000 due
primarily to an approximately $2.1 million increase in lease costs associated with
PSEs Fredonia 3 and 4 electric generation units offset by reduced operating costs
resulting from the sale of the Centralia generating station in May 2000 and a net cost of
$2.9 million after estimated insurance recovery to repair the PSE-owned Fredonia
combustion turbine unit #1, which was out of service from February 21, 2001 through May
14, 2001.
        PSEs
Personal Energy ManagementTM energy-efficiency program costs increased $11.1 million in
2001, reflecting a full year of implementation compared to 2000. PSE began providing
Personal Energy ManagementTM billing information to electric customers in December 2000. 
        Other
utility operations and maintenancecosts increased $11.8 million in 2001 compared to 2000
due primarily to repair costs associated with storm and earthquake damage in 2001,
increased meter reading expenses associated with providing Personal Energy ManagementTM,
and a one-time insurance recovery received in 2000.
        PSEs
other operations and maintenanceexpenses decreased $10.5 million in 2001 compared to 2000
primarily due to a decrease in operating expenses at ConneXt, the assets of which were
sold in the third quarter of 2001.
        Depreciation
and amortizationexpenses increased $21.0 million in 2001 compared to 2000 due to the
effects of new plant placed into service during 2001, including ConsumerLinX, a customer
information and billing system, which was placed into service in phases through late 2000
and early 2001. 
        Taxes
other than income taxesincreased $10.2 million in 2001 of which $5.0 million was
attributed to PSE as a result of increases in municipal taxes and state excise taxes that
are revenue based. 
        Income
taxesdecreased by $50.0 million in 2001 of which $52.9 million was attributed to PSE due
to lower revenues and lower wholesale prices in the second half of the year.
OTHER INCOME
        Other
income, net of federal income tax, increased $9.5 million in 2001 compared to 2000 due
primarily to $11.8 million of reserves established in 2000 for a write-down to the fair
values of certain assets held for sale by Hydro Energy Development Corp. to their net
realizable values not recurring in 2001, $4.8 million of other income realized by Puget
Western, Inc. on investments in 2000 not recurring in 2001, $7.4 million of increase in
other income of ConneXt primarily from sales of assets in 2001, offset by reductions in
other income in 2001 for additional amortization of goodwill from acquisitions by
InfrastruX, officer incentive compensation accruals, and decreased other interest and
dividend income.

INTEREST CHARGES        Interest
charges, which consist of interest and amortization on long-term debt and other interest,
increased $15.0 million in 2001, of which $11.3 million at PSE was attributed to a full
years interest expense on the issuance of $25 million 7.61% Senior Medium-Term
Notes, Series B in September 2000 and the issuance of $260 million 7.69% Senior
Medium-Term Notes, Series C, in November 2000. In addition, interest was incurred on the
issuance of $200 million 8.4% Trust Preferred Securities in May 2001. Other interest
expense decreased $16.9 million compared to 2000 as a result of lower weighted average
interest rates and lower average daily short-term borrowings.

---

INFRASTRUX 2001 COMPARED TO 2000 
        InfrastruX
revenueincreased $128.8 million in 2001 compared to 2000. InfrastruX was formed in June
2000 and completed two acquisitions late in the third quarter of 2000. An additional six
companies were acquired in 2001. 
        InfrastruX
operation and maintenanceexpenses increased $106.6 million in 2001 compared to 2000 due
to limited operations in 2000 compared to a full year of operations and significant
acquisition activity in 2001. 
        Depreciation
and amortizationincreased $6.6 million in 2001 compared to 2000 due to the completion of
six acquisitions in 2001. 
        Income
taxesincreased $2.5 million in 2001 compared to 2000 due to the profitability of
companies acquired during 2000 and 2001.
        Interest
chargesincreased $3.5 million in 2001 compared to 2000 due to an increase in the amount
drawn on its revolving credit facilities primarily used for funding acquisitions.

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, 2002:

|Puget Energy                                 | Payments Due Per Period
|-------------------------------------------- | -----------------------
|Contractual Obligations(Dollars in millions) | Total                  
|                                             |                        
|                                             |                        
|Long-term debt                               |                        
|Short-term debt                              |                        
|Trust preferred securities (1)               |                        
|Preferred dividends (2)                      |                        
|Service contract obligations                 |                        
|Capital lease obligations                    |                        
|Non-cancelable operating leases              |                        
|Fredonia combustion turbines lease (3)       |                        
|Energy purchase obligations                  |                        
|Financial hedge obligations                  |                        
|                                             |                        
|Total contractual cash obligations           |                        

|                                            | Amount of CommitmentExpiration Per Period
|------------------------------------------- | -----------------------------------------
|Commercial Commitments(Dollars in millions) | Total                                    
|                                            |                                          
|Guarantees (4)                              |                                          
|Liquidity facilities - available (5)        |                                          
|Lines of credit - available (6)             |                                          
|Energy operations letter of credit (7)      |                                          
|                                            |                                          
|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) | On
October 8, 2002, the Board of Directors of PSE declared a dividend payable on January 1,
2003 for preferred stock outstanding on December 13, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | At
December 31, 2002, PSE had available a $250 million liquidity facility, which in part
provides credit support for outstanding commercial paper totaling $30.3 million, thereby
effectively reducing the available borrowing capacity under this line of credit to $219.7
million. At year end, the Company also had a three year $150.0 million receivables
securitization facility available. See Accounts Receivable Securitization Program under
Off-Balance Sheet Arrangements below for further discussions.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | InfrastruX
had $179.8 million in lines of credit with various banks, which fund capital
requirements of InfrastruX and its subsidiaries. InfrastruX and its subsidiaries had
outstanding loans of $144.0 million, effectively reducing the available borrowing
capacity under these lines of credit to $35.8 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | 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 expires on May 7,
2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Puget
Sound Energy. The following are PSEs aggregate contractual and commercial
commitments as of December 31, 2002:

|Puget Sound Energy                           | Payments Due Per Period
|-------------------------------------------- | -----------------------
|Contractual Obligations(Dollars in millions) | Total                  
|                                             |                        
|Long-term debt                               |                        
|Short-term debt                              |                        
|Trust preferred securities (1)               |                        
|Preferred dividends (2)                      |                        
|Service contract obligations                 |                        
|Non-cancelable operating leases              |                        
|Fredonia combustion turbines lease (3)       |                        
|Energy purchase obligations                  |                        
|Financial hedge obligations                  |                        
|                                             |                        
|Total contractual cash obligations           |                        

|                                            | Amount of CommitmentExpiration Per Period
|------------------------------------------- | -----------------------------------------
|Commercial Commitments(Dollars in millions) | Total                                    
|                                            |                                          
|Liquidity facilities - available (4)        |                                          
|Energy operations letter of credit (5)      |                                          
|                                            |                                          
|Total commercial commitments                |                                          

---

|(1) | See
note (1) above.
|--- | -------------------

|(2) | See
note (2) above.
|--- | -------------------

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

|(4) | See
note (5) above with respect to PSE.
|--- | ---------------------------------------

|(5) | See
note (7) above.
|--- | -------------------

OFF-BALANCE SHEET
ARRANGEMENTSCONSERVATION TRUST
        In
1995 and 1997, PSE sold a stream of future electric revenues associated with $237.7
million of its investment in conservation assets in its electric general rate tariff to
two grantor trusts. As a result of this sale, PSE collects these revenues from its
electric customers and remits them to the trusts. On August 29, 2001, PSE purchased the
remaining 1997 trust securities. During 2002, PSE collected and remitted $12.7 million to
the 1995 trust as compared to $31.0 million for both trusts in 2001. The remaining
principal expected to be collected on behalf of the 1995 trust is $18.9 million at
December 31, 2002. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
        In
order to provide a source of liquidity for PSE, in December 2002, PSE entered into a
Receivables Sales Agreement with Rainier Receivables, Inc., a wholly owned subsidiary of
PSE, pursuant to which PSE sold all of its utility customers 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 several financial institutions. The Receivables Purchase Agreement allows Rainier
Receivables to sell the receivables purchased from PSE to the financial institutions. The
amount of receivables sold by Rainier Receivables is not permitted to exceed
$150 million at any time.
        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 of the
receivables fees that are analogous to interest 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, 2002 there
were no amounts outstanding under the accounts receivable securitization facility. 
        FREDONIA 3 AND 4 OPERATING LEASE        In
April 2001, PSE revised its master operating lease to $70 million plus interest with a
financial institution. Under this revised agreement PSE leases two combustion turbines for
its Fredonia 3 and 4 electric generation facility. The lease has a term expiring in 2011,
but can be cancelled by PSE after three years. Payments under the lease vary with changes
in the London inter-bank offered rate (LIBOR). At December 31, 2002, PSEs
outstanding balance under the lease was $61.7 million. Lease payments assume a LIBOR of
1.38%. 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 87% of the
unamortized value of the equipment, PSE would be required to pay the lessor an amount
equal to the deficiency. 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 $224.2 million in 2002. PSE expects construction
expenditures will be approximately $271.9 million, $265.3 million and $265.0 million in
2003, 2004 and 2005, respectively. Construction expenditure estimates are subject to
periodic review and adjustment in light of changing economic, regulatory, environmental
and conservation factors.
OTHER ADDITIONS        Other
property, plant and equipment additions were $11.6 million in 2002. Puget Energy expects
InfrastruXs capital additions to be $16.6 million, $19.0 million, and $21.0 million
in 2003, 2004 and 2005, respectively. Construction expenditure estimates are subject to
periodic review and adjustment in light of changing economic, regulatory, environmental
and conservation factors.
CAPITAL RESOURCESCASH FROM
OPERATIONS        Cash
generated from operations (net of dividends and AFUDC) totaled $944.8 million for the
three-year period 2000-2002, and provided 117.7% of the $803.1 million of utility
construction expenditures (net of AFUDC) and other capital expenditure requirements for
that period. Internal cash generation (net of dividends and AFUDC) provided 254.8% of
total capital expenditure requirements in 2002, 57.7% in 2001, and 57.2% in 2000. Puget
Energy and PSE expect to continue financing the utility construction program and other
capital expenditure requirements with internally generated funds and externally financed
capital.

---

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, 2002, PSE could
issue:

| |  | approximately
$466.8 million of additional first mortgage bonds, at an assumed interest rate of 5.92%
on a ten-year first mortgage bond due to a limitation of the interest coverage ratio.
(PSE has approximately $1.2 billion of electric and gas bondable property available for
use for issuance of up to $700.8 million of first mortgage bonds, subject to the interest
coverage ratio limitation of 2.0 times net earnings available for interest. PSEs
interest coverage ratio at December 31, 2002 was 2.4 times net earnings available for
interest);
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
 $157.1  million of  additional  preferred  stock at an assumed  dividend  rate of
           7.75%; and
|- |  | ----------------------------------------------------------------------------------------------------------------------

| |  | approximately
$243.5 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 senior unsecured credit ratings
could adversely affect the companies 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. A
further downgrade in commercial paper ratings could preclude entirely PSEs ability
to issue commercial paper. 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
current ratings of Puget Energy and PSE, as of February 13, 2003, are:

|                               | Ratings          
|------------------------------ | -----------------
|Puget Energy                   | Standard & Poor's
|Corporate credit/issuer rating | BBB-             
|Puget Sound Energy            
|Corporate credit/issuer rating | BBB-             
|Senior secured debt            | BBB              
|Shelf debt senior secured      | BBB              
|Senior unsecured               | BB+              
|Preferred stock                | BB               
|Commercial paper               | A-3              
|Subordinate                    | *                
|Revolving credit facility      | *                
|Ratings outlook                | Stable           

*
No ratings provided.

Moody's
 Investors  Service has stated that its negative outlook is based upon uncertainty about
the  outcome of  investigations  by FERC of western  power  markets.  Moody's
 remains  concerned about what  conclusions  will  ultimately be drawn by FERC with
respect to year 2000 sales in western power markets and what other steps they might take
as the investigation runs its full course.

---

SHELF
REGISTRATIONS
         In February 2002, 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,
|- |  | -----------------------------

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

| |  | unsecured
debentures of PSE, and
|- |  | --------------------------------

| |  | trust
preferred securities of Puget Sound Energy Capital Trust III.
|- |  | -------------------------------------------------------------------

On
November 5, 2002,  Puget  Energy sold 5.75 million  shares of common  stock in a public
 offering. The net proceeds of  approximately  $114.6  million were  invested in PSE to
reduce its debt.  PSE is expected to refinance $161.9 million of its Pollution Control
Bonds series in March or April 2003.

LIQUIDITY
FACILITIES AND COMMERCIAL PAPER
         PSE's short-term borrowings and sales of
commercial paper are used to provide working capital for the utility construction
program.
         On December 23, 2002, PSE entered into a $250 million unsecured
364-day credit agreement with various banks and a $150 million 3-year receivables
securitization program. These facilities replaced PSE's entire $375 million bank line
of credit which was scheduled to terminate on February 13, 2003. At December 31, 2002,
PSE had available $400.0 million of liquidity facilities, which in part provide credit
support for outstanding commercial paper of $30.3 million, effectively reducing the
available borrowing capacity under the liquidity facilities to $369.7 million.
         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 $29.8
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, 2002, InfrastruX and its subsidiaries
had outstanding loans of $144.0 million, effectively reducing the available borrowing
capacity under these lines of credit to $35.8 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
$16.9 million (801,205 shares) in 2002 compared to $25.6 million (1,119,568 shares)
in 2001. The decrease in the Stock Purchase and Dividend Reinvestment Plan from 2002
to 2001 was largely attributable to the reduction of the common stock dividend on
May 15, 2002 to a quarterly dividend of $0.25 per share.

RATE
MATTERS - ELECTRIC
         On March 28, 2002, the Washington Commission approved and
adopted an unopposed settlement stipulation to resolve the interim phase of the
rate case, in order to allow $25 million in additional revenue to be recovered in
rates over an approximate period of three months, commencing April 1, 2002. On June 6,
2002, the parties and intervenors to the general rate case filed a settlement
stipulation for electric and common issues, which called for an electric general
rate increase of $59 million annually. On June 20, 2002, the Washington Commission
approved and adopted the settlement stipulation in the general case, putting new
rates into effect on July 1, 2002. PSE established a PCA mechanism in the rate case
settlement. The PCA mechanism will account for differences in PSE's modified
actual power costs relative to a power cost baseline. The mechanism would 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. PSE will be allowed
to file for rate increases to implement limited power supply cost increases related to
new resources.   PSEs share of the power costs through December 31, 2002 was $5.2 million.
Because of adverse hydro conditions in 2003, PSE anticipates reaching the $40 million cumulative
cap under the PCA mechanism by the fourth quarter of 2003.  Under the PCA mechanism, further increases
in variable power costs through June, 30, 2006 would be apportioned 99% to customers and 1% to PSE.

---

RATE
MATTERS - GAS
        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. On
September 30, 2002, PSE filed a proposal with the Washington Commission to reduce
natural gas supply rates under the PGA for the 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.

PROCEEDINGS
RELATING TO THE WESTERN POWER MARKETCALIFORNIA INDEPENDENT SYSTEM OPERATOR (CAISO)
RECEIVABLE AND CALIFORNIA 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 2001, PG&E and Southern California Edison defaulted on
payment obligations owed to various energy suppliers, including the CAISO. The CAISO
in turn defaulted on its payment obligations to PSE and various other energy
suppliers. On March 1, 2002, Southern California Edison paid its past due energy
obligations to the CAISO and various other parties; however, those funds were not
used to pay the outstanding balance of the CAISO obligations to PSE. PSE is continuing
to pursue recovery of the CAISO receivable.

        On October 1, 2002, the CAISO
determined a refund was due to PSE totaling $2.2 million in connection with a FERC
order of August 27, 2002 that determined parties that paid the CAISO
transmission access charges for energy delivered into the CAISO's control area in
calendar 2000 had been overcharged by the CAISO. PSE received $1.1 million of this
refund on October 8, 2002, which was credited to the CAISO receivable, reducing the
receivable balance recorded by PSE to $66.9 million. PSE has a bad debt reserve and
a transaction fee reserve totaling $41.5 million in connection with the CAISO
receivable, such that the net receivable at December 31, 2002 was $25.4 million. The
balance of the refund has not been paid by the CAISO.

         On July 25, 2001, FERC
ordered an evidentiary hearing (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. Hearings on the FERC California refund proceeding commenced in August
2002 in San Francisco, California, and concluded in Washington, DC in September 2002.

        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 Judge did not make exact  findings,  because  the report
contemplates  further  calculations  by the CAISO.) The report also enters  various  findings  within
the text of the  opinion,  but  those  findings  are not  reflected  in the  appendix.  The  appendix
indicates  that the net cash  position  as of March  2002 for PSE  would be an  amount  due to PSE of
$61.9  million,  and the  refund  PSE  would  owe to the CAISO  would be $26.3  million--making  a net
receivable  for PSE of $35.6  million.  The  appendix  calculations  did not  include,  however,  two
stipulations  and/or  findings  from the body of the opinion that excluded  certain PSE  transactions
from refund  liability,  primarily because they were not "spot market"  transactions.  Applying those
stipulations  would reduce the refund PSE would owe by $6.4 million,  and make the net PSE receivable
approximately  $42.0  million.  The  certification  also  states  that the  amounts  owing  should be
adjusted for interest,  a calculation the  Administrative  Law Judge did not make. FERC has expressed
an intention to act on the  Administrative  Law Judge's  certification--and  any other  submissions in
the docket,  as discussed  below--in the spring of 2003. The projected  schedule for resolution of the
refund proceedings could change  significantly,  however, if FERC were to adopt changes in the refund
methodology employed during the hearings, as proposed in the FERC's Staff's report discussed below.

        The FERC Staff issued a report in August 2002 (Docket No.  PA02-2)  that,  among other things,
recommends  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.  If adopted as proposed,  this  methodology of calculating  the cost of
natural  gas would  reduce the amount  owed by the CAISO to PSE for sales made  during 2000 and 2001.
PSE's  estimates  indicate  that the changes in  methodology  would  reduce PSE's net  receivable  to
approximately  $18 million (as compared to the $42.0 million,  calculated by the  Administrative  Law
Judge).  The current net receivable  recorded by PSE,  including the effects of the CAISO refund,  is
$25.4 million.

        On August 13, 2002,  FERC issued a notice  (Docket No.  EL00-95)  requesting  comments on: (1)
whether  the method  used to  determine  the cost of natural  gas for the refund  calculation  in the
California refund proceeding  should be modified;  (2) whether the FERC Staff's  substitute method is
appropriate  and, if not, what method  should be used;  and (3) what is the proper way to reflect the
effects of scarcity on price.  PSE jointly  sponsored  testimony and filed  comments in opposition to
the  recommendations  in the FERC  Staff's  report on October 15,  2002.  The issue  remains  pending
before FERC and no schedule for decision has been announced.

         On  November  20,  2002,  FERC  issued an Order on Motion for  Discovery  Order in the EL00-95
docket  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 permits
the parties to conduct  discovery  and file any such  evidence "no later than  February 28, 2003." On
February 10, 2003 FERC issued an order on  "clarification"  that  provides for reply  submissions  by
any party on or before March 17, 2003.  Like the November 20 discovery  order,  the February 10 order
expressly   states  that  the   Commission   intends  to  "finalize   the  issues  in  these  dockets
expeditiously"  and observes that the Commission  sees "no need for additional  discovery  procedures
following the February 28, 2003  submission  of  evidence."  On February 24, 2003,  FERC extended the
filing  deadlines to March 3, 2003 for the initial  submissions  and March 20, 2003 for replies,  due
to the east coast blizzard. In the March 3 filing by the California parties, they reiterated their allegations
of market manipulation against PSE and approximately 60 other companies.  PSE and the other parties are
expected to respond on March 20, 2003.

               On May 31,  2002,  FERC  conditionally  dismissed a  complaint  filed on March 20, 2002 by the
California  Attorney  General in Docket  EL02-71 that alleged  violations of the Federal Power Act 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,  that  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  re-file  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 re-filed 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 in Docket  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  alleges that PSE's sales to California
violated  the  requirements  of the  Federal  Power Act and that,  as such,  the sales also  violated
certain sections of the California  Business  Practices Act forbidding  unlawful business  practices.
The  complaint  asserts  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 has
removed  that suit to federal  court and has moved to dismiss it on the  grounds  that the issues are
within the exclusive or primary  jurisdiction  of FERC.  That motion was argued on September 26, 2002
and the question is under submission to the judge.
           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  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.

---

OTHER PROCEEDINGS
         On May 8, 2002, FERC issued a data request concerning
specific trading strategies described in memos prepared by Enron Corporation to
all sellers, including PSE, of wholesale electricity and/or ancillary services to
the CAISO and/or the California Power Exchange Corporation during the years 2000-2001.
On May 21 and May 22, 2002, FERC issued additional data requests to all sellers of
wholesale electricity or natural gas in the western United States, including
PSE, concerning "wash" or "roundtrip" trading activities. Each of the three
requests required the sellers to respond with an affidavit concerning the seller's
use or knowledge of various trading practices identified in the request. In response
to the data requests, PSE conducted a review of its activities and informed FERC
that it did not engage in the trading activity described in the applicable request.

        In October 2002, PSE provided information in response to a request by the
U.S. Commodity Futures Trading Commission (CFTC) for information about a limited
number of specific transactions with regional counterparties which have been the
subject of an investigation by the CFTC. PSE's own review of these trades concluded that
all the transactions were lawful and served normal business purposes. In January
2003, PSE was asked to provide additional information to the CFTC, primarily
concerning the results of any PSE internal investigation as to its trading activities
and reports to indices. PSE responded to that request by providing information in
February 2003. 
        In December 2002, PSE was named as one of more than 30 defendants
in two class actions, one filed in the federal district court in Seattle and the
other in Multnomah County Circuit Court in Oregon. PSE was served with the complaint
and summons in the Washington federal court case on February 3, but as of March 7, 2003
had not been served in the Oregon case. Nonetheless, the Oregon case was
removed to Oregon federal court by Reliant Energy Services on February 5, 2003. The
complaints allege that they are brought on behalf of all retail customers in Washington
and Oregon, respectively, and seek relief against the defendants (each of which is a
seller of electric energy at wholesale in certain markets) for "unfair or deceptive
acts," "fraud by concealment," negligence and for an accounting. No specific amounts
of damages are pled in the complaints.
         PSE cannot predict the outcome of any of
these ongoing proceedings relating to the western power markets, or whether the
ultimate impact on PSE will be material.

OTHER
        On October 2, 2002, the United Association of Plumbers and Pipefitters ratified
with PSE a new four-year collective bargaining agreement. Effective dates for the
new contract are October 1, 2002 to October 1, 2006. The contract covers
approximately 300 PSE employees. In addition, on December 3, 2002, the
International Brotherhood of Electrical Workers ratified an agreement to extend
their collective bargaining agreement with PSE through March 31, 2007. This contract
covers approximately 800 PSE employees.
         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
U.S if enacted in its proposed form. Major elements of FERC's proposal include: (a)
the use of Network Access Service to 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) The formation of Regional State Advisory Committees and
other regional entities 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 itself to the Standard Market
Design 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. On December 20, 2002, FERC issued a Notice extending the
deadline for comments addressing market design for the Western Interconnection to
February 18, 2003, but the notice also indicates FERC "will accept late-filed comments
through February 28, 2003." The Company has filed comments.

---

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. Non-utility revenue is recognized
when services are performed or upon the sale of assets. 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.

FERC
ACCOUNTING
         Puget Energy's regulated subsidiary, PSE, prepares its financial
statements in accordance with Generally Accepted Accounting Principles and in
conformity with FERC's uniform system of accounts. The Washington Commission
also requires PSE to use FERC's uniform system of accounts.

COST
BASED REGULATION
         Puget Energy's regulated subsidiary, PSE, is subject to
regulation 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 $483.7 million
as of December 31, 2002.

DERIVATIVES
        Puget Energy uses derivative financial instruments primarily to manage its
commodity price risks. Derivative financial instruments are accounted for under
Statement of Financial Accounting Standards (SFAS) No. 133 - "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138.
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, Puget 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.
The Company believes that the risk of non-performance by its counterparties is remote.

---

DEFINED
PENSION PLAN
         Puget Energy has a qualified defined benefit plan covering
substantially all employees of PSE. For 2002, 2001 and 2000 qualified pension
income of $17.7 million, $20.0 million and $16.6 million, respectively, has been
recorded in the financial statements. 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 $9.6 million in 2003 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 2002, PSE transitioned 462 service jobs that had previously been
held by PSE employees to outside service providers. Under SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," PSE recorded a curtailment loss of approximately $0.3
million.

CALIFORNIA
INDEPENDENT SYSTEM OPERATOR RESERVE
         PSE operates within the western wholesale
market and has made sales into the California energy market. During the first quarter
of 2001, PSE received partial payments for sales made in the fourth quarter of
2000. At December 31, 2000, PSE's receivables from the CAISO and other
counter-parties, net of reserves, were $41.8 million. At December 31, 2002, such
receivables, net of reserves, were approximately $25.4 million. The Company
calculated the reserve based upon estimated credit quality and collection from the
CAISO at December 31, 2002. See "Proceedings Related to the Western Power Market"
under Management's Discussion and Analysis of Financial Condition and Results of
Operation for further discussion.

NEW
ACCOUNTING PRONOUNCEMENTS
         In January 2003, Financial Accounting Standards
Board issued Interpretation No. 46 - "Consolidation of Variable Interest
Entities" (FIN 46). FIN 46 clarifies 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. 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 is in the process
of determining the impacts of this Interpretation.
         On January 1, 2002, SFAS No.
142, "Goodwill and Other Intangible Assets" became effective and as a result, Puget
Energy ceased amortization of goodwill associated with the InfrastruX business. During
2001, Puget Energy had approximately $2.8 million of goodwill amortization. Puget
Energy performed an initial impairment review of goodwill and will perform an annual
impairment review thereafter. The initial review was completed during the first half
of 2002, and did not result in an impairment charge. Puget Energy then performed its
annual impairment review as of October 31, 2002 and determined that its goodwill was
not impaired.
         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 will adopt
the new rules on asset retirement obligations on January 1, 2003. Application of the
new rules is not expected to result in a material increase in net property, plant and
equipment or expense.

---

The Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF or Task Force) at its June 2002 meeting came to a
consensus on one of three items included in EITF Issue 02-3 "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-3).
The Task Force has agreed that all mark-to-market gains and losses on energy
trading contracts whether realized or unrealized will be shown net in the income
statement (costs offset against revenues), irrespective of whether the contract is
physically settled. The presentation will be applicable to financial statements
for periods ending after July 15, 2002. The Company performs risk management
activities to optimize the value of energy supply and transmission assets and to
ensure that physical energy supply is available to meet the customer demand loads.
The Company also purchases energy when demand exceeds available supplies in its
portfolio; likewise the Company makes sales to other utilities and marketers when
surplus energy is available. These transactions are part of the Company's normal
operations to meet retail load. The Company has reclassified all settled
transactions that meet the definition of optimization (trading transactions
that optimize hydro resources, and purchases and sales between trading points) net in
the income statement to conform to the new presentation required under EITF 02-3.
The Company previously reported these transactions when settled in a gross manner
in the income statement in electric operating revenue and purchased electricity
expense. Unrealized gains or losses on derivative instruments that are required to
be marked-to-market remain reflected in unrealized (gain) loss on derivative
instruments on Puget Energy's and PSE's income statement as required by SFAS
No. 133. The adoption of EITF 02-3 does not have any impact on the previously
reported net income of the Company. The following optimization transactions were
recorded in electric operating revenue:

|                                                |  |  |  
|----------------------------------------------- |  |  | -
|Years Ended December 31; (Dollars in thousands) |  |  |  
|                                                |  |  |  
|Optimization sales                              |  |  | $
|Optimization purchases                          |  |  |  
|                                                |  |  |  
|Net margin on optimization transactions         |  |  | $
|                                                |  |  |  

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 customers with its wholesale portfolio of owned and contracted
resources does expose the Company to some volumetric and commodity price risks. 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:

| |       |                                                                                                                    
| | ----- | -------------------------------------------------------------------------------------------------------------------
| | (i)   | Ensure that physical energy supplies are available to serve
retail customer requirements;                          
| | (ii)  | Manage portfolio risks to limit undesired impacts on
the Companys financial results and to stabilize earnings; and
| | (iii) | Optimize 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 protect against unwanted
risk exposure. The second priority is to fully 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. Still other
hedges are structured similarly to insurance instruments, where PSE pays an insurance
premium to protect against certain extreme conditions. 
        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 tariff and variable prices. Costs
associated with ownership and operation of production facilities are another component of
this risk. The Company may use forward delivery agreements, swaps and option contracts 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 use of forward price instruments.

---

Transactions
that qualify as hedge transactions under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, 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.
        At
December 31, 2002, the Company had an after-tax net liability of approximately $7.5
million of energy contracts designated as qualifying cash flow hedges and a corresponding
unrealized gain amount in other comprehensive income. The Company also had energy
contracts that were marked-to-market through current earnings for 2002 of $7.5 million
after-tax. 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 reduce current earnings for those contracts marked-to-market
in earnings by an immaterial amount. In addition, the Company believes its PCA and the PGA
mechanism mitigate a portion of this risk. 
        Market
risk is managed subject to parameters established by the Board of Directors. The Company
has established a Risk Management Committee composed of Company officers that monitors
compliance with the Companys policies and procedures. In addition, the Audit
Committee of the Companys Board of Directors has oversight of the Risk Management
Committee.

        The
fair value of energy contracts that are recorded in the balance sheet of the Company are
comprised of the following (net of tax):

|                                                         | 
|-------------------------------------------------------- | 
|Derivative Contracts (Dollars in millions)               | 
|                                                        
|Fair value of contracts outstanding December 31, 2001    | 
|Contracts realized or otherwise settled during 2002      | 
|Changes in fair values of derivatives                    | 
|                                                        
|Fair value of contracts outstanding at December 31, 2002 | 

|                                                   | Fair Value of Contracts with Settlement During Year
|-------------------------------------------------- | ---------------------------------------------------
|Source of Fair Value (Dollars in millions)         | 2003                                               
|Prices based on models and other valuation methods |                                                    

Short-term
derivative contracts for the purchase and sale of electricity are valued based upon daily
quoted prices from an independent energy brokerage service. Values for short-term and
medium-term natural gas swap contracts are derived from a combination of quotes from
several independent energy brokers and are updated daily. Long-term gas swap contracts are
valued based on published pricing from a combination of independent brokerage services and
are updated monthly. Option contracts are valued using a modified Black-Scholes model
approach. 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 does utilize bank borrowings,
commercial paper and line of credit facilities 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 and did not have
any swap instruments outstanding as of December 31, 2002 or 2001. The carrying amounts and
fair values of Puget Energys fixed-rate debt instruments are:

|                       |  |                    |               |                   
|---------------------- |  | ------------------ | ------------- | ------------------
|(Dollars in millions)  |  | 2002CARRYINGAMOUNT | 2002FAIRVALUE | 2001CARRYINGAMOUNT
|                      
|Financial liabilities: | 
|Short-term debt        |  | $         47       | .3            | $         47      
|Long-term debt         |  | 2,223              | .0            | 2,381             
|                      

---

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See
index

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

None.

PART III

The information
required by Part III with respect to Puget Energy is incorporated herein by reference to
Puget Energys proxy statement for its 2003 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.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The
information required by this item with respect to PSE is incorporated herein by reference
to the material under Election of Directors and Security Ownership of
Directors and Executive Officers  Section 16(a) Beneficial Ownership Reporting
Compliance in Puget Energys proxy statement for its 2003 Annual Meeting of
Shareholders (Commission File No. 1-16305), which is filed as Exhibit 99.3 to this report.
Reference is also made to the information regarding PSEs executive officers set
forth in Part I of this report.

ITEM 11. EXECUTIVE
COMPENSATION

The
information required by this item with respect to PSE is incorporated herein by reference
to the material under Structure and Compensation of Board of DirectorsDirector
Compensation, Executive Compensation and Employment Contracts,
Termination of Employment and Change-In-Control Arrangements in Puget Energys
proxy statement for its 2003 Annual Meeting of Shareholders (Commission File No. 1-16305),
which is filed as Exhibit 99.3 to this report.

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 our 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, 2002.

---

|                                                             |                                                                                                                                                                                                                                                                                                                                                                    |     |                                                                                                                                                                                                                                                                                                                                                    |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |           |       
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ------
|                                                             | (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 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 1,322,051 | (2)(3)
|Equity compensation plans not    aproved by security holders | 260,000                                                                                                                                                                                                                                                                                                                                                            | (1) |                                                                                                                                                                                                                                                                                                                                                    | $22.51 | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 56,967    | (4)(5)
|Total                                                        | 300,000                                                                                                                                                                                                                                                                                                                                                            |     |                                                                                                                                                                                                                                                                                                                                                    | $22.51 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 1,379,018 |       

---

|(1) |  | 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 17,960 shares of Puget Energy common stock and have a weighted-average exercise
price of $19.26 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes
298,602 shares remaining available for purchase under Puget           Energys
Employee Stock Purchase Plan.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
1,023,449 shares available under Puget Energys Amended and           Restated 1995
Long-Term Incentive Plan, Puget Energy may also grant stock           awards, performance
awards and other stock-based awards. Includes 571,719 share           grants of
performance awards at the target level.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
56,967 shares available for issuance under Puget Energys           Non-employee
Director Stock Plan (Director Stock Plan). The Director Stock Plan           provides for
automatic stock payments to each of Puget Energys           non-employee directors.
Each non-employee director who is a non-employee           director at any time during a
calendar year receives a stock payment as a           portion of the quarterly retainer
paid to such director. Effective January 1,           2003, the number of shares that
will be issued to each non-employee director as           a stock payment under the
Director Stock Plan is determined by dividing between           50% and 100% (depending
on participants election) 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, except that 100%
of the quarterly retainer will be paid to a director           as a stock payment until
the director owns that number of shares determined by           dividing an amount equal
to the value of two years of quarterly retainers (based           on the amount of the
quarterly retainer that is being paid for that fiscal           quarter) by the fair
market value of Puget Energys common stock on the           last business day of
that fiscal quarter. Prior to January 1, 2003, the number           of shares that were
issued to each non-employee director as a stock payment           under the Director
Stock Plan was determined by dividing 40% 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Does
not include shares of Puget Energy common stock which may be issued in
          connection with cash amounts deferred into a stock fund measurement fund under
          PSEs Deferred Compensation Plan for Key Employees or Deferred
Compensation           Plan for Non-employee Directors.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SUMMARY OF EQUITY
COMPENSATION PLANS NOT APPROVED BY SHAREHOLDERS

Non-Plan GrantsOn
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, 2002, 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, 2002, 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. 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) within 90 days of the filing date of 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 controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

---

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
|-- |  | --------------------------------------------------

|2) |  | Exhibits
 see index
|-- |  | --------------------

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

|1) |  | Form
8-K filed by Puget Energy on October 17, 2002  Item 5 Other Events,
               related to Puget Energys third-quarter results of operation.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|2) |  | Form
8-K filed by Puget Energy on November 1, 2002  Item 5 Other Events,
               related to Puget Energy filing of exhibits to the Registration Statement
               relating to the public offering 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 10, 2003                 |  | Date:  March 10, 2003                

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. Bieghle      |  | Chairman of the Board                                     |  | March 7, 2003
|(Douglas P. Bieghle)        |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Stephen P. Reynolds     |  | President, Chief Executive Officer and Director           |  |              
|(Stephen P. Reynolds)       |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Stephen A. McKeon       |  | Senior Vice President Finance and Chief Financial Officer |  |              
|(Stephen A. McKeon)         |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/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/ Tomio Moriguchi         |  | Director                                                  |  |              
|(Tomio Moriguchi)           |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Dr. Kenneth P. Mortimer |  | Director                                                  |  |              
|(Dr. Kenneth P. Mortimer)   |  |                                                           |  |              
|                            |  |                                                           |  |              
|                            |  |                                                           |  |              
|/s/ Sally G. Narodick       |  | Director                                                  |  |              
|Sally G. Narodick           |  |                                                           |  |              

---

# CERTIFICATIONS OF
PUGET ENERGY

I, Stephen P. Reynolds, certify that:

|1. | I
have reviewed this annual report on Form 10-K of Puget Energy;
|-- | ----------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement           of a
material fact or omit to state a material fact necessary to make the           statements
made, in light of the circumstances under which such statements were           made, not
misleading with respect to the period covered by this annual report;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated
subsidiaries,                is made known to us by others within those entities,
particularly during the                period in which this annual report is being
prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this           annual
report whether or not there were significant changes in internal controls           or in
other factors that could significantly affect internal controls subsequent           to
the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 10, 2003

| |                                      
| | -------------------------------------
| | /s/ Stephen P. Reynolds              
| | Stephen P. Reynolds                  
| | President and Chief Executive Officer

---

I, Stephen A. McKeon, certify that:

|1. | I
have reviewed this annual report on Form 10-K of Puget Energy;
|-- | ----------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement           of a
material fact or omit to state a material fact necessary to make the           statements
made, in light of the circumstances under which such statements were           made, not
misleading with respect to the period covered by this annual report;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated
subsidiaries,                is made known to us by others within those entities,
particularly during the                period in which this annual report is being
prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this           annual
report whether or not there were significant changes in internal controls           or in
other factors that could significantly affect internal controls subsequent           to
the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 10, 2003

| |                                                        
| | -------------------------------------------------------
| | /s/ Stephen A. McKeon                                  
| | Stephen A. McKeon                                      
| | Sr. Vice President Finance and  Chief Financial Officer

---

# CERTIFICATIONS OF
PUGET SOUND ENERGY

I, Stephen P. Reynolds, certify that:

|1. | I
have reviewed this annual report on Form 10-K of Puget Sound Energy;
|-- | ----------------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement           of a
material fact or omit to state a material fact necessary to make the           statements
made, in light of the circumstances under which such statements were           made, not
misleading with respect to the period covered by this annual report;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated
subsidiaries,                is made known to us by others within those entities,
particularly during the                period in which this annual report is being
prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this           annual
report whether or not there were significant changes in internal controls           or in
other factors that could significantly affect internal controls subsequent           to
the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 10, 2003

| |                                      
| | -------------------------------------
| | /s/ Stephen P. Reynolds              
| | Stephen P. Reynolds                  
| | President and Chief Executive Officer

---

I, Stephen A. McKeon, certify that:

|1. | I
have reviewed this annual report on Form 10-K of Puget Sound Energy;
|-- | ----------------------------------------------------------------------

|2. | Based
on my knowledge, this annual report does not contain any untrue statement           of a
material fact or omit to state a material fact necessary to make the           statements
made, in light of the circumstances under which such statements were           made, not
misleading with respect to the period covered by this annual report;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based
on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated
subsidiaries,                is made known to us by others within those entities,
particularly during the                period in which this annual report is being
prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this
annual                report (the Evaluation Date); and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the
Evaluation                Date;
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent function):
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | all
significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record,
process,                summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls;
and
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls;
and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
registrants other certifying officers and I have indicated in this           annual
report whether or not there were significant changes in internal controls           or in
other factors that could significantly affect internal controls subsequent           to
the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 10, 2003

| |                                                        
| | -------------------------------------------------------
| | /s/ Stephen A. McKeon                                  
| | Stephen A. McKeon                                      
| | Sr. Vice President Finance and  Chief Financial Officer

---

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

---

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Puget Energy,
Inc.:

In
our opinion, the consolidated financial statements listed on page 57 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, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed on page 100
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 17 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.

PricewaterhouseCoopers LLP 
Seattle, Washington 
February 12, 2003

To the Shareholder of Puget Sound
Energy, Inc.:

In
our opinion, the consolidated financial statements listed on page 57 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, 2002 and 2001, and the results of
its operations and its cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed on page
100 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 17 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.

PricewaterhouseCoopers LLP 
Seattle, Washington
February 12, 2003

---

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, 2002, 2001 and 2000
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
Balance Sheets, December 31, 2002 and 2001
| | -------------------------------------------------------

| | Consolidated
Statements of Capitalization, December 31, 2002 and 2001
| | ---------------------------------------------------------------------

| | Consolidated
Statements of Common Shareholders' Equity

           for the years ended December 31, 2002, 2001 and 2000
| | -----------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Comprehensive Income for the years 
            ended December 31, 2002, 2001 and 2000
| | -----------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows for the years
          ended December 31, 2002, 2001 and 2000
| | ----------------------------------------------------------------------------------------------------

| | PUGET
SOUND ENERGY:
        Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000
| | ------------------------------------------------------------------------------------------------------------------

| | Consolidated
Balance Sheets, December 31, 2002 and 2001
| | -------------------------------------------------------

| | Consolidated
Statements of Capitalization, December 31, 2002 and 2001
| | ---------------------------------------------------------------------

| | Consolidated
Statements of Common Shareholders' Equity
          for the years ended December 31, 2002, 2001 and 2000
| | ---------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Comprehensive Income for the years
           ended December 31, 2002, 2001 and 2000
| | ---------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows for the years 
          ended December 31, 2002, 2001 and 2000
| | -----------------------------------------------------------------------------------------------------

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

| | Schedule:
| | ---------

|II. |  | Valuation
and Qualifying Accounts and Reserves for the years ended December 31, 2002, 2001 and 2000
|--- |  | ---------------------------------------------------------------------------------------------------

| | 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 | 2002 | 2001 | 2000
|--------------------------------------------------------------------------- | ---- | ---- | ----
|Operating revenues:                                                         |      |      |     
|Electric                                                                    |      |      | $   
|Gas                                                                         |      |      |     
|Other                                                                       |      |      |     
|                                                                           
|Total operating revenues                                                    |      |      |     
|                                                                           
|Operating expenses:                                                         |      |     
|Energy costs:                                                               |      |     
|Purchased electricity                                                       |      |      |     
|Residential exchange                                                        |      |      |     
|Purchased gas                                                               |      |      |     
|Fuel                                                                        |      |      |     
|Unrealized gain 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                                                            |      |      |     
|                                                                           
|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 and diluted earnings per common share before                          |      |     
|cumulative effect of accounting change                                      |      |      | $   
|Basic and diluted for cumulative effect of accounting change                |      |      |     
|                                                                           
|Basic and 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                         | 2002 | 2001
|------------------------------------------------------------ | ---- | ----
|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                                            |      |     
|Purchased gas receivable                                     |      |     
|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                    |      |     
|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                         | 2002 | 2001
|------------------------------------------------------------ | ---- | ----
|Capitalization:                                              |      |     
|(See Consolidated Statements of Capitalization):             |      |     
|Common equity                                                |      |     
|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                   |      |     
|Long-term debt                                               |      |     
|                                                            
|Total capitalization                                         |      |     
|                                                            
|Minority interest in consolidated subsidiary                 |      |     
|                                                            
|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                                        |      |     
|Unrealized loss on derivative instruments                    |      |     
|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 Energy Consolidated Statements of

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

|                                                                                 |  | 
|-------------------------------------------------------------------------------- |  | 
|(Dollars in thousands)                                                           |  | 
|AT DECEMBER 31                                                                   |  | 
|                                                                                
|Common equity:                                                                   |  | 
|Common stock $0.01 par value, 250,000,000 shares authorized, 93,642,659          |  | 
|and 87,023,210 shares outstanding at December 31, 2002 and 2001                  |  | 
|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 and outstanding                      |  | 
|                                                                                
|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,         14,808 shares outstanding      |  | 
|4.70% series - 150,000 shares authorized,                                        |  | 
|4,311 shares outstanding                                                         |  | 
|7.75% series - 750,000 shares authorized,                                        |  | 
|412,500 and 487,500 shares outstanding                                           |  | 
|                                                                                
|Total preferred stock subject to mandatory redemption                            |  | 
|                                                                                
|Corporation obligated, mandatorily redeemable preferred                          |  | 
|securities of subsidiary trust holding solely junior                             |  | 
|subordinated debentures of the corporation                                       |  | 
|                                                                                
|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                                          |  | 
|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 |                 | AccumulatedOther  |                     
|------------------------------------------------------------------- | ------------ | ---------- | --------------- | ----------------- | --------------------
|(Dollars in thousands)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 | Shares       | Amount     | Paid-in
Capital | Retained
Earnings | Comprehensive
Income
|Balance at December 31, 1999                                        |              |            |                 | 84,922,405        |                     
|Net income                                                          |              |            |                 | --                |                     
|Preferred stock dividend declared                                   |              |            |                 | --                |                     
|Loss on preferred stock redemptions                                 |              |            |                 | --                |                     
|Common stock dividend declared                                      |              |            |                 | --                |                     
|Common stock issued on dividend reinvestment                        |              |            |                 | 981,549           |                     
|plan                                                                |              |           
|Other                                                               |              |            |                 | (163              | )                   
|Other 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                        |              |            |                 | 1,119,568         |                     
|plan                                                                |              |           
|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        |                     
|                                                                   

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                     | 2002 | 2001 | 2000
|--------------------------------------------------------------------- | ---- | ---- | ----
|Net income                                                            |      |      | $   
|                                                                     
|Other comprehensive income, net of tax:                               |      |     
|Unrealized holding losses on marketable securities during the period  |      |      |     
|Reclassification adjustment for realized gains on marketable          |      |      |     
|securities included in net income                                     |      |      |     
|Foreign currency translation adjustment                               |      |      |     
|Minimum pension liability adjustment                                  |      |      |     
|Transition adjustment for unrealized gain on derivative instruments   |      |      |     
|as of January 1, 2001                                                 |      |     
|Unrealized gains (losses) on derivative instruments during the period |      |      |     
|Reversal of unrealized (gains) losses on derivative instruments       |      |      |     
|settled during the period                                             |      |     
|                                                                     
|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         | 2002 | 2001 | 2000
|--------------------------------------------------------- | ---- | ---- | ----
|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 instruments   |      |      |     
|Other (including conservation amortization)               |      |      |     
|Cash collateral received from energy supplier             |      |      |     
|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 expenditures - excluding equity AFUDC        |      |      |     
|Additions to other property, plant and equipment          |      |      |     
|Energy conservation expenditures                          |      |      |     
|Restricted cash                                           |      |      |     
|Proceeds from sale of investment in Cabot preferred stock |      |      |     
|Proceeds from sale of Centralia plant                     |      |      |     
|Proceeds from sale of securities                          |      |      |     
|Investments by InfrastruX                                 |      |      |     
|Repayment from/(loans to) 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                         |      |      |     
|Redemption of preferred stock                             |      |      |     
|Issuance of bonds and long-term debt                      |      |      |     
|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                     | 2002 | 2001 | 2000
|--------------------------------------------------------------------- | ---- | ---- | ----
|Operating revenues:                                                   |      |      |     
|Electric                                                              |      |      | $   
|Gas                                                                   |      |      |     
|Other                                                                 |      |      |     
|                                                                     
|Total operating revenues                                              |      |      |     
|                                                                     
|Operating expenses:                                                   |      |     
|Energy costs:                                                         |      |     
|Purchased electricity                                                 |      |      |     
|Residential exchange                                                  |      |      |     
|Purchased gas                                                         |      |      |     
|Fuel                                                                  |      |      |     
|Unrealized gain 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                                                      |      |      |     
|                                                                     
|Total interest charges                                                |      |      |     
|                                                                     
|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                                               |      |      | $   
|                                                                     

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                         | 2002 | 2001
|------------------------------------------------------------ | ---- | ----
|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 accounts  |      |     
|Unbilled revenues                                            |      |     
|Purchased gas receivable                                     |      |     
|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                    |      |     
|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                         | 2002 | 2001
|------------------------------------------------------------ | ---- | ----
|Capitalization:                                              |      |     
|(See Consolidated Statements of Capitalization):             |      |     
|Common equity                                                |      |     
|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                   |      |     
|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                                        |      |     
|Unrealized loss on derivative instruments                    |      |     
|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                          | 2002 | 2001
|------------------------------------------------------------- | ---- | ----
|Common equity:                                                |      |     
|Common stock ($10 stated value) - 15,000,000 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 and outstanding |      |     
|                                                             
|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,                     |      |     
|14,808 shares outstanding                                     |      |     
|4.70% series - 150,000 shares authorized,                     |      |     
|4,311 shares outstanding                                      |      |     
|7.75% series - 750,000 shares authorized, 412,500 and 487,500 |      |     
|shares outstanding                                            |      |     
|                                                             
|Total preferred stock subject to mandatory redemption         |      |     
|                                                             
|Corporation obligated, mandatorily redeemable preferred       |      |     
|securities of subsidiary trust holding solely junior          |      |     
|subordinated debentures of the corporation                    |      |     
|                                                             
|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                       |      |     
|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 |                 | AccumulatedOther  |                     
|------------------------------------------------------------------- | ------------ | ---------- | --------------- | ----------------- | --------------------
|(Dollars in thousands)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 | Shares       | Amount     | Paid-in
Capital | Retained
Earnings | Comprehensive
Income
|Balance at December 31, 1999                                        |              |            |                 | 84,922,405        |                     
|Net income                                                          |              |            |                 | --                |                     
|Preferred stock dividend declared                                   |              |            |                 | --                |                     
|Loss on preferred stock redemptions                                 |              |            |                 | --                |                     
|Common stock dividend declared                                      |              |            |                 | --                |                     
|Common stock issued on dividend reinvestment                        |              |            |                 | 981,549           |                     
|plan                                                                |              |           
|Other                                                               |              |            |                 | (163              | )                   
|Other 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 Energy                               |              |            |                 | --                |                     
|Other                                                               |              |            |                 | --                |                     
|Other comprehensive income                                          |              |            |                 | --                |                     
|                                                                   
|Balance at December 31, 2002                                        |              |            |                 | 85,903,791        |                     
|                                                                   

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

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

|(Dollars in thousands)FOR YEARS ENDED DECEMBER 31                    | 2002 | 2001 | 2000
|-------------------------------------------------------------------- | ---- | ---- | ----
|Net income                                                           |      |      | $   
|                                                                    
|Other comprehensive income, net of tax:                              |      |     
|Unrealized holding losses on marketable securities during the period |      |      |     
|Reclassification adjustment for realized gains on marketable         |      |      |     
|securities included in net income                                    |      |     
|Minimum pension liability adjustment                                 |      |      |     
|Transition adjustment  for unrealized gain on derivative             |      |      |     
|instruments at January 1, 2001                                       |      |     
|Unrealized gains (losses) on derivative instruments during the       |      |      |     
|period                                                               |      |     
|Reversal of unrealized (gains) losses on derivative instruments      |      |      |     
|settled during the period                                            |      |     
|                                                                    
|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         | 2002 | 2001 | 2000
|--------------------------------------------------------- | ---- | ---- | ----
|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 instruments   |      |      |     
|Other (including conservation amortization)               |      |      |     
|Cash collateral received from energy supplier             |      |      |     
|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 investment in Cabot preferred stock |      |      |     
|Proceeds from sale of Centralia plant                     |      |      |     
|Proceeds from sale of securities                          |      |      |     
|Investments by InfrastruX                                 |      |      |     
|Repayment from/(loans to) Schlumberger                    |      |      |     
|Other                                                     |      |      |     
|                                                         
|Net cash used by investing activities                     |      |      |     
|                                                         
|Financing activities:                                     |      |     
|Increase (decrease) in short-term debt - net              |      |      |     
|Dividends paid                                            |      |      |     
|Issuance of bonds                                         |      |      |     
|Issuance of trust preferred stock                         |      |      |     
|Redemption of 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), a Washington corporation. 

        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. The Annual
Reports on Form 10-K and Quarterly Reports on Form 10-Q are available at the Securities
and Exchange Commission website at www.sec.gov or at Puget Energys website at
www.pse.com.

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 and 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 together with removal cost, less salvage, is
charged to accumulated depreciation 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 the 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 2002, 3.0% in 2001 and 2.9% in 2000; depreciable gas utility plant was 3.3% in 2002,
3.5% in 2001 and 3.3% in 2000; and depreciable common utility plant was 4.3% in 2002, 3.1%
in 2001 and 1.9% in 2000. 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.

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 both
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, 2002 and 2001, included the following:

|(Dollars in millions)                              | REMAININGAMORTIZATIONPERIOD | 2002 | 2001         
|-------------------------------------------------- | --------------------------- | ---- | -------------
|Deferred income taxes                              |                             |      |              
|PURPA electric energy supply contract buyout costs |                             |      | 6 to 9 years 
|Investment in BEP exchange contract                |                             |      | 14 years     
|Unamortized energy conservation charges            |                             |      | 1 to 3 years 
|Storm damage costs - electric                      |                             |      | 4 years      
|Purchased gas receivable/(payable)                 |                             |      | 1 year       
|Deferred AFUDC                                     |                             |      | 30 years     
|Environmental remediation                          |                             |      |              
|Various other regulatory assets                    |                             |      | 1 to 21 years
|Deferred gains on property sales                   |                             |      | 3 years      
|Various other regulatory liabilities               |                             |      | 1 to 17 years
|                                                  
|Net regulatory assets and liabilities              |                             |      |              
|                                                  

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. 

        The
Company, in prior years, incurred costs associated with its 5% interest in a
now-terminated nuclear generating project (identified herein as Investment in Bonneville
Exchange Power (BEP)). Under terms of a settlement agreement with the Bonneville Power
Administration (BPA), which settled claims of the Company relating to construction delays
associated with that project, the Company is receiving power from the federal power system
resources marketed by BPA. The Companys remaining investment in BEP is included in
rate base and amortized on a straight-line basis over the life of the settlement agreement
(amortization is included in purchased electricity expense). The Company has
regulatory assets of approximately $243.6 million related to the buyout of purchased power
and gas sales contracts of two non-utility generation projects. Washington Commission
accounting orders have approved payments pursuant to these contracts for deferral and
collection in rates over the remaining life of the energy supply contracts.

---

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 and 2000. The allowed AFUDC rate on electric
utility plant was 8.76% beginning July 1, 2002 and 8.94% in 2001 and 2000. 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 $2.6
million for 2002, $2.7 million for 2001 and $2.8 million for 2000. 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 2002 and 2001 was $45.4 million and $47.0 million, respectively. PSEs allowance
for doubtful accounts for 2002 and 2001 was $43.5 million and $45.2 million, respectively.

RESTRICTED CASH 
        Restricted
cash represents cash to be used for specific purposes. Approximately $17.8 million in
restricted cash was received from BPA under the amended Residential Purchase and Sale
Agreement for residential and small farm customers who receive a credit on their bills for
the Residential and Farm Energy Exchange credit tariff. The restricted amount is the
excess paid by the BPA over the credit provided to these customers. All funds received
will be credited to these customers in the future. Approximately $1.1 million in
restricted cash was 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.

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, industrial accidents and
catastrophic property losses. 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 MECHANISM 
        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 power cost adjustment 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. 
        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.

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, net of transactional costs, from such activities 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 does not reflect sales revenue or
associated cost of sales for these transactions in its income statement.

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:

|(i) |  | Ensure
that physical energy supplies are available to serve retail customer
          requirements;
|--- |  | ---------------------------------------------------------------------------------------------------

|(ii) |  | Manage
portfolio risks to limit undesired impacts on           financial results; and
|---- |  | -------------------------------------------------------------------------------------

|(iii) |  | Optimize
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 Accounting for Derivative Instruments and Hedging Activities as
amended by SFAS No. 138. (See Note 17 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 
        On
January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133
requires that all contracts considered to be derivative instruments be recorded on the
balance sheet at their fair value. Certain contracts that would otherwise be considered
derivatives are exempt from this SFAS 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 when the transaction that they are hedging is recorded
as income. The Company designates derivative instruments 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, 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. Finally, 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.

STOCK-BASED COMPENSATION 
        The
Company has various stock compensation plans, which are described more fully in Note 14.
As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for the plans according to APB No. 25, Accounting for Stock Issued
to Employees, and related interpretations. The exercise price of stock options
granted was the market value of the stock on the date of grant, so no compensation expense
was recorded in the income statement for the options. There was, however, compensation
expense related to other stock compensation plans. Had the Company used the fair value
method of accounting specified by SFAS No. 123, net income and earnings per share would
have been as follows:

|Years Ended December 31; (Dollars in thousands, except per share) | 2002 | 2001 | 2000
|----------------------------------------------------------------- | ---- | ---- | ----
|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 123, net of tax                         |      |      |     
|                                                                 
|Pro forma income for common stock                                 |      |      | $   
|                                                                 
|Earnings per share:                                               |      |     
|Basic and diluted as reported                                     |      |      | $   
|Basic pro forma                                                   |      |      | $   
|Diluted pro forma                                                 |      |      | $   

DEBT RELATED COSTS 
        Debt
premium, discount 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) 
        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 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 are the result of InfrastruX acquiring companies during
2000 through 2002.

---

EARNINGS PER COMMON SHARE (PUGET ENERGY ONLY) 
        Basic
earnings per common share has been computed based on weighted average common shares
outstanding of 88,372,000, 86,445,000, and 85,411,000 for 2002, 2001 and 2000,
respectively. Diluted earnings per common share has been computed based on weighted
average common shares outstanding of 88,777,000, 86,703,000, and 85,690,000 for 2002, 2001
and 2000 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 $150.0 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, 2002, there were no
borrowings outstanding under the receivable securitization program.

NEW ACCOUNTING PRONOUNCEMENTS 
        In
January 2003, the Financial Accounting Standards Board issued Interpretation No. 46
 Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies
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. 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 is in the process of
determining the impacts of this Interpretation. 
        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. Puget Energy then performed its annual impairment review
as of October 31, 2002 and determined that its goodwill was not impaired. 
        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 will adopt the new rules on asset retirement obligations on January 1,
2003. Application of the new rules is not expected to result in a material increase in net
property, plant and equipment or expense.

---

The
Emerging Issues Task Force of the Financial Accounting Standards Board (EITF or Task
Force) at its June 2002 meeting came to a consensus on one of three items included in EITF
Issue 02-3 Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF 02-3). The Task Force has agreed that all mark-to-market gains and
losses on energy trading contracts whether realized or unrealized will be shown net in the
income statement (costs offset against revenues), irrespective of whether the contract is
physically settled. The presentation is applicable to financial statements for periods
ending after July 15, 2002. The Company performs risk management activities to optimize
the value of energy supply and transmission assets and to ensure that physical energy
supply is available to meet the customer demand loads. The Company also purchases energy
when demand exceeds available supplies in its portfolio; likewise the Company makes sales
to other utilities and marketers when surplus energy is available. These transactions are
part of the Companys normal operations to meet retail load. The Company has
reclassified all settled transactions that meet the definition of optimization (trading
transactions that optimize hydro resources, and purchases and sales between trading
points) net in the income statement to conform to the new presentation required under EITF
02-3. The Company previously reported these transactions when settled in a gross manner in
the income statement in electric operating revenue and purchased electricity expense.
Unrealized gains or losses on derivative instruments that are required to be
marked-to-market remain reflected in unrealized (gain) loss on derivative instruments on
Puget Energys and PSEs income statement as required by SFAS No. 133. The
adoption of EITF 02-3 does not have any impact on the previously reported net income of
the Company. The following optimization transactions were recorded in electric operating
revenue:

|Years Ended December 31; (Dollars in thousands) | 2002 | 2001 | 2000
|----------------------------------------------- | ---- | ---- | ----
|Optimization sales                              |      |      | $   
|Optimization purchases                          |      |      |     
|                                                |     
|Net margin on optimization transactions         |      |      | $   
|                                                |     

NOTE 2.
          Utility and Non-Utility Plant

Utility
plant at December 31, 2002 and 2001 included the following:

|(Dollars in thousands)At December 31                 | 2002 | 2001
|---------------------------------------------------- | ---- | ----
|Electric, gas and common utility plant classified by |      |     
|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                                |      |     
|Plant held for future use                            |      |     
|Other                                                |      |     
|Less accumulated provision for depreciation          |      |     
|                                                    
|Net utility plant                                    |      |     
|                                                    

---

Non-utility
plant and intangibles at December 31, 2002 and 2001 included the following:

|(Dollars in thousands)At December 31           | 2002 | 2001
|---------------------------------------------- | ---- | ----
|Non-utility plant                              |      |     
|Intangibles                                    |      |     
|Less accumulated depreciation and amortization |      |     
|                                              
|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.

NOTE 3.
          Preferred Stock

|                                                  | PREFERRED STOCK                               
|------------------------------------------------- | ----------------------------------------------
|                                                  | NOT SUBJECT TOMANDATORYREDEMPTION$25 PAR VALUE
|Shares outstanding December 31, 1999              | 2,400,000                                     
|Acquired for sinking fund:                        |                                               
|2000                                              | --                                            
|2001                                              | --                                            
|2002                                              | --                                            
|Called for redemption or reacquired and canceled: |                                               
|2000                                              | --                                            
|2001                                              |                                               
|2002                                              | --                                            
|Shares outstanding December 31, 2002              | 2,400,000                                     

See Consolidated Statements of
Capitalization for details on specific series.

The
$25 par value 7.45% Series Preferred stock not subject to mandatory redemption may be
redeemed at par on or after November 1, 2003.

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. At December 31,
2002, there were 40,689 shares of the 4.70% Series and 24,192 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. The 7.75% Series may be redeemed by the Company, subject to certain
restrictions, at $102.58 per share plus accrued dividends through February 15, 2003, and
at per share amounts which decline annually to a price of $100 after February 15, 2007.

COMPANY-OBLIGATED, 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. On February 26, 2003, the Company repurchased 19,750 shares
of the 8.231% Trust Securities.

---

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 $202.7 million at December 31, 2002. 
        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, 2002 was 36.1%.

---

NOTE 6.
          Long-Term Debt

FIRST MORTGAGE BONDS AND SENIOR NOTESAT DECEMBER 31 (Dollars in thousands)

|       |      |              |           |        |      |               |              
|------ | ---- | ------------ | --------- | ------ | ---- | ------------- | -------------
|SERIES | DUE  | 2002         | 2001      | SERIES | DUE  | 2002          | 2001         
|7.07%  | 2002 | $         -- | $  27,000 | 6.51%  | 2008 | $       1,000 | $       1,000
|7.15%  | 2002 | --           | 5,000     | 6.53%  | 2008 | 3,500         | 3,500        
|7.53%  | 2002 | --           | 10,000    | 7.61%  | 2008 | 25,000        | 25,000       
|7.625% | 2002 | --           | 25,000    | 6.46%  | 2009 | 150,000       | 150,000      
|7.85%  | 2002 | --           | 30,000    | 6.61%  | 2009 | 3,000         | 3,000        
|7.91%  | 2002 | --           | 20,000    | 6.62%  | 2009 | 5,000         | 5,000        
|6.20%  | 2003 | 3,000        | 3,000     | 7.12%  | 2010 | 7,000         | 7,000        
|6.23%  | 2003 | 1,500        | 1,500     | 7.96%  | 2010 | 225,000       | 225,000      
|6.24%  | 2003 | 1,500        | 1,500     | 7.69%  | 2011 | 260,000       | 260,000      
|6.30%  | 2003 | 20,000       | 20,000    | 8.20%  | 2012 | 30,000        | 30,000       
|6.31%  | 2003 | 5,000        | 5,000     | 8.59%  | 2012 | 5,000         | 5,000        
|6.40%  | 2003 | 11,000       | 11,000    | 6.83%  | 2013 | 3,000         | 3,000        
|7.02%  | 2003 | 30,000       | 30,000    | 6.90%  | 2013 | 10,000        | 10,000       
|6.25%  | 2004 | 40,000       | --        | 7.35%  | 2015 | 10,000        | 10,000       
|6.07%  | 2004 | 10,000       | 10,000    | 7.36%  | 2015 | 2,000         | 2,000        
|6.10%  | 2004 | 8,500        | 8,500     | 6.74%  | 2018 | 200,000       | 200,000      
|7.70%  | 2004 | 50,000       | 50,000    | 9.57%  | 2020 | 25,000        | 25,000       
|7.80%  | 2004 | 30,000       | 30,000    | 8.25%  | 2022 | 25,000        | 25,000       
|6.92%  | 2005 | 11,000       | 11,000    | 8.39%  | 2022 | 7,000         | 7,000        
|6.93%  | 2005 | 20,000       | 20,000    | 8.40%  | 2022 | 3,000         | 3,000        
|6.58%  | 2006 | 10,000       | 10,000    | 7.19%  | 2023 | 3,000         | 3,000        
|8.06%  | 2006 | 46,000       | 46,000    | 7.35%  | 2024 | 55,000        | 55,000       
|8.14%  | 2006 | 25,000       | 25,000    | 7.15%  | 2025 | 15,000        | 15,000       
|7.02%  | 2007 | 20,000       | 20,000    | 7.20%  | 2025 | 2,000         | 2,000        
|7.75%  | 2007 | 100,000      | 100,000   | 7.02%  | 2027 | 300,000       | 300,000      
|7.04%  | 2007 | 5,000        | 5,000     | 7.00%  | 2029 | 100,000       | 100,000      
|8.40%  | 2007 | 10,000       | 10,000    | Total  |      | $1,932,000    | $2,009,000   

In January 2002, the Company issued
$40.0 million of First Mortgage Bonds which are due January 2004. In February 2002, 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, principal amount of Senior Notes secured by a
pledge of First Mortgage Bonds, Unsecured Debentures or Trust Preferred Securities. In
February 2003, the Company notified investors of its intent to call three series of first
mortgage bonds totaling $20 million. The Company will repay 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, 2002, the earnings
available for interest were 2.4 times the annual interest charges.

---

POLLUTION CONTROL BONDS
        The
Company has outstanding three series of Pollution Control Bonds. 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 
|                    
|1993 Series - 5.875% |  |  | 2020
|1991 Series - 7.05%  |  |  | 2021
|1991 Series - 7.25%  |  |  | 2021
|1992 Series - 6.80%  |  |  | 2022
|                    
|Total                |  |  |     
|                    

On February 19, 2003 the Board of
Directors approved the refinancing of all Pollution Control Bonds series. It is
anticipated that the refinancing of the Pollution Control Bonds will be completed in March
or April 2003.
LONG-TERM REVOLVING
CREDIT FACILITY (PUGET ENERGY ONLY)
        InfrastruX
and its subsidiaries have signed credit agreements with several banks for up to $179.8
million which expire in 2003 and 2004. Under the InfrastruX credit agreement, Puget Energy
is the guarantor of $150.0 million of the line of credit. InfrastruX has borrowed $144.0
million at a weighted average interest rate of 3.27%, leaving a balance of $35.8 million
available under the lines of credit at December 31, 2002.
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) |  | 2003    |  | 2004     |  | 2005    |  | 2006    |  | 2007     |  | Thereafter | 
|---------------------- |  | ------- |  | -------- |  | ------- |  | ------- |  | -------- |  | ---------- | 
|Maturities of:         | 
|Long-term debt         |  | $73,206 |  | $265,848 |  | $31,525 |  | $81,000 |  | $135,000 |  | $1,636,360 | 

|                  
|------------------
|PUGET SOUND ENERGY

|(Dollars in thousands) |  | 2003    |  | 2004     |  | 2005    |  | 2006    |  | 2007     |  | Thereafter | 
|---------------------- |  | ------- |  | -------- |  | ------- |  | ------- |  | -------- |  | ---------- | 
|Maturities of:         | 
|Long-term debt         |  | $72,000 |  | $138,473 |  | $31,000 |  | $81,000 |  | $135,000 |  | $1,636,360 | 

NOTE 7.
Liquidity Facilities and Other Financing Arrangements        At
December 31, 2002, PSE had short-term borrowing arrangements that included a $250 million
unsecured 364-day line of credit with various banks and a $150 million 3-year receivables
securitization program. These agreements replaced a $375 million line of credit, which
would have expired on February 13, 2003. The new 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. The receivables
securitization program allows the Company to draw against eligible receivables at a rate
equal to that of high grade commercial paper.
        In
addition, PSE has agreements with several 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, 2002 and 2001.

---

|
|
|

|                                            |  |          
|------------------------------------------- |  | ---------
|(Dollars in thousands)At December 31        |  | 2002     
|Short-term borrowings outstanding:          | 
|Commercial paper notes                      |  | $  30,340
|Bank line of credit borrowings              |  | --       
|Puget Energy bank line of credit borrowings |  | 16,955   
|Weighted average interest rate              |  | 3.21%    
|InfrastruX revolving credit facility1       |  | 179,750  
|PSE credit availability2                    |  | 250,000  
|PSE receivable securitization program       |  | 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, 2002 and 2001.

NOTE 8.

            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, 2002 and 2001:

|                      |          |       |          |      
|--------------------- | -------- | ----- | -------- | -----
|                      | 2002     | 2002  | 2001     | 2001 
|                      | CARRYING | FAIR  | CARRYING | FAIR 
|(Dollars in millions) | AMOUNT   | VALUE | AMOUNT   | VALUE

|                                                 |  |             |    |            
|------------------------------------------------ |  | ----------- | -- | -----------
|                                                
|Financial assets:                                |  |             |    |            
|Cash                                             |  | $       176 | .7 | $       176
|Restricted cash                                  |  | 18          | .9 | 18         
|Equity securities3                               |  | 10          | .4 | 10         
|Notes receivable and other                       |  | 41          | .5 | 41         
|Energy derivatives                               |  | 13          | .6 | 13         
|Financial liabilities:                           | 
|Short-term debt                                  |  | 47          | .3 | 47         
|Preferred stock subject to mandatory redemption  |  | 43          | .2 | 42         
|Corporation obligated, mandatorily redeemable    |  | 300         | .0 | 303        
|preferred securities of subsidiary trust holding |  |             |   
|solely junior subordinated debentures of the     | 
|corporation                                      | 
|Long-term debt4                                  |  | 2,223       | .0 | 2,381      
|Energy derivatives                               |  | 2           | .4 | 2          

The
fair value of outstanding bonds including current maturities is estimated based on quoted
market prices. 
        The
preferred stock subject to mandatory redemption and corporation obligated, mandatorily
redeemable preferred securities of subsidiary trust holding solely junior subordinated
debentures of the corporation is estimated based on dealer quotes.

---

|1 | The
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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Provides
liquidity support for PSE's outstanding commercial paper in the amount of $30.3 million and $338.2 million
for 2002 and 2001, respectively,
effectively reducing the available borrowing capacity under these credit lines to $219.7
million and $36.8 million, respectively.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The
2002 and 2001 carrying amount includes an adjustment of $2.4 million and $4.5 million,
respectively, to report the available-for-sale securities at market value. This amount (or
unrealized gain) has been included as a component of other comprehensive income net of
deferred taxes of $0.8 million and $1.6 million for 2002 and 2001, respectively.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | PSE's
carrying and fair value of long-term debt for 2002 was $2,093.9 million and $2,252.7
million, respectively.
|- | -----------------------------------------------------------------------------------------------------------------

---

The
carrying value 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.

NOTE 9.

            
Supplementary Income Statement Information

|(Dollars in thousands)                                  | PUGETENERGY2002 | PSE2002   | PUGETENERGY2001 | PSE2001   | PUGET ENERGYAND PSE2000
|------------------------------------------------------- | --------------- | --------- | --------------- | --------- | -----------------------
|Taxes other than income taxes:                          |                 |           |                 |           |                        
|Real estate and personal property                       |                 | $  48,890 |                 | $  48,408 |                        
|State business                                          |                 | 77,527    |                 | 77,527    |                        
|Municipal and occupational                              |                 | 67,770    |                 | 67,770    |                        
|Other                                                   |                 | 37,029    |                 | 24,463    |                        
|                                                       
|Total taxes other than income taxes                     |                 | $231,216  |                 | $218,168  |                        
|                                                       
|Charged to:                                             |                
|Operating expense                                       |                 | $215,429  |                 | $202,381  |                        
|Other accounts, including construction work in progress |                 | 15,787    |                 | 15,787    |                        
|                                                       
|Total taxes other than income taxes                     |                 | $231,216  |                 | $218,168  |                        
|                                                       

NOTE 10.

            
Leases

All
of PSEs leases are operating leases. Certain leases contain purchase options,
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
| | 2002                   |              | $26,368 |          
| | 2001                   |              | 25,373  |          
| | 2000                   |              | 18,239  |          

Payments
received for the sublease of properties were approximately $2.6 million, $2.5 million, and
$2.4 million for the years ended December 31, 2002, 2001, and 2000, 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
| | 2003                         |              | $18,208 |          
| | 2004                         |              | 14,694  |          
| | 2005                         |              | 9,065   |          
| | 2006                         |              | 7,604   |          
| | 2007                         |              | 6,998   |          
| | Thereafter                   |              | 9,497   |          
| | Total minimum lease payments |              | $66,066 |          

Future
minimum sublease receipts for non-cancelable subleases are $1 million for 2003.

NOTE 11.

            
Income Taxes
         The
details of income taxes are as follows:

|(Dollars in thousands)                 | PUGETENERGY2002 | PSE2002 | PUGETENERGY2001 | PSE2001 | PUGET ENERGYAND PSE2000
|-------------------------------------- | --------------- | ------- | --------------- | ------- | -----------------------
|Charged to operating expense:          |                 |         |                 |         |                        
|Current - federal                      |                 |         | $               | (84,149 | )                      
|Current - state                        |                 |         |                 | (774    | )                      
|Deferred - net federal                 |                 |         |                 | 144,230 |                        
|Deferred- net state                    |                 |         |                 | 614     |                        
|Deferred investment tax credits        |                 |         |                 | (661    | )                      
|                                      
|Total charged to operations            |                 |         |                 | 59,260  |                        
|                                      
|Charged to miscellaneous income:       |                 |        
|Current                                |                 |         |                 | (3,276  | )                      
|Deferred - net                         |                 |         |                 | 1,228   |                        
|                                      
|Total charged to miscellaneous income  |                 |         |                 | (2,048  | )                      
|                                      
|Cumulative effect of accounting change |                 |         |                 | --      |                        
|                                      
|Total income taxes                     |                 |         | $               | 57,212  |                        
|                                      

---

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:

|(Dollars in thousands)                                   | PUGET ENERGY2002 | PSE2002 | PUGETENERGY2001 | PSE2001 | PUGETENERGYAND PSE2000
|-------------------------------------------------------- | ---------------- | ------- | --------------- | ------- | ----------------------
|Income taxes at the statutory rate                       |                  |         | $               | 61,587  |                       
|                                                        
|Increase (decrease):                                     |                  |        
|Depreciation expense deducted in the                     |                  |        
|financial statements in excess of tax                    |                  |        
|depreciation, net of depreciation                        |                  |        
|treated as a temporary difference                        |                  |         |                 | 10,041  |                       
|AFUDC included in income in the financial                |                  |        
|statements but excluded from taxable income              |                  |         |                 | (1,387  | )                     
|Accelerated benefit on early retirement                  |                  |        
|of depreciable assets                                    |                  |         |                 | (1,469  | )                     
|Investment tax credit amortization                       |                  |         |                 | (661    | )                     
|Energy conservation expenditures - net                   |                  |         |                 | 6,259   |                       
|Tax benefit of reduced salvage values                    |                  |         |                 | (10,193 | )                     
|State income taxes net of the federal income tax benefit |                  |         |                 | (104    | )                     
|Other - net                                              |                  |         |                 | (6,861  | )                     
|                                                        
|Total income taxes                                       |                  |         | $               | 57,212  |                       
|                                                        
|Effective tax rate                                       |                  |         |                 | 32.5    | %                     
|                                                        

---

The following are the principal components of income taxes as reported:

|(Dollars in thousands)                               | PUGET ENERGY2002 | PSE2002 | PUGETENERGY2001 | PSE2001 | PUGETENERGYAND PSE2000
|---------------------------------------------------- | ---------------- | ------- | --------------- | ------- | ----------------------
|Current income taxes - federal                       |                  |         | $               | (87,425 | )                     
|Current income taxes - state                         |                  |         |                 | (774    | )                     
|                                                    
|Deferred income taxes:                               |                  |        
|Conservation tax settlement                          |                  |         |                 | --      |                       
|Deferred FAS-133                                     |                  |         |                 | 4,064   |                       
|Cabot preferred stock sale                           |                  |         |                 | --      |                       
|Deferred taxes related to insurance reserves         |                  |         |                 | (1,662  | )                     
|Residential Purchase and Sale Agreement - net        |                  |         |                 | --      |                       
|Normalized tax benefits of the                       |                  |        
|accelerated cost recovery system                     |                  |         |                 | 29,197  |                       
|Energy conservation program                          |                  |         |                 | (96     | )                     
|Environmental remediation                            |                  |         |                 | 1,392   |                       
|WNP 3 tax settlement                                 |                  |         |                 | (1,126  | )                     
|Demand charges                                       |                  |         |                 | (8      | )                     
|Deferred revenue                                     |                  |         |                 | 612     |                       
|Software amortization                                |                  |         |                 | 35,373  |                       
|Capitalized overhead costs deducted for tax purposes |                  |         |                 | 72,220  |                       
|Allowance for doubtful accounts                      |                  |         |                 | --      |                       
|Other                                                |                  |         |                 | 6,106   |                       
|                                                    
|Total deferred income taxes                          |                  |         |                 | 146,072 |                       
|                                                    
|Deferred investment tax credits -                    |                  |        
|net of amortization                                  |                  |         |                 | (661    | )                     
|                                                    
|Total income taxes                                   |                  |         | $               | 57,212  |                       
|                                                    

---

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

|(Dollars in thousands)               | PUGET ENERGY2002 | PSE2002 | PUGETENERGY2001 | PSE2001
|------------------------------------ | ---------------- | ------- | --------------- | -------
|Utility plant                        |                  |         | $               | 578,137
|Energy conservation charges          |                  |         |                 | 16,473 
|Contributions in aid of construction |                  |         |                 | (44,770
|Bonneville Exchange Power            |                  |         |                 | 15,537 
|Cabot gas contract purchase          |                  |         |                 | 4,157  
|Deferred revenue                     |                  |         |                 | (5,292 
|Software amortization                |                  |         |                 | 41,408 
|Capitalized overhead costs           |                  |         |                 | 72,220 
|Other                                |                  |         |                 | 52,805 
|                                    
|Total                                |                  |         | $               | 730,675
|                                    

Puget
Energys totals of $730.7 million and $605.3 million for 2002 and 2001 consist of
deferred tax liabilities of $841.7 million and $713.8 million net of deferred tax assets
of $111.0 million and $108.5 million, respectively.
        PSEs
totals of $715.6 million and $601.0 million for 2002 and 2001 consist of deferred tax
liabilities of $824.2 million and $707.4 million net of deferred tax assets of $108.6
million and $106.4 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, 2002, the balance of this asset was $167.1 million.

NOTE 12.

            
Retirement Benefits

The
Company has a defined benefit pension plan covering substantially all of its utility
employees. Benefits are a function of both age and salary. Additionally, Puget Energy
maintains a non-qualified supplemental retirement plan for officers and certain
director-level employees.
        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)                         | 2002             | 2001          
|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 of year |                  |               
|Actual return on plan assets                   |                  |               
|Employer contribution                          |                  |               
|Benefits paid                                  |                  |               
|                                              
|Fair value of plan assets at end of year       |                  |               
|                                              
|Funded status                                  |                  |               
|Unrecognized actuarial gain                    |                  |               
|Unrecognized prior service cost                |                  |               
|Unrecognized net initial (asset)/obligation    |                  |               
|                                              
|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                          |                  |               
|                                              

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

|                              | PENSION BENEFITS | OTHER BENEFITS
|----------------------------- | ---------------- | --------------
|                              | 2002             | 2001          
|Discount rate                 | 6.75%            | 7.25%         
|Return on plan assets         | 8.25%            | 9.50%         
|Rate of compensation increase | 4.50%            | 5.0%          
|Medical trend rate            | --               | --            
|                              |                  |               

|1 | In
2002, the Company had $3.1 million in pension benefits plan amendments due to
changes in employment contracts, the addition of new entrants to the plan and
the vesting of certain nonvested participants who were affected by the
transition of service jobs to service providers. The Company had $3.5 million in
other benefits 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|                                           | PENSION BENEFITS |  | OTHER BENEFITS |         |   |  
|------------------------------------------ | ---------------- |  | -------------- | ------- | - | -
|(Dollars in thousands)                     |                  |  |                | 2002    |   |  
|                                           |                  |  |                |         |   |  
|Components of net periodic benefit cost:   |                  | 
|Service cost                               |                  |  | $              | 8,474   |   | $
|Interest cost                              |                  |  |                | 25,858  |   |  
|Expected return on plan assets             |                  |  |                | (43,032 | ) |  
|Amortization of prior service cost         |                  |  |                | 2,990   |   |  
|Recognized net actuarial gain              |                  |  |                | (5,120  | ) |  
|Amortization of transition                 |                  | 
|(asset)/obligation                         |                  |  |                | (1,136  | ) |  
|Plan curtailment                           |                  |  |                | (1,353  | ) |  
|Special recognition of prior service costs |                  |  |                | 1,683   |   |  
|                                           |                  |  |                |         |   |  
|Net pension benefit cost (income)          |                  |  | $              | (11,636 | ) | $

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 $39.4 million, $34.2 million, and $0, respectively, as of December 31,
2002. For the qualified pension plan the projected benefit obligation, accumulated benefit
obligation and fair value of plan assets were $330.3 million, $310.1 million, and $344.0
million, respectively as of December 31, 2002.
        The
assumed medical inflation rate is 10.0% in 2003 decreasing 1.0% per year to 6.0%. A 1%
change in the assumed medical inflation rate would have the following effects:

|                                               | 2002     | 2001    
|---------------------------------------------- | -------- | --------
|                                               | 1%       | 1%      
|(Dollars in thousands)                         | INCREASE | DECREASE
|                                               |          |         
|Effect on service and interest cost components |          |         
|Effect on post retirement benefit obligation   |          |         

NOTE 13.

            
Employee Investment Plans and Employee Stock Purchase Plan

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 $6.9 million, $8.0
million, and $7.2 million for the years 2002, 2001 and 2000, respectively.
        PSEs
contributions to the Employee Investment Plan were $6.1 million, $6.8 million, and $7.2
million for the years 2002, 2001 and 2000, respectively. The Employee Investment Plan
eligibility requirements are set forth in the plan documents.
        The
Company also has an Employee Stock Purchase Plan which was approved by shareholders on May
19, 1997, and commenced July 1, 1997, under which options are granted to eligible
employees who elect to participate in the plan on January 1st and July 1st of each year.
Participants are allowed to exercise those options six months later to the extent of
payroll deductions or cash payments accumulated during that six-month period. The option
price under the plan during 2002 was 85% of either the fair market value of the common
stock at the grant date or the fair market value at the exercise date, whichever was less.
Prior to 2002 the Company purchased stock for the plan on the open market. Starting with
the purchase rights accumulated under the July 1, 2002 grant the Company began issuing
rather than purchasing stock. The Companys contributions to the plan were $0.1
million, $0.1 million and $0.3 million for 2002, 2001 and 2000, respectively.

---

NOTE 14.

            
Stock-based Compensation Plans 
        The
Company has various stock compensation plans accounted for according to APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Total
compensation expense related to the plans was $6.3 million, $2.1 million and $3.9 million
in 2002, 2001 and 2000 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 $5.5 million, $2.3 million
and $3.2 million for 2002, 2001 and 2000, respectively. The fair value of the performance
awards granted in 2002, 2001 and 2000 is $14.82, $17.86 and $14.19 respectively. 247,184
performance awards were granted in 2002, 183,881 in 2001 and 204,044 in 2000. As of
December 31, 2002, there are four grant cycles active for a total of 571,719 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 new president and chief executive officer. These
options were awarded at the grant date market price of $22.51 and vest yearly over four
and five years although vesting is accelerated under certain conditions. The options
expire 10 years from the grant date. As of December 31, 2002, no options were exercisable.
The grant date fair value of the options is $3.37. Following the intrinsic value method of
APB 25, no compensation expense was recorded for these options.

RESTRICTED STOCK 
        In
2002, the Company granted 30,000 shares of restricted stock under the LTI Plan to be
purchased on the open market. The shares vest monthly with all of the shares vested by
December 2003. 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 at the rate of 20% per year.
Compensation expense related to the restricted shares was $0.5 million in 2002. No
restricted shares were issued in 2001 and 2000. Dividends are paid on all outstanding
restricted stock and are accounted for as a Puget Energy stock dividend, not as
compensation expense. At December 31, 2002 the weighted average grant date fair value for
all outstanding shares of restricted stock was $21.94. 
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. The Company purchased shares for the plan on the open market up
until the most recent offering at which time common stock was issued rather than
purchased. The Company currently plans to issue common stock for the ESPP. In 2002, 19,407
shares were purchased for the plan and 18,252 shares were issued. 45,659 shares and 48,513
shares were purchased in 2001 and 2000 respectively. At December 31, 2002 298,602 shares
may still be sold to employees under the plan. Dividends are paid on purchased shares and
are accounted for as a Puget Energy stock dividend, not as compensation expense. The
weighted average fair value of the purchase rights granted in 2002, 2001 and 2000 was
$4.19, $4.35 and $3.90 respectively.

---

INFRASTRUX STOCK OPTION
PLAN
        The InfrastruX stock option plan,
established in 2000, has 3,862,500 shares 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. No options were granted under the
InfrastruX plan in 2000. The following summarizes InfrastruX option information for 2002
and 2001:

|                                 | 2002                 | 2001                          
|-------------------------------- | -------------------- | ------------------------------
|                                 | Shares(in thousands) | Weighted-AverageExercise Price
|Outstanding at beginning of year | 1,995                |                               
|Granted                          | 725                  |                               
|Exercised                        | --                   |                               
|Canceled                         | (77)                 |                               
|Outstanding at end of year       | 2,643                |                               
|Options exercisable at year end  | 802                  |                               
|Weighted-average fair value of   |                      |                               
|options granted during the year  | $2.23                |                               

The following summarizes InfrastruX outstanding option information at December 31, 2002:

|                | SharesOutstanding(in thousands | Weighted-AverageContractual Life(in years) | Weighted-AverageExercise Price
|--------------- | ------------------------------ | ------------------------------------------ | ------------------------------
|Exercise Prices |                                |                                            |                               
|$4.00           | 1,828                          |                                            | 9.12                          
|$5.00           | 815                            |                                            | 9.31                          
|                | 2,643                          |                                            | 9.18                          

Stock
options awarded under the InfrastruX plan were generally granted at the market price on
the date of grant although some options have been granted at a discount requiring
InfrastruX to record compensation expense. A total of $0.1 million in compensation expense
related to stock options was recorded in 2002.
NON-EMPLOYEE DIRECTOR
STOCK PLAN
        The
Company has a director stock plan created in 1998 for all non-employee directors of Puget
Energy/PSE. Under the plan non-employee directors receive part of their quarterly retainer
in Company stock and may receive their entire retainer in Company stock if they choose.
The compensation expense related to the director stock plan was $0.2 million, $0.1 million
and $0.3 million in 2002, 2001, and 2000, respectively. The Company purchases stock for
this plan on the open market up to a maximum of 100,000 shares. As of December 31, 2002,
6,916 shares have been purchased for the director stock plan and 36,117 deferred, for a
total of 43,033 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 30,800 vested,
unexercised stock appreciation rights from the PSP&L Incentive Plan Awards granted to
executives of PSP&L. These were granted in 1993 and 1994 for $27.63 and $20.75,
respectively, and expire 10 years after the grant date. There are also 17,960 vested,
unexercised options from the WECO Incentive Stock Option Plan granted to key employees of
WECO. The options were granted between 1993 and 1996 for 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 near $0 in 2002, $(0.2) million in 2001 and $0.2 million in 2000. Compensation
expense related to the PSP&L plan was near $0 in 2002, $(0.1) million in 2001, and
$0.2 million in 2000.
        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
2002, 2001 and 2000:

|                             |  |  |  |      |      |      |    |      |  |    |     
|---------------------------- |  |  |  | ---- | ---- | ---- | -- | ---- |  | -- | ----
|                             |  |  |  | 2002 |      | 2001 |    | 2000
|Stock Options                |  | 
|Risk-free interest rate      |  |  |  | 4    | .32% |      | -- |      |  | -- |     
|Expected lives - years       |  |  |  | 4    | .50  |      | -- |      |  | -- |     
|Expected stock volatility    |  |  |  | 23   | .62% |      | -- |      |  | -- |     
|Dividend yield               |  |  |  | 5    | .00% |      | -- |      |  | -- |     
|                            
|InfrastruX Stock Option Plan |  | 
|Risk-free interest rate      |  |  |  | 4    | .05% |      | 4  | .87% |  | -- |     
|Expected lives - years       |  |  |  | 4    | .00  |      | 4  | .00  |  | -- |     
|Expected stock volatility    |  |  |  | 60   | .00% |      | 50 | .00% |  | -- |     
|                            
|Performance Awards           |  | 
|Risk-free interest rate      |  |  |  | 4    | .00% |      | 4  | .99% |  | 6  | .66%
|Expected lives - years       |  |  |  | 4    | .00  |      | 4  | .00  |  | 4  | .00 
|Expected stock volatility    |  |  |  | 23   | .71% |      | 20 | .76% |  | 18 | .59%
|Dividend yield               |  |  |  | 8    | .85% |      | 7  | .67% |  | 9  | .14%
|                            
|Employee Stock Purchase Plan |  | 
|Risk-free interest rate      |  |  |  | 1    | .65% |      | 4  | .26% |  | 5  | .59%
|Expected lives - years       |  |  |  | 0    | .50  |      | 0  | .50  |  | 0  | .50 
|Expected stock volatility    |  |  |  | 26   | .97% |      | 19 | .04% |  | 22 | .73%
|Dividend yield               |  |  |  | 5    | .81% |      | 7  | .72% |  | 8  | .98%

NOTE 15.

            
Other Investments



        In
March 1998, the Company entered into an agreement with Schlumberger North America
(Schlumberger) (formerly known as CellNet Data Services Inc.), under which the Company
would lend Schlumberger up to $35 million in the form of multiple draws so that
Schlumberger could finance an Automated Meter Reading (AMR) network system to be deployed
in the Companys service territory. In September 1999, the Company announced it was
expanding its AMR network system from 800,000 meters to 1,325,000 meters and as a result
increased the authorized loan amount to $72 million. As of December 31, 2000, the
outstanding loan balance was $51.9 million. In August 2001, Schlumberger paid off its
outstanding loan balance of $64.1 million.

NOTE 16.

            
Commitments and Contingencies



COMMITMENTS 
ELECTRIC
        For
the twelve months ended December 31, 2002, approximately 22.5% of the Companys
energy output was obtained at an average cost of approximately 13.96 mills 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, 2002, 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          | CONTRACT1EXP. DATE |      | LICENSE2EXP. DATE |                                                 
|                
|Rock Island      |                    |      |                   |                                                 
|Original units   |                    | 2012 |                   | 2029                                            
|Additional units |                    | 2012 |                   | 2029                                            
|Rocky Reach      |                    | 2011 |                   | 2006                                            
|Wells            |                    | 2018 |                   | 2012                                            
|Priest Rapids    |                    | 2005 |                   | 2005                                            
|Wanapum          |                    | 2009 |                   | 2005                                            
|                
|Total            |                    |      |                   |                                                 
|                

The
Companys estimated payments for power purchases from the Columbia River are $92.7
million for 2003, $82.6 million for 2004, $78.9 million for 2005, $76.5 million for 2006,
$79.3 million for 2007 and in the aggregate, $377.9 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 $124.0 million for 2003,
$75.5 million for 2004, $76.3 million for 2005, $77.9 million for 2006, $80.6 million for
2007 and in the aggregate, $500.3 million thereafter through 2037. These contracts have
varying terms and may include escalation and termination provisions.

---

|1 | 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. The new contracts 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
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'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, they have 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | 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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | 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: 41.7% at Rock Island; 55.1% at Rocky Reach;
89.7% at Priest Rapids; 67.9% at Wanapum; and 5.7% at Wells.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | The
components of 2002 costs associated with the interest portion of debt service are: Rock
Island, $21.1 million for all units; Rocky Reach, $8.0 million; Wells, $2.6 million;
Priest Rapids, $0.7 million; and Wanapum, $0.8 million.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

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 $202.7 million for 2003, $215.0 million for
2004, $220.3 million for 2005, $227.6 million for 2006, $210.4 million for 2007 and in the
aggregate, $946.5 million thereafter through 2012.
        The following table summarizes the Companys estimated obligations for future power
purchases:

|(Dollars in millions)   |  |  |   | 2003 |    |   | 2004 |    |   | 2005 |    |   | 2006 |    |   | 2007 |    |   | 2008 AND THERE-AFTER |    |   | TOTAL |   
|----------------------- |  |  | - | ---- | -- | - | ---- | -- | - | ---- | -- | - | ---- | -- | - | ---- | -- | - | -------------------- | -- | - | ----- | --
|                        |  |  |   |      |    |   |     
|Columbia River Projects |  |  | $ | 92   | .7 | $ | 82   | .6 | $ | 78   | .9 | $ | 76   | .5 | $ | 79   | .3 | $ | 377                  | .9 | $ | 787   | .9
|Other utilities         |  |  |   | 124  | .0 |   | 75   | .5 |   | 76   | .3 |   | 77   | .9 |   | 80   | .6 |   | 500                  | .3 |   | 934   | .6
|Non-utility generators  |  |  |   | 202  | .7 |   | 215  | .0 |   | 220  | .3 |   | 227  | .6 |   | 210  | .4 |   | 946                  | .5 |   | 2,022 | .5
|                        |  |  |   |      |    |   |     
|Total                   |  |  | $ | 419  | .4 | $ | 373  | .1 | $ | 375  | .5 | $ | 382  | .0 | $ | 370  | .3 | $ | 1,824                | .7 | $ | 3,745 | .0
|                        |  |  |   |      |    |   |     

Total
purchased power contracts provided the Company with approximately 12.1 million, 11.9
million and 15.1 million MWh of firm energy at a cost of approximately $466.1 million, $496.3
million, and $506.5 million for the years 2002, 2001 and 2000, respectively.
        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.
        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,
2002:

|                      |                     |                          |                         |                        
|--------------------- | ------------------- | ------------------------ | ----------------------- | -----------------------
|                      |                     |                          | COMPANY'S SHARE        
|(Dollars in millions) | ENERGYSOURCE (FUEL) | COMPANY'SOWNERSHIP SHARE | PLANT IN SERVICEAT COST | ACCUMULATEDDEPRECIATION
|Colstrip 1 and 2      |                     |                          |                         | Coal                   
|Colstrip 3 and 4      |                     |                          |                         | Coal                   

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.
        As
part of its electric operations and in connection with the 1999 buy-out 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 $8.1 million in 2002, $8.2
million in 2003, $8.5 million in 2004, $8.7 million in 2005, $8.9 million in 2006 and
$13.9 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
$12.8 million in 2002, $13.5 million in 2003, $14.2 million in 2004, $14.9 million in
2005, $15.6 million in 2006 and $25.0 million in the aggregate thereafter.
        PSE
enters into short-term energy supply contracts to meet its core customer needs. These
contracts are classified as normal purchases and sales in accordance with SFAS No. 133.
Commitments under these contracts for 2003 and 2004 total $47.2 million and $1.8 million,
respectively.

---

GAS SUPPLY
        The
Company has also entered into various firm supply, transportation and storage service
contracts in order to assure adequate availability of gas supply for its firm customers.
Many of these contracts, which have remaining terms from less than 1 year to 21 years,
provide that the Company must pay a fixed demand charge each month, regardless of actual
usage. Certain of PSEs firm gas supply agreements also obligate the Company to
purchase a minimum annual quantity at market-based contract prices. Generally, 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. Alternatively, under some of the contracts, the supplier may exercise a
right to reduce its subsequent obligation to provide firm gas to the Company. The Company
incurred demand charges in 2002 for firm gas supply, firm transportation service and firm
storage and peaking service of $27.4 million, $49.0 million and $6.4 million,
respectively. WNG Cap I incurred demand charges in 2002 for firm transportation service of
$9.4 million.
        The
following tables summarize the Companys obligations for future demand charges
through the primary terms of its existing contracts and the minimum annual take
requirements under the gas supply agreements. The quantified obligations are based on
current contract prices and FERC authorized rates, which are subject to change.

|                         
|-------------------------
|DEMAND CHARGE OBLIGATIONS

|                            |  |  |      |      |      |      |      |                      |       |    |    |   |    |    |   |    |    |   |     |    |   |     |   
|--------------------------- |  |  | ---- | ---- | ---- | ---- | ---- | -------------------- | ----- | -- | -- | - | -- | -- | - | -- | -- | - | --- | -- | - | --- | --
|(Dollars in millions)       |  |  | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 AND THERE-AFTER | TOTAL
|                            |  |  |      |      |      |      |     
|Firm gas supply             |  |  | $    | 20   | .6   | $    | 12   | .5                   | $     | 1  | .1 | $ | 1  | .1 | $ | 1  | .2 | $ | 2   | .8 | $ | 39  | .3
|Firm transportation service |  |  |      | 54   | .6   |      | 44   | .7                   |       | 11 | .6 |   | 11 | .6 |   | 11 | .6 |   | 82  | .1 |   | 216 | .2
|Firm storage service        |  |  |      | 7    | .2   |      | 8    | .6                   |       | 7  | .7 |   | 7  | .7 |   | 7  | .7 |   | 55  | .9 |   | 94  | .8
|                            |  |  |      |      |      |      |     
|Total                       |  |  | $    | 82   | .4   | $    | 65   | .8                   | $     | 20 | .4 | $ | 20 | .4 | $ | 20 | .5 | $ | 140 | .8 | $ | 350 | .3
|                            |  |  |      |      |      |      |     

|                               
|-------------------------------
|MINIMUM ANNUAL TAKE OBLIGATIONS

|(Therms in thousands) | 2003    | 2004    | 2005  | 2006 | 2007 | 2008 ANDTHERE-AFTER | TOTAL  
|--------------------- | ------- | ------- | ----- | ---- | ---- | ------------------- | -------
|                      |         |         |       |      |      |                     |        
|Firm gas supply       | 671,675 | 228,820 | 1,013 | --   | --   | --                  | 901,508

The
Company believes that all demand charges will be recoverable in rates charged to its
customers. Further, pursuant to implementation of FERC Order No. 636, the Company has the
right to resell or release to others any of its unutilized gas supply or transportation
and storage capacity.
        The
Company does not anticipate any difficulty in achieving the minimum annual take
obligations shown, as such volumes represent approximately 64% of expected annual sales
for 2003 and less than 11% of expected sales in subsequent years. 
        The
Companys current firm gas supply contracts obligate the suppliers to provide, in the
aggregate, annual volumes up to those shown below:

|                                                            
|------------------------------------------------------------
|MAXIMUM SUPPLY AVAILABLE UNDER CURRENT FIRM SUPPLY CONTRACTS

|(Therms in thousands) | 2003    | 2004    | 2005  | 2006  | 2007  | 2008 ANDTHERE-AFTER | TOTAL    
|--------------------- | ------- | ------- | ----- | ----- | ----- | ------------------- | ---------
|                      |         |         |       |       |       |                     |          
|Firm gas supply       | 719,821 | 264,035 | 7,013 | 6,000 | 6,000 | 24,000              | 1,026,869

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 $19.4
million in 2003, $20.0 million in 2004, $22.5 million in 2005, $23.2 million in 2006,
$23.9 million in 2007 and $86.7 million in the aggregate thereafter.

---

SURETY BOND
        The
Company has a self-insurance surety bond in the amount of $5.2 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 regulation by federal, state and local authorities.
The Company has been named by the Environmental Protection Agency (EPA) and/or the
Washington State Department of Ecology 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 as required by federal and state
laws and this process is nearing completion. 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 either insurance companies, 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, 2002. 
        ELECTRIC SITES
        The
Company has expended approximately $17.7 million related to the remediation activities
covered by the Washington Commissions order and has accrued approximately $1.7
million as a liability for future remediation costs for these and other remediation
activities. To date, the Company has recovered approximately $17.2 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 $62.5 million related to the remediation activities
covered by a Washington Commissions order and has accrued approximately $33.3
million for future remediation costs for these and other remediation sites. To date, the
Company has recovered approximately $58.7 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         Other
contingencies, arising out of the normal course of the Companys business, exist at
December 31, 2002. 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 17. 

            
Accounting for Derivative Instruments and Hedging Activities

        On
January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138.
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 provided by SFAS No. 133.

---

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.
        During
the year ended December 31, 2001, the Company recorded an increase to current earnings of
approximately $11.2 million pre-tax ($7.2 million after-tax) to record the change in
market value of outstanding derivative instruments not meeting cash flow hedge criteria.
During the year ended December 31, 2002, the remainder of the contracts which had given
rise to the income statement losses were settled and resulted in an additional increase to
earnings of $11.6 million pre-tax ($7.5 million after-tax). 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.
The amount of cash flow hedges that will reverse and be settled into the income statement
during 2003 will be $4.1 million. In addition, on December 31, 2002 the Company had a
short term unrealized gain on derivative contracts for the purchase of natural gas for
core gas business of $3.7 million pre-tax.
        The
Company has two contracts outstanding with a counterparty whose senior unsecured debt
ratings were downgraded in September 2002 to Ba2 by Moodys and in November 2002 to
BB by Standard & Poors. The first contract is a fixed for floating price natural
gas swap contract for which the Company has collected a collateral deposit in the amount
of $21.4 million from the counterparty to guarantee performance. The contract will expire
in June 2008 and is accounted for as a cash flow hedge under SFAS No. 133. The second is a
physical gas supply contract expiring in July 2008 which has been designated as a normal
purchase under SFAS No. 133. In February 2003, the counterpartys credit was further
downgraded although the counterparty continues to perform as required under the terms of
the two contracts. The Company believes the risk of non-performance by the counterparty is remote.
        At
October 15, 2001, the Company had recorded a deferred liability of approximately $26.9
million after-tax for financial gas contracts to be used for electric production that
until October 15, 2001 were designated as qualifying cash flow hedges. Changes in the
market values of these de-designated contracts resulted in the recording of a loss of $7.8
million pre-tax ($5.1 million after-tax) to earnings in the fourth quarter of 2001. In the
first quarter of 2002, the loss was reversed in its entirety when all of these contracts
were settled or terminated.
        During
2001, the Financial Accounting Standards Boards Derivative Implementation Group for
SFAS No. 133 issued guidance under Issue C16  Applying the Normal Purchases
and Normal Sales Exception to Contracts that Combine a Forward Contract and Purchased
Option Contract which became effective in the second quarter of 2002 for the
Company. Issue C16 establishes that fuel supply contracts that combine a forward contract
with a purchased option cannot qualify for the normal purchase and normal sales exception
because of the optionality of the quantity of fuel to be delivered under the contract.
 
        A
review of the fuel supply contracts by the Company determined that two long-term fuel
supply contracts that deliver natural gas to the Companys Encogen combustion turbine
plant contained provisions for the purchase of optional quantities of fuel, and as
originally written, would no longer qualify as normal purchase contracts upon
implementation of Issue C16. In the second quarter of 2002, the Company signed amendments
to those contracts that remove the optional provisions, requiring that the Company
purchase 100% of the contractual fuel quantities for the remaining terms of the contracts.
As a result, the contracts continue to qualify for the normal purchase-normal sale
exception to SFAS 133.



NOTE 18.

            
Supplemental Quarterly Financial Data (Unaudited)
        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)       |  |  |   |          
|---------------------------------------------------------------------------------- |  |  | - | ---------
|                                                                                   |  |  |   |          
|2002 QUARTER                                                                       |  |  |   | FIRST    
|                                                                                   |  |  |   |          
|Operating revenues                                                                 |  |  | $ | 739,060  
|Operating income                                                                   |  |  |   | 76,571   
|Other income                                                                       |  |  |   | 384      
|Net income                                                                         |  |  |   | 26,478   
|Basic and diluted earnings per common share                                        |  |  | $ | 0.28     
|                                                                                  
|(Unaudited; dollars in thousands except per-share amounts)                         |  | 
|                                                                                   |  |  |   |          
|2001 QUARTER                                                                       |  |  |   | FIRST    
|                                                                                   |  |  |   |          
|Operating revenues                                                                 |  |  | $ | 1,024,234
|Operating income                                                                   |  |  |   | 130,541  
|Other income                                                                       |  |  |   | 1,941    
|Net income                                                                         |  |  |   | 72,298   
|Basic earnings per common share                                                    |  |  | $ | 0.815    
|Diluted earnings per common share                                                  |  |  | $ | 0.812    
|                                                                                  
|PUGET SOUND ENERGY
     (Unaudited; dollars in thousands except per-share amounts) |  | 
|                                                                                   |  |  |   |          
|2002 QUARTER                                                                       |  |  |   | FIRST    
|                                                                                   |  |  |   |          
|Operating revenues                                                                 |  |  | $ | 678,299  
|Operating income                                                                   |  |  |   | 74,732   
|Other income                                                                       |  |  |   | 309      
|Net income                                                                         |  |  |   | 25,698   
|                                                                                  
|(Unaudited; dollars in thousands)                                                  |  | 
|                                                                                   |  |  |   |          
|2001 QUARTER                                                                       |  |  |   | FIRST    
|                                                                                   |  |  |   |          
|Operating revenues                                                                 |  |  | $ | 995,694  
|Operating income                                                                   |  |  |   | 130,111  
|Other income                                                                       |  |  |   | 2,843    
|Net income                                                                         |  |  |   | 72,879   

Operating
revenues for the Company include optimization transactions reported net in the income
statement as required by EITF 02-03 effective after June 30, 2002. The operating revenues
for all quarters of 2001 and the first and second quarters of 2002 have been reclassified
to conform with the current presentation.



NOTE 19.

            
Acquisitions

During
2001, InfrastruX acquired 100% of six companies based in the eastern United States,
mid-west and Texas for a total price of $83.6 million. During 2002, InfrastruX acquired
100% of three additional companies based in Texas for a total price of $49.7 million. All
purchases have been funded in the form of cash and preferred and common stock.
        These
companies provide utility infrastructure services such as: installing, replacing and
restoring underground cables and pipes for utilities and telecommunication 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
representing the excess of cost over the net tangible and identifiable intangible assets
of the business at the time of purchase was approximately $130.0 million before
amortization. During 2002, InfrastruX added $23.5 million of goodwill for a balance of
$125.6 million net of accumulated amortization. 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 was not amortized per SFAS No. 142  Goodwill and
Other Intangible Assets. 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 determined that no impairment had taken place. Puget
Energy then performed the annual impairment review as of October 31, 2002 and determined
that goodwill was not impaired. Puget Energy will perform an annual impairment review
hereafter. In addition, 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 and 2000, including amortization on the
intangible assets that were reclassified to goodwill in 2002, was approximately $3.4
million and $1.0 million, respectively. The income statement effects of discontinuing
amortization of goodwill for the comparative periods are as follows for Puget Energy:

|                                           |                    |                    |                   
|------------------------------------------ | ------------------ | ------------------ | ------------------
|(Dollars in thousands)                     | 2002               | 2001               | 2000              
|                                           |                    |                    |                   
|Reported income for common stock           | $      110,052     | $       98,426     | $      184,837    
|Add back goodwill amortization, net of tax | --                 | 2,826              | 907               
|                                           |                    |                    |                   
|Adjusted income for common stock           | $      110,052     | $      101,252     | $      185,744    
|                                           |                    |                    |                   
|Basic and diluted earnings per share      
|Reported income for common stock           | $             1.24 | $             1.14 | $             2.16
|Add back goodwill amortization             | --                 | 0.03               | 0.01              
|                                           |                    |                    |                   
|Adjusted income for common stock           | $             1.24 | $             1.17 | $             2.17
|                                           |                    |                    |                   

Identifiable
intangible assets acquired as a result of acquisitions of companies are amortized over the
expected useful lives of the assets, which range from five to 20 years. In 2002, a total
of $4.5 million was added to intangible assets, assigned $0.3 million to patents with an
amortization period of 16.0 years, $3.1 million to contractual customer relationships with
an amortization period of 8.3 years and $1.1 million to covenant not to compete with an
amortization period of 5.0 years. The total weighted average amortization period for the
2002 additions is 8.0 years. In 2001, $2.8 million was added to intangible assets,
assigned entirely to covenant not to compete with an amortization period of 5.0 years.
Total identifiable intangible assets are as follows:

|                                           |                  |                         |               
|------------------------------------------ | ---------------- | ----------------------- | --------------
|At December 31, 2001(Dollars in thousands) | GrossIntangibles | AccumulatedAmortization | NetIntangibles
|                                           |                  |                         |               
|Covenant not to compete                    | $  3,908         | $1,105                  | $  2,803      
|Developed technology                       | 14,190           | 1,744                   | 12,446        
|Contractual customer relationships         | 3,042            | 383                     | 2,659         
|Patents                                    | 793              | 49                      | 744           
|                                           |                  |                         |               
|Total                                      | $21,933          | $3,281                  | $18,652       
|                                           |                  |                         |               

|                                           |                  |                         |               
|------------------------------------------ | ---------------- | ----------------------- | --------------
|At December 31, 2002(Dollars in thousands) | GrossIntangibles | AccumulatedAmortization | NetIntangibles
|                                           |                  |                         |               
|Covenant not to compete                    | $  2,768         | $364                    | $  2,404      
|Developed technology                       | 14,190           | 1,006                   | 13,184        
|Patents                                    | 1,046            | 575                     | 471           
|                                           |                  |                         |               
|Total                                      | $18,004          | $1,945                  | $16,059       
|                                           |                  |                         |               

The
identifiable intangible amortization expense for the year ended December 31, 2002 was $1.9
million compared to $1.1 million and $0.3 million for 2001 and 2000, respectively. The
identifiable intangible assets amortization for future periods based on the current
acquisitions will be:

|(Dollars in thousands)         | 2003   | 2004   | 2005   | 2006   | 2007  
|------------------------------ | ------ | ------ | ------ | ------ | ------
|                               |        |        |        |        |       
|Future intangible amortization | $1,879 | $1,879 | $1,863 | $1,534 | $1,151

As
InfrastruX acquires more companies the total amortization amount in future periods may
change.
       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,
2000. 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 twelve months ended December 31, | 2002            | 2001            | 2000           
|                                                                                                      |                 |                 |                
|Operating revenues                                                                                    | $     2,413,122 | $     3,000,824 | $     3,577,354
|Net income for common                                                                                 | 111,058         | 102,649         | 198,637        
|Basic earnings per common share                                                                       | $  1.26         | $  1.19         | $  2.33        
|Diluted earnings per common share                                                                     | $  1.25         | $  1.18         | $  2.32        

---



NOTE 20.

            
Segment Information

Puget
Energy operates in primarily two business segments: the Regulated Utility Operations, or
PSE, and Utility Support, or InfrastruX, which was incorporated in the year 2000. 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 Washington State. InfrastruX specializes in
contracting services to other gas and electric utilities primarily in the mid-west, Texas
and the eastern United States.
        The
other principal non-utility line of business, which is a PSE subsidiary, is a real estate
investment and development company. Reconciling items between segments are not material.
        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 include an $8.0 million after-tax gain related to the ConneXt sale.

Financial
data for business segments are as follows:

|(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                     | 190,860    | 5,517      | --      | 196,377     
|Net income                                         | 104,044    | 9,455      | 4,384   | 117,883     
|Goodwill, net                                      | --         | 125,555    | --      | 125,555     
|Total assets                                       | 5,208,487  | 319,248    | 129,756 | 5,657,491   
|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                                       | 5,178,601  | 229,125    | 139,251 | 5,546,977   
|Construction expenditures - excluding equity AFUDC | 247,435    | --         | --      | 247,435     
|Additions to other property, plant and equipment   | --         | 5,193      | --      | 5,193       
|                                                   |            |            |         |             

|(Dollars in thousands)                             | REGULATED  |            |          | PUGET ENERGY
|-------------------------------------------------- | ---------- | ---------- | -------- | ------------
|2000                                               | UTILITY    | INFRASTRUX | OTHER    | TOTAL       
|                                                   |            |            |          |             
|Revenues                                           | $3,244,630 | $44,999    | $12,667  | $3,302,296  
|Depreciation and amortization                      | 194,228    | 2,268      | 17       | 196,513     
|Income tax                                         | 131,262    | 415        | (1,854)  | 129,823     
|Operating income                                   | 363,559    | 865        | (552)    | 363,872     
|Interest charges, net of AFUDC                     | 174,914    | 188        | --       | 175,102     
|Net income                                         | 204,720    | (543)      | (10,346) | 193,831     
|Goodwill, net                                      | --         | 57,887     | --       | 57,887      
|Total assets                                       | 5,339,669  | 106,520    | 110,480  | 5,556,669   
|Construction expenditures - excluding equity AFUDC | 296,480    | --         | --       | 296,480     
|                                                   |            |            |          |             



NOTE 21.

            
Impairment of Long-Lived Assets

In
the fourth quarter of 2000, Hydro Energy Development Corp., a wholly-owned subsidiary of
PSE, recorded an after-tax loss of approximately $11.8 million in Other Income of the
non-regulated business segment. The loss provision represents the difference between the
carrying value of 13 small hydroelectric generating projects Hydro Energy Development
Corp. was seeking approval to develop in western Washington State and managements
estimate of their net realizable value. Federal and state regulatory agencies that have
jurisdiction over the construction and operation of the proposed projects have made it
increasingly difficult to complete and operate the projects in an economic manner. Hydro
Energy Development Corp. owns and operates a 3.7 MW hydroelectric project located in
western Washington State.

---

Schedule II.Valuation and Qualifying Accounts and Reserves

|(Dollars in thousands)                          | BALANCE AT BEGINNING OF PERIOD | ADDITIONSCHARGED TOCOSTS ANDEXPENSES | DEDUCTIONS | BALANCEAT ENDOF PERIOD
|----------------------------------------------- | ------------------------------ | ------------------------------------ | ---------- | ----------------------
|PUGET ENERGY                                    |                                |                                      |            |                       
|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                   
|                                                |                                |                                      |            |                       
|PUGET SOUND ENERGY                              |                                |                                     
|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                   
|                                                |                                |                                      |            |                       
|PUGET ENERGY                                    |                                |                                     
|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, 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 ENERGY AND PUGET SOUND ENERGY             |                                |                                     
|YEAR ENDED DECEMBER 31, 2000                    |                                |                                     
|                                                |                                |                                      |            |                       
|Accounts deducted from assets on balance sheet: |                                |                                      |            |                       
|Allowance for doubtful accounts receivable      |                                |                                      | $          | 1,503                 
|Reserve on wholesale sales                      |                                |                                      |            | --                    
|Gas transportation contracts reserve            |                                |                                      |            | 1,780                 

---

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-eighth  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; and Exhibit 4.2 to Current                  Report on form 8-K dated November 2,
2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 be 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 |  | 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).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | 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).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 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).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | 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).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Pledge
 Agreement  dated August 1, 1991 between PSE and The First National Bank of Chicago,  as
Trustee                  (Exhibit (4)-j to Registration No. 33-45916).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Loan
 Agreement  dated  August 1, 1991  between the City of Forsyth,  Rosebud  County,
 Montana and PSE                  (Exhibit (4)-k to Registration No. 33-45916).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | Pledge
 Agreement  dated as of March 1, 1992 by and between PSE and Chemical  Bank relating to a
series                  of first  mortgage bonds (Exhibit 4.15 to Annual Report on Form
10-K for the fiscal year ended December                  31, 1993, Commission File No.
1-4393).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Pledge
 Agreement dated as of April 1, 1993 by and between PSE and The First National Bank of
Chicago,                  relating  to a series of first  mortgage  bonds  (Exhibit  4.16
to  Annual  Report on Form 10-K for the                  fiscal year ended December 31,
1993, Commission File No. 1-4393).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|4.14 |  | Indenture
of First Mortgage dated as of April 1, 1957 (Exhibit 4-B, Registration No. 2-14307).
|---- |  | ----------------------------------------------------------------------------------------------

|4.15 |  | First
Supplemental Indenture dated as of October 1, 1959 (Exhibit 4-D to Registration No.
2-17876).
|---- |  | ---------------------------------------------------------------------------------------------------

|4.16 |  | Sixth
Supplemental  Indenture dated as of August 1, 1966 (Exhibit to Form 8-K for month of
August 1966,                  File No. 0-951).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | Seventh
Supplemental Indenture dated as of February 1, 1967 (Exhibit 4-M, Registration No.
2-27038).
|---- |  | ----------------------------------------------------------------------------------------------------

|4.18 |  | Sixteenth
Supplemental Indenture dated as of June 1, 1977 (Exhibit 6-05 to Registration No.
2-60352).
|---- |  | -----------------------------------------------------------------------------------------------------

|4.19 |  | Seventeenth
 Supplemental  Indenture  dated as of August 9, 1978 (Exhibit  5-K.18 to  Registration
 No.                  2-64428).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------

|4.20 |  | 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).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.21 |  | 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).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.22 |  | 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).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.23 |  | Twenty-ninth
 Supplemental  Indenture  dated  as of June  1,  1993  (Exhibit  4-A to  Registration
 No.                  33-49599).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|4.24 |  | 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).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.25 |  | Statement
of Relative  Rights and Preferences for the 7 3/4% Series  Preferred Stock  Cumulative,
 $100                  Par Value. (Exhibit 1.6 to Registration  Statement on Form 8-A
filed February 14, 1994, Commission File                  No. 1-4393).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.26 |  | 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).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.27 |  | 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).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.28 |  | 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).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.29 |  | 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).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*4.30 |  | Thirty-first
Supplement Indenture dated February 10, 1997.
|----- |  | ----------------------------------------------------------

|10.1 |  | Assignment
and Agreement  dated as of August 13, 1964 between  Public Utility  District No. 1 of
Chelan                  County,  Washington and PSE,  relating to the Rock Island
 Project  (Exhibit 13-b to  Registration  No.                  2-24262).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | 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).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Assignment
and Agreement  dated as of August 13, 1964 between  Public Utility  District No. 1 of
Chelan                  County,  Washington  and PSE,  relating to the Rocky Reach
Project  (Exhibit 13-e to  Registration  No.                  2-24252).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Assignment
and Agreement  dated as of August 13, 1964 between  Public  Utility  District No. 2 of
Grant                  County,  Washington and PSE,  relating to the Priest Rapids
 Development  (Exhibit 13-j to Registration                  No. 2-24252).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Assignment
and Agreement  dated as of August 13, 1964 between  Public  Utility  District No. 2 of
Grant                  County,  Washington and PSE,  relating to the Wanapum  Development
 (Exhibit 13-n to  Registration  No.                  2-24252).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.6 |  | 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).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | First
Amendment  executed as of February 9, 1965 to Reserved Share Power Sales Contract
 between Public                  Utility  District  No. 1 of Douglas  County,  Washington
 and PSE,  relating  to the Wells  Development                  (Exhibit 13-r to
Registration No. 2-24252).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Assignment
and Agreement  dated as of August 13, 1964 between Public Utility  District No. 1 of
Douglas                  County,  Washington  and PSE,  relating to the Wells
 Development  (Exhibit  13-u to  Registration  No.                  2-24252).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | 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).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Reserve
Share Power Sales Contract  dated June 22, 1959 between Public Utility  District No. 2 of
Grant                  County,  Washington and PSE,  relating to the Priest Rapids
Project  (Exhibit 13-k to Registration  No.                  2-15618).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Reserved
Share 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-s to                  Registration No. 2-21824).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Exchange
 Agreement  executed  August 13, 1964 between the United States of America,  Columbia
 Storage Power Exchange
and PSE, relating to Canadian Entitlement (Exhibit 13-ff to Registration No. 2-24252).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.27 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.37 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.38 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.39 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.40 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.41 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.42 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.43 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.44 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.45 |  | Agreement
for Purchase and Sale of Firm Capacity and Energy between The Washington  Water Power
Company                  and PSE dated as of January 1, 1988  (Exhibit  (10)-1 to
Quarterly  Report on Form 10-Q for the quarter                  ended March 31, 1988,
Commission File No. 1-4393).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.46 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.47 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.48 |  | Agreement
for the Purchase of Power dated as of October 27, 1988 between  Pacific Power & Light
Company                  (PacifiCorp)  and PSE (Exhibit (10)-78 to Annual Report on Form
10-K for the fiscal year ended December                  31, 1988, Commission File No.
1-4393).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.49 |  | Agreement
 for Sale and  Exchange of Firm Power dated as of November  23, 1988  between the
 Bonneville                  Power  Administration  and PSE (Exhibit (10)-79 to Annual
Report on Form 10-K for the fiscal year ended                  December 31, 1988,
Commission File No. 1-4393).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.50 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.51 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.52 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.53 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.54 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.55 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.56 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.57 |  | Amendment
 No.  1 to the  Fifteen-Year  Power  Sales  Agreement  dated  as of April  18,  1990
 between                  PacifiCorp  and PSE (Exhibit  (10)-93 to Annual Report on Form
10-K for the fiscal year ended  December                  31, 1990, Commission File No.
1-4393).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.58 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.59 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.60 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.61 |  | Letter
 Agreement  dated April 25, 1991 between Sumas Energy,  Inc. and PSE, to amend the
Agreement for                  Firm Power Purchase dated as of February 24, 1989 (Exhibit
(10)-2 to Quarterly  Report on Form 10-Q for                  the quarter ended June 30,
1991, Commission File No. 1-4393).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.62 |  | Amendment
dated June 7, 1991 to Letter  Agreement  dated April 25, 1991 between Sumas Energy,  Inc.
and                  PSE (Exhibit  (10)-3 to Quarterly  Report on Form 10-Q for the
quarter ended June 30, 1991,  Commission                  File No. 1-4393).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.63 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.64 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.65 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.66 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.67 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.68 |  | Intertie
 and Network  Transmission  Agreement,  dated as of October 4, 1991 between  Bonneville
 Power                  Administration  and PSE  (Exhibit  (10)-109  to Annual  Report on
Form 10-K for the  fiscal  year ended                  December 31, 1991, Commission File
No. 1-4393).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.69 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.70 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.71 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.72 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.73 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.74 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.75 |  | Contract
 with G. B.  Swofford,  Senior Vice  President  Customer  Operations,  dated  October 18,
1996                  (Exhibit  10.120 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1996,  Commission                  File No. 1-4393).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.76 |  | 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).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.77 |  | Service
 Agreement dated November 1, 1989 with Northwest  Pipeline  Corporation  covering
 liquefaction                  storage gas service filed under cover of Form SE dated
December 27, 1989.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.78 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.79 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.80 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.81 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.82 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.83 |  | 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).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.84 |  | 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.85 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.86 |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.87 |  | Firm
 Transportation  Service Agreement dated January 12, 1994 between Northwest  Pipeline
 Corporation                  and Washington Natural Gas Company for firm transportation
 service from Plymouth, LNG (Exhibit 10-R to                  Form 10-K for the year
ended September 30, 1994, File No. 1-11271).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.88 |  | Service
 Agreement  dated July 9, 1991 with Northwest  Pipeline  Corporation for SGS-2F Storage
Service                  filed under cover of Form SE dated  December  23,  1991
 (Exhibit  10-S to Form 10-K for the year ended                  September 30, 1994, File
No. 1-11271).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.89 |  | 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).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.90 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.91 |  | Change
in control  agreement with T. J. Hogan dated August 17, 1995 (Exhibit 10.152 to Annual
Report on                  Form 10-K for the fiscal year ended December 31, 1997,
Commission File No. 1-4393).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.92 |  | Employment
 agreement  with S. A.  McKeon,  Vice  President  and  General  Counsel,  dated May 27,
1997                  (Exhibit  10.152 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1998,  Commission                  File No. 1-4393).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.93 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*10.94 |  | Amendment
No. 1 to the Puget Energy,  Inc.  Non-employee  Director Stock Plan,  effective as of
January                  1, 2003.
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------

---

|10.95 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.96 |  | 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.)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.97 |  | 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).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.98 |  | Retention
Agreement with S .A. McKeon, Vice President and General Counsel, dated July 1, 2001.
|----- |  | ----------------------------------------------------------------------------------------------

|10.99 |  | Employment
agreement with S. P. Reynolds, Chief Executive Officer and President, dated January 7,
2002.
|----- |  | -------------------------------------------------------------------------------------------------------

|10.100 |  | 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).
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.101 |  | 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).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.102 |  | 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).
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.103 |  | 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 No1-16305 and 1-4393).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.104 |  | Change-in-control
 agreement with G. B. Swofford,  Senior Vice  President and Chief  Operating  Officer
                 dated March 12, 1999.  (Exhibit 10-4 to Form 10-Q for the quarter ended
June 30, 2002,  File  No 1-16305                  and 1-4393).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.105 |  | Change-in-control
 agreement with T.J. Hogan,  Senior Vice President,  External Affairs dated March 12,
                 1999. (Exhibit 10-5 to Form 10-Q for the quarter ended June 30, 2002,
File No 1-16305 and 1-4393).
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*10.106 |  | Credit
Agreement dated December 23, 2002 covering PSE and various banks named therein,  Bank
One, NA as                  administrative agent.
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|*10.107 |  | Receivable
 Purchase Agreement dated December 23, 2002 among PSE, Rainier  Receivables,  Inc., and
Bank                  One, NA as agent.
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|*10.108 |  | Receivable
Sale Agreement dated December 23, 2002 among PSE and Rainier Receivables, Inc.
|------- |  | -----------------------------------------------------------------------------------------

|*10.109 |  | Employment
 agreement with J.M. Ryan, Vice President  Energy Portfolio  Management,  dated November
30,                  2001.
|------- |  | ------------------------------------------------------------------------------------------------------------------------------

|*10.110 |  | Change-in-Control
 Agreement  with J.M.  Ryan,  Vice  President,  Energy  Portfolio  Management,  dated
                 November 30, 2001.
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|*12-1 |  | Statement
 setting  forth  computation  of ratios of earnings to fixed  charges of Puget  Energy
 (1998                  through 2002).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|*12-2 |  | Statement
 setting  forth  computation  of ratios of  earnings to fixed  charges of Puget Sound
 Energy                  (1998 through 2002).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|*99.1 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*99.2 |  | Certification
 Pursuant  to 18  U.S.C.  Section  1350,  as  Adopted  Pursuant  to  Section  906  of the
                 Sarbanes-Oxley act of 2002 - Stephen A. McKeon.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*99.3 |  | Puget
Energy proxy statement for 2003 Annual Meeting of Shareholders (Commission File No.
1-16305).
|----- |  | ---------------------------------------------------------------------------------------------------

---

*Filed
herewith.