================================================================================

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


                                    FORM 10-Q



         [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
                                       OR
         [  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OR
                  THE SECURITIES EXCHANGE ACT OF 1934
                                (NO FEE REQUIRED)
                  FOR THE TRANSITION PERIOD FROM ________ TO _________


                          ----------------------------

                          COMMISSION FILE NUMBER 1-4393
                          ----------------------------



                            PUGET SOUND ENERGY, INC.
             (Exact name of registrant as specified in its charter)

WASHINGTON                                                            91-0374630
(State or other jurisdiction of                                    (IRS Employer
incorporation or organization)                               Identification No.)


            411 - 108TH AVENUE N.E., BELLEVUE, WASHINGTON 98004-5515
                    (Address of principal executive offices)

                                 (425) 454-6363
              (Registrant's telephone number, including area code)


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) or the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file for such  reports),  and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ---

The number of shares of  registrant's common stock  outstanding at September
30, 1998 was 84,560,567.

================================================================================

<PAGE>





                                TABLE OF CONTENTS


                                                                            Page
                                                                          Number
                                                                          ------
PART I.   FINANCIAL INFORMATION

          Item 1.     Financial Statements
              Consolidated Statements of Income - 
                 3 months ended September 30, 1998 and 1997                    3
             
              Consolidated Statements of Income - 
                 9 months ended September 30, 1998 and 1997                    4

              Consolidated Statements of Comprehensive Income - 
                 3 months ended September 30, 1998 and 1997                    5

              Consolidated Statements of Comprehensive Income - 
                 9 months ended September 30, 1998 and 1997                    5

              Consolidated Balance Sheets - September 30, 1998
                 and December 31, 1997                                         6

              Consolidated Statements of Cash Flows - 
                 9 months ended September 30, 1998 and 1997                    8

              Notes to Consolidated Financial Statements                       9

          Item 2.     Management's Discussion and Analysis of Financial 
                      Condition and Results of Operations                     12

PART II.  OTHER INFORMATION

          Item 1      Legal Proceedings                                       24

          Item 4      Submission of Matters to a Vote of Security Holders     24

          Item 6      Exhibits and Reports on Form 8-K                        24

SIGNATURE                                                                     25






                                       2
<PAGE>
                                                           
PART I        FINANCIAL INFORMATION
Item 1        FINANCIAL STATEMENTS
<TABLE>

                             PUGET SOUND ENERGY, INC
                        CONSOLIDATED STATEMENTS OF INCOME
                      (Thousands except per share amounts)
                                   (Unaudited)
<CAPTION>
Three Months Ended September 30                             1998            1997
-------------------------------                             ----            ----
<S>                                                    <C>             <C>   
OPERATING REVENUES:
     Electric                                          $ 375,398       $ 288,683
     Gas                                                  49,955          46,135
     Other                                                 2,004           6,203
                                                       ---------       ---------
          Total operating revenue                        427,357         341,021
                                                       ---------       ---------

OPERATING EXPENSES:
Energy costs:
     Purchased electricity                               211,226         142,789
     Purchased gas                                        17,174          16,493
     Electric generation fuel                             15,661          12,291
     Residential Exchange                                (11,763)        (13,885)
Utility operations and maintenance                        52,213          55,690
Other operations and maintenance                           1,305           5,721
Depreciation and amortization                             41,988          46,533
Taxes other than federal income taxes                     33,146          32,719
Federal income taxes                                      16,628           7,249
            Total operating expenses                     377,578         305,600
                                                       ---------       ---------

OPERATING INCOME                                          49,779          35,421

OTHER INCOME                                               5,721           6,029
 
INCOME BEFORE INTEREST CHARGES                            55,500          41,450

INTEREST CHARGES, net of AFUDC                            34,409          29,452
                                                       ---------       ---------

NET INCOME                                                21,091          11,998
                                                                                
Less:  Preferred stock dividends accrual                   3,226           3,516
                                                                                
Preferred stock redemption                                    --             471
                                                       ---------       ---------

INCOME FOR COMMON STOCK                                $  17,865       $   8,953
                                                       =========       =========

BASIC COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE        84,561          84,561
                                                       =========       =========

BASIC & DILUTED EARNINGS PER COMMON SHARE:             $    0.21       $    0.11
                                                       =========       =========
</TABLE>

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


                                       3
<PAGE>
<TABLE>

                            PUGET SOUND ENERGY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (Thousands except per share amounts)
                                   (Unaudited)
<CAPTION>
Nine Months Ended September 30                              1998           1997
------------------------------                              ----           ----
<S>                                                  <C>             <C>  
OPERATING REVENUES:
     Electric                                        $ 1,030,907     $  858,229
     Gas                                                 274,529        274,554
     Other                                                 9,514         24,273
                                                     -----------     ----------
       Total operating revenue                         1,314,950      1,157,056
                                                     -----------     ----------

OPERATING EXPENSES:
Energy costs:
     Purchased electricity                               517,881        421,314
     Purchased gas                                       117,700        117,838
     Electric generation fuel                             36,402         29,696
     Residential Exchange                                (39,333)       (50,766)
Utility operations and maintenance                       171,976        184,362
Other operations and maintenance                           4,226         17,466
Depreciation and amortization                            123,171        122,811
Merger and related costs                                      --         55,789
Taxes other than federal income taxes                    115,623        113,675
Federal income taxes                                      68,478          7,169
                                                     -----------     ----------
          Total operating expenses                     1,116,124      1,019,354
                                                     -----------     ----------

OPERATING INCOME                                         198,826        137,702
OTHER INCOME                                              10,234         28,736
                                                     -----------     ----------

INCOME BEFORE INTEREST CHARGES                           209,060        166,438
INTEREST CHARGES, net of AFUDC                           102,466         88,391
                                                     -----------     ----------

INCOME FROM CONTINUING OPERATIONS                        106,594         78,047
DISCONTINUED OPERATIONS                                       --         (2,622)
                                                     -----------     ---------- 
                                                                               

NET INCOME                                               106,594         75,425
Less:  Preferred stock dividends accrual                   9,784         14,480
Preferred stock redemption                                    --            471
                                                     -----------     ----------
                                                                           
INCOME FOR COMMON STOCK                               $   96,810     $   61,416
                                                     ===========     ==========

BASIC COMMON SHARES OUTSTANDING - WEIGHTED AVERAGE        84,561         84,560
                                                     ===========     ===========
BASIC & DILUTED EARNINGS (LOSS) PER COMMON SHARE:
     From continuing operations                       $     1.14     $     0.76
     From discontinued operations                             --          (0.03)
                                                     -----------     -----------
 
BASIC AND DILUTED EARNINGS PER COMMON SHARE           $     1.14     $     0.73
                                                     ===========     ==========

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

</TABLE>

                                       4
<PAGE>
<TABLE>

                            PUGET SOUND ENERGY, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (Dollars in Thousands)
                                   (Unaudited)
<CAPTION>
Three Months Ended September 30,                       1998                1997
---------------------------------                      ----                ----
<S>                                            <C>                  <C>  

Net Income                                     $     21,091         $    11,998
Other comprehensive income, net of tax:
     Unrealized holding losses on available
          for sale securities                        (6,586)                 --
                                               ------------         -----------

Comprehensive Income                           $     14,505         $    11,998
                                               ============         ===========



</TABLE>
<TABLE>


                            PUGET SOUND ENERGY, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (Dollars in Thousands)
                                   (Unaudited)

<CAPTION>
Nine Months Ended September 30,                        1998                1997
--------------------------------                       ----                ----
<S>                                            <C>                  <C>    
Net Income                                     $    106,594         $    75,425
Other comprehensive income, net of tax:
     Unrealized holding losses on available
          for sale securities                        (5,806)                 -- 
                                                
                                               ------------         -----------
Comprehensive Income                           $    100,788         $    75,425
                                               ============         ===========

</TABLE>

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

                                       5
<PAGE>
<TABLE>

                            PUGET SOUND ENERGY, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
                                   (Unaudited)

                                     ASSETS
<CAPTION>
                                               September 30         December 31
                                                       1998                1997
                                               ------------         -----------
<S>                                            <C>                  <C>
UTILITY PLANT:
     Electric                                   $ 3,748,565         $ 3,632,652
     Gas                                          1,299,013           1,231,109
     Less: Accumulated depreciation
           and amortization                      (1,689,511)         (1,613,300)
                                                -----------         -----------

          Net utility plant                       3,358,067           3,250,461
                                                -----------         -----------

OTHER PROPERTY AND INVESTMENTS                      249,179             279,644
                                                -----------         -----------

CURRENT ASSETS:
     Cash                                            14,640               7,759
     Accounts receivable                            294,969             280,787
     Materials and supplies, at average cost         61,512              54,423
     Prepayments and other                           11,282               5,420
                                                -----------         -----------
          Total current assets                      382,403             348,389
                                                                               
LONG-TERM ASSETS:
     Regulatory asset for deferred income taxes     259,545             258,430
     Tenaska regulatory asset                       220,102             215,000
     Other                                          138,903             141,446
                                                -----------         -----------

          Total long-term assets                    618,550             614,876
                                                -----------         -----------

TOTAL ASSETS                                    $ 4,608,199         $ 4,493,370
                                                ===========         ===========

</TABLE>
    The accompanying notes are an integral part of the financial statements.

                                       6
<PAGE>
<TABLE>
                            PUGET SOUND ENERGY, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
                                   (Unaudited)

                         CAPITALIZATION AND LIABILITIES
<CAPTION>
                                               September 30         December 31
                                                       1998                1997
                                               ------------         -----------
<S>                                            <C>                  <C>   
CAPITALIZATION:
    Common shareholders' investment:
       Common stock, $10 stated value,
       150,000,000 shares authorized,
       84,560,567 and 84,560,645 shares 
       outstanding                              $   845,606         $   845,606
    Additional paid-in capital                      450,763             450,845
    Earnings reinvested in the business              26,221              46,672
    Accumulated other comprehensive income            9,148              14,954
                                                -----------         -----------
                                                  1,331,738           1,358,077
    Preferred stock not subject to
      mandatory redemption                           95,265              95,488
    Preferred stock subject to
      mandatory redemption                           73,162              78,134
    Corporation  obligated,   mandatorily  
      redeemable  preferred  securities  of
      subsidiary trust holding solely junior 
      subordinated debentures of the 
      corporation                                   100,000             100,000
    Long-term debt                                1,524,739           1,411,707
                                                -----------         -----------
           Total capitalization                   3,124,904           3,043,406
                                                -----------         -----------

CURRENT LIABILITIES:
    Accounts Payable                                168,045             116,548
    Short-term debt                                 358,741             372,538
    Current maturities of long-term debt             57,000              51,000
    Purchased gas liability                           2,970                 876
    Accrued expenses:
      Taxes                                          58,709              73,636
      Salaries and wages                             16,088              15,326
      Interest                                       29,683              27,704
      Other                                          21,751              33,198
                                                -----------         -----------
          Total current liabilities                 712,987             690,826
                                                -----------         -----------

DEFERRED INCOME TAXES                               632,355             629,018
                                                -----------         -----------
OTHER DEFERRED CREDITS                              137,953             130,120
                                                -----------         -----------
TOTAL CAPITALIZATION AND LIABILITIES            $ 4,608,199         $ 4,493,370
                                                ===========         ===========
</TABLE>
    The accompanying notes are an integral part of the financial statements.


                                       7
<PAGE>
<TABLE>

                            PUGET SOUND ENERGY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (Unaudited)
<CAPTION>
Nine Months Ended September 30,                        1998                1997
--------------------------------                       ----                ----
<S>                                              <C>                 <C>
OPERATING ACTIVITIES:
Income from continuing operations                $  106,594          $   78,047
Adjustments to reconcile income from
  continuing operations to net cash
  provided by operating activities:
     Depreciation and amortization                  123,171             122,811
     Deferred income taxes and tax credits - net      2,223               3,192
     PRAM accrued revenues                               --              40,777
     Other                                           40,667              77,916
     Change in certain current assets
       and liabilities (Note 5)                       2,824              (6,634)
--------------------------------------------------------------------------------
        Net Cash Provided by Operating Activities   275,479             316,109
--------------------------------------------------------------------------------

INVESTING ACTIVITIES:
Construction expenditures - excluding
  equity AFUDC                                     (230,744)           (176,306)
Additions to energy conservation program             (4,730)             (2,849)
Cash received from sale of conservation assets-net       --              34,380
Other                                                (3,885)             17,785
--------------------------------------------------------------------------------
          Net Cash Used by Investing Activities    (239,359)           (126,990)
--------------------------------------------------------------------------------

FINANCING ACTIVITIES:
Decrease in short-term debt, net                    (13,797)            (29,591)
Dividends paid                                     (127,037)           (127,664)
Issuance of common and preferred securities              --             100,066
Issuance of Bonds                                   200,000                  --
Redemption of bonds and notes                       (81,002)                 (1)
Redemption of common and preferred stock             (5,236)           (128,742)
Issue costs of bonds and stock                       (2,167)             (1,530)
--------------------------------------------------------------------------------
          Net Cash Used by Financing Activities     (29,239)           (187,462)
--------------------------------------------------------------------------------
Increase in cash from continuing operations           6,881               1,657
Decrease in cash from discontinued operations:
  Investing activities                                   --              (2,622)
--------------------------------------------------------------------------------
Net Increase (decrease) in cash                       6,881                (965)
Cash at Beginning of year                             7,759               4,335
Adjustment to conform fiscal year of WECo                --                  39
================================================================================
Cash at End of Period                            $   14,640          $    3,409
================================================================================
</TABLE>
    The accompanying notes are an integral part of the financial statements.

                                       8
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)      SUMMARY OF CONSOLIDATION POLICY

         The  consolidated  financial  statements  include the accounts of Puget
Sound Energy,  Inc. ("the  Company") and its  wholly-owned  subsidiaries,  after
elimination  of  all  significant  intercompany  items  and  transactions.   One
immaterial subsidiary is stated on an equity basis.

         The consolidated  financial  statements contained in this Form 10-Q are
unaudited.  In the opinion of management,  all adjustments  necessary for a fair
presentation of the results for the interim periods have been reflected and were
of a normal recurring nature other than as described in footnotes 2 and 4. These
condensed financial  statements should be read in conjunction with the Company's
annual report on Form 10-K.

         On  February  10,  1997,  the  Company   consummated  its  merger  with
Washington  Energy  Company  ("WECo").  The merger has been  accounted  for as a
pooling of interests.  Accordingly,  the consolidated  financial statements have
been  retroactively  restated to include the  results of  operations,  financial
position  and cash flows of WECo for all periods  prior to  consummation  of the
merger.

         Effective with the merger, WECo's 1996 fiscal year-end was changed from
September 30 to December 31 to conform to the Company's  year-end.  Accordingly,
WECo's  operations  for the three  months ended  December  31,  1996,  have been
reported as an adjustment of $10.8 million to consolidated  retained earnings in
the first quarter of 1997.  WECo's  revenues for the three months ended December
31, 1996, were $148.6 million, net income was $16.9 million, common stock issued
was $1.0 million and common stock  dividends  declared were $6.1 million for the
same period.

(2)      MERGER WITH WASHINGTON ENERGY COMPANY

         Effective  February 10,  1997,  WECo and its  wholly-owned  subsidiary,
Washington Natural Gas Company,  ("WNG") were merged into the Company,  formerly
Puget Sound Power & Light Company ("PSPL"), which then changed its name to Puget
Sound Energy, Inc.

         In  connection  with the  merger,  the  Company  recognized  direct and
indirect  pre-tax  merger-related  expenses  of $55.8  million  during the first
quarter of 1997.  The charge  consisted  primarily of  severance  costs of $15.5
million, benefit-related curtailment costs of $9.1 million, transaction costs of
$13.7 million and systems and facilities  integration costs of $7.2 million. The
nonrecurring  charge reduced net income by approximately  $36.3 million or $0.43
per share. In addition,  pre-tax  merger-related  costs of $4.8 million or $0.04
per share were recognized in the fourth quarter of 1996 by PSPL.

         The order  approving the merger,  issued by the Washington  Commission,
     contains a rate plan that is designed to provide a five-year period of rate
certainty for customers and provide the Company with an opportunity to achieve a
reasonable return on investment. As required under the merger order, the Company
filed tariffs,  effective February 8, 1997, that resulted in an average electric
rate decrease of 5.6% related to the termination of the Periodic Rate Adjustment
Mechanism  ("PRAM"),  and an increase in electric  general rates of between 1.0%
and 2.5%,  depending  on rate class.  The general  tariff  rate  increase  had a
positive  impact on  earnings  while the  decrease  related  to the PRAM did not
affect  earnings  because  all  previously  accrued  PRAM  revenues  were  fully
collected.  The net impact on  customer  rates was an average  rate  decrease of
3.7%, including a decrease in residential rates of 3.2%. General electric tariff
rates were  stipulated to increase  between 1.0% to 1.5% depending on rate class
on  January 1 of each of the three  following  years,  while  those for  certain
customers  will  increase  by 1.5% in the  fourth  year.  General  rates for all
classes of natural gas customers  will remain  unchanged  until January 1, 1999,
when they will decrease sufficiently to reduce gas sales margin by 1 percent.

                                       9
<PAGE>

(3)      EARNINGS PER COMMON SHARE

         Basic  earnings per common share have been  computed  based on weighted
average  common shares  outstanding  of 84,561,000 for the three and nine months
ended  September 30, 1998 and  84,561,000  and 84,560,000 for the three and nine
months ended September 30, 1997, respectively.

         Diluted  earnings per common share have been computed based on weighted
average common shares outstanding of 84,696,000 and 84,680,000 for the three and
nine months ended September 30, 1998 and 84,626,000 and 84,618,000 for the three
and nine months ended September 30, 1997, respectively. These shares include the
dilutive effect of securities related to long-term  employee  compensation plans
approved by shareholders.

(4)      DISCONTINUED OPERATIONS

     On March 5, 1997, the Company  conveyed its interests in  undeveloped  coal
properties  through its wholly-owned  subsidiary  Thermal Energy,  Inc. to Wesco
Resources, Inc. effective February 1, 1997. The Company's remaining $4.0 million
investment in Thermal Energy, Inc. was written off to expense and appears in the
consolidated financial statement as discontinued operations.

(5)      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
         The following  provides  additional  information  concerning  cash flow
activities:
<CAPTION>
Nine Months Ended September 30                         1998                1997
------------------------------                  -----------         -----------
<S>                                             <C>                 <C>
Changes in current asset and 
 current liabilities:
  Accounts receivable                             $ (14,182)           $ 95,921
  Materials and supplies                             (7,090)             (1,671)
  Prepayments and Other                              (5,862)              2,386
  Purchased gas liability                             2,094             (29,314)
  Accounts payable                                   51,497             (42,680)
  Accrued expenses and Other                        (23,633)            (31,276)
================================================================================
Net change in current assets and
  current liabilities                               $ 2,824            $ (6,634)
================================================================================
Cash payments:
  Interest (net of capitalized interest)           $103,495            $ 81,123
  Income taxes                                      $66,360             $(2,152)
--------------------------------------------------------------------------------

</TABLE>

                                       10
<PAGE>


(6)      OTHER

         On June 15, 1998 the Company  issued $200 million  principal  amount of
Senior  Medium-Term  Notes,  Series A. The  Notes are due June 15,  2018 with an
interest rate of 6.74%.

         In September  1998,  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  principal  amount of  Senior  Notes,
secured by a pledge of First Mortgage Bonds.  The Senior Notes may be offered in
one or more  series  at  prices  and on  terms to be  determined  at the time of
offering.

     In June 1997, the FASB issued Statement of Financial  Accounting  Standards
No. 131,  "Disclosures about Segments of an Enterprise and Related  Information"
("Statement No. 131"),  which  establishes  requirements  that companies  report
certain information about operating segments. Statement No. 131 is effective for
fiscal years beginning after December 15, 1997.  While this statement may result
in additional financial disclosures,  it will not impact the Company's financial
position or results of operations.

     In  February  1998,  the FASB  issued  Statement  of  Financial  Accounting
Standards   No.  132,   "Employers   Disclosures   about   Pensions   and  Other
Postretirement   Benefits"   ("Statement  No.  132"),   which  standardizes  the
disclosure   requirements  for  pensions  and  other  postretirement   benefits.
Statement No. 132 is effective  for fiscal years  beginning  after  December 15,
1997. While this statement may result in additional  financial  disclosures,  it
will not impact the Company's financial position or results of operations.

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No.  133,  "Accounting  for  Derivative   Instruments  and  Hedging  Activities"
("Statement No. 133") which establishes  accounting and reporting  standards for
derivative  instruments and hedging  activities.  Statement No. 133 is effective
for all fiscal  years  beginning  after June 15,  1999.  The Company has not yet
determined the effect Statement No. 133 will have on its financial statements or
the timing of adoption.

                                       11
<PAGE>

Item 2        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
              AND RESULTS OF OPERATIONS

         The  following  discussion  of the  Company's  business  includes  some
forward-looking  statements that involve risks and uncertainties.  Words such as
"estimates," "expects," "anticipates," "plans," and similar expressions identify
forward-looking  statements  involving risks and uncertainties.  Those risks and
uncertainties  include, but are not limited to, the ongoing restructuring of the
electric and gas industries and the outcome of regulatory proceedings related to
that restructuring.  The ultimate impacts of both increased  competition and the
changing  regulatory  environment  on  future  results  are  uncertain,  but are
expected to  fundamentally  change how the Company  conducts its  business.  The
outcome of these  changes and other  matters  discussed  below may cause  future
results to differ materially from historic results,  or from results or outcomes
currently expected or sought by the Company.

                              RESULTS OF OPERATIONS

         Net income for the three months  ended  September  30, 1998,  was $21.1
million on operating  revenues of $427.4  million,  compared  with net income of
$12.0  million on  operating  revenues of $341.0  million for the same period in
1997.  Income for common stock was $17.9  million for the third  quarter of 1998
and $9.0 million for the third quarter of 1997.  Basic and Diluted  earnings per
common share were $0.21 for the third  quarter of 1998 compared to $0.11 for the
third quarter of 1997.

         For the first nine  months of 1998,  net  income was $106.6  million on
operating  revenues  of  $1,315.0  million,  compared  with net  income of $75.4
million on operating  revenues of $1,157.1 million for the corresponding  period
in 1997.  Income for common stock was $96.8 million for the first nine months of
1998 and $61.4 million for the same period in 1997.  Basic and diluted  earnings
per common  share were $1.14 for the nine months  ended  September  30, 1998 and
$0.73 for the same period in 1997.

         The  increase in net income and  earnings  per share for the first nine
months of 1998 compared to the first nine months of 1997 is primarily the result
of the absence of the after-tax charge of $36.3 million (43 cents per share) for
costs related to the merger which was recorded in the first quarter of 1997. Net
income for the first nine months of 1997 also  included an  after-tax  charge of
$2.6  million  (3 cents per  share),  related  to a write  off of the  Company's
remaining  investment in  undeveloped  coal  reserves and related  activities in
southeastern  Montana.  These  charges  in the  first  nine  months of 1997 were
partially  offset by $13.6  million  (16 cents per  share) of one time  benefits
related  to an  income  tax  refund  received  in the  second  quarter  of 1997.
Excluding  the  impact  of these  charges  and  credits  to  income,  continuing
operations  for the first nine  months of 1998  produced  earnings  of $1.14 per
share compared to $1.03 in the first nine months of 1997.

         Total  kilowatt-hour  sales were 7.9 billion,  including 3.3 billion in
sales to other  utilities,  for the  third  quarter  of  1998,  compared  to 7.1
billion,  including  2.6  billion  in sales to other  utilities,  for the  third
quarter of 1997.  For the nine month periods ended  September 30, 1998 and 1997,
total kilowatt-hour  sales were 21.8 billion,  including 6.6 billion in sales to
other  utilities,  and 19.9  billion,  including  5.0  billion in sales to other
utilities, respectively.

         Total gas sales in the third quarter of 1998 were 127.7 million  therms
compared to 128.9 million  therms in the third quarter of 1997.  Total gas sales
for the nine months ended September 30, 1998, were 678.6 million therms compared
to 686.1 million therms in the nine months ended September 30, 1997.

                                       12
<PAGE>


         The  Company's  operating  revenues  and  associated  expenses  are not
generated evenly during the year.  Variations in energy usage by customers occur
from season to season and from month to month  within a season,  primarily  as a
result of changing  weather  conditions.  The Company  normally  experiences its
highest  energy  sales in the first and fourth  quarters  of the year.  Electric
sales to other  utilities  also vary by quarter and year  depending  principally
upon water conditions for the generation of hydroelectric power,  customer usage
and the energy requirements of other utilities.


                                       13
<PAGE>

<TABLE>
                              Results of Operations
                           Comparative Periods Ending
                    September 30, 1998 vs. September 30, 1997
                               Increase (Decrease)
<CAPTION>

                                                      Three                Nine
                                                      Month               Month
                                                     Period              Period
                                                     --------------------------
                                                             (In Millions)
<S>                                                  <C>                 <C>   

Operating revenue changes
  General rate increases 
    (effective 2/10/97 and 1/1/98)                     $3.4               $14.4
  PRAM revenues                                          --                44.8
  BPA Residential Purchase & Sale Agreement            (0.5)                0.2
  Sales to other utilities                             72.5                93.4
  Electric load and other changes                      11.4                19.9
  Gas revenue change                                    3.8                  --
  Other revenue changes                                (4.2)              (14.7)
                                                     ------              ------

          Total operating revenue change               86.4               158.0
                                                     ------              ------

Operating expense changes Energy costs:
          Purchased electricity                        68.4                96.6
          Purchased gas                                 0.7                (0.1)
          Electric generation fuel                      3.4                 6.7
          Residential exchange credit                   2.1                11.4
  Utility operations and maintenance                   (3.5)              (12.4)
  Other operations and maintenance                     (4.4)              (13.2)
  Depreciation and amortization                        (4.5)                0.4
  Merger costs                                           --               (55.8)
  Taxes other than federal income taxes                 0.4                 1.9
  Federal income taxes                                  9.4                61.3
                                                     ------              ------

          Total operating expense change               72.0                96.8
                                                     ------              ------

Other income                                           (0.3)              (18.6)

Interest charges                                        5.0                14.0
                                                     ------              ------

          Income from continuing operations             9.1                28.6

Discontinued operations, net of tax                      --                (2.6)
                                                     ------              ------

          Net income change                            $9.1               $31.2
                                                     ======              ======

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

</TABLE>

                                       14
<PAGE>

         OPERATING REVENUES

         Electric  operating  revenues for both the three and nine month periods
ended September 30, 1998,  increased compared to the same periods in 1997 due to
an overall average 1.8% general rate increase  effective February 8, 1997 and an
overall average 1.2% general rate increase on January 1, 1998.

         Electric  operating  revenues for the nine months ended  September  30,
1998,  increased $172.7 million compared to the same period in 1997 partially as
a result of a $48.6 million PRAM revenue  reduction in the first quarter of 1997
associated with an IRS 1991-1994  Conservation  tax refund and related  interest
income.  Based on the Company's  agreement with the Washington  Commission,  the
benefit of the tax refund was passed on to retail  customers  as a reduction  of
the PRAM accrued revenue  balance.  The $48.6 million  revenue  reduction in the
nine month period ended  September 30, 1997 was offset by a decrease in federal,
state  and  local  taxes  as  well  as a  decrease  in  interest  expense  and a
recognition of interest income.

         Revenues in 1998 and 1997 were  reduced  because of the credit that the
Company  received  through the Residential  Purchase and Sale Agreement with the
Bonneville Power  Administration  ("BPA").  The agreement  enables the Company's
residential  and small farm  customers  to receive the  benefits  of  lower-cost
federal  power.  On January 29, 1997,  the Company and BPA signed a  Residential
Exchange Termination Agreement.  The Agreement ends the Company's  participation
in the  Residential  Purchase  and  Sale  agreement  with  BPA.  As  part of the
Termination  Agreement,  the  Company  will  receive  payments  by  the  BPA  of
approximately  $235 million over five years. Under the rate plan approved by the
Washington Commission in its merger order, the Company will continue to reflect,
in customers' bills, the current level of Residential  Exchange  benefits.  Over
the remainder of the  Residential  Exchange  Termination  Agreement from October
1998 through June 2001, it is projected  that the Company will credit  customers
approximately  $193.3  million  more than it will  receive  from BPA  during the
following periods:

                                                         Dollars in
                                 Period                    Millions
                                 ------                  ----------
                         October- December 1998               $ 9.5
                        January - December 1999                71.6
                        January - December 2000                71.8
                          January - June 2001                  40.4
                                                             ------
                                                             $193.3

         Electric  sales to other  utilities  increased  $72.5 million and $93.4
million in the quarter and nine months ended  September 30, 1998,  respectively,
over the same  period in 1997 as  wholesale  sales to Duke  Energy  Trading  and
Marketing and other  transactions  in which energy is delivered  within the next
thirty days have increased.  While wholesale sales volumes increased 27% and 34%
in the three and nine  months  ended  September  30,  1998  compared to the same
periods in 1997, the dollar  volumes  associated  with the sales  increased more
dramatically  because of higher  wholesale  market  prices for electric  energy.
Related  power cost  expenses  for the  periods  also  increased  as the Company
generated and purchased more power for these sales. (See discussion of agreement
with Duke Energy Trading and Marketing under "Other".)

                                       15
<PAGE>

         Electric  revenues  increased  $11.4  million and $19.9 million for the
quarter and nine months ended September 30, 1998 compared to the same periods in
1997  primarily  as a result of 2% growth in the  number of  electric  customers
served as well as strong commercial and industrial customer sales.

         Gas  operating   revenues  for  the  quarter  ended  September  30,1998
increased  $3.8  million or 8.3% from the prior year  quarter  while gas volumes
decreased 1.0% from 128.9 million therms to 127.7 million therms.  This resulted
from a decrease in industrial firm and  transportation  sales volumes with lower
prices and margins and an increase in residential firm sales with a higher price
and margin. Gas sales margin (regulated utility sales less the cost of gas sold)
increased by $2.1 million,  or 7.9% in the third quarter of 1998 compared to the
same period in 1997.

         Gas operating revenues for the nine months ended September 30, 1998 and
September 30, 1997, were $274.5 million and $274.6 million, respectively. During
this period,  a 4.4% increase in gas customers was offset by the negative impact
of warmer weather on the company's gas heating load in the first quarter of 1998
compared  to 1997.  Gas  margin in the nine  months  ended  September  30,  1998
decreased slightly by $0.6 million or 0.4%.

         Other revenues decreased in both the three months and nine months ended
September  30, 1998 as compared to the same periods in 1997 due primarily to the
sale of an  unregulated  subsidiary  (Washington  Energy  Services  Company)  in
October 1997.

OPERATING EXPENSES

         Purchased  electricity  expenses  increased  $68.4  million  and  $96.6
million  for the  three  and  nine  month  periods  ended  September  30,  1998,
respectively,  compared  to the same  periods in 1997.  The  increases  were due
primarily to increased secondary power purchases from other utilities to support
wholesale sales and higher  payments for firm power  purchases from  non-utility
generators.

         Fuel expense  increased  $3.4 million and $6.7 million in the three and
nine month periods ended  September 30, 1998,  respectively,  as compared to the
same periods in 1997 primarily due to the Company generating more electricity at
Company-owned   gas-fired   combustion  turbine  plants.  These  increases  were
partially offset by reductions to Colstrip fuel expense.  In September 1998, the
Company recorded a reduction of $4.9 million in fuel expense and $3.5 million of
interest  income  related  to the  resolution  of  outstanding  issues  with the
Colstrip coal supplier.

         Residential  exchange credits associated with the Residential  Purchase
and Sale  Agreement  with BPA  decreased  $2.1 million and $11.4  million in the
three and nine months ended September 30, 1998 when compared to the same periods
in 1997.  The  primary  reason for the  decrease  was the  Residential  Exchange
Termination Agreement between the Company and BPA in January 1997.

         Utility Operations and maintenance  expenses decreased $3.5 million and
$12.4  million for the three and nine month  periods  ended  September 30, 1998,
respectively,  compared to the same periods in 1997. The decreases are primarily
the result of improved operating efficiencies as a result of the merger in 1997.

         Other  operations and maintenance  expenses  decreased $4.4 million and
$13.2  million for the three and nine month  periods  ended  September 30, 1998,
respectively,  compared to the same periods in 1997. The decreases are primarily
the result of the sale of the Company's unregulated subsidiary Washington Energy
Services Company in October 1997.

                                       16
<PAGE>

         Depreciation  and  amortization  expense  decreased  $4.5  million  and
increased $0.4 million for the three and nine month periods ended  September 30,
1998,  respectively,  from the same periods in 1997. The decrease in the quarter
was the result of an August 1997 Washington  Commission  Order which  authorized
the Company to record  interest income of $8.3 million related to a conservation
tax refund but  required the Company to expense  deferred  storm damage costs in
the amount of $7.4 million,  and  establish a $1.0 million  reserve to cover the
costs of a Company retail pilot program.

         Merger  related costs  recorded in the nine months ended  September 30,
1997,  were $55.8 million  including  amounts  related to transaction  expenses,
employee  separation  and systems and  facilities  integration.  On an after-tax
basis the charge was $36.3  million or 43 cents per share  during the first nine
months of 1997. (See Footnote 2 to the Consolidated Financial Statements.)

         Federal income taxes  increased $9.4 million for the three months ended
September  30,  1998,  primarily  due to higher  pre-tax  operating  income from
continuing operations for the quarter.

         Federal income taxes  increased $61.3 million for the nine months ended
September 30, 1998 from the same period in 1997 due to higher pre-tax  operating
income from  continuing  operations  in 1998 and a number of factors in 1997. An
IRS tax refund  related to the method of  accounting  for taxes on  conservation
expenditures  during the first quarter of 1997 decreased federal income taxes by
$26.5 million. In addition,  there was a $17.0 million reduction associated with
a decrease in PRAM revenues of $48.6 million. Merger costs expensed in the first
quarter of 1997 further reduced federal income taxes by $19.3 million.

OTHER INCOME

         Other income,  net of federal  income tax,  decreased  $0.3 million and
$18.6 million for the three months and nine months periods ending  September 30,
1998, respectively, compared to the same periods in 1997. In September, 1998 the
Company  recorded $4.5 million of interest  income  related to the resolution of
outstanding issues with a coal supplier. In September 1997, the Company recorded
$8.4 million of interest income  associated with a conservation tax refund under
an order from the Washington  Commission  which authorized the Company to record
the interest  income and to write-off  deferred storm damage costs in the amount
of $7.4  million and  establish a $1.0  million  reserve to cover the costs of a
Company  retail pilot  program.  The  decrease in the nine month  period  ending
September  30, 1998,  was also due to the receipt of interest  income in 1997 of
$13.6 million from the IRS on tax refunds for prior years in  connection  with a
plant abandonment loss, conservation tax refunds and certain additional research
and experimental credits claimed for tax purposes.

INTEREST CHARGES

     Interest  charges,  which consist of interest and amortization on long-term
debt and other interest,  increased $5.0 million and $14.0 million for the three
and nine month periods ended September 30, 1998,  respectively,  compared to the
same periods in 1997 as a result of the  issuance of $300  million  7.02% Senior
Medium-Term  Notes,  Series A, in December  1997,  the  issuance of $100 million
8.231%  Capital  Trust  Debentures in June 1997 and the issuance of $200 million
6.74% Senior Medium-Term Notes,  Series A in mid-June 1998. These increases were
partially  offset by the maturity of $100  million  Secured  Medium-Term  Notes,
Series A in October 1997, $10 million  Secured  Medium-Term  Notes,  Series B in
February 1998 and $5 million Secured Medium-Term Notes, Series B in March 1998.

                                       17
<PAGE>

                  CONSTRUCTION, CAPITAL RESOURCES AND LIQUIDITY

         Construction  expenditures  (excluding  AFUDC) for the third quarter of
1998 were $89.3 million,  including $2.4 million of  conservation  expenditures,
compared to $61.4 million,  including $2.3 million of conservation expenditures,
for the third quarter of 1997. Year-to-date construction expenditures (excluding
AFUDC)  totaled  $229.7   million,   including  $4.7  million  of   conservation
expenditures, compared to $175.3 million, including $2.7 million of conservation
expenditures,  for the same period in 1997. Construction expenditures (excluding
AFUDC)  for 1998 and 1999 are  expected  to be $311  million  and $274  million,
respectively.  Construction expenditure estimates are subject to periodic review
and adjustment.

            Cash  provided  by  operations  (net of  dividends  and  AFUDC) as a
percentage of construction  expenditures  (excluding AFUDC) was 0.0% and (42.5)%
for the  third  quarters  of 1998  and  1997,  respectively.  Cash  provided  by
operations  (net  of  dividends  and  AFUDC)  as a  percentage  of  construction
expenditures  (excluding  AFUDC) was 62.1% and 105.4% for the nine month periods
ended September 30, 1998 and 1997, respectively.

         On September  30, 1998,  the Company had  available  $375.0  million in
lines of credit with various banks, which provide credit support for outstanding
commercial paper borrowing of $112.2 million,  reducing the available  borrowing
capacity under these lines of credit to $262.8 million. In addition, the Company
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.

                              YEAR 2000 CONVERSION
BACKGROUND

The Year 2000 problem results from the use of two digits rather than four digits
in computer hardware and software to define the applicable year (i.e. 98 instead
of 1998).  If not  corrected on computer  systems  that must process  dates both
before and after January 1, 2000, two digit year "fields" may create  processing
errors or system  failures.  The  Company's  goal is to be Year 2000 ready which
means that critical systems,  devices,  applications and business  relationships
have been  evaluated  and are expected to be suitable for continued use into and
beyond the Year 2000, or contingency plans are in place.

PROJECT APPROACH AND PROGRESS

The Company has  established a central  project team to coordinate all Year 2000
activities and identified exposure in three categories:  information technology;
embedded  chip  technology;   and  external   non-compliance  by  customers  and
suppliers.  The project team is taking a phased  approach in conducting the Year
2000 project for its internal systems. The phases include inventory, assessment,
planning/prioritizing,  remediation,  testing,  implementation  and  contingency
planning.  In  addition,   the  Company  has  engaged  outside  consultants  and
technicians to aid in formulating and implementing its plan. All business units,
excluding  embedded systems,  have completed the discovery phase.  Assessment is
scheduled  to  continue  until  November  1998,  with  remediation,  testing and
implementation scheduled to be completed during the second quarter of 1999.

                                       18
<PAGE>

The  Company  has been  upgrading  mainframe  and client  server  financial  and
business  applications  since 1997 and replacing many of its business systems as
part of its business  plans  following  its merger in 1997. In September , 1998,
the Company  implemented a SAP business system which includes  substantially all
of the  Company's  business  applications  with the  exception  of its  customer
service information system. Implementation of a new customer service information
system is currently  scheduled to begin in the fourth  quarter of 1998 and to be
complete by mid-year  1999. The new systems and software are designed to be Year
2000 compliant. The remainder of the applications and operating environments are
in the  remediation/testing  phase. Full  implementation of all applications and
components of the  Company's  internal  systems are scheduled for  completion by
mid-year 1999.

A  specialized  team has been  formed by the  Company to  inventory,  assess and
remediate embedded  technology in its generation,  transmission and distribution
systems for both gas and  electric  operations.  The project is currently in the
discovery phase. An engineering  consulting firm has been retained to assist the
Company in accelerating the assessment phase of the project. The consulting firm
has an assessment  database of 30,000 components used in the utilities industry.
The  assessment  phase is scheduled to be  completed in December  1998.  At that
time,  remediation,  testing and implementation will commence, and are scheduled
to be completed by the end of the second quarter of 1999.  Contingency  planning
specific  to  the  Year  2000  issue  will  begin  in  November  1998,  yielding
preliminary plans by the end of 1998. These plans will be refined and updated as
remediation  and test results are analyzed,  and are scheduled for completion in
third quarter of 1999.

The Company is also  communicating  with suppliers,  financial  institutions and
other  business  partners to coordinate  Year 2000  conversion and determine the
extent to which the  Company  is  exposed to third  party  compliance  failures.
Approximately  20% of vendors and  suppliers  have been  contacted to date.  All
third party assessment is scheduled to be completed in January 1999.

In addition,  the Company is working with various  industry groups including the
North American Electric  Reliability Council (NERC) and the regional reliability
council,  the Western Systems  Coordinating  Council (WSCC) in an effort to make
electricity  production  and delivery  systems  reliable  during the  millennium
transition.  The United  States  Department of Energy has asked NERC to assume a
leadership  role in preparing the U.S.  electric  industry for the transition to
the Year 2000.

COSTS

While the  replacement of business  systems under business plans  developed as a
result of the 1997 merger are not included in the  Company's  Year 2000 project,
those  replacements   substantially  reduce  the  number  of  internal  business
applications that require remediation. In addition to the costs of replacing new
business systems,  the Company has expended  approximately  $1.0 million through
September 30, 1998 on Year 2000 remediation efforts, exclusive of internal labor
costs.  Although it is  difficult  to  determine  the total  remaining  costs of
implementing the Year 2000 plan, the Company's current estimate is approximately
$11 million.  Approximately one third of these costs will be capitalized and the
remainder will be expensed.

                                       19
<PAGE>


RISK ASSESSMENT

The  Company's  current  customer  service  information  system is not Year 2000
compliant and is being replaced.  The implementation is expected to be completed
by mid-year 1999.  The Company's  ability to invoice and collect for services is
dependent  upon  implementation  of the new system or remediation of the current
system.  If the system is not implemented (or the current system  remediated) by
the year 2000,  certain normal business  activities such as customer billing and
collections could be adversely affected by interruptions.

The electric  power-supply  systems of North  America are  connected  into three
major  interconnections  called grids. The western grid covers the western third
of the U.S., western Canada and parts of Mexico.  Operational component failures
of any entity  connected  to the grid could  cause  failures  in that grid.  The
Company will need to continue to assess this risk as the  millennium  approaches
to  evaluate  the  likelihood  of power  failures  and  develop  approaches  for
mitigating the risk of failures.

Much of the natural gas and electric  systems are comprised of wires,  poles and
pipes  containing  no  imbedded  chips.  However,  these  systems do employ some
computer  components that could be affected by the Year 2000  transition.  Since
many of the  components  used  by the  Company  exist  in  multiple  sub-station
locations,  there is a risk  that a  component  could  be  missed,  a  component
manufacturer could provide erroneous information, or the component (while deemed
and  tested  compliant)  could  fail in a  specific  configuration  found at the
Company . The  Company  has  formed a  special  team to  handle  these  types of
components  (embedded  systems),  and retained an engineering firm with specific
utility experience to assist in the effort.

The  failure  to  correct  a  material  Year  2000  problem  could  result in an
interruption  in, or a failure of,  Company  business  activities or operations.
Such failures  could  materially and adversely  affect the Company's  results of
operations,  liquidity and financial  condition.  Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000  readiness of  third-party  suppliers  and  customers,  the Company is
unable to determine at this time whether the  consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial  condition.  The Year 2000 project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem and the Year 2000
readiness  of  its  material  vendors.  The  Company  believes  that,  with  the
implementation  of  new  business  systems  and  completion  of the  project  as
scheduled,  the possibility of significant  interruptions  of normal  operations
should be reduced.

CONTINGENCY PLANS

The Company has started a process to identify various scenarios that could occur
in the event that Year 2000 issues are not resolved in a timely manner. Existing
emergency  preparedness  plans will be updated,  and  contingency  plans will be
developed as necessary to address the risk  scenarios.  Contingency  planning is
scheduled to continue through the third quarter of 1999.


                                       20
<PAGE>


FORWARD LOOKING STATEMENTS

Readers are cautioned that forward-looking statements contained in the Year 2000
update are based on management's best estimates and may be influenced by factors
that could cause actual  outcomes and results to be  materially  different  than
projected.  Specific factors that might cause differences  between the estimates
and actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer  code,  timely  responses  to  and  corrections  by  third-parties  and
suppliers,  the ability to implement new systems in a timely manner, the ability
to  implement  interfaces  between  the new  systems  and the  systems not being
replaced, and similar uncertainties.  Due to the general uncertainty inherent in
the Year 2000 problem,  resulting in part from the  uncertainty of the Year 2000
readiness of third-parties and the  interconnection  of global  businesses,  the
Company  cannot  ensure  its  ability  to timely  and  cost-effectively  resolve
problems  associated  with Year 2000 issues that may affect its  operations  and
business, or expose it to third-party liability.

                                      OTHER

         On March 20, 1991, the Company  executed a 20-year contract to purchase
energy and 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, the Company and
Tenaska  Washington  Partners entered into revised agreements which have lowered
purchased power costs from the Tenaska project by restructuring  its natural gas
supply. The project's  original  long-term gas supply contracts  contained fixed
and escalating gas prices that were well above the current and projected  future
market prices for natural gas. As a result of the restructuring,  the Company is
now 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. The Company obtained an order from the Washington Commission
creating a regulatory asset related to the $215 million  restructuring  payment.
Under  terms of the order,  the  Company  is allowed to accrue as an  additional
regulatory  asset one-half the carrying  costs of the deferred  balance over the
first five years.  Amortization of the regulatory  assets  commenced  January 1,
1998 and extends over the remaining 14 year life of the contract.

         On April 1, 1998 the  Company and Duke  Energy  Trading  and  Marketing
(DETM) of Houston, a unit of Duke Energy Corp.,  signed an agreement relating to
energy-marketing  and  trading  activities  in 14  western  States  and  British
Columbia.  The purpose of this  agreement is to  coordinate  the two  companies'
activities in serving Puget Sound Energy's native power load with DETM's Western
power and natural gas marketing and trading operations.  The companies share the
benefits of this coordination  proportionally up to certain  stipulated  amounts
intended to be reflective  of the value the  companies  would have realized from
their respective operations in the absence of the agreement. The companies share
equally any benefits created above the stipulated amounts.

         Under the terms of the  agreement,  DETM performs the forward  electric
energy trading function.  As a result,  the Company's future wholesale "sales to
other utilities" revenues and related "secondary purchase" power expenses, which
previously have reflected  trading  activity by the Company,  will be lower than
amounts which the Company would report absent this  agreement.  During the third
quarter of 1998, the Company  continued to execute in its own name  transactions
in which electric  energy is delivered  within the next thirty days.  Therefore,
during this interim period,  the Company's  results include those  transactions.
When  fully  implemented,  the  Company  will  only  record  as  "sales to other
utilities" or "secondary  purchases"  sales to or purchases from DETM reflecting
the Company's net energy surplus or deficiency  over the reporting  period.  The
Company  will  also  record  its  share of the  benefits  that  result  from the
agreement.  The  agreement  provides  that forward  trading  activities  will be
conducted  according to DETM's energy price risk and credit  policies,  and that
the Company is not  responsible  for any losses  caused by deviation  from these
policies.

                                       21
<PAGE>

         On June 25, 1998,  the Company  received  approval from the  Washington
Commission  to begin a new  performance-based  mechanism for  strengthening  its
gas-supply  purchasing and  gas-storage  practices.  The Purchase Gas Adjustment
(PGA)  Incentive  Mechanism,  which  encourages  competitive  gas purchasing and
management  of pipeline  and  storage-capacity  became  effective  July 1, 1998.
Incentive gains and losses from the three-year  experimental  program are shared
between customers and shareholders.  Currently, the Company manages more than 40
natural gas supply and pipeline  contracts,  making sure that supplies arrive in
sufficient quantities through pipeline capacity contracts.  It purchases natural
gas  supplies  from  producers  primarily in western  Canada and the U.S.  Rocky
Mountains.   The  Company's  supply  portfolio  includes  low-cost  natural  gas
purchased  during the summer and stored for winter use. The Company  expects the
PGA Incentive  Mechanism to produce modest increases in gas margin.  No gains or
losses were  recognized  in the third  quarter of 1998 as realized  amounts were
below minimum thresholds for ratemaking purposes.

         On July 8, 1998,  the  Washington  Commission  approved  the  Company's
requested  accounting  treatment  for its program to reduce  costly  tree-caused
power outages. The Tree Watch program,  which focuses on controlling  vegetation
outside the Company's rights-of-way,  should improve service reliability for its
customers and result in future savings in outage recovery  costs.  The five-year
$43 million program will be treated as an investment that will be amortized over
10 years.  The Company expects the Tree Watch investment to be offset by savings
from lower outage restoration and storm damage costs over the same period.

     On November 2, 1998,  the Company  announced it signed an agreement to sell
the  Company's  735-megawatt  interest  in the  four-unit,  coal-fired  Colstrip
generation  plant  in  eastern  Montana,  as  well  as  associated  transmission
facilities. The Company signed the agreement with PP&L Global, Inc., of Fairfax,
Virginia,  a subsidiary  of PP&L  Resources,  Inc.  Included in the sale are the
Company's 50 percent  interest in Colstrip Units 1 and 2; 25 percent interest in
Units 3 and 4; and associated Colstrip transmission capacity across Montana. The
sales price is expected to be $549 million  before taxes and  expenses.  The net
book value of these assets and related  regulatory assets is approximately  $464
million.  The Company  expects the Colstrip  sale to close in the second half of
1999.  Completion of the sale is contingent on receipt of acceptable  regulatory
treatment from the Washington  Utilities and  Transportation  Commission and the
Federal Energy Regulatory Commission.

         The  Company  has also  agreed  to join  with the  other  owners of the
coal-fired generating plant at Centralia, Washington by offering for sale its 92
megawatt  ownership  interest in the facility.  As part of the sale process,  an
independent  consultant  has been  hired to  review  the  projected  reclamation
liability  related to the coal mining  operations  (the study is  scheduled  for
completion in early 1999).

         For a discussion of FASB Statement No. 131, "Disclosures about Segments
of an  Enterprise  and  Related  Information",  see  Note 6 to the  Consolidated
Financial Statements.

                                       22
<PAGE>

         For a discussion  of FASB  Statement  No. 132,  "Employers  Disclosures
about  Pensions  and  Other  Postretirement   Benefits",   see  Note  6  to  the
Consolidated Financial Statements.

         For a discussion of FASB Statement No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities",  see Note 6 to the Consolidated  Financial
Statements.


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PART II       OTHER INFORMATION
Item 1        LEGAL PROCEEDINGS

         Contingencies  arising  out  of the  normal  course  of  the  Company's
business,  exist at September 30, 1998. 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

         In accordance  with the Company's  Bylaws,  a shareholder  proposing to
transact business at the Company's annual meeting must provide written notice of
such proposal, in the manner required by the Company's Bylaws, no later than 120
days prior to the date of such annual meeting (or, if the Company  provides less
than 120 days' notice of such  meeting,  no later than 10 days after the date of
the Company's notice). For a shareholder proposal to be considered for inclusion
in the  Company's  proxy  materials  relating  to its  1999  Annual  Meeting  of
Shareholders,  such proposal must be received at the principal  executive office
of the  Company no later than  December  1, 1998.  In  addition,  if the Company
receives  notice of a shareholder  proposal after February 15, 1999, the persons
named as  proxies  in the  Company's  proxy  materials  will have  discretionary
authority to vote on such shareholder proposal.

Item 6        EXHIBITS AND REPORTS ON FORM 8-K

      (a)     The following exhibits are filed herewith:

              12-a   Statement setting forth computation of ratios of earnings 
                     to fixed charges (1993 through 1997 and 12 months ended 
                     September 30, 1998)

              12-b   Statement  setting forth  computation of ratios of earnings
                     to combined  fixed  charges and preferred  stock  dividends
                     (1993 through 1997 and 12 months ended September 30, 1998)

              27     Financial Data Schedule

      (b)     Reports on Form 8-K

              None


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                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                       PUGET SOUND ENERGY, INC.


                                       JAMES W. ELDREDGE
                                       ----------------------------------
                                       JAMES W. ELDREDGE
                                       Corporate Secretary and Controller

Date: November 13, 1998                Chief accounting officer and officer duly
                                       authorized to sign this report on behalf 
                                       of the registrant



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