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,
      2009
                
                OR
 
 [  ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE SECURITIES
      EXCHANGE ACT OF 1934
 
 For
      the Transition period from ________ to
_________
 
 
 Commission
                File
      Number
              Exact
      name of registrant as specified
                in
      its charter, state of incorporation,
                address
      of principal executive offices,
                telephone
      number
              I.R.S.
                Employer
                Identification
                Number
 
 
 1-16305
              PUGET
      ENERGY, INC.
                A
      Washington Corporation
                10885
      NE 4th
      Street, Suite 1200
                Bellevue,
      Washington 98004-5591
                (425)
      454-6363
              91-1969407
 
 
 1-4393
              PUGET
      SOUND ENERGY, INC.
                A
      Washington Corporation
                10885
      NE 4th
      Street, Suite 1200
                Bellevue,
      Washington 98004-5591
                (425)
      454-6363
              91-0374630
 
 
 Indicate
by check mark whether the registrants: (1) have filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) have been subject to such filing requirements for
the past 90 days.
  Puget
      Energy, Inc.
              Yes
              /  /
              No
              /X/
              
              Puget
      Sound Energy, Inc.
              Yes
              /X/
              No
              /  /
 
 Indicate
by check mark whether the registrants have submitted electronically and posted
on their corporate websites, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
  Puget
      Energy, Inc.
              Yes
              /  /
              No
              /  /
              
              Puget
      Sound Energy, Inc.
              Yes
              /  /
              No
              /  /
 
 Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company.  See
definition of “large accelerated filer, accelerated filer and smaller reporting
company” in Rule 12b-2 of the Exchange Act.
  Puget
      Energy, Inc.
              Large
      accelerated filer
              /  /
              Accelerated
      filer
              /  /
              Non-accelerated
      filer
              /X/
              Smaller
      reporting company
              /  /Puget
      Sound Energy, Inc.
              Large
      accelerated filer
              /  /
              Accelerated
      filer
              /  /
              Non-accelerated
      filer
              /X/
              Smaller
      reporting company
              /  /
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Puget
      Energy, Inc.
              Yes
              /  /
              No
              /X/
              
              Puget
      Sound Energy, Inc.
              Yes
              /  /
              No
              /X/
 
 As of
February 6, 2009, all of the outstanding shares of voting stock of Puget Energy,
Inc. are held by Puget Equico LLC, an indirect wholly owned subsidiary of Puget
Holdings LLC.  All of the outstanding shares of voting stock of Puget
Sound Energy, Inc. are held by Puget Energy, Inc.
  
  Table of
Contents
 DefinitionsFiling FormatForward-Looking StatementsPart I.
              Financial InformationItem 1.
              Financial StatementsPuget
      Energy, Inc.Consolidated Statements of Income –Three Months Ended
      September 30, 2009 (Successor) and Three Months Ended September 30, 2008
      (Predecessor)Consolidated Statements of Income – February 6, 2009 -
      September 30, 2009 (Successor), January 1, 2009 - February 5, 2009 and
      Nine Months Ended September 30, 2008 (Predecessor)Consolidated Statements of Comprehensive Income
      –Three Months Ended September 30, 2009 (Successor) and Three Months Ended
      September 30, 2008 (Predecessor)Consolidated Statements of Comprehensive Income –
      February 6, 2009 -  September 30, 2009 (Successor), January 1,
      2009 - February 5, 2009 and Nine Months Ended September 30, 2008
      (Predecessor)Consolidated Balance Sheets – September 30, 2009
      (Successor) and December 31, 2008 (Predecessor)Consolidated Statement of Shareholder’s Equity –
      September 30, 2009 (Successor), February 5, 2009 and December 31, 2008
      (Predecessor)Consolidated Statements of Cash Flows – February 6,
      2009 -  September 30, 2009 (Successor), January 1, 2009 -
      February 5, 2009  and Nine Months Ended September 30, 2008
      (Predecessor)Puget
      Sound Energy, Inc.Consolidated Statements of Income – Three and Nine
      Months Ended September 30, 2009 and 2008Consolidated Statements of Comprehensive Income
      – Three and Nine Months Ended September 30, 2009 and
    2008Consolidated Balance Sheets – September 30, 2009
      and December 31, 2008Consolidated Statement of Common Shareholder’s
      Equity – September 30, 2009 and December 31, 2008Consolidated Statements of Cash Flows – Nine Months
      Ended September 30, 2009 and 2008NotesCombined Notes to Consolidated Financial
      StatementsItem 2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      OperationsItem 3.
              Quantitative and Qualitative Disclosure About
      Market RiskItem 4.
              Controls and ProceduresPart II.
              Other InformationItem 1.
              Legal ProceedingsItem 1A.
              Risk FactorsItem 6.
              ExhibitsSignaturesExhibit Index
 
   
  DEFINITIONS
  
  AFUDC
              Allowance
      for Funds Used During ConstructionASC
              Accounting
      Standards CodificationASU
              Accounting
      Standards UpdateBPA
              Bonneville
      Power AdministrationCorps
              US
      Army CorpsEBITDA
              Earnings
      Before Interest, Tax, Depreciation and AmortizationFASB
              Financial
      Accounting Standards BoardFERC
              Federal
      Energy Regulatory CommissionGAAP
              Generally
      Accepted Accounting PrinciplesIRP
              Integrated
      Resource PlanISDA
              International
      Swaps and Derivatives AssociationkW
              KilowattkWh
              Kilowatt
      HourLIBOR
              London
      Interbank Offered RateMMBtus
              One
      Million British Thermal UnitsMW
              Megawatt
      (one MW equals one thousand kW)MWh
              Megawatt
      Hour (one MWh equals one thousand kWh)NAESB
              North
      American Energy Standards BoardNERC
              North
      American Electric Reliability CorporationNinth
      Circuit
              United
      States Court of Appeals for the Ninth CircuitNPNS
              Normal
      Purchase Normal SaleOCI
              Other
      Comprehensive IncomePCA
              Power
      Cost AdjustmentPGA
              Purchased
      Gas AdjustmentPSE
              Puget
      Sound Energy, Inc.Puget
      Energy
              Puget
      Energy, Inc.Puget
      Equico
              Puget
      Equico LLCPuget
      Holdings
              Puget
      Holdings LLCPURPA
              Public
      Utility Regulatory Policies ActREP
              Residential
      Exchange ProgramVIE
              Variable
      Interest EntityWashington
      Commission
              Washington
      Utilities and Transportation CommissionWECC
              Western
      Electricity Coordinating CouncilWSPP
              Western
      Systems Power Pool
  
  
   FILING FORMAT
 This
Report on Form 10-Q is a Quarterly Report filed separately by two different
registrants, Puget Energy, Inc. (Puget Energy) as a voluntary Securities and
Exchange Commission (SEC) filer, and Puget Sound Energy, Inc.
(PSE).  Puget Energy is a voluntary SEC filer as part of the
commitments approved by the Washington Utilities and Transportation Commission
(Washington Commission) in its merger order.  Any references in this
report to the “Company” are to Puget Energy and PSE collectively.
 
 FORWARD-LOOKING STATEMENTS
 Puget
Energy and PSE are including the following cautionary statements in this Form
10-Q 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 and assumptions of future events or
performance.  Words or phrases such as “anticipates,” “believes,”
“estimates,” “expects,” “future,” “intends,” “plans,” “predicts,” “projects,”
“will likely result,” “will continue” or similar expressions identify
forward-looking statements.
 Forward-looking
statements involve risks and uncertainties that 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.  However, 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:
 
 ·
              Governmental
      policies and regulatory actions, including those of the Federal Energy
      Regulatory Commission (FERC) and the Washington Commission, with respect
      to allowed rates of return, cost recovery, financing, industry and rate
      structures, transmission and generation business structures within PSE,
      acquisition and disposal of assets and facilities, operation, maintenance
      and construction of electric generating facilities, maintenance,
      construction and operation of natural gas and electric distribution and
      transmission facilities (natural gas and electric), licensing of
      hydroelectric operations and natural gas storage facilities, recovery of
      other capital investments, recovery of power and natural gas costs,
      recovery of regulatory assets and present or prospective wholesale and
      retail competition;·
              Failure
      of PSE to comply with FERC or Washington Commission standards and/or
      rules, which could result in penalties based on the discretion of either
      commission;·
              Failure
      of PSE to comply with electric reliability standards developed by the
      North American Electric Reliability Corporation (NERC) for users, owners
      and operators of the power system, which could result in penalties of up
      to $1.0 million per day per violation;·
              Changes
      in, adoption of, and compliance with laws and regulations, including
      decisions and policies concerning the environment, climate change,
      emissions, natural resources and fish and wildlife (including the
      Endangered Species Act) as well as the risk of litigation arising from
      such matters, whether involving public or private
    claimants;·
              The
      ability to recover costs arising from changes in enacted federal, state or
      local tax laws through revenue in a timely manner;·
              Changes
      in tax law, related regulations, or differing interpretation or
      enforcement of applicable law by the Internal Revenue Service or other
      taxing jurisdiction;·
              Accidents
      or natural disasters, such as hurricanes, windstorms, earthquakes, floods,
      fires and landslides, which can interrupt service and lead to lost
      revenues, cause temporary supply disruptions and/or price spikes in the
      cost of fuel and raw materials and impose extraordinary
    costs;·
              Commodity
      price risks associated with procuring natural gas and power in wholesale
      markets;·
              Wholesale
      market disruption, which may result in a deterioration of market
      liquidity, increase the risk of counterparty default, affect the
      regulatory and legislative process in unpredictable ways, negatively
      affect wholesale energy prices and/or impede PSE’s ability to manage its
      energy portfolio risks and procure energy supply, affect the availability
      and access to capital and credit markets and/or impact delivery of energy
      to PSE from its suppliers;·
              Financial
      difficulties of other energy companies and related events, which may
      affect the regulatory and legislative process in unpredictable ways and
      also adversely affect the availability of and access to capital and credit
      markets and/or impact delivery of energy to PSE from its
      suppliers;
  
  
 ·
              The
      effect of wholesale market structures (including, but not limited to,
      regional market designs or transmission organizations) or other related
      federal initiatives;·
              PSE
      electric or natural gas distribution system failure, which may impact
      PSE’s ability to deliver energy supply to its
customers;·
              Changes
      in weather conditions in the Pacific Northwest, which could have effects
      on PSE’s customer usage and revenues;·
              Weather,
      which can have a potentially serious impact on PSE’s ability to procure
      adequate supplies of natural gas, fuel or purchased power to serve its
      customers and the cost of procuring such supplies;·
              Variable
      hydro conditions, which can impact streamflow and PSE’s ability to
      generate electricity from hydroelectric facilities;·
              Electric
      plant generation and transmission system outages, which can have an
      adverse impact on PSE’s expenses with respect to repair costs, added costs
      to replace energy or higher costs associated with dispatching a more
      expensive resource;·
              The
      ability of natural gas or electric plant to operate as
      intended;·
              The
      ability to renew contracts for electric and natural gas supply and the
      price of renewal;·
              Blackouts
      or large curtailments of transmission systems, whether PSE’s or others’,
      which can affect PSE’s ability to deliver power or natural gas to its
      customers and generating facilities;·
              The
      ability to restart electric generation facilities following a regional
      transmission disruption;·
              The
      failure of the interstate natural gas pipeline to deliver gas to PSE’s
      system, which may impact PSE’s ability to adequately deliver natural gas
      supply or electric power to its customers;·
              Industrial,
      commercial and residential growth and demographic patterns in the service
      territories of PSE;·
              General
      economic conditions in the Pacific Northwest, which might impact customer
      consumption or affect PSE’s accounts receivable;·
              The
      loss of significant customers, changes in the business of significant
      customers or the condemnation of PSE’s facilities, which may result in
      changes in demand for PSE’s services;·
              The
      failure of information systems or the failure to secure information system
      data which may impact the operations and cost of PSE’s customer service,
      generation, distribution and transmission;·
              The
      impact of acts of God, terrorism, flu pandemic or similar significant
      events;·
              Capital
      market conditions, including changes in the availability of capital and
      interest rate fluctuations;·
              Employee
      workforce factors including strikes, work stoppages, availability of
      qualified employees or the loss of a key executive;·
              The
      ability to obtain insurance coverage and the cost of such
      insurance;·
              The
      ability to maintain effective internal controls over financial reporting
      and operational processes;·
              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 or PSE;
      and·
              Deteriorating
      values of the equity, fixed income and other markets, which could
      significantly impact the value of investments of PSE’s retirement plan,
      postretirement medical benefit plan trusts and the funding of obligations
      thereunder.
 
 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.  You are also advised to
consult Item 1A-“Risk Factors” in the Company’s most recent annual report on
Form 10-K.
  
  PART
I            FINANCIAL
INFORMATION
 
 Item
1.              Financial
Statements
 PUGET ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Dollars
in thousands)
 (Unaudited)
 
 Successor
              
              
              PredecessorThree
      Months
                Ended
                September
      30,
                2009
              
              
              Three
      Months
                Ended
                September
      30,
                2008Operating
      revenues:Electric
              
              $
              449,658
              
              
              $
              467,355Gas
              
              
              142,128
              
              
              
              133,249Other
              
              
              840
              
              
              
              5,558Total
      operating revenues
              
              
              592,626
              
              
              
              606,162Operating
      expenses:Energy
      costs:Purchased
      electricity
              
              
              160,723
              
              
              
              173,667Electric
      generation fuel
              
              
              77,164
              
              
              
              64,899Residential
      exchange
              
              
              (19,271
              )
              
              
              (170
              )Purchased
      gas
              
              
              72,463
              
              
              
              70,125Net
      unrealized (gain) loss on derivative instruments
              
              
              (74,831
              )
              
              
              3,516Utility
      operations and maintenance
              
              
              116,129
              
              
              
              105,995Non-utility
      expense and other
              
              
              4,542
              
              
              
              5,002Merger
      related costs
              
              
              --
              
              
              
              1,271Depreciation
      and amortization
              
              
              83,454
              
              
              
              77,678Conservation
      amortization
              
              
              12,836
              
              
              
              13,832Taxes
      other than income taxes
              
              
              57,785
              
              
              
              56,873Total
      operating expenses
              
              
              490,994
              
              
              
              572,688Operating
      income
              
              
              101,632
              
              
              
              33,474Other
      income (deductions):Other
      income
              
              
              13,272
              
              
              
              6,865Other
      expense
              
              
              (1,299
              )
              
              
              (2,281
              )Interest
      charges:AFUDC
              
              
              2,661
              
              
              
              2,167Interest
      expense
              
              
              (72,930
              )
              
              
              (50,730
              )Income
      before income taxes
              
              
              43,336
              
              
              
              (10,505
              )Income
      tax expense
              
              
              18,829
              
              
              
              (2,280
              )Net
      income (loss)
              
              $
              24,507
              
              
              $
              (8,225
              )
 
 The
accompanying notes are an integral part of the financial
statements.
 
  
  PUGET ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Dollars
in thousands)
 (Unaudited)
 
 Successor
              
              
              PredecessorFebruary
      6,
                2009
      -
                September30,
                2009
              
              
              January
      1,
                2009
      -
                February
      5,
                2009
              
              
              Nine
      Months
                Ended
                September
      30,
                2008Operating
      revenues:Electric
              
              $
              1,293,024
              
              
              $
              213,618
              
              
              $
              1,551,528Gas
              
              
              685,484
              
              
              
              190,001
              
              
              
              810,326Other
              
              
              4,597
              
              
              
              94
              
              
              
              7,646Total
      operating revenues
              
              
              1,983,105
              
              
              
              403,713
              
              
              
              2,369,500Operating
      expenses:Energy
      costs:Purchased
      electricity
              
              
              518,912
              
              
              
              90,737
              
              
              
              645,385Electric
      generation fuel
              
              
              131,163
              
              
              
              11,961
              
              
              
              144,599Residential
      exchange
              
              
              (60,063
              )
              
              
              (12,542
              )
              
              
              (20,475
              )Purchased
      gas
              
              
              403,741
              
              
              
              120,925
              
              
              
              484,038Net
      unrealized (gain) loss on derivative instruments
              
              
              (125,166
              )
              
              
              3,867
              
              
              
              1,240Utility
      operations and maintenance
              
              
              315,479
              
              
              
              37,650
              
              
              
              334,608Non-utility
      expense and other
              
              
              11,332
              
              
              
              112
              
              
              
              7,063Merger
      related costs
              
              
              2,731
              
              
              
              44,324
              
              
              
              8,320Depreciation
      and amortization
              
              
              220,382
              
              
              
              26,742
              
              
              
              229,366Conservation
      amortization
              
              
              39,803
              
              
              
              7,592
              
              
              
              42,723Taxes
      other than income taxes
              
              
              188,889
              
              
              
              36,935
              
              
              
              214,820Total
      operating expenses
              
              
              1,647,203
              
              
              
              368,303
              
              
              
              2,091,687Operating
      income
              
              
              335,902
              
              
              
              35,410
              
              
              
              277,813Other
      income (deductions):Other
      income
              
              
              31,938
              
              
              
              3,653
              
              
              
              21,782Other
      expense
              
              
              (5,064
              )
              
              
              (369
              )
              
              
              (4,098
              )Charitable
      foundation funding
              
              
              (5,000
              )
              
              
              --
              
              
              
              --Interest
      charges:AFUDC
              
              
              6,210
              
              
              
              350
              
              
              
              6,378Interest
      expense
              
              
              (189,458
              )
              
              
              (17,291
              )
              
              
              (150,322
              )Income
      before income taxes
              
              
              174,528
              
              
              
              21,753
              
              
              
              151,553Income
      tax expense
              
              
              54,391
              
              
              
              8,997
              
              
              
              46,310Net
      income
              
              $
              120,137
              
              
              $
              12,756
              
              
              $
              105,243
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars
in thousands)
 (Unaudited)
 
 Successor
              
              
              PredecessorThree
      Months
                Ended
                September
      30,
                2009
              
              
              Three
      Months
                Ended
                September
      30,
                2008Net
      income (loss)
              
              $
              24,507
              
              
              $
              (8,225
              )Other
      comprehensive income:Net
      unrealized loss on interest rate swaps during the period, net of tax of
      $(11,681) and $0, respectively
              
              
              (21,694
              )
              
              
              --Reversal
      of net unrealized loss  on interest rate swaps during the
      period, net of tax of $2,959 and $0, respectively
              
              
              5,495
              
              
              
              --Unrealized
      gain from pension and postretirement plans, net of tax of $0 and $2,754,
      respectively
              
              
              --
              
              
              
              5,114Net
      unrealized gain (loss) on energy derivative instruments during the period,
      net of tax of $16 and $(90,975), respectively
              
              
              30
              
              
              
              (168,954
              )Reversal
      of net unrealized (gain)loss on energy derivative instruments settled
      during the period, net of tax of $6,699 and $(13,158),
      respectively
              
              
              12,440
              
              
              
              (24,436
              )Amortization
      of financing cash flow hedge contracts to earnings, net of tax of $0 and
      $43, respectively
              
              
              --
              
              
              
              79Other
      comprehensive (loss)
              
              
              (3,729
              )
              
              
              (188,197
              )Comprehensive
      income (loss)
              
              $
              20,778
              
              
              $
              (196,422
              )
 
 
 Successor
              
              
              PredecessorFebruary
      6,
                2009
      -
                September
      30,
                2009
              
              
              January
      1,
                2009-
                February 5,
                2009
              
              
              Nine
      Months
                Ended
                September
      30,
                2008Net
      income
              
              $
              120,137
              
              
              $
              12,756
              
              
              $
              105,243Other
      comprehensive income:Net
      unrealized loss on interest rate swaps during the period, net of tax of
      $(12,493), $0 and $0, respectively
              
              
              (23,203
              )
              
              
              --
              
              
              
              --Reversal
      of net unrealized loss  on interest rate swaps during the
      period, net of tax of $7,178, $0 and $0, respectively
              
              
              13,330
              
              
              
              --
              
              
              
              --Unrealized
      gain (loss) from pension and postretirement plans, net of tax of $0, $170
      and $(1,459), respectively
              
              
              --
              
              
              
              315
              
              
              
              (2,709
              )Net
      unrealized gain (loss) on energy derivative instruments during the period,
      net of tax of $(14,120), $(13,010) and $(4,808),
    respectively
              
              
              (26,222
              )
              
              
              (24,162
              )
              
              
              (8,930
              )Reversal
      of net unrealized (gain) loss on energy derivative instruments settled
      during the period, net of tax of $7,824, $2,428 and $(14,003),
      respectively
              
              
              14,531
              
              
              
              4,509
              
              
              
              (26,005
              )Amortization
      of financing cash flow hedge contracts to earnings, net of tax of $0, $15
      and $128, respectively
              
              
              --
              
              
              
              26
              
              
              
              238Other
      comprehensive (loss)
              
              
              (21,564
              )
              
              
              (19,312
              )
              
              
              (37,406
              )Comprehensive
      income (loss)
              
              $
              98,573
              
              
              $
              (6,556
              )
              
              $
              67,837
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET
ENERGY, INC.
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands)
 
 ASSETS
 
 Successor
              
              
              PredecessorSeptember
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008Utility
      plant (at original cost, including construction work in progress
      of
                $456,162
      and $255,214, respectively):Electric
      plant
              
              $
              4,604,816
              
              
              $
              6,596,359Gas
      plant
              
              
              1,968,278
              
              
              
              2,500,236Common
      plant
              
              
              294,867
              
              
              
              550,368Less:  Accumulated
      depreciation and amortization
              
              
              (196,661
              )
              
              
              (3,358,816
              )Net
      utility plant
              
              
              6,671,300
              
              
              
              6,288,147Other
      property and investments:Goodwill
              
              
              1,656,513
              
              
              
              --Investment
      in Bonneville Exchange Power contract
              
              
              27,331
              
              
              
              29,976Other
      property and investments
              
              
              121,995
              
              
              
              118,039Total
      other property and investments
              
              
              1,805,839
              
              
              
              148,015Current
      assets:Cash
              
              
              83,537
              
              
              
              38,526Restricted
      cash
              
              
              18,083
              
              
              
              18,889Accounts
      receivable, net of allowance for doubtful accounts
              
              
              210,414
              
              
              
              203,563Secured
      pledged accounts receivable
              
              
              --
              
              
              
              158,000Unbilled
      revenues
              
              
              100,690
              
              
              
              248,649Materials
      and supplies, at average cost
              
              
              77,590
              
              
              
              62,024Fuel
      and gas inventory, at average cost
              
              
              99,720
              
              
              
              120,205Unrealized
      gain on derivative instruments
              
              
              17,946
              
              
              
              15,618Income
      tax
              
              
              164,090
              
              
              
              19,121Prepaid
      expense and other
              
              
              31,216
              
              
              
              14,964Power
      contract acquisition adjustment gain
              
              
              159,156
              
              
              
              --Deferred
      income taxes
              
              
              36,335
              
              
              
              9,439Total
      current assets
              
              
              998,777
              
              
              
              908,998Other
      long-term and regulatory assets:Regulatory
      asset for deferred income taxes
              
              
              87,299
              
              
              
              95,417Regulatory
      asset for PURPA buyout costs
              
              
              86,331
              
              
              
              110,838Power
      cost adjustment mechanism
              
              
              3,168
              
              
              
              3,126Regulatory
      assets related to power contracts
              
              
              240,478
              
              
              
              --Other
      regulatory assets
              
              
              778,164
              
              
              
              766,732Unrealized
      gain on derivative instruments
              
              
              28,673
              
              
              
              6,712Power
      contract acquisition adjustment gain
              
              
              905,743
              
              
              
              --Other
              
              
              123,021
              
              
              
              40,421Total
      other long-term and regulatory assets
              
              
              2,252,877
              
              
              
              1,023,246Total
      assets
              
              $
              11,728,793
              
              
              $
              8,368,406
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET
ENERGY, INC.
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands)
 
 CAPITALIZATION
AND LIABILITIES
 
 Successor
              
              
              PredecessorSeptember
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008Capitalization:Common
      shareholders’ investment:Common
      stock $0.01 par value, 250,000,000 shares authorized, 129,678,489 shares
      outstanding, respectively
              
              $
              --
              
              
              $
              1,297Common
      stock $0.01 par value, 1,000 shares authorized, 200 shares outstanding,
      respectively
              
              
              --
              
              
              
              --Additional
      paid-in capital
              
              
              3,308,957
              
              
              
              2,275,225Earnings
      reinvested in the business
              
              
              37,447
              
              
              
              259,483Accumulated
      other comprehensive loss, net of tax
              
              
              (21,564
              )
              
              
              (262,804
              )Total
      shareholders’ equity
              
              
              3,324,840
              
              
              
              2,273,201Redeemable
      securities and long-term debt:Preferred
      stock subject to mandatory redemption
              
              
              --
              
              
              
              1,889Junior
      subordinated notes
              
              
              250,000
              
              
              
              250,000Long-term
      debt
              
              
              3,789,109
              
              
              
              2,270,860Total
      redeemable securities and long-term debt
              
              
              4,039,109
              
              
              
              2,522,749Total
      capitalization
              
              
              7,363,949
              
              
              
              4,795,950Current
      liabilities:Accounts
      payable
              
              
              194,817
              
              
              
              342,254Short-term
      debt
              
              
              --
              
              
              
              964,700Current
      maturities of long-term debt
              
              
              240,000
              
              
              
              158,000Accrued
      expenses:Purchased
      gas liability
              
              
              70,351
              
              
              
              8,892Taxes
              
              
              74,543
              
              
              
              85,068Salaries
      and wages
              
              
              27,988
              
              
              
              35,280Interest
              
              
              51,213
              
              
              
              36,074Unrealized
      loss on derivative instruments
              
              
              230,128
              
              
              
              236,866Power
      contract acquisition adjustment loss
              
              
              101,636
              
              
              
              --Other
              
              
              199,568
              
              
              
              117,222Total
      current liabilities
              
              
              1,190,244
              
              
              
              1,984,356Long-term
      liabilities and regulatory liabilities:Deferred
      income taxes
              
              
              1,072,666
              
              
              
              749,766Unrealized
      loss on derivative instruments
              
              
              91,334
              
              
              
              158,423Regulatory
      liabilities
              
              
              257,525
              
              
              
              219,221Regulatory
      liabilities related to power contracts
              
              
              1,064,899
              
              
              
              --Power
      contracts acquisition adjustment loss
              
              
              138,842
              
              
              
              --Other
      deferred credits
              
              
              549,334
              
              
              
              460,690Total
      long-term liabilities and regulatory liabilities
              
              
              3,174,600
              
              
              
              1,588,100Total
      capitalization and liabilities
              
              $
              11,728,793
              
              
              $
              8,368,406
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF COMMON SHAREHOLDER’S EQUITY
 (Dollars
in thousands)
 (Unaudited)
 
 
 Common
      Stock
              
              
              Additional
              
              
              
              
              
              Accumulated
                OtherShares
              
              
              Amount
              
              
              Paid-in
                Capital
              
              
              Retained
                Earnings
              
              
              Comprehensive
                Loss
              
              
              Total
                AmountPredecessorBalance
      at December 31, 2008
              
              
              129,678,489
              
              
              $
              1,297
              
              
              $
              2,275,225
              
              
              $
              259,483
              
              
              $
              (262,804
              )
              
              $
              2,273,201Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              12,756
              
              
              
              --
              
              
              
              12,756Common
      stock dividend declared
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (38,188
              )
              
              
              --
              
              
              
              (38,188
              )Common
      stock expense
              
              
              --
              
              
              
              --
              
              
              
              (455
              )
              
              
              --
              
              
              
              --
              
              
              
              (455
              )Vesting
      of employee common stock
              
              
              --
              
              
              
              --
              
              
              
              1,531
              
              
              
              --
              
              
              
              --
              
              
              
              1,531Other
      comprehensive loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (19,312
              )
              
              
              (19,312
              )Balance
      at February 5, 2009
              
              
              129,678,489
              
              
              $
              1,297
              
              
              $
              2,276,301
              
              
              $
              234,051
              
              
              $
              (282,116
              )
              
              $
              2,229,533SuccessorCapitalization
      at merger
              
              
              200
              
              
              $
              --
              
              
              $
              3,308,529
              
              
              $
              --
              
              
              $
              --
              
              
              $
              3,308,529Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              120,137
              
              
              
              --
              
              
              
              120,137Common
      stock dividend declared
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (82,690
              )
              
              
              --
              
              
              
              (82,690
              )Employee
      stock plan tax windfall
              
              
              --
              
              
              
              --
              
              
              
              428
              
              
              
              --
              
              
              
              --
              
              
              
              428Other
      comprehensive loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (21,564
              )
              
              
              (21,564
              )Balance
      at September 30, 2009
              
              
              200
              
              
              $
              --
              
              
              $
              3,308,957
              
              
              $
              37,447
              
              
              $
              (21,564
              )
              
              $
              3,324,840
 
 The
accompanying notes are an integral part of the financial
statements.
 
  
  PUGET ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in thousands, Unaudited)
 Successor
              
              
              PredecessorFebruary
      6,
                2009
      -
                September
      30,
                2009
              
              
              January
      1,
                2009
      -
                February
      5,
                2009
              
              
              Nine
      Months
                Ended
                September
      30,
                2008Operating
      activities:Net
      income
              
              $
              120,137
              
              
              $
              12,756
              
              
              $
              105,243Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              220,382
              
              
              
              26,742
              
              
              
              229,366Conservation
      amortization
              
              
              39,803
              
              
              
              7,592
              
              
              
              42,723Deferred
      income taxes and tax credits, net
              
              
              203,757
              
              
              
              (512
              )
              
              
              71,729Amortization
      of gas pipeline capacity assignment
              
              
              (6,236
              )
              
              
              (791
              )
              
              
              (6,869
              )Non
      cash return on regulatory assets
              
              
              (6,390
              )
              
              
              (800
              )
              
              
              (7,427
              )Net
      unrealized (loss) gain on derivative instruments
              
              
              (125,166
              )
              
              
              3,867
              
              
              
              1,240Mint
      Farm deferred costs
              
              
              (11,297
              )
              
              
              (3,443
              )
              
              
              --Pension
      funding
              
              
              (18,000
              )
              
              
              --
              
              
              
              --Change
      in residential exchange program
              
              
              (634
              )
              
              
              1,927
              
              
              
              32,303Derivative
      contracts classified as financing activities due to merger
              
              
              349,695
              
              
              
              --
              
              
              
              --Other
              
              
              (7,975
              )
              
              
              5,230
              
              
              
              18,656Change
      in certain current assets and liabilities:Accounts
      receivable and unbilled revenue
              
              
              309,376
              
              
              
              (31,332
              )
              
              
              261,755Materials
      and supplies
              
              
              1,522
              
              
              
              (3,388
              )
              
              
              2,078Fuel
      and gas inventory
              
              
              (14,681
              )
              
              
              7,605
              
              
              
              (32,699
              )Income
      taxes
              
              
              (163,246
              )
              
              
              18,277
              
              
              
              14,278Prepayments
      and other
              
              
              (12,432
              )
              
              
              (3,295
              )
              
              
              (18,525
              )Purchased
      gas receivable/payable
              
              
              59,748
              
              
              
              1,711
              
              
              
              (61,673
              )Accounts
      payable
              
              
              (181,082
              )
              
              
              (40,203
              )
              
              
              (76,048
              )Taxes
      payable
              
              
              9,468
              
              
              
              (3,340
              )
              
              
              (25,940
              )Accrued
      expenses and other
              
              
              (39,599
              )
              
              
              59,172
              
              
              
              9,249Net
      cash provided by operating activities
              
              
              727,150
              
              
              
              57,775
              
              
              
              559,439Investing
      activities:Construction
      and capital expenditures - excluding equity AFUDC
              
              
              (537,027
              )
              
              
              (49,531
              )
              
              
              (424,280
              )Energy
      efficiency expenditures
              
              
              (55,270
              )
              
              
              (4,918
              )
              
              
              (43,730
              )Restricted
      cash
              
              
              816
              
              
              
              (10
              )
              
              
              (14,164
              )Other
              
              
              14,035
              
              
              
              959
              
              
              
              (2,756
              )Net
      cash used by investing activities
              
              
              (577,446
              )
              
              
              (53,500
              )
              
              
              (484,930
              )Financing
      activities:Change
      in short-term debt and leases, net
              
              
              (61,191
              )
              
              
              (151,800
              )
              
              
              320,999Dividends
      paid
              
              
              (120,878
              )
              
              
              --
              
              
              
              (97,257
              )Long-term
      notes and bonds issued
              
              
              400,211
              
              
              
              250,000
              
              
              
              --Redemption
      of mandatorily preferred stock
              
              
              --
              
              
              
              (1,889
              )
              
              
              --Redemption
      of bonds and notes
              
              
              (150,000
              )
              
              
              --
              
              
              
              (179,500
              )Derivative
      contracts classified as financing activities due to merger
              
              
              (349,695
              )
              
              
              --
              
              
              
              --Issuance
      and redemption costs of bonds and other
              
              
              (16,577
              )
              
              
              7,133
              
              
              
              (1,619
              )Net
      cash (used) provided by financing activities
              
              
              (298,130
              )
              
              
              103,444
              
              
              
              42,623Net
      increase (decrease) in cash
              
              
              (148,426
              )
              
              
              107,719
              
              
              
              117,132Cash
      at beginning of year
              
              
              231,963
              
              
              
              38,526
              
              
              
              40,797Cash
      at end of period
              
              $
              83,537
              
              
              $
              146,245
              
              
              $
              157,929Supplemental
      cash flow information:Cash
      payments for interest (net of capitalized interest)
              
              $
              177,839
              
              
              $
              1,239
              
              
              $
              132,290Cash
      payments (refunds) from income taxes
              
              
              129
              
              
              
              --
              
              
              
              (42,392
              )
 The
accompanying notes are an integral part of the financial
statements.
 
  PUGET SOUND ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Dollars
in thousands)
 (Unaudited)
 
 
 Three
      Months Ended
                  September
      30,
              
              
              Nine
      Months Ended
                  September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Operating
      revenues:Electric
              
              $
              449,658
              
              
              $
              467,355
              
              
              $
              1,506,642
              
              
              $
              1,551,528Gas
              
              
              142,128
              
              
              
              133,249
              
              
              
              875,485
              
              
              
              810,326Other
              
              
              840
              
              
              
              5,558
              
              
              
              4,333
              
              
              
              7,646Total
      operating revenues
              
              
              592,626
              
              
              
              606,162
              
              
              
              2,386,460
              
              
              
              2,369,500Operating
      expenses:Energy
      costs:Purchased
      electricity
              
              
              160,867
              
              
              
              173,667
              
              
              
              610,034
              
              
              
              645,385Electric
      generation fuel
              
              
              77,164
              
              
              
              64,899
              
              
              
              143,124
              
              
              
              144,599Residential
      exchange
              
              
              (19,271
              )
              
              
              (170
              )
              
              
              (72,604
              )
              
              
              (20,475
              )Purchased
      gas
              
              
              72,463
              
              
              
              70,125
              
              
              
              524,666
              
              
              
              484,038Net
      unrealized (gain) loss on derivative instruments
              
              
              (27,144
              )
              
              
              3,516
              
              
              
              (34,734
              )
              
              
              1,240Utility
      operations and maintenance
              
              
              116,129
              
              
              
              105,995
              
              
              
              353,129
              
              
              
              334,608Non-utility
      expense and other
              
              
              2,282
              
              
              
              4,977
              
              
              
              5,677
              
              
              
              6,690Merger
      and related costs
              
              
              --
              
              
              
              --
              
              
              
              23,908
              
              
              
              --Depreciation
      and amortization
              
              
              83,500
              
              
              
              77,678
              
              
              
              247,246
              
              
              
              229,366Conservation
      amortization
              
              
              12,836
              
              
              
              13,832
              
              
              
              47,395
              
              
              
              42,723Taxes
      other than income taxes
              
              
              57,785
              
              
              
              56,873
              
              
              
              225,824
              
              
              
              214,820Total
      operating expenses
              
              
              536,611
              
              
              
              571,392
              
              
              
              2,073,665
              
              
              
              2,082,994Operating
      income
              
              
              56,015
              
              
              
              34,770
              
              
              
              312,795
              
              
              
              286,506Other
      income (deductions):Other
      income
              
              
              13,272
              
              
              
              6,865
              
              
              
              35,591
              
              
              
              21,747Other
      expense
              
              
              (1,299
              )
              
              
              (2,281
              )
              
              
              (5,432
              )
              
              
              (4,098
              )Interest
      charges:AFUDC
              
              
              2,661
              
              
              
              2,167
              
              
              
              6,560
              
              
              
              6,378Interest
      expense
              
              
              (52,900
              )
              
              
              (50,730
              )
              
              
              (155,904
              )
              
              
              (150,322
              )Interest
      expense on Puget Energy note
              
              
              (66
              )
              
              
              (187
              )
              
              
              (207
              )
              
              
              (633
              )Income
      (loss) before income taxes
              
              
              17,683
              
              
              
              (9,396
              )
              
              
              193,403
              
              
              
              159,578Income
      tax (benefit) expense
              
              
              9,841
              
              
              
              (2,120
              )
              
              
              56,806
              
              
              
              46,840Net
      income (loss)
              
              $
              7,842
              
              
              $
              (7,276
              )
              
              $
              136,597
              
              
              $
              112,738
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET SOUND ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars
in thousands)
 (Unaudited)
 
 Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      income
              
              $
              7,842
              
              
              $
              (7,276
              )
              
              $
              136,597
              
              
              $
              112,738Other
      comprehensive income:Unrealized
      gain (loss) from pension and postretirement plans, net of tax of $516,
      $2,754, $284 and $(1,459), respectively
              
              
              958
              
              
              
              5,114
              
              
              
              527
              
              
              
              (2,709
              )Net
      unrealized gain (loss) on energy derivative instruments during the period,
      net of tax of $167, $(90,975), $(33,542) and $(4,808),
      respectively
              
              
              310
              
              
              
              (168,954
              )
              
              
              (62,293
              )
              
              
              (8,930
              )Reclassification
      of net unrealized (gain) loss on energy derivative instruments settled
      during the period, net of tax of $22,516, $(13,158), $34,454 and
      $(14,003), respectively
              
              
              41,815
              
              
              
              (24,436
              )
              
              
              63,985
              
              
              
              (26,005
              )Amortization
      of financing cash flow hedge contracts to earnings, net of tax of $43,
      $43, $128 and $128, respectively
              
              
              79
              
              
              
              79
              
              
              
              238
              
              
              
              238Other
      comprehensive income (loss)
              
              
              43,162
              
              
              
              (188,197
              )
              
              
              2,457
              
              
              
              (37,406
              )Comprehensive
      income (loss)
              
              $
              51,004
              
              
              $
              (195,473
              )
              
              $
              139,054
              
              
              $
              75,332
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET SOUND ENERGY, INC.
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands)
 
 ASSETS
 
 September
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008Utility
      plant: (at original cost, including construction work in progress of
      $456,162 and $255,214, respectively)Electric
      plant
              
              $
              6,974,529
              
              
              $
              6,596,359Gas
      plant
              
              
              2,632,523
              
              
              
              2,500,236Common
      plant
              
              
              596,870
              
              
              
              550,368Less:  Accumulated
      depreciation and amortization
              
              
              (3,567,372
              )
              
              
              (3,358,816
              )Net
      utility plant
              
              
              6,636,550
              
              
              
              6,288,147Other
      property and investments:Investment
      in Bonneville Exchange Power contract
              
              
              27,331
              
              
              
              29,976Other
      property and investments
              
              
              117,265
              
              
              
              118,039Total
      other property and investments
              
              
              144,596
              
              
              
              148,015Current
      assets:Cash
              
              
              83,506
              
              
              
              38,470Restricted
      cash
              
              
              18,083
              
              
              
              18,889Accounts
      receivable, net of allowance for doubtful accounts
              
              
              210,487
              
              
              
              207,776Secured
      pledged accounts receivable
              
              
              --
              
              
              
              158,000Unbilled
      revenues
              
              
              100,690
              
              
              
              248,649Materials
      and supplies, at average cost
              
              
              65,950
              
              
              
              62,024Fuel
      and gas inventory, at average cost
              
              
              107,070
              
              
              
              120,205Unrealized
      gain on derivative instruments
              
              
              17,946
              
              
              
              15,618Income
      taxes
              
              
              134,561
              
              
              
              17,317Prepaid
      expenses and other
              
              
              30,243
              
              
              
              14,420Deferred
      income taxes
              
              
              21,346
              
              
              
              9,439Total
      current assets
              
              
              789,882
              
              
              
              910,807Other
      long-term and regulatory assets:Regulatory
      asset for deferred income taxes
              
              
              87,299
              
              
              
              95,417Regulatory
      asset for PURPA buyout costs
              
              
              86,331
              
              
              
              110,838Power
      cost adjustment mechanism
              
              
              3,168
              
              
              
              3,126Other
      regulatory assets
              
              
              674,180
              
              
              
              766,732Unrealized
      gain on derivative instruments
              
              
              16,531
              
              
              
              6,712Other
              
              
              137,878
              
              
              
              40,365Total
      other long-term and regulatory assets
              
              
              1,005,387
              
              
              
              1,023,190Total
      assets
              
              $
              8,576,415
              
              
              $
              8,370,159
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET
SOUND ENERGY, INC.
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands)
 
 CAPITALIZATION
AND LIABILITIES
 
 September
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008Capitalization:Common
      shareholder’s investment:Common
      stock ($10 stated value) - 150,000,000 shares authorized, 85,903,791
      shares outstanding
              
              $
              --
              
              
              $
              859,038Common
      stock ($0.01 par value) - 150,000,000 shares authorized, 85,903,791 shares
      outstanding
              
              
              859
              
              
              
              --Additional
      paid-in capital
              
              
              2,959,205
              
              
              
              1,296,005Earnings
      reinvested in the business
              
              
              326,403
              
              
              
              356,947Accumulated
      other comprehensive loss, net of tax
              
              
              (260,347
              )
              
              
              (262,804
              )Total
      shareholder’s equity
              
              
              3,026,120
              
              
              
              2,249,186Redeemable
      securities and long-term debt:Preferred
      stock subject to mandatory redemption
              
              
              --
              
              
              
              1,889Junior
      subordinated notes
              
              
              250,000
              
              
              
              250,000Long-term
      debt
              
              
              2,638,860
              
              
              
              2,270,860Total
      redeemable securities and long-term debt
              
              
              2,888,860
              
              
              
              2,522,749Total
      capitalization
              
              
              5,914,980
              
              
              
              4,771,935Current
      liabilities:Accounts
      payable
              
              
              194,756
              
              
              
              341,255Short-term
      debt
              
              
              --
              
              
              
              964,700Short-term
      note owed to parent
              
              
              22,898
              
              
              
              26,053Current
      maturities of long-term debt
              
              
              240,000
              
              
              
              158,000Accrued
      expenses:Purchased
      gas liability
              
              
              70,351
              
              
              
              8,892Taxes
              
              
              74,543
              
              
              
              85,068Salaries
      and wages
              
              
              27,988
              
              
              
              35,280Interest
              
              
              47,419
              
              
              
              36,112Unrealized
      loss on derivative instruments
              
              
              175,822
              
              
              
              236,866Other
              
              
              107,494
              
              
              
              117,223Total
      current liabilities
              
              
              961,271
              
              
              
              2,009,449Long-term
      liabilities and regulatory liabilities:Deferred
      income taxes
              
              
              930,145
              
              
              
              750,440Unrealized
      loss on derivative instruments
              
              
              91,334
              
              
              
              158,423Regulatory
      liabilities
              
              
              244,038
              
              
              
              219,221Other
      deferred credits
              
              
              434,647
              
              
              
              460,691Total
      long-term liabilities and regulatory liabilities
              
              
              1,700,164
              
              
              
              1,588,775Total
      capitalization and liabilities
              
              $
              8,576,415
              
              
              $
              8,370,159
 
 The
accompanying notes are an integral part of the financial
statements.
  
  PUGET SOUND ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF COMMON SHAREHOLDER’S EQUITY
 (Dollars
in thousands)
 (Unaudited)
  Common
      Stock
                
                
                Additional
                
                
                
                
                
                Accumulated
                  OtherFor
      Nine Months Ended
                  September
      30, 2009
                
                Shares
                
                
                Amount
                
                
                Paid-in
                  Capital
                
                
                Retained
                  Earnings
                
                
                Comprehensive
                  Loss
                
                
                Total
                  AmountBalance
      at December 31, 2008
                
                
                85,903,791
                
                
                $
                859,038
                
                
                $
                1,296,005
                
                
                $
                356,947
                
                
                $
                (262,804
                )
                
                $
                2,249,186Net
      income
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                136,597
                
                
                
                --
                
                
                
                136,597Common
      stock dividend declared
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (167,141
                )
                
                
                --
                
                
                
                (167,141
                )Change
      in par value
                
                
                --
                
                
                
                (858,179
                )
                
                
                858,179
                
                
                
                --
                
                
                
                --
                
                
                
                --Other
      comprehensive income
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                2,457
                
                
                
                2,457Investment
      from Parent
                
                
                --
                
                
                
                --
                
                
                
                805,283
                
                
                
                --
                
                
                
                --
                
                
                
                805,283Employee
      common stock award transferred to liability award
                
                
                --
                
                
                
                --
                
                
                
                (690
                )
                
                
                --
                
                
                
                --
                
                
                
                (690
                )Tax
      windfall
                
                
                --
                
                
                
                --
                
                
                
                428
                
                
                
                --
                
                
                
                --
                
                
                
                428Balance
      at September 30, 2009
                
                
                85,903,791
                
                
                $
                859
                
                
                $
                2,959,205
                
                
                $
                326,403
                
                
                $
                (260,347
                )
                
                $
                3,026,120
  The
accompanying notes are an integral part of the financial
statements.
  
  PUGET SOUND ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in thousands)
 (Unaudited)
 Nine
      Months Ended
                September
      30,2009
              
              
              2008Operating
      activities:Net
      income
              
              $
              136,597
              
              
              $
              112,738Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              247,246
              
              
              
              229,366Conservation
      amortization
              
              
              47,395
              
              
              
              42,723Deferred
      income taxes and tax credits, net
              
              
              174,580
              
              
              
              69,182Amortization
      of gas pipeline capacity assignment
              
              
              (7,027
              )
              
              
              (6,869
              )Non
      cash return on regulatory assets
              
              
              (7,189
              )
              
              
              (7,427
              )Net
      unrealized loss on derivative instruments
              
              
              (34,734
              )
              
              
              1,240Mint
      Farm deferred costs
              
              
              (14,740
              )
              
              
              --Pension
      funding
              
              
              (18,000
              )
              
              
              --Change
      in residential exchange program
              
              
              1,292
              
              
              
              32,303Other
              
              
              (12,041
              )
              
              
              28,286Change
      in certain current assets and liabilities:Accounts
      receivable and unbilled revenue
              
              
              282,184
              
              
              
              258,487Materials
      and supplies
              
              
              (3,926
              )
              
              
              2,078Fuel
      and gas inventory
              
              
              13,135
              
              
              
              (32,699
              )Income
      taxes
              
              
              (117,243
              )
              
              
              14,820Prepayments
      and other
              
              
              (15,824
              )
              
              
              (18,525
              )Purchased
      gas receivable/payable
              
              
              61,459
              
              
              
              (61,673
              )Accounts
      payable
              
              
              (131,274
              )
              
              
              (76,727
              )Taxes
      payable
              
              
              (10,099
              )
              
              
              (25,940
              )Accrued
      expenses and other
              
              
              2,341
              
              
              
              9,236Net
      cash provided by operating activities
              
              
              594,132
              
              
              
              570,599Investing
      activities:Construction
      expenditures - excluding equity AFUDC
              
              
              (586,558
              )
              
              
              (424,280
              )Energy
      efficiency expenditures
              
              
              (60,188
              )
              
              
              (43,730
              )Restricted
      cash
              
              
              806
              
              
              
              (18,159
              )Other
              
              
              14,994
              
              
              
              (2,756
              )Net
      cash used by investing activities
              
              
              (630,946
              )
              
              
              (488,925
              )Financing
      activities:Change
      in short-term debt, net
              
              
              (212,991
              )
              
              
              320,999Dividends
      paid
              
              
              (167,141
              )
              
              
              (113,421
              )Loan
      from (payment to) parent
              
              
              (3,156
              )
              
              
              8,962Long
      term bond issued
              
              
              600,000
              
              
              
              --Redemption
      of trust preferred stock
              
              
              (1,889
              )
              
              
              --Redemption
      of bonds and notes
              
              
              (150,000
              )
              
              
              (179,500
              )Investment
      from parent
              
              
              25,960
              
              
              
              --Issuance
      cost of bonds and other
              
              
              (8,933
              )
              
              
              (1,614
              )Net
      cash used by financing activities
              
              
              81,850
              
              
              
              35,426Net
      increase in cash
              
              
              45,036
              
              
              
              117,100Cash
      at beginning of year
              
              
              38,470
              
              
              
              40,773Cash
      at end of period
              
              $
              83,506
              
              
              $
              157,873Supplemental
      cash flow information:Cash
      payments for interest (net of capitalized interest)
              
              $
              132,277
              
              
              $
              132,290Cash
      refunds from income taxes
              
              
              129
              
              
              
              (39,730
              )
 
 The
accompanying notes are an integral part of the financial
statements.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1)
                Summary
      of Consolidation Policy
 Basis
of Presentation
 Puget
Energy, Inc. (Puget Energy) is an energy services holding company that owns
Puget Sound Energy, Inc. (PSE).  PSE is a public utility incorporated
in the state of Washington that furnishes electric and natural gas services in a
territory covering 6,000 square miles, primarily in the Puget Sound
region.  On February 6, 2009, Puget Holdings LLC (Puget Holdings), a
consortium of long-term infrastructure investors, completed its merger with
Puget Energy.  As a result of the merger, Puget Energy is a direct
wholly owned subsidiary of Puget Equico LLC (Puget Equico), which is an indirect
wholly owned subsidiary of Puget Holdings.  Puget Energy’s basis of
accounting incorporates the application of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC
805) as of the date of the merger.  ASC 805 requires the acquirer to
recognize and measure identifiable assets acquired and liabilities assumed at
fair value as of the merger date.  The financial statements and
accompanying footnotes have been segregated to present pre-merger activity as
the “Predecessor” Company and post-merger activity as the “Successor”
Company.
 The
consolidated financial statements of Puget Energy reflect the accounts of Puget
Energy and its subsidiary, PSE.  PSE’s consolidated financial
statements include the accounts of PSE and its subsidiaries.  The
consolidated financial statements are presented after elimination of all
significant intercompany items and transactions.  PSE’s basis of
accounting will continue to be on a historical basis and PSE’s financial
statements will not include any ASC 805 purchase accounting
adjustments.
 The
consolidated financial statements contained in this Form 10-Q are
unaudited.  In the respective opinions of the management of Puget
Energy and PSE, all adjustments necessary for a fair statement of the results
for the interim periods have been reflected and were of a normal recurring
nature.  These consolidated financial statements should be read in
conjunction with the audited financial statements (and the Combined Notes
thereto) included in the combined Puget Energy and PSE Annual Report on Form
10-K for the year ended December 31, 2008.
 The
preparation of financial statements in conformity with Generally Accepted
Accounting Principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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.
 PSE
collected Washington State excise taxes (which are a component of general retail
rates) and municipal taxes of $43.0 million and $182.6 million for the three and
nine months ended September 30, 2009, respectively, and $42.4 million and $172.3
million for the three and nine months ended September 30, 2008,
respectively.  The Company’s policy is to report such taxes on a gross
basis in operating revenues and taxes other than income taxes in the
accompanying consolidated statements of income.
 (2)
                Business Combinations
      (Puget Energy Only)
 On
February 6, 2009, Puget Holdings completed its merger with Puget
Energy.  As a result of the merger, Puget Energy is the direct wholly
owned subsidiary of Puget Equico, which is an indirect wholly owned subsidiary
of Puget Holdings.  After the merger, Puget Energy has 1,000 shares
authorized, of which 200 shares have been issued at a par value of $0.01 per
share.
 At the
time of the merger, each issued and outstanding share of common stock of Puget
Energy, other than any shares owned by consortium members, were cancelled and
converted automatically into the right to receive $30.00 in cash, without
interest.  The fair value of consideration transferred was $3.9
billion, including funding by Puget Holdings of $3.0 billion, debt of $0.6
billion issued by Puget Energy and $0.3 billion that was the result of the
stepped-up basis of the investors’ previously owned shares.
 The table
below is the consolidated statement of fair value of assets acquired and accrued
liabilities assumed as of February 6, 2009 measured in accordance with ASC
805.  Revisions to the original purchase price may be made until
February 6, 2010, which is one year from the date of purchase.
 
 (Dollars
      in Thousands)
              
              AmountNet
      utility plant
              
              $
              6,346,032Other
      property and investments
              
              
              151,913Goodwill
              
              
              1,656,513Current
      assets
              
              
              1,185,397Long-term
      and regulatory assets
              
              
              2,497,355Long-term
      debt
              
              
              2,490,544Current
      liabilities
              
              
              2,173,079Long-term
      liabilities
              
              
              3,283,893
 
 The
following tables present the fair value adjustments to Puget Energy’s balance
sheet and recognition of goodwill in accordance with ASC 805:
 
 ASSETS
 (Dollars
      in Thousands)
              
              February
      6,
                2009
                (Unaudited)Utility
      plant:Electric
      plant
              
              $
              (2,367,756
              )Gas
      plant
              
              
              (666,278
              )Common
      plant
              
              
              (302,015
              )Less:  Accumulated
      depreciation and amortization
              
              
              3,381,095Net
      utility plant
              
              
              45,046Other
      property and investments:Goodwill
              
              
              1,656,513Non-utility
      property
              
              
              4,250Total
      other property and investments
              
              
              1,660,763Current
      assets:Materials
      and supplies, at average cost
              
              
              13,700Fuel
      and gas inventory, at average cost
              
              
              (27,561
              )Unrealized
      gain on derivative instruments
              
              
              3,765Power
      contract fair value gain
              
              
              123,975Deferred
      income taxes
              
              
              28,716Total
      current assets
              
              
              142,595Other
      long-term and regulatory assets:Other
      regulatory assets
              
              
              145,711Unrealized
      gain on derivative instruments
              
              
              1,359Regulatory
      asset related to power contracts
              
              
              317,800Power
      contract fair value gain
              
              
              1,016,225Other
              
              
              (17,072
              )Total
      other long-term and regulatory assets
              
              
              1,464,023Total
      assets
              
              $
              3,312,427
 
  
 CAPITALIZATION
AND LIABILITIES
 
 (Dollars
      in Thousands)
              
              February
      6,
                2009
                (Unaudited)Capitalization:Total
      shareholders’ equity
              
              $
              1,660,160Redeemable
      securities and long-term debt:Long-term
      debt
              
              
              (280,315
              )Total
      redeemable securities and long-term debt
              
              
              (280,315
              )Total
      capitalization
              
              
              1,379,845Current
      liabilities:Unrealized
      loss on derivative instruments
              
              
              84,603Current
      portion of deferred income taxes
              
              
              171Power
      contract fair value loss
              
              
              118,167Other
              
              
              42,679Total
      current liabilities
              
              
              245,620Long-term
      liabilities and regulatory liabilities:Deferred
      income taxes
              
              
              157,038Unrealized
      loss on derivative instruments
              
              
              50,979Regulatory
      liabilities
              
              
              17,417Regulatory
      liabilities related to power contracts
              
              
              1,140,200Power
      contract fair value loss
              
              
              199,633Other
      deferred credits
              
              
              121,695Total
      long-term liabilities and regulatory liabilities
              
              
              1,686,962Total
      capitalization and liabilities
              
              $
              3,312,427
 
 The
carrying values of net utility plant and the majority of regulatory assets and
liabilities were determined to be stated at fair value at the acquisition date
considering that assets valued are subject to regulation by the Washington
Utilities and Transportation Commission (Washington Commission) and the Federal
Energy Regulatory Commission (FERC) and a market participant would not be
expected to recover any more or less than the carrying value of the
assets.  ASC 805 requires that the beginning balance of fixed
depreciable assets be shown net, with no accumulated amortization recorded, at
the date of acquisition, consistent with fresh start accounting.
 Other
property and investments includes the carrying value of the investments in PSE
subsidiaries and other non-utility assets adjusted to fair value based on a
combination of the income approach, the market based approach and the cost
approach.
 The fair
values of materials and supplies, which included emission allowances, renewable
energy credits and carbon financial instruments, were established using a
variety of approaches to estimate the market price.  The carrying
value of fuel inventory was adjusted to its fair value by applying market cost
at the date of acquisition.
 Energy
derivative contracts were reassessed and revalued at the merger date based on
forward market prices and forecasted energy requirements.
 The fair
value assigned to the power contracts was determined using an income approach
comparing the contract rate to the market rate over the remaining period of the
contracts.  The fair value of the power contracts will be amortized as
the contracts settle.
 Other
regulatory assets include service contracts which were valued using the income
approach comparing the contract rate to the market rate over the remaining
period of the contract.
 The fair
value of leases was determined using the income approach which calculated the
favorable/unfavorable leasehold interests as the net present value of the
difference between the contract lease rent and market lease rent over the
remaining terms of the contracted lease obligation.
 The fair
value assigned to long-term debt was determined using two different
methodologies.  For those securities which were actively traded by a
third party pricing service, the best indication of fair value was assumed to be
the third party’s quoted price.  For those securities for which the
third party did not provide regular pricing, the fair value of the debt was
estimated by forecasting out all coupon and principal payments and discounting
them to the present value at an approximated discount rate.
 The
merger also triggered a new basis of accounting for Puget Energy for the
postretirement benefit plans sponsored by PSE under ASC 805 which required
remeasuring plan liabilities without the five year smoothing of market-related
asset gains and losses.
 Puget
Energy recognized approximately $1.7 billion in goodwill, which will not be
deductible for tax purposes and is reflected on Puget Energy’s consolidated
balance sheet as of September 30, 2009.  The goodwill represents the
potential long-term return of Puget Energy to the investors.  Goodwill
will be tested at least annually for impairment, with any impairment charged to
earnings.  Puget Energy will complete its first annual goodwill
impairment review as of October 1 in the fourth quarter of
2009.  Goodwill will be tested for impairment annually using a two
step process in accordance with ASC 350, “Intangibles – Goodwill and Other” (ASC
350).  The first step compares the carrying amount of the reporting
unit with its fair value, with a carrying value higher than fair value
indicating potential impairment.  If the first step test fails, the
second step is performed.  This entails a full valuation of Puget
Energy’s assets and liabilities and comparing the valuation to the carrying
amount, with the difference indicating the amount of
impairment.  Goodwill of a reporting unit shall be tested for
impairment on an interim basis if an event occurs or circumstances change that
would cause the fair value of a reporting unit to fall below its carrying
amount.
 During
the first nine months of 2009, Puget Energy incurred pre-tax merger expenses of
$47.1 million primarily related to legal fees, transaction advisory services,
new credit facility fees, change of control provisions and real estate excise
tax.  Puget Energy’s merger costs for the first nine months of 2009
will not be indicative for periods following the acquisition.
 One day
prior to the merger, PSE defeased its preferred stock in the amount of $1.9
million.  In conjunction with the merger on February 6, 2009, Puget
Energy contributed $805.3 million in capital to PSE, of which $779.3 million was
used to pay off short-term debt owed by PSE, including $188.0 million in
short-term debt outstanding through the PSE Funding accounts receivable
securitization program that was terminated upon closing of the
merger.  An additional $26.0 million of the capital contribution was
used to pay change in control costs associated with the merger.
   (3)
              Income Taxes (Puget
      Energy Only)
  As a
result of the ASC 805 purchase accounting adjustments, Puget Energy is including
the following information related to its income taxes.  The details of
income taxes for the three months ended September 30, 2009 as compared to the
same period in 2008 are as follows:
 Successor
              
              
              Predecessor(Dollars
      in Thousands)
              
              Three
      Months
                Ended
                September
      30,
                2009
              
              
              Three
      Months
                Ended
                September
      30,
                2008Charged
      to operating expense:Current:Federal
              
              $
              (118,192
              )
              
              $
              (35,163
              )State
              
              
              104
              
              
              
              (25
              )Deferred
      – federal
              
              
              136,917
              
              
              
              32,908Total
      income taxes
              
              $
              18,829
              
              
              $
              (2,280
              )
  The
details of income taxes for the nine months ended September 30, 2009 as compared
to the same period in 2008 are as follows:
 
 (Dollars
      in Thousands)
              
              Successor
                February
      6,
                2009
      -
                September
      30,
                2009
              
              
              Predecessor
                January
      1,
                2009
      -
                February
      5,
                2009
              
              
              Predecessor
                Nine
      Months
                Ended
                September
      30,
                2008Charged
      to operating expense:Current:Federal
              
              $
              (157,450
              )
              
              $
              10,185
              
              
              $
              (26,099
              )State
              
              
              (633
              )
              
              
              87
              
              
              
              (78
              )Deferred
      - federal
              
              
              212,474
              
              
              
              (1,275
              )
              
              
              72,487Total
      income taxes
              
              $
              54,391
              
              
              $
              8,997
              
              
              $
              46,310
 
 
 Puget
Energy’s deferred tax liability at September 30, 2009 and December 31, 2008 is
composed of amounts related to the following types of temporary
differences:
  Successor
              
              
              Predecessor(Dollars
      in Thousands)
              
              September
      30,
                2009
              
              
              December
      31,
                2008Utility
      plant and equipment
              
              $
              1,004,175
              
              
              $
              746,486Regulatory
      asset for income taxes
              
              
              87,299
              
              
              
              95,417Storm
      damage
              
              
              38,316
              
              
              
              42,037Pensions
      and other compensation
              
              
              24,916
              
              
              
              (62,837
              )Other
      deferred tax liabilities
              
              
              65,061
              
              
              
              47,963Subtotal
      deferred tax liabilities
              
              
              1,219,767
              
              
              
              869,066Fair
      value of derivative instruments
              
              
              6,669
              
              
              
              (69,259
              )Other
      deferred tax assets
              
              
              (190,105
              )
              
              
              (59,480
              )Subtotal
      deferred tax assets
              
              
              (183,436
              )
              
              
              (128,739
              )Total
              
              $
              1,036,331
              
              
              $
              740,327
 
 The above
amounts have been classified in the Consolidated Balance Sheets at September 30,
2009 and December 31, 2008 as follows:
 
 Successor
              
              
              Predecessor(Dollars
      in Thousands)
              
              September
      30,
                2009
              
              
              December
      31,
                2008Current
      deferred taxes
              
              $
              (36,335
              )
              
              $
              (9,439
              )Non-current
      deferred taxes
              
              
              1,072,666
              
              
              
              749,766Total
              
              $
              1,036,331
              
              
              $
              740,327
 
 Puget
Energy calculates its deferred tax assets and liabilities under ASC 740, “Income
Taxes” (ASC 740).  ASC 740 requires recording deferred tax balances,
at the currently enacted tax rate, on assets and liabilities that are reported
differently for income tax purposes than for financial reporting
purposes.  For ratemaking purposes, deferred taxes are not provided
for certain temporary differences.  PSE has established a regulatory
asset for income taxes recoverable through future rates related to those
temporary differences for which no deferred taxes have been provided, based on
prior and expected future ratemaking treatment.
 Puget
Energy accounts for uncertain tax positions under ASC 740 which requires the use
of a two-step approach for recognizing and measuring tax positions taken or
expected to be taken in a tax return.  First, a tax position should
only be recognized when it is more likely than not, based on technical merits,
that the position will be sustained upon examination by the taxing
authority.  Second, a tax position that meets the recognition
threshold should be measured at the largest amount that has a greater than 50%
likelihood of being sustained.
 At
September 30, 2009 and December 31, 2008, Puget Energy had no material
unrecognized tax benefits.  As a result, no interest or penalties were
accrued for unrecognized tax benefits during the year.
 For ASC
740 purposes, Puget Energy has open tax years from 2006 through
2009.  Puget Energy classifies interest as interest expense and
penalties as other expense in the financial statements.
   (4)
              Accounting
      for Derivative Instruments and Hedging
  Activities
  As a
result of the merger, Puget Energy reassessed and revalued its derivative
contracts that were designated on PSE’s books as Normal Purchase Normal Sale
(NPNS) or cash flow hedges and met the criteria defined in ASC 815, “Derivatives
and Hedging” (ASC 815).  The fair value of the reassessed contracts
was recorded as either assets or liabilities with an offset to
goodwill.  As a result, the amount recorded in accumulated other
comprehensive income at the time of the merger was reflected as
goodwill.
 ASC 815
requires that all contracts considered to be derivative instruments be recorded
on the balance sheet at their fair value.  The Company enters into
contracts to manage its energy resource portfolio and interest rate exposure
including forward physical and financial contracts, option contracts and
swaps.  The majority of PSE’s physical contracts qualify for the NPNS
exception to derivative accounting rules, provided they meet certain
criteria.  Generally, NPNS applies to contracts with creditworthy
counterparties, for which physical delivery is probable and in quantities that
will be used in the normal course of business.  Power purchases
designated as NPNS must meet additional criteria if the transaction is within
PSE’s forecasted load requirements and if the counterparty owns or controls
energy resources within the western region to allow for physical delivery of the
energy.  PSE may enter into financial fixed contracts to hedge the
variability of certain NPNS contracts.  Those contracts that do not
meet the NPNS exception or cash flow hedge criteria are marked-to-market to
current earnings in the income statement, subject to deferral under ASC 980,
“Regulated Operations” (ASC 980), for energy related derivatives due to the
Power Cost Adjustment (PCA) mechanism and Purchased Gas Adjustment (PGA)
mechanism.
 On July
1, 2009, the Company elected to de-designate its energy derivative contracts
that previously had been determined to meet the requirements of cash flow hedges
with the primary goal being to simplify its financial reporting.  The
contracts that were de-designated related to physical electric supply contracts
and natural gas swap contracts to fix the price of natural gas for electric
generation.  For these contracts, if the contract was probable of
delivery, the amount in other comprehensive income (OCI) was locked and all
future mark-to-market accounting will impact earnings.  The amount in
OCI will be transferred to earnings when the contracts settle.  If
delivery of the contract is no longer probable of occurring, the locked OCI will
be transferred to earnings upon such determination.  As a result, the
Company will likely experience earnings volatility in future
periods.
 PSE
pursues various portfolio optimization strategies, but is not in the business of
assuming risk for the purpose of realizing speculative trading
revenues.  The nature of serving regulated electric customers with its
wholesale portfolio of owned and contracted electric generation resources
exposes PSE and its customers to some volumetric and commodity price risks
within the sharing mechanism of the PCA.  Therefore, wholesale market
transactions are focused on balancing PSE’s energy portfolio, reducing costs and
risks where feasible and reducing volatility in wholesale costs and margin in
the portfolio.  PSE’s energy risk portfolio management function
monitors and manages these risks using analytical models and
tools.  In order to manage risks effectively, PSE enters into physical
and financial transactions which are appropriate for the service territory of
PSE and are relevant to its regulated electric and gas portfolios.
 If it is
determined that it is uneconomical to operate PSE’s controlled electric
generating facilities in the future period, the fuel supply cash flow hedge
relationship is terminated and the hedge is de-designated which results in
recognition of future changes in value in the income statements.  As
these contracts are settled, amounts previously deferred in OCI are recognized
as energy costs and are included as part of the PCA mechanism.
 ASC 815
requires disclosures about a company’s derivative activities and how the related
hedged items affect a company’s financial position, financial performance and
cash flows.  To meet the objectives, ASC 815 requires qualitative
disclosures about the Company’s fair value amounts of gains and losses
associated with derivative instruments, as well as disclosures about credit risk
related contingent features in derivative agreements.
 The
following tables present the fair values and locations of Puget Energy’s
derivative instruments recorded on the balance sheet at September 30, 2009 and
December 31, 2008:
 
 Derivatives
      Designated as  Hedging InstrumentsPuget
      Energy
                Successor
                at
      September 30, 2009
              
              Puget
      Energy
                Predecessor
                at
      December 31, 2008(Dollars
      in Millions)
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2
              
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2Interest
      rate swaps:Current
              $          --
              
              $          27.3
              
              $          --
              
              $         
         --Long-term
              12.1
              
              --
              
              --
              
              --Electric
      portfolio:Current
              --
              
              --
              
              0.1
              
              85.3Long-term
              --
              
              --
              
              0.4
              
              93.1Total
      derivatives
              $     12.1
              
              $  
             27.3
              
              $        0.5
              
              $      178.4 ____________
 1
              Balance
      sheet location: Unrealized gain on derivative
  instruments.2
              Balance
      sheet location: Unrealized loss on derivative
  instruments.
 
 
 
 Derivatives
      Not Designated as Hedging InstrumentsPuget
      Energy
                Successor
                at
      September 30, 2009
              
              Puget
      Energy
                Predecessor
                at
      December 31, 2008(Dollars
      in Millions)
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2
              
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2Electric
      portfolio:Current
              $    
         3.1
              
              $      116.1
              
              $       0.3
              
              $          5.3Long-term
              6.1
              
              68.5
              
              0.1
              
              3.0Gas
      portfolio3:Current
              14.8
              
              86.7
              
              15.2
              
              146.3Long-term
              10.4
              
              22.9
              
              6.2
              
              62.3Total
      derivatives
              $   
        34.4
              
              $      294.2
              
              $     21.8
              
              $      216.9 ____________
 1
              Balance
      sheet location: Unrealized gain on derivative
  instruments.2
              Balance
      sheet location: Unrealized loss on derivative
  instruments.3
              Puget
      Energy had a derivative liability and an offsetting regulatory asset of
      $84.3 million at September 30, 2009 and $187.2 million at December 31,
      2008 related to financial contracts used to economically hedge the cost of
      physical gas purchased to serve natural gas customers.  All fair
      value adjustments on derivatives relating to the natural gas business have
      been reclassified to a deferred account in accordance with ASC 980 due to
      the PGA mechanism.  All increases and decreases in the cost of
      natural gas supply are passed on to customers with the PGA
      mechanism.  As the gains and losses on the hedges are realized
      in future periods, they will be recorded as gas costs under the PGA
      mechanism.
 
 
 The
following tables present the fair values and locations of PSE’s derivative
instruments recorded on the balance sheet at September 30, 2009 and December 31,
2008:
 
 Derivatives
      Designated as  Hedging InstrumentsPuget
      Sound Energy
                at
      September 30, 2009
              
              Puget
      Sound Energy
                at
      December 31, 2008(Dollars
      in Millions)
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2
              
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2Electric
      portfolio:Current
              $         --
              
              $         --
              
              $    0.1
              
              $    85.3Long-term
              --
              
              --
              
              0.4
              
              93.1Total
      derivatives
              $         --
              
              $         --
              
              $    0.5
              
              $  178.4 ____________
 1
              Balance
      sheet location: Unrealized gain on derivative
  instruments.2
              Balance
      sheet location: Unrealized loss on derivative
  instruments.
 
 Derivatives
      Not Designated as Hedging InstrumentsPuget
      Sound Energy
                at
      September 30, 2009
              
              Puget
      Sound Energy
                at
      December 31, 2008(Dollars
      in Millions)
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2
              
              Asset
                Derivatives
      1
              
              Liability
                Derivatives
      2Electric
      portfolio:Current
              $    
       3.1
              
              $    89.1
              
              $      0.3
              
              $      5.3Long-term
              6.1
              
              68.5
              
              0.1
              
              3.0Gas
      portfolio: 3Current
              14.8
              
              86.7
              
              15.2
              
              146.3Long-term
              10.4
              
              22.8
              
              6.2
              
              62.3Total
      derivatives
              $    34.4
              
              $  267.1
              
              $    21.8
              
              $  216.9 ____________
 1
              Balance
      sheet location: Unrealized gain on derivative
  instruments.2
              Balance
      sheet location: Unrealized loss on derivative
  instruments.3
              Puget
      Energy had a derivative liability and an offsetting regulatory asset of
      $84.3 million at September 30, 2009 and $187.2 million at December 31,
      2008 related to financial contracts used to economically hedge the cost of
      physical gas purchased to serve natural gas customers.  All fair
      value adjustments on derivatives relating to the natural gas business have
      been reclassified to a deferred account in accordance with ASC 980 due to
      the PGA mechanism.  All increases and decreases in the cost of
      natural gas supply are passed on to customers with the PGA
      mechanism.  As the gains and losses on the hedges are realized
      in future periods, they will be recorded as gas costs under the PGA
      mechanism.
 
 The
following table presents the effect of hedging instruments on Puget Energy’s OCI
and income for the three months ended September 30, 2009:
  Puget
      Energy
                (Dollars
      in Millions)
                Successor
                Three
      Months Ended
                September
      30, 2009
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      OCI on
                Derivatives
              Location
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCI
      into
                Income
              Amount
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCI
      into
                Income
              Location
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesDerivatives
      in Cash Flow
                Hedging
      Relationships
              Effective
                Portion
      1
              Effective
      Portion 2
              Ineffective
      Portion and AmountExcluded
                from
      Effectiveness Testing 2,
      3Interest
      rate contracts:
              $    (21.7)
              Interest
      expense
              $      8.4
              
              $      --Commodity
      contracts:
                Electric
      derivatives
              --
              Electric
      generation fuel
              18.4
              Net
      unrealized gain on derivative instruments
              --Electric
      derivatives
              --
              Purchased
      electricity
              0.7
              Net
      unrealized gain on derivative instruments
              --Total
              $    (21.7)
              
              $    27.5
              
              $      --
 ____________
 1
              Changes
      in OCI are reported in after tax dollars.2
              A
      reclassification of a loss in OCI increases Accumulated OCI and decreases
      earnings.  Amounts reported are in pre-tax
    dollars.3
              Ineffective
      portion of long-term power supply contracts that are designated as cash
      flow hedges.
 
 
 The
following tables present the effect of hedging instruments on Puget Energy’s OCI
and income for the nine months ended September 30, 2009:
 
 Puget
      Energy
                (Dollars
      in Millions)
                SuccessorFebruary 6,
      2009 -
                September
      30, 2009
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      OCI on
                Derivatives
              Location
      of
                Gain/(Loss)
                Reclassified
      from Accumulated
                OCI
      into
                Income
              Amount
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
      OCI
                into
      Income
              Location
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesDerivatives
      in Cash Flow
                Hedging
      Relationships
              Effective
                Portion
      1
              Effective
      Portion 2
              Ineffective
      Portion and AmountExcluded
                from
      Effectiveness Testing 2,
      3Interest
      rate contracts:
              $    (23.2)
              Interest
      expense
              $    20.5
              
              $        --Commodity
      contracts:
                Electric
      derivatives
              (19.9)
              Electric
      generation fuel
              20.0
              Net
      unrealized gain on derivative instruments
              0.3Electric
      derivatives
              (6.3)
              Purchased
      electricity
              2.3
              Net
      unrealized loss on derivative instruments
              (2.9)Total
              $    (49.4)
              
              $    42.8
              
              $    (2.6)
 
 Puget
      Energy
                (Dollars
      in Millions)
                PredecessorJanuary 1,
      2009 -
                February
      5, 2009
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      OCI on
                Derivatives
              Location
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCI
      into
                Income
              Amount
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCI
      into
                Income
              Location
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesDerivatives
      in Cash Flow
                Hedging
      Relationships
              Effective
                Portion
      1,4
              Effective
      Portion 2
              Ineffective
      Portion and AmountExcluded
                from
      Effectiveness Testing 2,
      3Interest
      rate contracts:
              $          --
              Interest
      expense
              $       --
              
              $       --Commodity
      contracts:
                Electric
      derivatives
              (20.8)
              Electric
      generation fuel
              5.0
              Net
      unrealized loss on derivative instruments
              --Electric
      derivatives
              (3.4)
              Purchased
      electricity
              1.9
              Net
      unrealized loss on derivative instruments
              (1.0)Gas
      derivatives
              --
              Purchased
      gas
              --
              Net
      unrealized loss on derivative instruments
              --Total
              $    (24.2)
              
              $     6.9
              
              $    (1.0) ____________
 1
              Changes
      in OCI are reported in after tax dollars.2
              Losses
      are reported in pre-tax dollars.3
              Ineffective
      portion of long-term power supply contracts that are designated as cash
      flow hedges.4
              The
      balances associated with the components of accumulated OCI (loss) on
      Predecessor basis were eliminated as a result of push-down accounting
      effective February 6, 2009, when the Successor period
    began.
 
 The
following table presents the effect of hedging instruments on PSE’s OCI and
income for the three months ended September 30, 2009:
  Puget
      Sound Energy
                (Dollars
      in Millions)
                Three
      Months Ended
                September
      30, 2009
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      OCI on
                Derivatives
              Location
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCI
      into
                Income
              Amount
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
                OCIinto
                Income
              Location
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesDerivatives
      in Cash Flow
                Hedging
      Relationships
              Effective
                Portion
      1
              Effective
      Portion 2
              Ineffective
      Portion and AmountExcluded
                from
      Effectiveness Testing 2,
      3Commodity
      contracts:
                Electric
      derivatives
              $    0.4
              Electric
      generation fuel
              $   58.5
              Net
      unrealized gain on derivative instruments
              $    --Electric
      derivatives
              (0.1)
              Purchased
      electricity
              5.8
              Net
      unrealized gain on derivative instruments
              --Total
              $    0.3
              
              $  64.3
              
              $    -- ____________
 1
              Changes
      in OCI are reported in after tax dollars.2
              A
      reclassification of a loss in OCI increases accumulated OCI and decreases
      earnings.  Amounts reported are in pre-tax
    dollars.3
              Ineffective
      portion of long-term power supply contracts that are designated as cash
      flow hedges.
 
 The
following table presents the effect of hedging instruments on PSE’s OCI and
income for the nine months ended September 30, 2009:
  Puget
      Sound Energy
                (Dollars
      in Millions)
                Nine
      Months Ended
                September
      30, 2009
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      OCI on
                Derivatives
              Location
      of
                Gain/(Loss)
                Reclassified
      from
                Accumulated
                OCI
      into
                Income
              Amount
      of
                Gain/(Loss)
                Reclassified
                from
                Accumulated
      OCI
                into
      Income
              Location
      of
                Gain/(Loss)
                Recognizedin
                Income
      on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on DerivativesDerivatives
      in Cash Flow
                Hedging
      Relationships
              Effective
                Portion
      1
              Effective
      Portion 2
              Ineffective
      Portion and AmountExcluded
                from
      Effectiveness Testing 2,
      3Interest
      rate contracts:
              $  
           --
              Interest
      expense
              $  
       0.2
              
              $        --Commodity
      contracts:
                Electric
      derivatives
              (51.1)
              Electric
      generation fuel
              77.9
              Net
      unrealized gain on derivative
                instruments
              --Electric
      derivatives
              (11.2)
              Purchased
      electricity
              20.4
              Net
      unrealized loss on derivative
                instruments
              (2.7)Total
              $
      (62.3)
              
              $  98.5
              
              $ 
        (2.7) ____________
 1
              Changes
      in OCI are reported in after tax dollars.2
              A
      reclassification of a loss in OCI increases accumulated OCI and decreases
      earnings.  Amounts reported are in pre-tax
    dollars.3
              Ineffective
      portion of long-term power supply contracts that are designated as cash
      flow hedges.
 
 For
derivative instruments that meet cash flow hedge criteria, the effective portion
of the gain or loss on the derivative is reported as a component of OCI and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. Gains and losses on the derivatives representing
hedge ineffectiveness are recognized in current earnings.  PSE expects
that $65.3 million of losses in OCI will be reclassified into earnings within
the next 12 months.  Puget Energy expects that $12.7 million of losses
in OCI will be reclassified into earnings within the next 12
months.  The maximum length of time over which Puget Energy and PSE
are hedging their exposure to the variability in future cash flows extends to
October 2016 for the physical electric contracts and to August 2012 for electric
generation fuel financial contracts.
 
  The
following tables present the effect of Puget Energy’s derivatives not designated
as hedging instruments on income during the three months and nine months ended
September 30, 2009, respectively:
 
 Puget
      Energy
                (Dollars
      in Millions)
                Successor
                Three
      Months Ended
                September
      30, 2009
              Location
      of
                Gain/(Loss)
                in
      Income on
                Derivatives
              Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesCommodity
      contracts:
                Electric
      derivatives
              Net
      unrealized gain on derivative instruments
              $      76.4
      1Electric
      generation fuel
              45.9Purchased
      electricity
              6.7Total
              
              $   
        129.0
 ______________
 1
              Differs
      from the amount stated in the income statement as it does not include
      $(1.6) million amortization expense related to energy contracts that were
      elected as NPNS contracts with a non-zero fair value upon
      election.
 
 Puget
      Energy
                  (Dollars
      in Millions)
                Location
      of
                  Gain/(Loss)
                  in
      Income on
                  Derivatives
                Successor
                  February
      6, 2009 -
                  September
      30, 2009
                  Amount
      of
                  Gain/(Loss)
                  Recognized
      in Income
                  on
      Derivatives
                Predecessor
                  January
      1, 2009 -
                  February
      5, 2009
                  Amount
      of
                  Gain/(Loss)
                  Recognized
      in Income
                  on
      DerivativesCommodity
      contracts:
                  Electric
      derivatives
                Net
      unrealized gain on derivative instruments
                $   100.5
      1
                $    (2.9)Electric
      generation fuel
                50.9
                (0.9)Purchased
      electricity
                18.1
                (0.1)Total
                
                $   169.5
                $    (3.9)
 ____________
 1
              Differs
      from the amount stated in the income statement as it does not include
      $34.2 million of NPNS amortization expense as well as the first quarter
      credit reserve adjustment of $(11.6) million and prior quarter
      ineffectiveness of $2.1 million measured in prior designated hedging
      relationships.
 
 The
following table presents the effect of PSE’s derivatives not designated as
hedging instruments on income during the three months and nine months ended
September 30, 2009, respectively:
  Puget
      Sound Energy
                (Dollars
      in Millions)
              Location
      of
                Gain/(Loss)
                in
      Income on
                Derivatives
              Three
      Months
                Ended
                September
      30, 2009
                Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                Derivatives
              Nine
      Months
                Ended
                September
      30, 2009
                Amount
      of
                Gain/(Loss)
                Recognized
                in
      Income on
                DerivativesCommodity
      contracts:
                Electric
      derivatives
              Net
      unrealized loss on derivative instruments
              $   27.1
              $ 
          37.4Electric
      generation fuel
              45.9
              57.9Purchased
      electricity
              6.7
              7.3Total
              
              $   79.7
              $    102.6
  
 Puget
Energy had the following outstanding commodity contracts as of September 30,
2009:
  Puget
      Energy
                Nine
      Months Ended September 30, 2009
              Number
      of UnitsDerivatives
      designated as hedging instruments:Interest
      rate swaps
              $
      1.483 Billion USDDerivatives
      not designated as hedging instruments:Gas
      derivatives 1
              206,655,550
      MMBtusElectric
      generation fuel
              78,351,000
      MMBtusPurchased
      electricity
              5,633,000
      MWh ________________
 1
              Gas
      derivatives are deferred in accordance with ASC
  980.
 
 PSE had
the following outstanding commodity contracts as of September 30,
2009:
  Puget
      Sound Energy
                Nine
      Months Ended September 30, 2009
              Number
      of UnitsDerivatives
      not designated as hedging instruments:Gas
      derivatives 1
              206,655,550
      MMBtusElectric
      generation fuel
              78,351,000
      MMBtusPurchased
      electricity
              4,847,900
      MWh ________________
 1
              Gas
      derivatives are deferred in accordance with ASC
  980.
 
 PSE is
exposed to credit risk primarily through buying and selling electricity and
natural gas to serve its customers.  Credit risk is the potential loss
resulting from a counterparty’s non-performance under an
agreement.  PSE manages credit risk with policies and procedures for,
among other things, counterparty analysis, exposure measurement, exposure
monitoring and exposure mitigation.
 PSE
monitors counterparties that are experiencing financial problems, have
significant swings in credit default swap rates, have credit rating changes by
external rating agencies, or have changes in ownership.  Where deemed
appropriate, PSE may request collateral or other security from its
counterparties to mitigate potential credit default losses.  Criterion
employed in this decision includes, among other things, the perceived
creditworthiness of the counterparty and the expected credit
exposure.
 It is
possible that volatility in energy commodity prices could cause PSE to have
material credit risk exposures with one or more counterparties.  If
such counterparties fail to perform their obligations under one or more
agreements, PSE could suffer a material financial loss.  However, as
of September 30, 2009, approximately 99.9% of PSE’s energy portfolio exposure,
excluding NPNS transactions, is with counterparties that are rated at least
investment grade by the major rating agencies and 0.1% are either rated below
investment grade or are not rated by rating agencies.  PSE assesses
credit risk internally for counterparties that are not rated.
 PSE
generally enters into the following master agreements: (1) Western Systems Power
Pool agreements (WSPP) – standardized power sales contract in the electric
industry; (2) International Swaps and Derivatives Association agreements; (ISDA)
– standardized financial gas and electric contracts; and (3) North American
Energy Standards Board agreements (NAESB) – standardized physical gas
contracts.  PSE believes that entering into such agreements reduces
credit risk exposure because such agreements provide for the netting and set-off
of monthly payments and, in the event of counterparty default, termination
payments.
 PSE
computes credit reserves at a master agreement level (i.e. WSPP, ISDA or NAESB)
by counterparty. PSE considers external credit ratings and market factors, such
as credit default swaps and bond spreads, in determination of
reserves.  PSE recognizes that external ratings may not always reflect
how a market participant perceives a counterparty’s risk of
default.  PSE uses both default factors published by Standard &
Poor’s (S&P) and factors derived through analysis of market risk, which
reflect the application of an industry standard recovery rate.  PSE
selects a default factor by counterparty at an aggregate master agreement level
based on a weighted average default tenor for that counterparty’s
deals.  The default tenor is used by weighting fair values and
contract tenors for all deals for each counterparty and coming up with an
average value.  The default factor used is dependent upon whether the
counterparty is in a net asset or a net liability position after applying the
master agreement levels.
 PSE
applies the counterparty’s default factor to compute credit reserves for
counterparties that are in a net asset position.  Moreover, PSE
applies its own default factor to compute credit reserves for counterparties in
a net liability position.  Credit reserves are booked as contra
accounts to unrealized gain (loss) positions. As of September 30, 2009, PSE was
in a net liability position with the majority of counterparties, so the default
factors of counterparties did not have a significant impact on reserves for the
year.  The majority of PSE’s derivative contracts are with
financial institutions and other utilities operating within
the Western Electricity Coordinating Council (WECC).
 
 PSE
enters into energy contracts with various credit risk related contingent
features, which could result in a counterparty requesting immediate payment or
demanding immediate and ongoing full overnight collateralization on derivative
instruments in a net liability position.
 The table
below presents the fair value of the overall contractual contingent liability
positions for Puget Energy’s derivative activity at September 30,
2009:
 
 Puget
      Energy
                Contingent
      Feature
                (Dollars
      in Millions)
              Fair
      Value 3
                Liability
              Posted
                Collateral
              Contingent
                CollateralCredit
      rating1
              $      (63.0)
              $       --
              $      63.0Forward
      value of contract 2
              (25.7)
              20.0
              --Total
              $      (88.7)
              $   20.0
              $      63.0 _________________
 1
              PSE
      is required to maintain an investment grade credit rating from each of the
      major credit rating agencies.2
              Collateral
      requirements may vary, based on changes in forward value of underlying
      transactions.3
              Represents
      derivative fair values of contracts with contingent features for
      counterparties in net derivative liability positions at September 30,
      2009.  Excludes NPNS, accounts payable and accounts receivable
      activity.
 
 The table
below presents the fair value of the overall contractual contingent liability
positions for PSE’s derivative activity at September 30, 2009
 
 Puget
      Sound Energy
                Contingent
      Feature
                (Dollars
      in Millions)
              Fair
      Value 3
                Liability
              Posted
                Collateral
              Contingent
                CollateralCredit
      rating1
              $    (36.0)
              $       --
              $   36.0Forward
      value of contract 2
              (25.7)
              20.0
              --Total
              $    (61.7)
              $  20.0
              $   36.0 _________________
 1
              PSE
      is required to maintain an investment grade credit rating from each of the
      major credit rating agencies.2
              Collateral
      requirements may vary, based on changes in forward value of underlying
      transactions.3
              Represents
      derivative fair values of contracts with contingent features for
      counterparties in net derivative liability positions at September 30,
      2009.  Excludes NPNS, accounts payable and accounts receivable
      activity.
   (5)
              Fair
      Value Measurements
  ASC 820,
“Fair Value Measurements and Disclosures” (ASC 820), establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value.  The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement) and the lowest
priority to unobservable inputs (Level 3 measurement).  The three
levels of the fair value hierarchy defined by ASC 820 are as
follows:
 
 Level 1 –
Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date.  Active markets are those in
which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.  Level 1
primarily consists of financial instruments such as exchange-traded derivatives
and listed equities. Equity securities that are also classified as cash
equivalents are considered Level 1 if there are unadjusted quoted prices in
active markets for identical assets or liabilities.
 
 Level 2 –
Pricing inputs are other than quoted prices in active markets included in Level
1, which are either directly or indirectly observable as of the reported
date.  Level 2 includes those financial instruments that are valued
using models or other valuation methodologies.  These models are
primarily industry-standard models that consider various assumptions, including
quoted forward prices for commodities, time value, volatility factors, and
current market and contractual prices for the underlying instruments, as well as
other relevant economic measures.  Substantially all of these
assumptions are observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the
marketplace.  Instruments in this category include non-exchange-traded
derivatives such as over-the-counter forwards and options.
 
 
 Level 3 –
Pricing inputs include significant inputs that are generally less observable
from objective sources.  These inputs may be used with internally
developed methodologies that result in management’s best estimate of fair
value.  Level 3 instruments include those that may be more structured
or otherwise tailored to customers’ needs.  At each balance sheet
date, Puget Energy and PSE perform an analysis of all instruments subject to ASC
820 and includes in Level 3 all of those whose fair value is based on
significant unobservable inputs.
 
 Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.  If
a fair value measurement relies on inputs from different levels of the
hierarchy, the entire measurement must be placed based on the lowest level input
that is significant to the fair value measurement.   The
Company’s assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the valuation of fair value assets
and liabilities and their placement within the fair value hierarchy
levels.  The determination of the fair values incorporates various
factors that not only include the credit standing of the counterparties involved
and the impact of credit enhancements (such as cash deposits, letters of credit
and priority interests), but also the impact of the
Company’s  nonperformance risk on its liabilities.
 As of
September 30, 2009, the Company considered the markets for its electric and
natural gas Level 2 derivative instruments to be actively
traded.  Management’s assessment is based on the trading activity
volume in real-time and forward electric and natural gas markets.  The
Company regularly confirms the validity of pricing service quoted prices (e.g.
Level 2 in the fair value hierarchy) used to value commodity contracts to the
actual prices of commodity contracts entered into during the most recent
quarter.
 The
following table sets forth, by level within the fair value hierarchy, Puget
Energy’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of September 30, 2009 and December 31,
2008:
 
 Puget
      Energy
                Recurring
      Fair Value Measures
              Successor
                as
      of September 30, 2009
              Predecessor
                as
      of December 31, 2008(Dollars
      in Millions)
              Level
      1
              Level
      2
              Level
      3
              Total
              Level
      1
              Level
      2
              Level
      3
              TotalAssets:Energy
      derivative instruments
              $       --
              $   25.8
              $     8.6
              $   34.4
              $       --
              $   21.8
              $     0.5
              $    22.3Money
      market accounts
              60.5
              5.1
              --
              65.6
              24.7
              --
              1.4
              26.1Interest
      rate derivative instruments
              --
              12.1
              --
              12.1
              --
              --
              --
              --Total
      assets
              $   60.5
              $   43.0
              $     8.6
              $
      112.1
              $   24.7
              $   21.8
              $     1.9
              $    48.4Liabilities:Energy
      derivative instruments
              $       --
              $
      183.2
              $
      110.9
              $
      294.1
              $       --
              $
      261.2
              $
      134.1
              $  395.3Interest
      rate derivative instruments
              --
              27.3
              --
              27.3
              --
              --
              --
              --Total
      liabilities
              $       --
              $
      210.5
              $
      110.9
              $
      321.4
              $       --
              $
      261.2
              $
      134.1
              $  395.3
 
 The
following table sets forth by level within the fair value hierarchy PSE’s
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of September 30, 2009 and December 31, 2008:
 
 Puget
      Sound Energy
                Recurring
      Fair Value Measures
              At
      Fair Value as of September 30, 2009
              At
      Fair Value as of December 31, 2008(Dollars
      in Millions)
              Level
      1
              Level
      2
              Level
      3
              Total
              Level
      1
              Level
      2
              Level
      3
              TotalAssets:Energy
      derivative instruments
              $       --
              $   25.8
              $     8.6
              $   34.4
              $       --
              $   21.8
              $     0.5
              $     22.3Money
      market accounts
              60.5
              5.1
              --
              65.6
              24.7
              --
              1.4
              26.1Total
      assets
              $   60.5
              $   30.9
              $     8.6
              $
      100.0
              $   24.7
              $   21.8
              $     1.9
              $     48.4Liabilities:Energy
      derivative instruments
              $       --
              $
      156.2
              $
      110.9
              $
      267.1
              $       --
              $
      261.2
              $
      134.1
              $
      395.3Total
      liabilities
              $       --
              $
      156.2
              $
      110.9
              $
      267.1
              $       --
              $
      261.2
              $
      134.1
              $
      395.3
 
 
 The
following tables set forth a reconciliation of Puget Energy’s changes in the
fair value of derivatives classified as Level 3 in the fair value
hierarchy:
 
 Puget
      Energy
                Level
      3 Roll-Forward Net Asset/(Liability)
                (Dollars
      in Millions)
                Three
      Months Ended September 30,
              Successor
                2009
              Predecessor
                2008Balance
      at beginning of period net asset/(liability)
              $
      (136.7)
              $   148.8Changes
      during period:Realized
      and unrealized energy derivatives-
      included in earnings
              15.1
              1.5-
      included in other comprehensive income
              --
              (93.9)-
      included in regulatory assets/liabilities
              (1.0)
              (11.3)Purchases,
      issuances, and settlements
              5.8
              (39.1)Energy
      derivatives transferred in/out of Level 3
              14.5
              (41.8)Balance
      at end of period net asset/(liability)
              $
      (102.3)
              $
      (35.8)
  Puget
      Energy
                Level
      3 Roll-Forward Net Asset/(Liability)
                (Dollars
      in Millions)
              Successor
                February
      6,
                2009
      -
                September
      30,
                2009
      1
              Predecessor
                January
      1,
                2009
      -
                February
      5,
                2009
      1
              Predecessor
                Nine
      Months
                Ended
                September
      30,
                2008Balance
      at beginning of period liability
              $  (185.8)
              $  (132.2)
              $   (6.1)Changes
      during period:Realized
      and unrealized energy derivatives-
      included in earnings
              5.2
              (0.6)
              (1.5)-
      included in other comprehensive income
              (17.4)
              (14.8)
              (21.6)-
      included in regulatory assets/liabilities
              (3.3)
              (1.4)
              (10.8)Purchases,
      issuances, and settlements
              19.5
              2.1
              6.0Energy
      derivatives transferred in/out of Level 3 2
              79.5
              8.5
              (1.8)Balance
      at end of period asset/(liability)
              $
      (102.3)
              $  (138.4)
              $
      (35.8) _________________
 1
              The
      ending balance for the Predecessor was eliminated as a result of push-down
      accounting effective February 6, 2009, when the Successor period began,
      causing a difference between the ending and beginning of period balances
      for the Predecessor and Successor Companies.2
              The
      energy derivatives transferred in/out of Level 3 for the Successor
      includes the money market fund balance of $1.4 million.  These
      money market funds became Level 2 during the second quarter 2009. The
      transfer in/out balance related to the commodity contracts was $79.5
      million for the nine months ended roll forward tables for the Successor
      Company.
 
 The
following table sets forth a reconciliation of PSE’s changes in the fair value
of derivatives classified as Level 3 in the fair value hierarchy:
  Puget
      Sound Energy
                Level
      3 Roll-Forward Net Asset/(Liability)
                (Dollars
      in Millions)
              ThreeMonths
                Ended
                September30,
                2009
              Three Months
                Ended
                September
      30,
                2008
              Nine Months
                Ended
                September30,
                2009
              Nine Months
                Ended
                September30,
                2008Balance
      at beginning of period  (net credit reserve on energy
      derivatives)
              $  (136.7)
              $   148.8
              $     (132.2)
              $     (6.1)Changes
      during period:Realized
      and unrealized energy derivatives-
      included in earnings
              15.1
              1.5
              19.2
              (1.5)-
      included in other comprehensive income
              --
              (93.9)
              (38.0)
              (21.6)-
      included in regulatory assets/liabilities
              (1.0)
              (11.3)
              (6.8)
              (10.8)Purchases,
      issuances, and settlements
              5.8
              (39.1)
              21.9
              6.0Energy
      derivatives transferred in/out of Level 3 1
              14.5
              (41.8)
              33.6
              (1.8)Balance
      as of September 30, 2009 (net credit reserve on energy
      derivatives)
              $  (102.3)
              $  (35.8)
              $   
       (102.3)
              $  (35.8)
 _________________
 1
              The
      energy derivatives transferred in/out of Level 3 includes the money market
      fund balance of $1.4 million.  These money market funds became
      Level 2 during the second quarter 2009. The transfer in/out balance
      related to the commodity contracts was $33.6 million for the nine months
      ended roll forward tables.
 
 Realized
gains and losses on energy derivatives for Level 3 recurring items are included
in energy costs in the Company’s income statement under purchased electricity,
electric generation fuel or purchased natural gas when settled.
 Unrealized
gains and losses for Level 3 inputs on energy derivatives recurring items are
included in the net unrealized (gain)/loss on derivative instruments section in
the Company’s income statement and as a net unrealized (gain)/loss on derivative
instruments in OCI.  The Company does not believe that the fair values
diverge materially from the amounts the Company currently anticipates realizing
on settlement or maturity.
 Energy
derivative instruments are classified as Level 3 in the fair value hierarchy
because Level 3 inputs are significant to their fair value
measurement.  Energy derivatives transferred out of Level 3 represent
existing assets or liabilities that were classified as Level 3 at the end of the
prior reporting period for which the lowest significant input became observable
during the current reporting period.
   (6)
              Estimated
      Fair Value of Financial Instruments
  Puget
Energy
 The
following table presents the carrying amounts and estimated fair values of Puget
Energy’s financial instruments at September 30, 2009 and December 31, 2008 in
accordance with ASC 270, “Interim Reporting” (ASC 270):
 
 Successor
                September
      30, 2009
              Predecessor
                December 31,
      2008(Dollars
      in Millions)
              Carrying
                Amount
              Fair
                Value
              Carrying
                Amount
              Fair
                ValueFinancial
      assets:Cash
              $      83.5
              $     83.5
              $      38.5
              $      38.5Restricted
      cash
              18.1
              18.1
              18.9
              18.9Notes
      receivable and other
              74.2
              74.2
              71.8
              71.8De-designated
      commodity instruments 1
              2.0
              2.0
              --
              --Energy
      derivatives
              34.4
              34.4
              22.3
              22.3Interest
      rate derivative instruments
              12.1
              12.1
              --
              --Financial
      liabilities:Short-term
      debt
              $          --
              $         --
              $    964.7
              $    964.7Preferred
      stock subject to mandatory redemption
              --
              --
              1.9
              1.9Junior
      subordinated notes
              250.0
              228.7
              250.0
              112.5Current
      maturities of long-term debt (fixed-rate)
              240.0
              246.4
              158.0
              158.0Long-term
      debt (fixed-rate)
              2,638.9
              2,886.8
              2,270.9
              1,951.0Long-term
      debt (variable-rate)
              1,483.0
              1,427.2
              --
              --De-designated
      commodity instruments 1
              70.1
              70.1
              --
              --Energy
      derivatives
              294.1
              294.1
              395.3
              395.3Interest
      rate derivative instruments
              27.3
              27.3
              --
              -- _______________
 1
              De-designated
      commodity instruments represent derivative contracts acquired at fair
      value by Puget Energy at the acquisition date that were subsequently
      designated as NPNS in accordance with ASC 815 and are no longer recorded
      at fair value at the end of the reporting period. The amounts above
      represent the remaining unamortized value that will be amortized into
      earnings over the original life of the
  contracts.
 
 The fair
value of the senior secured fixed notes and variable rate was estimated using
U.S. Treasury yields and related current market credit spreads, interpolating to
the maturity date of each issue.  The fair value of the junior
subordinated notes was priced on a yield to call basis using a market price from
an independent financial institution.
 The fair
value of the preferred stock subject to mandatory redemption as of December 31,
2008 was estimated based on dealer quotes.  The carrying values of
short-term debt and notes receivable are considered to be a reasonable estimate
of fair value.  The carrying amount of cash, which includes temporary
investments with original maturities of three months or less, is also considered
to be a reasonable estimate of fair value.  Puget Energy values
derivative instruments based on daily quoted prices from an independent external
pricing service.  When externally quoted market prices are not
available for derivative contracts, Puget Energy uses a valuation model that
uses volatility assumptions relating to future energy prices based on specific
energy markets and utilizes externally available forward market price
curves.
 
 Puget
Sound Energy
 The
following table presents the carrying amounts and estimated fair values of PSE’s
financial instruments at September 30, 2009 and December 31, 2008:
 
 September
      30, 2009
              December 31,
      2008(Dollars
      in Millions)
              Carrying
                Amount
              Fair
                Value
              Carrying
                Amount
              Fair
                ValueFinancial
      assets:Cash
              $       83.5
              $        83.5
              $      38.5
              $      38.5Restricted
      cash
              18.1
              18.1
              18.9
              18.9Notes
      receivable and other
              74.2
              74.2
              71.8
              71.8Energy
      derivatives
              34.5
              34.5
              22.3
              22.3Financial
      liabilities:Short-term
      debt
              $           --
              $           --
              $    964.7
              $    964.7Short-term
      debt owed by PSE to Puget Energy
              22.9
              22.9
              26.1
              26.1Preferred
      stock subject to mandatory redemption
              --
              --
              1.9
              1.9Junior
      subordinated notes
              250.0
              228.7
              250.0
              112.5Current
      maturities of long-term debt (fixed-rate)
              240.0
              246.4
              158.0
              158.0Non-current
      maturities of long-term debt (fixed-rate)
              2,638.9
              2,886.8
              2,270.9
              1,951.0Energy
      derivatives
              267.2
              267.2
              395.3
              395.3
 
 The fair
value of the senior secured notes was estimated using U.S. Treasury yields and
related current market credit spreads, interpolating to the maturity date of
each issue.  The fair value of the junior subordinated notes was
priced on a yield to call basis using a market price from an independent
financial institution.
 The fair
value of the preferred stock subject to mandatory redemption as of December 31,
2008 was estimated based on dealer quotes.  The carrying values of
short-term debt and notes receivable are considered to be a reasonable estimate
of fair value.  The carrying amount of cash, which includes temporary
investments with original maturities of three months or less, is also considered
to be a reasonable estimate of fair value.  PSE values derivative
instruments based on daily quoted prices from an independent external pricing
service.  When externally quoted market prices are not available for
derivative contracts, PSE uses a valuation model.  The model uses
volatility assumptions relating to future energy prices based on specific energy
markets, utilizing externally available forward market price
curves.
 
  (7)
              Financing
      Arrangements
  Bond Issuances.  On
January 23, 2009, PSE issued $250.0 million of senior notes, secured by first
mortgage bonds. The bonds are non-callable, were placed with approximately 35
institutional investors, have a term of seven years and carry a 6.75% interest
rate.  On September 11, 2009, PSE issued $350.0 million of senior
notes, secured by first mortgage bonds.  The bonds are non-callable,
were placed with approximately 80 institutional investors, have a term of 30
years and carry a 5.757% interest rate.
 
 Dividend Payment
Restrictions.The payment of dividends by PSE to Puget Energy
is restricted by provisions of certain covenants applicable to long-term debt
contained in PSE’s electric and natural gas mortgage indentures.  At
September 30, 2009, approximately $439.5 million of unrestricted retained
earnings was available for the payment of dividends under the most restrictive
mortgage indenture covenant.  In addition, beginning February 6, 2009,
as approved in the Washington Commission merger order, dividends may not be
declared or paid if PSE’s common equity ratio, calculated on a regulatory basis,
is 44.0% or below except to the extent a lower equity ratio is ordered by the
Washington Commission.  In addition, pursuant to the merger order, PSE
may not declare or make any distribution unless on the date of distribution
PSE’s corporate credit/issuer rating is investment grade (equal to or greater
than BBB- with S&P and Baa3 with Moody’s Investors Services (Moody’s)), or,
if its credit rating is below investment grade, the PSE’s ratio of Earnings
Before Interest, Tax, Depreciation and Amortization (EBITDA) to interest for the
most recently ended four fiscal quarter periods prior to such date is equal to
or greater than three to one.  Puget Energy’s ability to pay dividends
to its shareholder is also limited by the merger order as well as by the terms
of its credit facilities, beginning February 6, 2009.  Pursuant to the
merger order, Puget Energy may not declare or make a distribution unless on such
date Puget Energy’s ratio of consolidated EBITDA to consolidated interest
expense for the four most recently ended fiscal quarters prior to such date is
equal to or greater than two to one.  At September 30, 2009, the
Company met or exceeded all restrictive test minimums required for the payment
of dividends.
 
 Puget
Energy Credit Facilities
 Effective
with the close of the merger on February 6, 2009, Puget Energy has a $1.225
billion five-year term loan and a $1.0 billion credit facility for funding
utility capital expenditures.  Prior to the merger close, Puget Energy
had no credit facilities.
 Puget
Energy’s credit agreements contain usual and customary affirmative and negative
covenants that, among other things, place limitations on its, or PSE’s ability
to incur additional indebtedness and liens, issue equity, pay dividends,
transact with affiliates and make dispositions and investments.  The
credit agreements also contain financial covenants, whose measurement periods
began with the third quarter 2009 financial statements, based on the following
three ratios:  cash flow interest coverage, cash flow debt leverage
and debt service coverage.  Puget Energy certifies its compliance with
such covenants each quarter with the lending banks.  As of September
30, 2009, Puget Energy exceeded each of the ratio minimums.
 The two
credit facilities mature in February 2014, contain similar terms and conditions
and are syndicated among numerous banks and financial
institutions.  The agreements provide Puget Energy with the ability to
borrow at different interest rate options and include variable fee
levels.  Borrowings may be at the bank’s prime rate plus a spread or
at floating rates based on the London Interbank Offered Rate (LIBOR) plus a
spread.  Puget Energy must also pay a commitment fee on the unused
portion of the $1.0 billion facility.  The spreads and the commitment
fee depend on Puget Energy’s credit ratings as determined by S&P and Moody’s
credit ratings.  Based on Puget Energy’s credit ratings as of the date
of this report, the spread over prime rate is 125 basis points, the spread to
the LIBOR is 225 basis points and the commitment fee is 84 basis
points.
 At
September 30, 2009, the term loan was fully drawn at $1.225 billion and $258.0
million was outstanding under the $1.0 billion facility, leaving $742.0 million
available for use on the facility.  Concurrent with the borrowings
under these credit agreements, Puget Energy entered into a series of interest
rate swaps with a group of banks to fix the interest rates at 4.76% for the term
of the credit facilities on the two loans totaling $1.483 billion.
 The
source of funding to satisfy Puget Energy’s credit agreement costs is from the
payment of dividends to Puget Energy from PSE.  See “Dividend Payment
Restrictions” discussion above.
 
 PSE
Credit Facilities
 As of
September 30, 2009, PSE had no short-term borrowings and as of February 5, 2009,
PSE had $838.6 million in short-term borrowings under its credit
facilities.  Effective immediately after the merger on February 6,
2009, PSE has three committed unsecured revolving credit facilities that
provide, in the aggregate, $1.150 billion in short-term borrowing
capability.  Each of the credit facilities are described
below.
 
 PSE
Credit Agreements from February 6, 2009
 Effective
with the close of the merger, PSE has three committed unsecured revolving credit
facilities that provide, in the aggregate, $1.150 billion in short-term
borrowing capability.  These new facilities include a $400.0 million
credit agreement for working capital needs, a $400.0 million credit facility for
funding capital expenditures and a $350.0 million facility to support energy
hedging activities.
 PSE’s
credit agreements contain similar usual and customary covenants as described in
the Puget Energy agreements.  PSE’s financial covenants include cash
flow interest coverage and cash flow debt leverage ratios whose measurement
periods began with the third quarter 2009 financial statements.  PSE
certifies its compliance with such covenants each quarter with the lending
banks.
 These
facilities mature in 2014, contain similar terms and conditions and are
syndicated among numerous committed banks.  The agreements provide PSE
with the ability to borrow at either a base rate (based on the Prime Rate) or
the Eurodollar rate (based on the LIBOR), plus a spread.  PSE must
also pay a commitment fee on the unused portion of the facilities. The spread
and the commitment fee depend on PSE’s credit ratings as determined by S&P
and Moody’s credit ratings. Based on PSE’s credit ratings as of the date of this
report, the spread is 85 basis points and the commitment fee is 26 basis
points.  The $400.0 million working capital facility and $350.0
million credit agreement to support energy hedging allow for issuing standby
letters of credit up to the entire amount of the credit
agreements.  The $400.0 million working capital facility also serves
as a backstop for PSE’s commercial paper program.
 As of
September 30, 2009, PSE had no borrowings outstanding under either the working
capital or capital expenditure facilities and had a $20.0 million letter of
credit outstanding under the facility supporting energy
hedging.  Outside of the credit agreements, PSE had a $6.0 million
letter of credit through a bank in support of a long-term transmission
contract.
 
 PSE
Credit Agreements at February 5, 2009
 At
February 5, 2009, PSE had available unsecured revolving credit agreements in the
amounts of $500.0 million for working capital purposes and $350.0 million to
support energy hedging activities, each expiring in April 2012.  The
credit agreements provided credit support for letters of credit and commercial
paper.  At February 5, 2009, PSE had $249.9 million of loans
outstanding plus a $6.6 million letter of credit under the $500.0 million
facility and a $30.0 million letter of credit and no loans drawn under the
$350.0 million facility.  There was no commercial paper outstanding
under either facility.
 In August
2008, PSE entered into a nine-month $375.0 million credit agreement with four
banks and as of February 5, 2009, PSE had fully drawn the $375.0 million
capacity under the agreement.
 At
February 5, 2009, PSE had a $200.0 million receivables securitization facility
which was set to expire in December 2010.  At February 5, 2009, $188.0
million was outstanding under the receivables securitization
facility.  The facility allowed receivables to be used as collateral
to secure short-term loans, not exceeding the lesser of $200.0 million or the
borrowing base of eligible receivables, which fluctuate with the seasonality of
energy sales to customers.  On February 6, 2009, the credit agreements
and securitization facility were repaid, terminated and replaced with the new
post-merger facilities described above.
 
 Demand Promissory
Note.On June 1, 2006, PSE entered into an uncommitted
revolving credit facility with its parent, Puget Energy, pursuant to a Demand
Promissory Note (Note) under which PSE may borrow up to $30.0 million from Puget
Energy.  Under the terms of the Note, PSE pays interest on the
outstanding borrowings based on the lowest of the weighted-average interest rate
of: (a) PSE’s outstanding commercial paper interest rate or (b) PSE’s senior
unsecured revolving credit facility.  At September 30, 2009, the
outstanding balance of the Note was $22.9 million.  As of December 31,
2008, the outstanding balance of the Note was $26.1 million.  This
Note was unaffected by the February 6, 2009 merger.
 
 Summary
of Puget Energy and PSE Credit Facilities
 
 (Dollars
      in Thousands)
              Successor
                September
      30,
                2009
              Predecessor
                February
      5,
                2009Committed
      financing arrangements:PSE
      line of credit 1,
      6
              $              --
              $    490,000PSE
      line of credit 2,
      6
              
              315,000PSE
      line of credit 3,
      6
              
              375,000PSE
      receivables securitization program 4,
      6
              
              200,000PSE
      working capital facility 6,
      7
              400,000
              --PSE
      capital expenditures facility 6,
      7
              400,000
              --PSE
      hedging facility 6,
      7
              350,000
              --Puget
      Energy 5-year term loan8
              1,225,000
              --Puget
      Energy capital expenditures facility 9
              1,000,000
              --Uncommitted
      financing agreements:Puget
      Energy demand promissory note 5
              30,000
              30,000 _______________
 1
              Provided
      liquidity for PSE’s general corporate purposes and support for PSE’s
      outstanding commercial paper and letters of credit.  This $500.0
      million facility is reflected as $490.0 million due to Lehman Brothers’
      lack of funding its $10.0 million commitment. At February 5, 2009, PSE had
      $249.9 million of loans plus a $6.6 million letter of credit outstanding
      under this facility leaving $233.5 million of available borrowing
      capacity. This credit facility was repaid and subsequently terminated in
      connection with the merger.2
              Provided
      credit support for PSE’s energy and natural gas hedging
      activities.  This $350.0 million facility is reflected as $315.0
      million reduced for Lehman Brothers’ lack of funding its $35.0 million
      commitment.  At February 5, 2009, PSE had one outstanding letter
      of credit under this facility in the amount of $30.0
      million.  There were no loans outstanding at February 5,
      2009.  This credit facility was repaid and subsequently
      terminated in connection with the merger.3
              Provided
      short-term funding for PSE’s acquisition of the Mint Farm natural gas
      fired electric generating facility and general corporate
      liquidity.  At February 5, 2009, there were $375.0 million of
      loans outstanding under this facility.  This credit facility was
      repaid and subsequently terminated in connection with the
      merger.4
              Provided
      borrowings secured by accounts receivable and unbilled
      revenues.  At February 5, 2009, PSE Funding had borrowed $188.0
      million, leaving $12.0 million available to borrow under the
      program.  This credit facility was repaid and subsequently
      terminated in connection with the merger.5
              PSE
      has a revolving credit facility with Puget Energy in the form of a
      promissory note to borrow up to $30.0 million subject to approval by Puget
      Energy.  At September 30, 2009, there was $22.9 million
      outstanding.  At February 5, 2009, the outstanding balance on
      the note was $25.7 million.  The outstanding balance and related
      interest are eliminated on Puget Energy’s balance sheet upon
      consolidation.6
              Effective
      February 6, 2009, the PSE lines of credit and PSE receivables
      securitization program were terminated and replaced with three lines of
      credit with a group of banks.7
              Three
      new PSE lines of credit consist of $400.0 million to fund operating
      expenses, $400.0 million to fund capital expenditures and $350.0 million
      to support energy and natural gas hedging activity.  As of
      September 30, 2009, PSE had no borrowings outstanding under either the
      working capital or capital expenditure facilities and had a $20.0 million
      letter of credit outstanding under the $350.0 million hedging
      facility.8
              Effective
      February 6, 2009, Puget Energy entered into this credit agreement to
      assist with funding the merger transaction and to repay short-term loans
      under the previous PSE credit facilities.  The full amount of
      the $1.225 billion loan was hedged to lock in a fixed interest rate of
      4.76%.9
              Effective
      February 6, 2009 Puget Energy entered into this credit facility to provide
      funding for capital expenditures.  At September 30, 2009 a loan
      in the amount of $258.0 million was outstanding.  An interest
      rate hedge was entered into at time of borrowing to lock in a fixed
      interest rate of 4.76%.
   (8)
              Retirement
      Benefits
  PSE has a
defined benefit pension plan covering substantially all PSE
employees.  Pension benefits earned are a function of age, salary and
years of service.  PSE also maintains a non-qualified supplemental
retirement plan for officers and certain director-level
employees.
 The
February 6, 2009 merger of Puget Energy with Puget Holdings triggered a new
basis of accounting for PSE’s retirement benefit plans.  PSE did not
record the remeasurement of retirement plans as all the purchase accounting
adjustments are recorded at Puget Energy.
 
 Puget
Energy
 The
following tables summarize Puget Energy’s net periodic benefit cost for the
three months ended September 30, 2009 as compared to the same period in
2008:
 
 Qualified Pension Benefits(Dollars
      in Thousands)
              Successor
                Three
      Months
                Ended
                September
      30,
                2009
              Predecessor
                Three
      Months
                Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $   3,401
              $   3,187Interest
      cost
              7,067
              6,652Expected
      return on plan assets
              (7,523)
              (10,391)Amortization
      of net loss
              --
              236Amortization
      of prior service cost
              --
              161Net
      periodic benefit cost (income)
              $   2,945
              $     (155)
 
 
 SERP Pension Benefits(Dollars
      in Thousands)
              Successor
                Three
      Months
                Ended
                September
      30,
                2009
              Predecessor
                Three
      Months
                Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $      259
              $      234Interest
      cost
              594
              553Amortization
      of net loss
              --
              183Amortization
      of prior service cost
              --
              154Net
      periodic benefit cost
              $      853
              $   1,124
 
 
 Other
      Benefits(Dollars
      in Thousands)
              Successor
                Three
      Months
                Ended
                September
      30,
                2009
              Predecessor
                Three
      Months
                Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $        31
              $        28Interest
      cost
              244
              296Expected
      return on plan assets
              (103)
              (197)Amortization
      of net gain
              --
              (177)Amortization
      of prior service cost
              --
              21Amortization
      of transition obligation
              --
              13Net
      periodic benefit cost (income)
              $      172
              $       (16)
 
 The
following tables summarize Puget Energy’s net periodic benefit cost for the nine
months ended September 30, 2009 as compared to the same period in
2008:
 
 Qualified Pension Benefits(Dollars
      in Thousands)
              Successor
                February
      6, 2009 -
                September
      30,
                20091
              Predecessor
                January
      1, 2009 -
                February
      5,
                2009
              Predecessor
                Nine
      Months Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $   9,068
              $   1,090
              $   9,562Interest
      cost
              18,845
              2,302
              19,956Expected
      return on plan assets
              (20,060)
              (3,585)
              (31,172)Amortization
      of net loss (gain)
              --
              269
              708Amortization
      of prior service cost
              --
              95
              484Net
      periodic benefit cost (income)
              $   7,853
              $      171
              $    (462)
 
 
 SERP Pension Benefits(Dollars
      in Thousands)
              Successor
                February
      6, 2009 -
                September
      30,
                20091
              Predecessor
                January
      1, 2009 -
                February
      5,
                2009
              Predecessor
                Nine
      Months Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $      692
              $        89
              $      702Interest
      cost
              1,584
              193
              1,658Amortization
      of net loss (gain)
              --
              74
              549Amortization
      of prior service cost
              --
              51
              462Net
      periodic benefit cost
              $   2,276
              $      407
              $   3,371
 
 
 Other Benefits(Dollars
      in Thousands)
              Successor
                February
      6, 2009 -
                September
      30,
                20091
              Predecessor
                January
      1, 2009 -
                February
      5,
                2009
              Predecessor
                Nine
      Months Ended
                September
      30,
                2008Components
      of net periodic benefit cost:Service
      cost
              $       83
              $        11
              $     115Interest
      cost
              650
              88
              862Expected
      return on plan assets
              (275)
              (37)
              (592)Amortization
      of net loss (gain)
              --
              (15)
              (575)Amortization
      of prior service cost
              --
              7
              63Amortization
      of transition obligation
              --
              4
              38Net
      periodic benefit cost (income)
              $     458
              $        58
              $      (89) __________________
 1
              The
      disclosed information is based on an initial January 31, 2009 measurement
      date and as a result the expense numbers are shown pro-rated for the third
      quarter 2009.
  
 Puget
Sound Energy
 The
following table summarizes the net periodic benefit cost for the three months
ended September 30:
 
 Qualified
                Pension
      Benefits
              SERP
                Pension
      Benefits
              Other
                Benefits(Dollars
      in Thousands)
              2009
              2008
              2009
              2008
              2009
              2008Components
      of net periodic benefit cost:Service
      cost
              $  3,535
              $  3,187
              $     267
              $     234
              $       31
              $       28Interest
      cost
              6,934
              6,652
              579
              553
              240
              296Expected
      return on plan assets
              (10,863)
              (10,391)
              --
              --
              (114)
              (197)Amortization
      of net loss (gain)
              925
              236
              221
              183
              (115)
              (177)Amortization
      of prior service cost
              283
              161
              154
              154
              21
              21Amortization
      of transition obligation
              --
              --
              --
              --
              13
              13Net
      periodic benefit cost (income)
              $     814
              $    (155)
              $  1,221
              $  1,124
              $       76
              $      (16)
 
 The
following table summarizes the net periodic benefit cost for the nine months
ended September 30:
 
 Qualified
                Pension
      Benefits
              SERP
                Pension
      Benefits
              Other
                Benefits(Dollars
      in Thousands)
              2009
              2008
              2009
              2008
              2009
              2008Components
      of net periodic benefit cost:Service
      cost
              $10,605
              $  9,562
              $     801
              $     702
              $       94
              $     115Interest
      cost
              20,801
              19,956
              1,736
              1,658
              720
              862Expected
      return on plan assets
              (32,590)
              (31,172)
              --
              --
              (341)
              (592)Amortization
      of net loss (gain)
              2,777
              708
              664
              549
              (345)
              (575)Amortization
      of prior service cost
              850
              484
              462
              462
              62
              63Amortization
      of transition obligation
              --
              --
              --
              --
              37
              38Net
      periodic benefit cost (income)
              $  2,443
              $    (462)
              $  3,663
              $  3,371
              $     227
              $      (89)
 
 PSE
expects to make contributions totaling $18.4 million to the qualified pension
plan for the year ending December 31, 2009.  During the three and nine
months ended September 30, 2009, PSE contributed $12.0 million and $18.0
million, respectively, to the qualified pension plan.  In October
2009, PSE contributed $0.4 million to the qualified pension plan.  PSE
previously disclosed in its financial statements for the year ended December 31,
2008 that it expected contributions by PSE to fund the Supplemental Executive
Retirement Plan (SERP) and the other postretirement plans for the year ending
December 31, 2009 to be $4.0 million and $0.1 million,
respectively.  During the three and nine months ended September 30,
2009, PSE contributed $­­­0.4 million and $3.9 million,
respectively, to the SERP plan.
 During
the nine months ended September 30, 2009, actual contributions for the other
postretirement medical benefit plan were $0.6 million. 
  (9)
                Regulation
      and Rates
  On
October 16, 2009, PSE filed an accounting petition requesting that the
Washington Commission authorize the deferral and recovery of incremental costs
associated with protecting the Company’s infrastructure, facilitating public
safety, and preparing PSE’s electric and natural gas system in the Green River
Valley flood plain in anticipation of release of water from the U.S. Army Corps
of Engineers (Corps) Howard Hanson Dam (the Dam).  In the event of
actual flooding, PSE also petitioned the Washington Commission to allow the
deferral of costs associated with the repair and restoration of any electric and
gas system infrastructure affected by a flood.
 On
October 7, 2009, PSE filed an amended accounting petition requesting that the
Washington Commission authorize PSE to defer the net revenues from the sale of
renewable energy credits (RECs) and carbon financial instruments (collectively,
REC Proceeds) and use the revenues to: (1) provide funding for low income energy
efficiency and renewable energy services, (2) credit a portion of the REC
Proceeds to the California Receivable (see Litigation footnote for further
discussion) and (3) provide a credit to customers by offsetting the REC Proceeds
against a regulatory asset.  The accounting petition is an amended
petition to the accounting petition originally filed in April 2007 that
requested deferred accounting treatment for renewable energy
credits.
 On
September 30, 2009, PSE filed an accounting petition requesting that the
Washington Commission authorize PSE to normalize any Treasury grant dollars
received under Section 1503 of the American Recovery and Reinvestment Act of
2009 associated with the Wild Horse Expansion project.  Treasury
grants are tax free grants related to certain renewable energy infrastructure
that are available in lieu of the production tax credit allowed under the
Internal Revenue Code.
 
 
 On
September 24, 2009, the Washington Commission approved a revision to PSE’s
Residential and Farm Energy Exchange Benefit effective on October 1,
2009.  The tariff change revised the credit applied to residential and
small customer electric tariff schedules from $103.2 million to $81.7 million on
an annualized basis.  The Washington Commission also approved PSE’s
continuation of a residential exchange balancing account (for timing differences
related to the Bonneville Power Administration (BPA) payment versus the PSE rate
credit) and applicable interest computations on the balancing
account.
 On
September 24, 2009 the Washington Commission approved PSE’s requested revisions
to its PGA tariff schedules resulting in a decrease of $198.1 million or 17.1%
on an annual basis in gas sales revenues effective October 1,
2009.  The rate decrease was the result of lower costs of natural gas
in the forward market and an increase of the credit for the accumulated PGA
payable balance.  The PGA rate change will impact PSE’s revenue but
will not impact its net income as the decreased revenue will be offset by
decreased purchased gas costs.
 On May
28, 2009, the Washington Commission approved a PGA rate decrease of $21.2
million or 1.7% annually effective June 1, 2009.  PGA rate changes do
not impact net income.
 On May 8,
2009, PSE filed a general rate case requesting recovery of increased electric
and natural gas revenue requirements.  PSE requested an electric
general rate increase of approximately $148.1 million or 7.4% annually, and an
increase in natural gas rates of $27.2 million or 2.2% annually.  On
August 3, 2009, PSE filed a correction to the natural gas rate request which
changed the rate increase to $30.4 million or 2.5%.  On September 28,
2009, PSE filed supplemental testimony that updated power costs and load
forecast, among other changes.  The supplemental filing changed the
requested electric rate increase to $153.6 million or 7.67%.  This
rate request includes an equity component of 48.0% and a requested return on
equity of 10.8%.  A final order from the Washington Commission is
expected by April 2010.
 On April
17, 2009, the Washington Commission issued an order approving and adopting a
settlement agreement that authorized PSE to defer certain ownership and
operating costs related to its purchase of the Mint Farm Generation Station
(Mint Farm) that will be incurred prior to PSE recovering such costs in electric
customer rates.  Under Washington State law, a jurisdictional electric
utility may defer the costs associated with purchasing and operating a natural
gas plant that complies with the greenhouse gas (GHG) emissions performance
standard until the plant is included in rates or for two years from the date of
purchase, whichever occurs sooner.  As of September 30, 2009, PSE had
established a regulatory asset of $17.1 million per the Washington Commission
order.  The prudence of the Mint Farm acquisition, recovery of costs
of Mint Farm and compliance with the GHG emissions performance standard will be
addressed in PSE’s general rate proceeding.
   (10)
                Litigation
  Residential
Exchange.  Like other investor-owned utilities in the region,
PSE has been a party to certain agreements with the BPA that provide payments
under its residential exchange program (REP) to PSE which PSE passes through to
its residential and small farm electric customers.  Several actions in
the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) against
BPA asserted that BPA acted contrary to law in connection with this REP,
including with respect to benefits received or to be received by PSE from BPA.
After Ninth Circuit decisions in those actions, BPA revisited certain REP
determinations and calculations relating to payments made in the 2001 to 2006
period.  PSE also has an agreement with BPA for going-forward REP
payment amounts to 2012 and for the period 2012 to 2028 and has sought Ninth
Circuit review of the agreements related thereto.  The amounts of such
payments and the methods utilized in setting them are subject to FERC review,
judicial review, or both, and are subject to adjustment, which may affect the
amount of REP benefits paid or to be paid by BPA to PSE.  It is not
clear what impact, if any, these reviews or other REP-related litigation may
ultimately have on PSE.
 PSE Settlement of California
Matters.On May 8, 2009, PSE and certain California parties
filed a proposed settlement with FERC that resolved all the matters and disputes
pending between PSE and California parties relating to the Western Energy
Crisis.  On July 1, 2009, FERC approved the settlement.
 Under the
settlement, PSE releases all claims to amounts held in—or presumed payable
into—certain escrow accounts.  In particular, the California Power
Exchange and Pacific Gas & Electric will deliver $59.9 million, plus up to
$36.8 million in interest, from escrows they maintain to the California
parties.  The release of those funds fully satisfies all claims by the
California parties against PSE, and the California parties assume the risk of
any shortfalls or adjustments that occur in those accounts.
 The
settlement resolves all claims by the California parties against PSE in all
proceedings and resolves all claims by PSE against California energy purchasers
in all proceedings; except that PSE retains any claims or defenses that pertain
to the Pacific Northwest Refund Proceedings at FERC.
 In
addition to the FERC approval obtained on July 1, 2009, PSE’s settlement with
the California parties was expressly conditioned upon two other actions: (1) the
California Energy Commission approval as qualifying facilities under California
renewable energy rules of PSE’s Wild Horse and Hopkins Ridge wind farms; and (2)
the approval by the California Public Utilities Commission of a renewable power
agreement between PSE and Southern California Edison (SCE), under which PSE will
sell qualifying renewable power to SCE in 2009 and 2010.  PSE entered
into the SCE contract in January 2009 and all required approvals for that
contract were obtained by June 18, 2009.
 Use of
the proceeds from the renewable power transaction, for ratemaking and accounting
purposes, will be determined by the Washington Commission.  As
previously discussed, PSE is seeking full recovery of the net California
receivable of $21.1 million which has been reclassified as a deferred asset
through this proceeding.
 The
Pacific Northwest Refund Proceeding, which is updated below, is the only
remaining litigation from the western energy crisis involving PSE.
 Pacific Northwest
Refund Proceeding.In October 2000, PSE filed a complaint
at FERC (Docket No. EL01-10) against “all jurisdictional sellers” in the Pacific
Northwest seeking prospective price caps consistent with any result FERC ordered
for the California markets.   In April 2009, the Ninth Circuit
rejected the requests for rehearing filed in this matter and remanded the
proceeding to FERC.  FERC is now considering what response to take to
the Court remand order.  PSE, Powerex and several other sellers have
petitioned the U.S. Supreme Court for review of the Ninth Circuit
decision.  That petition is unlikely to be decided before
2010.  PSE intends to vigorously defend its position but is unable to
predict the outcome of this matter.
   (11)
                Related
      Party Transactions
  On June
1, 2006, PSE entered into a revolving credit facility with its parent, Puget
Energy, in the form of a Demand Promissory Note (Note).  Through the
Note, PSE may borrow up to $30.0 million from Puget Energy, subject to approval
by Puget Energy.  Under the terms of the Note, PSE pays interest on
the outstanding borrowings based on the lower of the weighted-average interest
rate of: (a) PSE’s outstanding commercial paper interest rate or (b) PSE’s
senior unsecured revolving credit facility.  At September 30, 2009 and
December 31, 2008, the outstanding balance of the Note was $22.9 million and
$26.1 million, respectively, and the interest rate was 1.1% and 1.7%,
respectively.  This Note was unaffected by the February 6, 2009
merger.
 Effective
with the close of the merger on February 6, 2009, Puget Energy has a $1.225
billion five-year term loan and a $1.0 billion credit facility for funding
capital expenditures.  These facilities mature in 2014, contain
similar terms and conditions and are syndicated among numerous committed
banks.  One of these banks is Macquarie Bank Limited, which has a
commitment of $25.2 million to the term loan and a $20.6 million commitment to
the capital expenditure credit facility.  As of September 30, 2009,
the term loan was fully drawn at $1.225 billion and $258.0 million was
outstanding under the $1.0 billion credit facility.  On February 6,
2009, Puget Energy entered into several interest rate swap instruments to hedge
volatility associated with these two loans.  Two of the swap
instruments were entered into with Macquarie Bank Limited with a total notional
amount of $444.9 million.
   (12)
                Variable
      Interest Entities
  In
accordance with ASC 810, “Consolidation” (ASC 810), a variable interest entity
(VIE) is an entity in which the investors as a group do not have: (1) the
characteristics of a controlling financial interest in the equity of the entity;
(2) sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support; or (3) symmetry between voting rights
and economic interests and where substantially all of the entity’s activities
either involve or are conducted on behalf of an investor with disproportionally
few voting rights. Variable interests in a VIE are contractual, ownership or
other pecuniary interests in an entity that change with changes in the fair
value of the entity’s net assets exclusive of variable interest.
 ASC 810
requires that if a business entity has a controlling financial interest in a
VIE, the financial statements must be included in the consolidated financial
statements of the business entity.
 ASC 810
requires new expanded disclosures for VIEs in the quarterly financial statements
for periods ending after December 15, 2008.  The disclosures required
by ASC 810 are intended to provide users of the financial statements with
greater transparency about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with
VIEs.
 A primary
beneficiary of a VIE is the variable interest holder (e.g. a contractual
counterparty or capital provider), who is deemed to have the controlling
financial interest(s) and is considered to be exposed to the majority of the
risks and rewards associated with the VIE and therefore must consolidate
it.  PSE enters into a variety of contracts for energy with other
counterparties and evaluates all contracts for variable
interests.  PSE’s variable interests primarily arise through power
purchase agreements where PSE obtains control other than through voting rights
and is required to buy all or a majority of generation from a plant at rates set
forth in a power purchase agreement, subject to displacement. If a counterparty
does not deliver energy to PSE, PSE may have to replace the energy at prices
which could be higher or lower than agreed to prices.  Therefore, PSE
may be exposed to risk associated with replacement costs of a
contract.
 PSE
evaluates variable interest relationships based on significance.  If
PSE did not participate significantly in the design or redesign of an entity and
the variable interest is not considered significant to PSE’s financial
statements, the variable interest is not considered
significant.  Purchase power contracts with governmental organizations
do not require disclosure.  When PSE determines a significant variable
interest may exist with another party, PSE requests information to determine if
it is required to be consolidated.
 Due to
the merger and adoption of ASC 805, Puget Energy has re-evaluated PSE’s power
purchase agreements under ASC 840, “Leases” (ASC 840).  Neither Puget
Energy nor PSE have an equity ownership interest in the entities selling energy
under the long-term contracts to PSE.  Puget Energy has determined
that one power purchase agreement, which was in effect prior to ASC 810, may be
considered to be a significant VIE.  PSE evaluated its power purchase
agreements and determined that two power purchase agreements may be considered
significant VIEs under ASC 810.  PSE is required to buy all the
generation from the cogeneration plants, subject to displacement, at rates set
forth in the relevant power purchase agreements.  As a result, PSE
submitted requests for information to the parties; however, they have refused to
submit to PSE the necessary information for PSE to determine whether they meet
the requirements of a VIE that requires consolidation. PSE will continue to
submit requests for information to the counterparties annually to determine if
ASC 810 is applicable.  Puget Energy’s purchased electricity expense
for the three months ended September 30, 2009 and 2008 with the entity was $14.6
million and $14.0 million, respectively.  PSE’s purchased electricity
expense for the three months ended September 30, 2009 and 2008 with the two
entities was $52.9 million and $56.4 million, respectively.  The power
purchase agreements expire in December 2011.
 The
following table presents Puget Energy’s VIE relationships, irrespective of
significance, related to power purchase agreements as of September 30,
2009:
 
 (Dollars
      in Millions)
                Variable
      Interests in Power Purchase Agreements
                  as
      of September 30, 2009Nature
      of Variable Interest
                Longest
                  Contract
      Tenor
                Number
      of
                  Counterparties
                Aggregate
                  Carrying
      Value
                  Asset/(Liability)2
                Level
      of
                  Activity
      –
                  2009
                  Expenses
      2Electric-Combustion
      Turbine Co-generation plant 1
                2011
                1
                $                   (5.6)
                $             43.7Electric-
      Hydro
                2037
                7
                $                   (0.2)
                $               7.3Other
                
                2011
                2
                $                        --
                $               0.2Total
                
                10
                $                   (5.8)
                $             51.2
 _____________
 1
                Variable
      interests may be significant.2
                Carrying
      values are classified on the balance sheet in accounts payable and
      expenses are classified on the income statement in purchased
      electricity.
 
 The
following table presents PSE’s VIE relationships, irrespective of significance,
related to power purchase agreements as of September 30, 2009:
 
 (Dollars
      in Millions)
                Variable Interests in
      Power Purchase Agreements
                  as
      of September 30, 2009Nature
      of Variable Interest
                Longest
                  Contract
      Tenor
                Number
      of
                  Counterparties
                Aggregate
                  Carrying
      Value
                  Asset/(Liability)2
                Level
      of
                  Activity
      –
                  2009
                  Expenses
      2Electric-Combustion
      Turbine Co-generation plant 1
                2011
                2
                $                  (15.7)
                $            132.0Electric-
      Hydro
                2037
                7
                $                    (0.2)
                $                7.3Other
                
                2011
                2
                $                         --
                $                0.2Total
                
                11
                $                  (15.9)
                $            139.5
 _____________
 1
                Variable
      interests may be significant.2
                Carrying
      values are classified on the balance sheet in accounts payable and
      expenses are classified on the income statement in purchased
      electricity.
   (13)
                Other
  Snoqualmie Falls
Project.PSE received a new 40-year operating license for its
Snoqualmie Falls hydroelectric project from FERC in 2004.  The license
contained an array of FERC-approved plans to upgrade the facility.  Due to
changed circumstances, on December 6, 2007, PSE filed an application for a
non-capacity amendment to the license to account for technology improvements and
hydrologic and other changes.  On June 1, 2009, FERC issued an order
amending the license that incorporates the changes requested by PSE.  This
order is final and no party sought rehearing or review.
  Outage Claim.  On
April 23, 2009, PSE experienced an outage predominantly in Skagit County,
Washington, that resulted in approximately 93,000 PSE customers losing electric
service for periods ranging from less than an hour to about six
hours.  Investigation of the outage determined that it was caused by a
failing transmission line connector.  PSE responded to customer
inquiries and filed various reports with regulatory bodies concerning the
event.  In addition, PSE filed a report with the WECC describing the
event, its cause and the remedial measures PSE has put in process to minimize
the potential for a similar event in the future.  Under the mandatory
reliability standards, WECC and the North American Electric Reliability
Corporation (NERC) are empowered to conduct investigations of outages and impose
penalties if standards were violated.  PSE does not believe that
reliability standards were violated.  Both WECC and NERC have
indicated to PSE that their reviews are concluded and they consider the matter
closed.  Customer claims may ensue and the outcome of any such
proceeding is not known at this time.
 
 (14)
                New
      Accounting Pronouncements
  In
September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-12,
“Fair Value Measurements and Disclosures: Investments in Certain Entities that
Calculate Net Asset Value per Share (or Its Equivalent).”  The
standard allows the reporting entity, as a practical expedient, to measure the
fair value of investments that do not have readily determinable fair values on
the basis of the net asset value per share of the investment if the net asset
value of the investment is calculated in a matter consistent with ASC 946,
“Financial Services – Investment Companies.”  The standard requires
disclosures about the nature and risk of the investments and whether the
investments are probable of being sold at amounts different from the net asset
value per share.  The standard is effective for the first reporting
period ending after December 15, 2009, which will be December 31, 2009 for the
Company.  As of September 30, 2009, Puget Energy has determined the
ASU has no material impact to its consolidated financial position or results of
operations.
 In
September 2009, the FASB issued, ASU No. 2009-05, “Fair Value Measurements:
Measuring Liabilities at Fair Value.”  The standard reduces ambiguity
in financial reporting when measuring the fair value of liabilities. The
standard also provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more of the
techniques in the standard.  As of September 30, 2009, the Company has
determined that the new standard has no impact to its consolidated financial
position or results of operations.
 In June
2009, FASB issued ASU No. 2009-01, Topic 105, “Generally Accepted Accounting
Principles amendments based on the Statement of Financial Standards No. 168 –
The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles.” With this ASU, the FASB Codification became the
authoritative source of GAAP.  The FASB Codification was effective for
interim and annual reporting periods ending after September 15, 2009, which is
September 30, 2009 for the Company.  The FASB Codification has not had
a material impact on the financial reporting of the Company.
 In June
2009, FASB issued a new standard on identifying VIEs.  The new
standard replaces a quantitative approach with a qualitative approach to
determine whether PSE’s variable interest or interests give it a controlling
financial interest in a VIE.  In addition, the standard requires
enhanced disclosures which will provide users of the financial statements with
more transparent information about an enterprise’s involvement in a
VIE.  The standard is effective for the first annual reporting period
beginning after November 15, 2009 and for interim periods within that first
annual reporting period, which will be the period ending March 31, 2010 for the
Company.  The Company is currently assessing the impact of this
standard.
 In May
2009, FASB issued a new standard on subsequent events.  The standard
does not require significant changes regarding recognition or disclosure of
subsequent events but does require disclosure of the date through which
subsequent events have been evaluated for disclosure and
recognition.  The standard is effective for financial statements
issued after June 15, 2009 which was the quarter ended June 30, 2009 for the
Company.  The implementation of this standard did not have a
significant impact on the financial statements of the Company.  The
Company has performed an evaluation of subsequent events through November 3,
2009, which is the date
the financial statements in this report were issued.
 On April
9, 2009, FASB issued a standard on Interim Disclosures about Fair Value of
Financial Instruments.  The standard requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements.  The new standard
was effective for the Company as of June 30, 2009.
 On April
9, 2009, FASB issued a new standard which provides additional clarification on
determining fair value when the volume and level of activity for an asset or a
liability has significantly decreased and identifying transactions that are not
orderly.  The standard became effective for the Company as of June 30,
2009.  The standard provides additional guidance for estimating fair
value when the volume and level of activity for the asset or liability have
significantly decreased. The new standard also includes guidance on identifying
circumstances that indicate a transaction is not orderly.  As of
September 30, 2009, the Company has determined that the new standard has no
impact to its consolidated financial position or results of
operations.
 On
January 1, 2009, Puget Energy adopted ASC 805, “Business
Combinations.”  The objective of the standard is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. To accomplish that, the standard establishes
principles and requirements for how the acquirer: (1) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed and any noncontrolling interest in the acquiree; (2) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and (3) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination.
 On
December 30, 2008, FASB issued a standard that directs companies to provide
additional disclosures about plan assets of a defined benefit pension or other
postretirement plan.  The objectives of the disclosures are to
disclose the following: (1) how investment allocation decisions are made,
including the factors that are pertinent to an understanding of investment
policies and strategies; (2) major categories of plan assets; (3) inputs and
valuation techniques used to measure the fair value of plan assets; (4) effect
of fair value measurements using significant unobservable inputs (Level 3) on
changes in plan assets for the period; and (5) significant concentrations of
risk within plan assets.  The standard is effective for the fiscal
year December 15, 2009, which is the fiscal year end December 31, 2009 for the
Company.  The Company is currently assessing the impact of the
standard.
  
 Item
2.              Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion of Puget Energy and PSE’s financial condition and results
of operations contains forward-looking statements that involve risks and
uncertainties, such as statements of Puget Energy and PSE’s plans, objectives,
expectations and intentions.  Words or phrases such as “anticipates,”
“believes,” “estimates,” “expects,” “future,” “intends,” “plans,” “projects,”
“predicts,” “will likely result,” and “will continue” and similar expressions
are used to identify 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.  Puget Energy and PSE’s actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the factors described below and under the caption
“Forward-Looking Statements” at the beginning of this report.  Readers
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Form 10-Q.
 
 Overview
 
 Puget
Energy, Inc. (Puget Energy) is an energy services holding company and all of its
operations are conducted through its subsidiary Puget Sound Energy, Inc. (PSE),
a regulated electric and natural gas utility company.   PSE is
the largest electric and natural gas utility in the state of Washington,
primarily engaged in the business of electric transmission, distribution,
generation and natural gas distribution.  Puget Energy’s business
strategy is to generate stable cash flows by offering reliable electric and
natural gas service in a cost effective manner through PSE.On February
6, 2009, Puget Holdings LLC (Puget Holdings) completed its merger with Puget
Energy.  PSE’s basis of accounting will continue to be on a historical
basis and PSE’s financial statements will not include any Accounting Standards
Codification No. 805, “Business Combinations” (ASC 805) purchase accounting
adjustments.
 PSE
generates revenues and cash flow primarily from the sale of electric and natural
gas services to residential and commercial customers within a service territory
covering approximately 6,000 square miles, principally in the Puget Sound region
of the State of Washington.  To meet customer growth and replacement
of expiring power contracts, PSE is increasing its energy efficiency programs to
reduce the need for additional energy generation, pursuing additional renewable
energy production resources (primarily wind) and base load natural gas-fired
generation to meet its needs.  As PSE acquires new long-term energy
resources, it will require access to capital markets to meet its financing
needs.
 The
number of PSE’s electric and natural gas customers continues to increase in 2009
but at a slower rate, approximately 1.0% annually for each.  Electric
retail kilowatt sales and gas therm sales for the nine months ended September
30, 2009 have declined 1.2% and 6.7%, respectively, as compared to the same
period in 2008.  The decline in sales volumes in 2009 is due to warmer
temperatures, the impact of PSE’s residential and commercial customer
conservation programs and weaker economic conditions in the Puget Sound
region.  The average temperature in PSE’s service territory during the
first nine months of both 2009 and 2008 were colder than normal in the Puget
Sound region which has resulted in an increase in heating degree days of 2.1%
and 8.4%, respectively.  However, the winter forecast provided by the
National Oceanic and Atmospheric Administration’s Climate Prediction Center is
for an El Nino weather pattern, which may cause the Pacific Northwest to be
drier and warmer than normal.  As a result of drier weather conditions
during the first nine months of 2009, PSE hydroelectric generation and
hydroelectric generation obtained under take or pay contracts has declined by
11.6% as compared to the same period in 2008 causing an increase in overall
power supply costs.
 
 Factors
and Trends Affecting PSE’s Performance.
 The
principal business, economic and other factors that affect PSE’s operations and
financial performance include:
 ·
                  The
      rates PSE is allowed to charge for its
services;
 ·
                  Weather
      conditions;
 ·
                  Demand
      for electricity and natural gas among customers in PSE’s service
      territory;
 ·
                  Regulatory
      decisions allowing PSE to recover costs, including purchased power and
      fuel costs, on a timely basis;
 ·
                  PSE’s
      ability to supply electricity and natural gas, either through
      company-owned generation, purchase power contracts or by procuring natural
      gas or electricity in wholesale
markets;
 ·
                  Availability
      and access to capital and the cost of capital;
  and
 ·
                  Regulatory
      compliance costs, including those related to new and developing federal
      regulations of electric system reliability, state regulations of natural
      gas pipelines and federal and state environmental
    standards.
 Regulation of PSE Rates and Recovery
of PSE Costs.  The rates that PSE is allowed to charge for its
services is the single most important item influencing its financial position,
results of operations and liquidity.  PSE is highly regulated and the
rates that it charges its retail customers are determined by the Washington
Utilities and Transportation Commission (Washington Commission).  The
Washington Commission determines these rates based in part on historic test year
costs plus weather normalized assumptions about hydro conditions and power costs
in the relevant rate year.  If in a particular rate year PSE’s costs
are higher than what is allowed to be recovered in rates, revenues may not be
sufficient to permit PSE to earn its allowed return or to cover its
costs.  In addition, the Washington Commission determines whether
expenses and investments are reasonable and prudent in providing electric and
natural gas service.  If the Washington Commission determines that
part of PSE’s costs do not meet the standard, those costs may be disallowed
partially or entirely and not recovered in rates.
 
 Currently,
PSE has a power cost adjustment (PCA) mechanism that provides for recovery of
power costs from customers or refunding of power cost savings to customers, as
those costs vary from the “power cost baseline” level of power costs which are
set, in part, based on normalized assumptions about weather and hydro
conditions. Excess power costs or power cost savings will be apportioned between
PSE and its customers pursuant to the graduated scale set forth in the PCA
mechanism. As a result, if power costs are significantly higher than the
baseline rate, PSE’s expenses could significantly increase.  PSE also has a PGA
mechanism in retail natural gas rates to recover variations in natural gas
supply and transportation costs.  Variations in natural gas rates are
passed through to customers; therefore PSE’s natural gas margin and net income
are not affected by such variations.
 Weather
Conditions.  Weather conditions in PSE’s service territory can
have a significant impact on customer energy usage, thus PSE’s revenues and
energy supply expenses. PSE’s operating revenues and associated energy supply
expenses are not generated evenly throughout the year.  While
generally both PSE’s electric and natural gas sales are greatest during winter
months, 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
and subsequently higher power costs during the winter heating season in the
first and fourth quarters of the year and its lowest sales in the third quarter
of the year.  Varying wholesale electric prices and the amount of
hydroelectric energy supplies available to PSE also make quarter-to-quarter
comparisons difficult.  PSE is experiencing lower customer usage due
in part to warmer temperatures beginning with the second quarter of 2009 as
compared to 2008, although winter months of both 2008 and 2009 were colder than
historical averages in the Puget Sound region.
 Customer
Demand.  Although in the long term PSE expects the number of
natural gas customers to grow at rates slightly above electric customers, both
residential electric and natural gas customers are expected to continue a
long-term trend of slow decline of energy usage based on continued energy
efficiency improvements and higher retail rates.  Because the
Washington Commission has not approved any “decoupling” or similar regulatory
adjustment mechanism for PSE, energy efficiency or conservation programs lead to
a direct reduction in energy margin.  In addition, the effects of the
current recession on Washington State’s economy have caused a decline in
customer usage in 2009 compared to 2008.
 Access to
Capital.  PSE relies on access to bank borrowings and
short-term money markets as sources of liquidity and longer-term debt markets to
fund its utility construction program and other capital expenditure requirements
not satisfied by cash flow from its operations or equity investment from its
parent, Puget Energy.  Neither Puget Energy nor PSE has any debt
outstanding that would accelerate debt maturity upon a credit rating
downgrade.  However, a ratings downgrade could adversely affect the
ability to renew existing, or obtain access to new, credit facilities and could
increase the cost of such facilities.  For example, under Puget
Energy’s and PSE’s credit facilities, both of which expire in 2014, the
borrowing costs and commitment fees increase as their respective credit ratings
decline.If PSE is
unable to access capital on reasonable terms, its ability to pursue improvements
or acquisitions, including generating capacity, which may be relied on for
future growth and to otherwise implement its strategy, could be adversely
affected.  The current condition of capital markets and the economy
have caused general concern regarding access to sufficient capital at a
reasonable cost.  However, PSE has not been significantly impacted by
the recent disruption in the credit environment and expects to continue to be
able to access the capital markets to meet is short and long term borrowing
needs.
 Regulatory Compliance Costs and
Expenditures.  PSE’s operations are subject to extensive
federal, state and local laws and regulations.  Such regulations cover
electric system reliability, gas pipeline system safety and energy market
transparency, among other areas.  Environmental regulations of air and
water quality and endangered species protection also impact the Company’s
operations, as would possible climate change legislation.  PSE must
spend significant sums on measures including resource planning, remediation,
monitoring, pollution control equipment and emissions-related abatement and fees
in order to comply with these regulatory requirements.
 Compliance
with these or other future regulations, such as those pertaining to climate
change, could require significant capital expenditures by PSE and adversely
affect PSE's financial position, results of operations, cash flows and
liquidity.
 
 Other
Challenges and Strategies
 Energy Supply.  As
noted in PSE’s Integrated Resource Plan (IRP) filed with the Washington
Commission, PSE projects that future energy needs will exceed current resources
from long-term power purchase agreements and Company-controlled power
resources.  The IRP identifies reductions in contractual supplies of
energy and capacity available under certain long-term power purchase agreements,
requiring replacement of supplies to meet projected
demands.  Therefore, PSE’s IRP supports a strategy of significantly
increasing energy efficiency programs, pursuing additional renewable resources
(primarily wind) and additional base load natural gas-fired generation to meet
the growing needs of its customers.  If PSE cannot acquire further
additional energy supply resources at a reasonable cost, it may be required to
purchase additional power in the open market at a cost that could, in the
absence of regulatory relief, significantly increase its expenses and reduce
earnings and cash flows.
 
 Infrastructure
Investment.  PSE is investing heavily in its utility
infrastructure and customer service functions in order to meet increasing
regulatory requirements, customer energy needs and aging
infrastructure.  These investments and operating requirements give
rise to significant growth in depreciation expense and operating expense, which
are not recovered through the ratemaking process in a timely
manner.  This “regulatory lag” is expected to continue for the
foreseeable future.
 Operational Risks Associated With
Generating Facilities.  PSE owns and operates coal, natural
gas-fired, hydro, wind-powered and oil-fired generating
facilities.  Operation of electric generating facilities involves
risks that can adversely affect energy output and efficiency levels, including
facility shutdowns due to equipment and process failures or fuel supply
interruptions.  Colstrip Unit 4, for example, has been out of service
since March 2009 due to significant repair work required to the unit which was
discovered during its routine overhaul.  It is estimated that the unit
will be out of service until early November 2009 and that PSE will incur higher
power costs of approximately $16.0 million from July through October
2009.  PSE does not have business interruption insurance coverage to
cover replacement power costs and the physical loss is not covered by the
project’s insurance policy.
 
 
 Results
of Operations
 
 Puget Sound
Energy
 All the
operations of Puget Energy are conducted through its subsidiary
PSE.  Net income for the three months ended September 30, 2009 was
$7.8 million on operating revenues of $592.6 million as compared to net loss of
$7.3 million on operating revenues of $606.2 million for the same period in
2008.  Electric revenues were favorably impacted by an electric
general tariff rate increase approved by the Washington Commission of 7.1%
effective November 1, 2008 which contributed $4.7 million.  Gas
revenues were favorably impacted by a general tariff rate increase approved by
the Washington Commission of 4.6% effective November 1, 2008, which contributed
$4.2 million.  Electric revenues were also favorably impacted by a
1.8% increase in electric customer usage which contributed $3.0 million, while
gas sales were impacted by lower customer usage which declined 6.8% or $3.2
million, primarily due to warmer average temperatures in the Pacific Northwest
during the month of July 2009 compared to the same period in 2008 combined with
the impact of the recession on Washington State’s economy.  Also
positively impacting gas revenues is a $4.4 million increase due to customer mix
and other pricing variances.  Net income was also impacted due to the
extended Colstrip outage resulting in a decline in Company-owned coal fired
electric generation of 19.0% and lower hydroelectric generation due to drier
weather conditions which reduced hydroelectric generation by
21.7%.  PSE owns a 25.0% interest in Colstrip Unit 4 with its share of
the output being 217 megawatts (MWs).  Company-owned gas fired
electric generation increased during 2009 as compared to the same period in 2008
by 160.0% due to the Colstrip Unit 4 outage.  Net income was
positively impacted by an increase in unrealized gains related to derivatives of
$30.7 million primarily due to the de-designation of all energy supply related
cash flow hedges on July 1, 2009 and increasing volatility in market
prices.  Also positively impacting net income was a $7.4 million net
increase in other income and expenses due primarily to an increase in regulatory
interest income from the Mint Farm Generation Station (Mint Farm) of $4.6
million, an increase in the allowance for funds used during construction (AFUDC)
of $1.6 million and a $1.4 million gain on corporate owned life
insurance.  These increases were partially offset by an increase in
utility operations and maintenance expenses of $10.1 million, a $12.0 million
increase in income taxes and an increase in depreciation and amortization of
$5.8 million.
 Net
income for the nine months ended September 30, 2009 was $136.6 million on
operating revenues of $2.4 billion as compared to net income of $112.7 million
on operating revenues of $2.4 billion for the same period in
2008.  Electric sales were favorably impacted by an electric general
tariff rate increase approved by the Washington Commission of 7.1% effective
November 1, 2008 which contributed $38.7 million.  Gas sales were
favorably impacted by a gas general tariff rate increase of 4.6% effective
November 1, 2008 that was approved by the Washington Commission which
contributed $32.0 million.  Electric and gas sales were impacted by
lower customer usage which declined 1.2% and 6.7%, respectively.  Net
income was also impacted by the extended Colstrip outage resulting in a decline
in Company-owned coal fired electric generation of 14.0% and lower hydroelectric
generation due to drier weather conditions which reduced hydroelectric
generation by 11.6% for the period.  Company-owned gas fired electric
generation increased during 2009 as compared to the same period in 2008 by
103.0% due to the Colstrip Unit 4 outage.  Net income was positively
impacted by an increase in unrealized gains related to derivatives of $36.0
million primarily due to the de-designation of all cash flow hedges on July 1,
2009 and increasing volatility in market prices.  Also positively
impacting net income was a $12.5 million net increase in other income and
expenses due primarily to an increase in regulatory interest income from Mint
Farm.  These increases were partially offset by one-time merger costs
of $23.9 million related to the merger of Puget Energy with Puget
Holdings.  These costs were primarily related to PSE employee
compensation triggered by Puget Energy’s change of control, credit agreement
related expenses and the income statement impact of deferred compensation
related liability increases triggered by the merger.  Net income was
also negatively impacted due to an increase of $18.5 million in utility
operations and maintenance, a $17.9 million increase in depreciation and
amortization and a $10.0 million increase in income taxes.
 
 Electric
Operating Revenues
 The table
below sets forth changes in electric operating revenues for PSE for the three
months ended September 30, 2009 as compared to the same period in
2008.
 
 (Dollars
      in Millions)
                  Three
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeElectric
      operating revenues:Residential
      sales
                $  195.6
                $  199.7
                $  (4.1)
                (2.1)%Commercial
      sales
                199.3
                191.6
                7.7
                4.0Industrial
      sales
                24.0
                25.7
                (1.7)
                (6.6)Other
      retail sales, including unbilled revenue
                12.8
                4.3
                8.5
                *Total
      retail sales
                431.7
                421.3
                10.4
                2.5Transportation
      sales
                3.1
                2.6
                0.5
                19.2Sales
      to other utilities and marketers
                33.2
                27.6
                5.6
                20.3Other
                (18.3)
                15.9
                (34.2)
                *Total
      electric operating revenues
                $  449.7
                $  467.4
                $
      (17.7)
                (3.8)%
 ___________________
 *
                Percent
      change not applicable or
meaningful.
 
 Electric
retail sales increased $10.4 million for the three months ended September 30,
2009 as compared to the same period in 2008.  The increase was due in
part to the electric general rate increase of November 1, 2008 that was
partially offset by a merger rate credit effective February 13, 2009, which
combined, contributed to an increase in electric retail sales of $24.5 million
for 2009 as compared to 2008, including a decrease in the conservation rider
charged to customers for PSE’s energy efficiency programs.  Also
contributing to the increases was an increase in retail electricity usage of
86,777 megawatt hours (MWhs) or 1.8% related to increased customer usage
primarily related to higher temperatures in July 2009 as compared to the same
period in 2008, which resulted in an increase of approximately $7.8 million to
electric operating revenue.  The benefits of the Residential and Farm
Energy Exchange Benefit credited to customers reduced electric operating
revenues by $20.3 million.  This credit also reduced power costs and
revenue sensitive taxes by a corresponding amount with no impact on
earnings.
 Sales to
other utilities and marketers increased $5.6 million for the three months ended
September 30, 2009 as compared to the same period in 2008 primarily due to a
decrease in wholesale electric energy prices which decreased revenues by $12.5
million which was offset by $17.9 million due to an increase in
volume.
 Other
electric operating revenues decreased $34.2 million for the three months ended
September 30, 2009 as compared to the same period in 2008 primarily due to a
decrease of $31.7 million in non-core gas sales and related losses from hedging
contracts entered into to manage these natural gas costs for electric
generation.  Such gains or losses on the sale of natural gas, which
was intended to be used for electric generation, are included as a component of
PSE’s PCA mechanism.
 The table
below sets forth changes in electric operating revenues for PSE for the nine
months ended September 30, 2009 as compared to the same period in
2008.
 
 (Dollars
      in Millions)
                  Nine
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeElectric
      operating revenues:Residential
      sales
                $   794.8
                $   783.3
                $  11.5
                1.5%Commercial
      sales
                628.8
                593.1
                35.7
                6.0Industrial
      sales
                74.4
                79.2
                (4.8)
                (6.1)Other
      retail sales, including unbilled revenue
                (42.2)
                (28.1)
                (14.1)
                (50.2)Total
      retail sales
                1,455.8
                1,427.5
                28.3
                2.0Transportation
      sales
                7.9
                5.5
                2.4
                43.6Sales
      to other utilities and marketers
                53.4
                70.1
                (16.7)
                (23.8)Other
                (10.5)
                48.4
                (58.9)
                *Total
      electric operating revenues
                $
      1,506.6
                $
      1,551.5
                $
      (44.9)
                (2.9)%
 _______________
 *
                Percent
      change not applicable or
meaningful.
 
 Electric
retail sales increased $28.3 million for the nine months ended September 30,
2009 as compared to the same period in 2008.  The increase was due in
part to the electric general rate increase of November 1, 2008 that was
partially offset by a merger rate credit effective February 13, 2009, which
combined, contributed to an increase in electric retail sales of $100.4 million
for 2009 as compared to 2008, including an increase in the conservation rider
charged to customers for PSE’s energy efficiency programs.  This
increase was partially offset by the benefits of the Residential and Farm Energy
Exchange Benefit credited to customers which reduced electric operating revenues
by $54.5 million.  This credit also reduced power costs and revenue
sensitive taxes by a corresponding amount with no impact on
earnings.  Also partially offsetting these increases was a decrease in
retail electricity usage of 187,467 MWhs or 1.2% related to decreased customer
usage for 2009 as compared to the same period in 2008, which resulted in a
decrease of approximately $17.3 million to electric operating
revenue.
 Sales to
other utilities and marketers decreased $16.7 million for the nine months ended
September 30, 2009 as compared to the same period in 2008 primarily due to a
decline in wholesale electric energy prices which decreased revenues by $31.3
million which was offset by $15.1 million due to an increase in
volume.
 Other
electric operating revenues decreased $58.9 million for the nine months ended
September 30, 2009 as compared to the same period in 2008 primarily due to $56.5
million decrease in non-core gas sales and related losses from hedging contracts
entered into to manage these natural gas costs.
 The
following electric rate changes were approved by the Washington Commission in
2008 and 2009:
 
 Type
      of Rate
                  Adjustment
                Effective
      Date
                Average
                  Percentage
                  Increase
      (Decrease)
                  in
      Rates
                Annual
                  Increase
      (Decrease)
                  in
      Revenues
                  (Dollars
      in Millions)Electric
      General Rate Case
                November
      1, 2008
                7.1
      %
                $
      130.2Merger
      Rate Credit
                February
      13, 2009
                (0.4)
                (6.7)
 
 Gas
Operating Revenues
 The table
below sets forth changes in gas operating revenues for PSE for the three months
ended September 30, 2009 as compared to the same period in 2008.
 
 (Dollars
      in Millions)
                  Three
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeGas
      operating revenues:Residential
      sales
                $    77.2
                $    71.3
                $  5.9
                8.3%Commercial
      sales
                50.3
                46.3
                4.0
                8.6Industrial
      sales
                6.6
                8.0
                (1.4)
                (17.5)Total
      retail sales
                134.1
                125.6
                8.5
                6.8Transportation
      sales
                3.3
                3.3
                --
                --Other
                4.7
                4.3
                0.4
                9.3Total
      gas operating revenues
                $  142.1
                $  133.2
                $  8.9
                6.7%
 
 Gas
retail sales increased $8.5 million for the three months ended September 30,
2009 as compared to the same period in 2008 primarily due to a $24.3 million
increase in gas operating revenues as a result of a 11.1% PGA mechanism rate
increase for retail customers effective October 1, 2008, a general rate increase
effective November 1, 2008 and a 1.7% PGA mechanism rate decrease effective June
1, 2009.  The PGA mechanism passes through to customers increases or
decreases in the natural 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 natural gas pipeline transportation
costs.  PSE’s gas margin and net income are not affected by changes
under the PGA mechanism.  Partially offsetting this increase is a 10.1
million or 10.5% decrease in gas therm sales related to warmer temperatures for
the three months ended September 30, 2009 as compared to the same period in
2008, which decreased revenue by $15.8 million.
 The table
below sets forth changes in gas operating revenues for PSE for the nine months
ended September 30, 2009 as compared to the same period in 2008.
 
 (Dollars
      in Millions)
                  Nine
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeGas
      operating revenues:Residential
      sales
                $  563.5
                $  509.8
                $  53.7
                10.5%Commercial
      sales
                257.9
                246.2
                11.7
                4.8Industrial
      sales
                29.6
                30.5
                (0.9)
                (3.0)Total
      retail sales
                851.0
                786.5
                64.5
                8.2Transportation
      sales
                9.6
                10.6
                (1.0)
                (9.4)Other
                14.9
                13.2
                1.7
                12.9Total
      gas operating revenues
                $  875.5
                $  810.3
                $   65.2
                8.0%
 
 Gas
retail sales increased $64.5 million for the nine months ended September 30,
2009 as compared to the same period in 2008 due to a $129.0 million increase in
gas operating revenues as a result of a 11.1% PGA mechanism rate increase for
retail customers effective October 1, 2008, a general rate increase effective
November 1, 2008 and a 1.7% PGA mechanism rate decrease effective June 1,
2009.  The PGA mechanism passes through to customers increases or
decreases in the natural 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 natural gas pipeline transportation
costs.  PSE’s net income is not affected by changes under the PGA
mechanism.  Partially offsetting the increase is a 46.5 million or
7.0% decrease in gas therm sales which decreased revenue by $64.9
million.
 The
following natural gas rate adjustments were approved by the Washington
Commission in 2008 and 2009:
 
 Type
      of Rate
                  Adjustment
                Effective
      Date
                Average
                  Percentage
                  Increase
      (Decrease)
                  in
      Rates
                Annual
                  Increase
      (Decrease)
                  in
      Revenues
                  (Dollars
      in Millions)Purchased
      Gas Adjustment
                October
      1, 2008
                11.1
      %
                $
      108.8General
      Rate Case
                November
      1, 2008
                4.3
                49.2Merger
      Rate Credit
                February
      13, 2009
                (0.4)
                (3.6)Purchased
      Gas Adjustment
                June
      1, 2009
                (1.7)
                (21.2)Purchased
      Gas Adjustment
                October
      1, 2009
                (17.1)
                (198.1)
 
 Non-Utility
Operating Revenues
 The
tables below set forth changes in non-utility operating revenues for PSE for the
three and nine months ended September 30, 2009, respectively, as compared to the
same period in 2008.
 
 (Dollars
      in Millions)
                  Three
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeNon-utility
      operating revenue
                $  0.8
                $  5.6
                $  (4.8)
                
                (85.7)
                %
 
 
 (Dollars
      in Millions)
                  Nine
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeNon-utility
      operating revenue
                $  4.3
                $  7.7
                $  (3.4)
                
                (44.2)
                %
 
 Non-utility
operating revenues decreased $4.8 million and $3.4 million for the three and
nine months ended September 30, 2009, respectively, as compared to the same
period in 2008 due to lower property sales during 2009 as compared to the same
period in 2008 by PSE’s real estate subsidiary and lower revenues related to
non-tariff customer support work performed by PSE.
 
 Operating
Expenses
 The table
below sets forth significant changes in operating expenses for PSE and its
subsidiaries for the three months ended September 30, 2009 as compared to the
same period in 2008.
 
 (Dollars
      in Millions)
                  Three
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangePurchased
      electricity
                $
      160.9
                $  173.7
                $  (12.8)
                (7.4)%Electric
      generation fuel
                77.2
                64.9
                12.3
                19.0Residential
      exchange
                (19.3)
                (0.2)
                (19.1)
                *Unrealized
      (gain) loss on derivatives
                (27.1)
                3.5
                (30.6)
                *Utility
      operations and maintenance
                116.1
                106.0
                10.1
                9.5Non-utility
      expense and other
                2.3
                5.0
                (2.7)
                (54.0)Depreciation
      and amortization
                83.5
                77.7
                5.8
                7.5
 ___________________
 *
                Percent
      change not applicable or
meaningful.
 
 
 The table
below sets forth significant changes in operating expenses for PSE and its
subsidiaries for the nine months ended September 30, 2009 as compared to the
same period in 2008.
 
 (Dollars
      in Millions)
                  Nine
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangePurchased
      electricity
                $
      610.0
                $  645.4
                $  (35.4)
                (5.5)%Residential
      exchange
                (72.6)
                (20.5)
                (52.1)
                *Purchased
      gas
                524.7
                484.0
                40.7
                8.4Unrealized
      (gain) loss on derivatives
                (34.7)
                1.2
                (35.9)
                *Utility
      operations and maintenance
                353.1
                334.6
                18.5
                5.5Merger
      and related costs
                23.9
                --
                23.9
                *Depreciation
      and amortization
                247.3
                229.4
                17.9
                7.8Conservation
      amortization
                47.4
                42.7
                4.7
                11.0Taxes
      other than income taxes
                225.8
                214.8
                11.0
                5.1
 ___________________
 *
                Percent
      change not applicable or
meaningful.
 
 Purchased electricityexpenses
decreased $12.8 million and $35.4 million for the three and nine months ended
September 30, 2009, respectively, as compared to the same period in
2008.  The decrease for the three months ended September 30, 2009 was
primarily the result of lower wholesale market prices which contributed $6.9
million and a decrease in purchased power of 196,974 MWh or 6.7% resulting in a
decrease of $10.6 million. This decrease is primarily due to lower customer
usage related to weak economic conditions and higher generation from natural gas
combustion turbines.  This decrease was partially offset by an
increase in transmission and other expenses which contributed $4.5
million.
 The
decrease for the nine months ended September 30, 2009 was primarily the result
of lower wholesale market prices which contributed $13.5 million and a decrease
in purchased power of 493,725 MWh or 4.2% resulting in a decrease of $24.6
million. This decrease is primarily due to lower customer usage related to weak
economic conditions and higher generation from natural gas combustion
turbines.  This decrease was partially offset by an increase in
transmission and other expenses which contributed $2.2 million.
 To meet
customer demand, PSE economically dispatches resources in its power supply
portfolio such as fossil-fuel generation, owned and contracted hydroelectric
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 regulated power portfolio through short-term
and intermediate-term off-system physical purchases and sales as well as through
other risk management techniques.
 Electric generation fuelexpense increased $12.3
million for the three months ended September 30, 2009, as compared to the same
period in 2008.  The increase for the three months ended September 30,
2009 was due in part to increased generation from Fredonia and combustion
turbines which contributed $16.3 million.  This increase was partially
offset by a decrease in fuel expense of $4.6 million primarily due to the outage
of Colstrip Unit 4.  The unit was taken offline in March 2009 to
conduct maintenance and repair and is expected to return to service in November
2009.
 Residential exchange credits
associated with the Bonneville Power Administration (BPA) Residential Exchange
Program (REP) increased $19.1 and $52.1 million for the three and nine months
ended September 30, 2009, respectively, as a result of an agreement with BPA to
continue to pass on REP benefits to PSE’s customers.  REP does not
have an impact on net income.
 Purchased gasexpenses
increased $40.7 million for the nine months ended September 30, 2009, as
compared to the same period in 2008 primarily due to an increase of 11.1% in PGA
rates effective October 1, 2008 offset by a 1.7% PGA rate decrease effective
June 1, 2009 which provides the rates used to determine gas costs based on
customer usage.  The rate increase was the result of declining costs
of natural gas wholesale costs and a reduction of the credit for accumulated PGA
payable balance.  The PGA mechanism allows PSE to recover expected
natural gas supply and transportation costs, and defer, as a receivable or
liability, any natural gas supply and transportation costs that exceed or fall
short of this expected gas cost amount in PGA mechanism rates, including accrued
interest.  The PGA mechanism payable balance at September 30, 2009 was
$70.4 million as compared to $8.9 million at December 31, 2008.  PSE
is authorized by the Washington Commission to accrue carrying costs on PGA
receivable and payable balances.  A receivable balance in the PGA
mechanism reflects an under recovery of market natural gas cost through
rates.  A payable balance reflects over recovery of market natural gas
cost through rates.
 Unrealized gain on derivative
instrumentsincreased $30.6 million and $35.9 million forthe three and nine
months ended September 30, 2009, respectively, as compared to the same period in
2008.  On July 1, 2009, PSE elected to de-designate its energy
derivative contracts that met the requirements of cash flow
hedges.  The contracts that were de-designated related to physical
electric supply contracts and natural gas swap contracts to fix the price of
natural gas for electric generation.  For these contracts, if the
contract was probable of delivery, the amount in other comprehensive income
(OCI) was locked and all future mark-to-market accounting will impact
earnings.  The amount in OCI will be transferred to earnings when the
contracts settle.  If delivery of the contract is no longer probable
of occurring, the locked OCI will be transferred to earnings upon such
determination.  As a result, PSE will likely experience earnings
volatility in future periods.
 
 Utility operations and maintenanceexpense increased $10.1 million and $18.5 million for the three and nine
months ended September 30, 2009, respectively, as compared to the same period in
2008.  The increase for the three months ended September 30, 2009 was
primarily due to an increase in customer service costs of $8.0 million, which
includes increases in bad debt expense, electric generation operations and
maintenance costs and gas operations and distribution expenses.  Also
contributing to this increase is a $1.1 million increase in electric
transmission and distribution costs.  The increase for the nine months
ended September 30, 2009 was driven by a $15.8 million increase in customer
service expenses, which included increases in bad debt expense, salaries and
benefits rent expense, and electric transmission and distribution costs and a
$2.7 million increase in gas operations costs.
 Non-utility expense and other
decreased $2.7 million for the three months ended September 30, 2009, as
compared to the same period in 2008 due to a decrease in non-tariff customer
support work performed by PSE and a decrease related to the termination of Puget
Energy’s previous stock-based compensation plan.
 Merger and related costs
associated with the merger with Puget Holdings increased $23.9 million for the
nine months ended September 30, 2009, as compared to the same period in
2008.  The costs include compensation costs as a result of the change
in control, write-off of deferred debt costs associated with the termination of
the pre-merger credit facilities, expenses associated with new credit facilities
and the impact of deferred compensation liabilities as a result of the
merger.  Pursuant to the Washington Commission merger order
commitments, PSE will not seek recovery of these costs.
 Depreciation and amortization
expense increased $5.8 million and $17.9 million for the three and nine months
ended September 30, 2009, respectively, as compared to the same period in
2008.  Excluding the regulatory credit for the deferral of Mint Farm
fixed costs of $3.4 million and $10.4 million, depreciation and amortization
expense increased $9.2 million and $28.3 million, respectively, for the three
and nine months ended September 30, 2009 as compared to the same period in
2008.  This increase is due to additional depreciable property placed
into service, amortization adjustments for Mint Farm and Whitehorn and an
increase in storm amortization costs as approved in PSE’s general rate case
effective November 1, 2008.
 Conservation amortization
increased $4.7 million for the nine months ended September 30, 2009, as compared
to the same period in 2008, due to lower recovery of conservation
expenditures.  Conservation amortization is a pass-through tariff item
with no impact on earnings.
 Taxes other than income taxes
increased $11.0 million for the nine months ended September 30, 2009 as compared
to the same period in 2008 due to revenue sensitive taxes from increased
revenue.
 
 Other Income, Other Expenses,
Interest Expense and Income Tax Expense.  The table below sets
forth significant changes for PSE for the three months ended September 30, 2009
as compared to the same period in 2008.
 
 (Dollars
      in Millions)
                  Three
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeOther
      income and expense, net
                $
      12.0
                $  4.6
                $  7.4
                *
      %Income
      tax expense (benefit)
                9.8
                (2.1)
                11.9
                *
 ___________________
 *
                Percent
      change not applicable or
meaningful.
 
 The table
below sets forth significant changes for PSE for the nine months ended September
30, 2009 as compared to the same period in 2008.
 
 (Dollars
      in Millions)
                  Nine
      Months Ended September 30,
                2009
                2008
                Change
                Percent
                  ChangeOther
      income and expense, net
                $  30.2
                $    17.7
                $   12.5
                70.6%Interest
      expense
                149.6
                144.6
                5.0
                3.5Income
      tax expense
                56.8
                46.8
                10.0
                21.4
 
 Other income and expenseincreased $7.4 million and $12.5 million for the three and nine months
ended September 30, 2009, respectively, as compared to the same period in
2008.  The increase was primarily due to an increase in regulatory
interest income from Mint Farm of $4.6 million, AFUDC of $1.6 million and $1.4
million gain on corporate owned life insurance.  The increase of $12.5
million for nine months ended September 30, 2009 as compared to the same period
in 2008 was primarily due to an increase in regulatory interest income from Mint
Farm partially offset by a charitable contribution of $5.0 million.
 Interest expenseincreased
$5.0 million for the nine months ended September 30, 2009, as compared to the
same period in 2008.  The increase was primarily due to issuance of
higher long-term debt and increased debt issuance amortization costs on the
post–merger credit facilities.
 Income tax expenseincreased
$11.9 million and $10.0 million for the three and nine months ended September
30, 2009, respectively, as compared to the same period in 2008.  The
third quarter 2009 increase was primarily due to a higher effective tax rate in
part due to a revision in the wind generation and production tax credit forecast
which lowered the expected production tax credits.  In addition, the
forecast of annual pre-tax income increased, which has the effect of increasing
the effective rate.  The increase of $10.0 million for nine months
ended September 30, 2009 as compared to the same period in 2008 is primarily due
to the increase in pre-tax income.
 
 Puget
Energy
 All the
operations of Puget Energy are conducted through its subsidiary
PSE.  “Predecessor” refers to the operations of Puget Energy and PSE
prior to the consummation of the merger.  “Successor” refers to the
operations of Puget Energy and PSE subsequent to the merger.  The
merger was accounted for in accordance with the Financial Accounting Standards
Board (FASB) ASC 805.  The purchase price was allocated to the related
assets and liabilities based on their respective estimated fair values on the
merger date with the remaining consideration recorded as
goodwill.  The fair values of assets are being amortized over their
estimated useful lives in a manner that best reflects the economic benefits
derived from such assets.  Goodwill is not amortized, but is subject
to impairment testing on an annual basis.  Such adjustments to fair
value and the allocation of purchase price between identifiable intangibles and
goodwill will have an impact on Puget Energy’s expenses and
profitability.
 Puget
Energy’s net income for the three and nine months ended September 30 is as
follows:
 
 (Dollars
      in Millions)
                Successor
                  Three
      Months
                  Ended
                  September
      30,
                  2009
                Predecessor
                  Three
      Months
                  Ended
                  September
      30,
                  2008
                
                Total
                  Nine
      Months
                  Ended
                  September
      30,
                  2009
                Successor
                  February
      6,
                  2009
      -
                  September
      30,
                  2009
                Predecessor
                  January
      1,
                  2009
      -
                  February
      5,
                  2009
                Predecessor
                  Nine
      Months
                  Ended
                  September
      30,
                  2008PSE
      reported net income
                $     7.8
                $
      (7.3)
                
                $136.6
                $105.0
                $  31.6
                $  112.7PSE
      fair value adjustments
                30.0
                --
                
                53.7
                53.6
                --
                --Puget
      Energy (parent)
                (13.3)
                (0.9)
                
                (57.4)
                (38.5)
                (18.8)
                (7.5)Net
      income (loss)
                $
      24.5
                $
      (8.2)
                
                $132.9
                $120.1
                $  12.8
                $  105.2
 
 Puget
Energy’s net income for the three months ended September 30, 2009 was $24.5
million on operating revenues of $592.6 million as compared to net loss of $8.2
million on operating revenues of $606.2 million for the same period in 2008,
which included PSE net income of $7.8 million and operating revenues of $592.6
million.
 PSE’s
basis of accounting will continue to be on a historical basis and PSE’s
financial statements will not include any ASC 805 purchase accounting
adjustments.  Puget Energy’s net income was also impacted by purchase
accounting related to valuations of PSE’s assets and liabilities and additional
interest expense at Puget Energy as a result of the issuance of debt at the time
of the merger.  Puget Energy’s net income was positively impacted by
unrealized gains on derivative instruments related to settlements of contracts
and mark-to-market accounting of derivative contracts which increased net income
by an additional $47.7 million pre-tax due to purchase accounting and changes in
the forward market prices on natural gas and electricity.  These
contracts were reassessed and valued at Puget Energy due to purchase
accounting.  Net income was impacted by increases in interest expense
of $20.2 million related to the issuance of debt at the time of the
merger.  There was a $2.1 million increase in expense due to pension
and postretirement plan costs associated with the remeasurement of PSE’s
retirement plans at the time of the merger.
 Net
income for the nine months ended September 30, 2009 was $132.9 million on
operating revenues of $2.4 billion as compared to net income of $105.2 million
on operating revenues of $2.4 billion for the same period in 2008, which
included PSE net income of $136.6 million and operating revenues of $2.4
billion.  Net income was positively impacted by an increase in
unrealized gains related to derivatives as a result of the reassessment of
derivatives due to purchase accounting under ASC 815, “Derivatives and Hedging”
(ASC 815).  Puget Energy revalued the contracts at the date of the
merger and determined that certain Normal Purchase Normal Sale (NPNS) contracts
would be marked-to-market on Puget Energy’s financial statements while they
remain NPNS contracts on PSE financial statements.  In addition, at
the time of the merger, cash flow hedge contracts had recorded an unrealized
loss in accumulated OCI which was reclassified to goodwill in accordance with
ASC 805.  As these contract settle, the losses reflected at the time
of the merger are reversed through earnings at Puget Energy while they are
reversed through OCI at PSE.  These increases were partially offset by
one-time merger costs of $47.1 million, of which $23.9 million was from PSE
related to the merger of Puget Energy with Puget Holdings.  These
costs were primarily related to PSE employee compensation triggered by Puget
Energy’s change of control, credit agreement related expenses and the income
statement impact of deferred compensation related liability increases triggered
by the merger.  Additional costs were for real estate excise tax,
legal fees, transaction advisory services and severance.  Net income
was impacted by increases in interest expense of $51.3 million related to the
issuance of debt at the time of the merger and a $5.0 million charitable
contribution to the PSE Foundation.  Also impacting net income is a
$4.9 million increase in expense due to pension and postretirement plan
costs.
 
 The
following tables set forth changes between Puget Energy and PSE income
statements as a result of purchase accounting adjustments, merger related costs
and Puget Energy operating expenses.  Significant changes related to
Puget Energy will be discussed below.  See “Puget Sound Energy Results
from Operations” for a discussion of PSE changes.
 
 Benefit/(Expense)
                  (Dollars
      in Millions)
                Successor
                PredecessorThree
      Months Ended September 30,
                2009
                2008
                ChangePSE
      reported net income (loss)
                $  7.8
                $  (7.3)
                $  15.1Purchased
      electricity
                0.1
                --
                0.1Unrealized
      gain on derivative instruments
                47.7
                --
                47.7Non-utility
      expense and other
                (2.1)
                --
                (2.1)Merger
      related costs
                --
                (1.3)
                1.3Interest
      expense
                (20.0)
                0.2
                (20.2)Income
      tax expense
                (9.0)
                0.2
                (9.2)Puget
      Energy net income (loss)
                $
      24.5
                $  (8.2)
                $  32.7
 
 
 (Dollars
      in Millions)
                Successor
                Predecessor
                
                PredecessorBenefit/(Expense)
                  Nine
      Months Ended September 30,
                February
      6,
                  2009
      -
                  September
      30,
                  2009
                January
      1,
                  2009
      -
                  February
      5,
                  2009
                Combined
                Nine
      Months
                  Ended
                  September
      30,
                  2008
                ChangePSE
      reported net income
                $
      105.0
                $
      31.6
                $  136.6
                $
      112.7
                $  23.9Other
      operating revenue
                0.3
                --
                0.3
                --
                0.3Purchased
      electricity
                0.4
                --
                0.4
                --
                0.4Unrealized
      (gain)loss on derivative instruments
                86.6
                --
                86.6
                --
                86.6Non-utility
      expense and other
                (5.8)
                --
                (5.8)
                (0.4)
                (5.4)Merger
      related costs
                (2.7)
                (20.4)
                (23.1)
                (8.3)
                (14.8)Depreciation
      and amortization
                0.1
                --
                0.1
                --
                0.1Charitable
      contribution expense
                (5.0)
                --
                (5.0)
                --
                (5.0)Interest
      expense
                (50.7)
                --
                (50.7)
                0.6
                (51.3)Income
      tax expense
                (8.1)
                1.6
                (6.5)
                0.6
                (7.1)Puget
      Energy net income
                $
      120.1
                $
      12.8
                $
      132.9
                $
      105.2
                $
      27.7
 
 Unrealized gain on derivative
instruments at Puget Energy was higher than the unrealized gain at PSE by
$47.7 million and $86.6 million for the three and nine months ended September
30, 2009, respectively, due to the reassessment of derivatives due to purchase
accounting under ASC 805.  Puget Energy revalued the contracts at the
date of the merger and determined that certain NPNS contracts would be
marked-to-market on Puget Energy financial statements while they remain NPNS
contracts on PSE financial statements.  In addition, at the time of
the merger, cash flow hedge contracts had recorded an unrealized loss in
accumulated OCI which was reclassified to goodwill in accordance with ASC
805.  As these contract settle, the losses reflected at the time of
the merger are reversed through earnings at Puget Energy while they are reversed
through OCI at PSE.
 On July
1, 2009, Puget Energy elected to de-designate its energy derivative contracts
that previously had been determined to meet the requirements of cash flow hedges
with the primary goal being to simplify its financial reporting.  The
contracts that were de-designated related to physical electric supply contracts
and natural gas swap contracts to fix the price of gas for electric
generation.  For these contracts, if the contract was probable of
delivery the amount in OCI was locked and all future mark-to-market accounting
will impact earnings.  The amount in OCI will be transferred to
earnings when the contracts settle.  If the delivery of the contract
is no longer probable of occurring, the locked OCI will be transferred to
earnings upon such determination.  As a result, Puget Energy will
likely experience earnings volatility in future periods.
 Non-utility expense and other
at Puget Energy was higher than PSE by $2.1 million and $5.4 million for the
three and nine months ended September 30, 2009, respectively, primarily related
to a remeasurement of PSE’s pension and post retirement plans due to the merger
under ASC 805, which contributed $1.7 million and $4.9 million for the three and
nine months ended September 30, 2009.
 Merger related costsincreased
$14.8 million at Puget Energy for the nine months ended September 30, 2009
related to compensation triggered by Puget Energy’s change of control, excise
taxes associated with the transaction and financial advisor fees.
 Charitable contribution
expense increased $5.0 million at Puget Energy for the nine months ended
September 30, 2009, due to a charitable contribution to the PSE
Foundation.
 Interest expense at Puget
Energy increased $20.2 million and $51.3 million for the three and nine months
ended September 30, 2009, respectively, due to the term loan and credit facility
entered into by the Consortium as part of the purchase of Puget
Energy.
 
 Income tax expense at Puget
Energy increased $9.2 million and $7.1 million for the three and nine months
ended September 30, 2009.  The third quarter 2009 increase was due to
an increase in pre-tax income.  The increase for the nine months ended
September 30, 2009 as compared to the same period in 2008 is due to an increase
in pre-tax income combined with an increase in the effective tax
rate.  The effective tax rate increase is attributable primarily to
non-deductible merger transaction costs.
 
 Capital
Requirements
 Contractual
Obligations and Commercial Commitments
 With the
exception of the $350.0 million in senior notes issued on September 8, 2009,
which, including accrued interest, is a $351.1 million contractual obligation,
there have been no material changes from the contractual obligations and
consolidated commercial commitments set forth in Part II, Item 7 in Puget
Energy’s Form 10-Q for the period ended March 31, 2009 and in PSE’s Form 10-Q
for the period ended June 30, 2009.  The accrued interest on the
senior notes from October 1, 2009 through the life of the issuance is $604.5
million.  The information provided in the contractual obligations
table is incorporated herein by reference to the material under “Capital
Requirements” in Item 7 “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” in the combined Puget Energy and PSE
annual report on Form 10-K.
 
 Utility
Construction Program
 PSE’s
construction programs for generating facilities, the electric transmission
system and the natural gas and electric distribution systems are designed to
meet continuing customer growth and to support reliable energy
delivery.  The cash flow construction expenditures, excluding equity
AFUDC and customer refundable contributions were $533.3 million for the nine
months ended September 30, 2009.  The anticipated utility construction
expenditures, excluding AFUDC, for 2009, 2010 and 2011 are:
 
 Capital
      Expenditure Estimates
                  (Dollars
      in Millions)
                
                2009
                
                2010
                
                2011Energy
      delivery, technology and facilities
                $
                659
                $
                657
                $
                626New
      supply resources
                
                180
                
                369
                
                524Total
      expenditures
                $
                839
                $
                1,026
                $
                1,150
 
 The
proposed utility construction expenditures and any new generation resource
expenditures that may be incurred are anticipated to be funded with a
combination of sources that may include cash from operations, short-term debt,
long-term debt and/or equity.  Construction expenditure estimates,
including any new generation resources, are subject to periodic review and
adjustment in light of changing economic, regulatory, environmental and
efficiency factors.  PSE’s strategy and its related capital
expenditures result in a level of spending that will likely exceed its cash flow
from operations.  As a result, successful execution of PSE’s strategy
is dependent in part on continued access to the capital markets.
 
 Capital
Resources
 Cash
From Operations
 
 Puget Sound
Energy
 Cash
generated from operations for the nine months ended September 30, 2009 was
$594.1 million, an increase of $23.5 million from the $570.6 million generated
during the nine months ended September 30, 2008.  The increase was
primarily the result of an overrecovery of natural gas costs through the PGA
mechanism during the first nine months of 2009 of $61.5 million compared to an
underrecovery of $61.7 million during the same period in 2008 which increased
operating activities by $123.2 million.  Further, PSE made net
payments of $39.7 million in income taxes during the first nine months of 2008
compared to a net payment of $0.1 million in 2009 which resulted in an increase
of $39.8 million.  In addition, PSE recognized $105.4 million greater
net deferred income taxes and tax credits during the nine months ended September
30, 2009 as compared to the same period in 2008.  Also, fuel and gas
inventory decreased by $13.1 million during the first nine months of 2009
compared to an increase of $32.7 during 2008, which resulted in an increase of
$45.8 million.
 The
increase in cash generated from operating activities for the first nine months
of 2009 as compared to 2008 was partially offset by $18.0 million in pension
funding during 2009, as well as net payments of $131.2 million of accounts
payable during the first nine months of 2009 compared to net payments of $76.7
million in 2008 due to the timing of payments, which resulted in a decrease of
$54.5 million.  PSE increased prepaid income taxes for the first nine
months of 2009 by $132.1 million compared to the same period in 2008, and
increased net payments made for the residential exchange program by $31.0 over
the same period in 2008.  PSE paid $37.7 million in transmission
deposits to secure future transmission capacity for the Lower Snake River Wing
Project.  PSE also incurred $14.7 million of deferred costs related to
Mint Farm during 2009.
 
 Puget
Energy
 Cash
generated from operations for the nine months ended September 30, 2009 was
$784.9 million, an increase of $225.5 million from the $559.4 million generated
during the nine months ended September 30, 2008.  The increase was
primarily the result of $349.7 million in derivative settlement payments
reclassified to financing activities as a result of the merger.  Also
contributing to the increase in operating cash flow was the overrecovery of
natural gas costs through the PGA mechanism during the first nine months of 2009
of $61.5 million compared to an underrecovery of $61.7 million during the same
period in 2008 which increased operating activities by $123.2
million.  Taxes payable increased $6.1 million during the first nine
months of 2009 compared to a decrease of $25.9 million in 2008, causing an
increase of $32.0 million, and fuel and gas inventory increased $7.1 million
compared to an increase of $32.7 million in 2008, causing an increase in cash
from operations of $25.6 million.  In addition, Puget Energy
recognized $131.5 million greater net deferred income taxes and tax credits
during the nine months ended September 30, 2009 as compared to the same period
in 2008.
 The
increase in cash generated from operating activities for the first nine months
of 2009 as compared to 2008 was partially offset by an increase of $145.2
million in natural gas payments and payment of gas financial hedge contracts,
power cost and other payable balances as compared to the same period in 2008,
and $18.0 million in pension funding during 2009.  Further, Puget
Energy received a refund of $42.4 million in income taxes during the first nine
months of 2008 compared to a net refund of $0.1 million in 2009 which resulted
in a decrease of $42.3 million.  PSE paid $37.7 million in
transmission deposits to secure future transmission capacity for the Lower Snake
River Wind Project, and increased net payments made for the residential exchange
program by $31.0 over the same period in 2008.  Puget Energy also
increased prepaid income taxes for the first nine months of 2009 by $159.2
million compared to the same period in 2008, and incurred $14.7 million of
deferred costs related to Mint Farm during 2009.
  Financing
Program
 Financing
utility construction requirements and operational needs are dependent upon the
amount of cash available and the cost and availability of external funds from
the capital markets.  PSE anticipates refinancing the redemption of
bonds with its liquidity facilities and/or the issuance of new
bonds.  Access to funds depends upon factors such as general economic
conditions, regulatory climate and policies, Puget Energy’s and PSE’s credit
ratings and investor receptivity to investing in the utility industry and
PSE.
 
 Liquidity
Facilities and Commercial Paper
 PSE’s
short-term borrowings and sales of commercial paper are used to provide working
capital and funding of utility construction programs.  Puget Energy
and PSE have not been significantly impacted by the recent disruption in the
credit environment.
 
 Puget
Energy Credit Facilities
 Effective
with the close of the merger on February 6, 2009, Puget Energy has a $1.225
billion five-year term loan and a $1.0 billion credit facility for funding
utility capital expenditures.  Prior to the merger close, Puget Energy
had no credit facilities.
 Puget
Energy’s credit agreements contain usual and customary affirmative and negative
covenants that, among other things, place limitations on its, or its operating
companies’ ability to incur additional indebtedness and liens, issue equity, pay
dividends, transact with affiliates and make dispositions and
investments.  The credit agreements also contain financial covenants,
whose measurement periods began with the third quarter 2009 financial
statements, based on the following three ratios:  cash flow interest
coverage, cash flow debt leverage and debt service coverage. Puget Energy
certifies its compliance with such covenants each quarter with the lending
banks.  As of September 30, 2009, Puget Energy exceeded each of the
ratio minimums.
 The two
credit facilities mature in February 2014, contain similar terms and conditions
and are syndicated among numerous banks and financial
institutions.  The agreements provide Puget Energy with the ability to
borrow at different interest rate options and include variable fee
levels.  Borrowings may be at the bank’s prime rate plus a spread or
at floating rates based on the London Interbank Offered Rate (LIBOR) plus a
spread.  Puget Energy must also pay a commitment fee on the unused
portion of the $1.0 billion facility.  The spreads and the commitment
fee depend on Puget Energy’s credit ratings as determined by Standard &
Poor’s (S&P) and Moody’s Investment Services (Moody’s).  Based on
Puget Energy’s credit ratings as of the date of this report, the spread over
prime rate is 125 basis points, the spread to the LIBOR is 225 basis points and
the commitment fee is 84 basis points.
 As of
September 30, 2009, the term loan was fully drawn at $1.225 billion and $258.0
million was outstanding under the $1.0 billion facility, leaving $742.0 million
available for use on the facility.  Concurrent with the borrowings
under these credit agreements, Puget Energy entered into a series of interest
rate swaps with a group of banks to fix the interest rates at 4.76% for the term
of the credit facilities on these two loans totaling $1.483
billion.
 
 PSE
Credit Facilities
 As of
September 30, 2009 PSE had no short-term borrowings and as of February 5, 2009,
PSE had $838.6 million in short-term borrowings under its credit
facilities.  Effective immediately after the merger on February 6,
2009, PSE has three committed unsecured revolving credit facilities that
provide, in the aggregate, $1.150 billion in short-term borrowing
capability.  Each of the credit facilities are described
below.
 
 PSE
Credit Agreements from February 6, 2009
 Effective
with the close of the merger, PSE has three committed unsecured revolving credit
facilities that provide, in the aggregate, $1.150 billion in short-term
borrowing capability.  These new facilities include a $400.0 million
credit agreement for working capital needs, a $400.0 million credit facility for
funding capital expenditures and a $350.0 million facility to support energy
hedging activities.
 PSE’s
credit agreements contain similar usual and customary covenants as described in
the Puget Energy agreements.  PSE’s financial covenants include cash
flow interest coverage and cash flow debt leverage ratios whose measurement
periods began with the third quarter 2009 financial statements.  PSE
certifies its compliance with such covenants each quarter with the leading
banks.
 
 These
facilities mature in 2014, contain similar terms and conditions and are
syndicated among numerous committed banks.  The agreements provide PSE
with the ability to borrow at either a base rate (based on the Prime Rate) or
the Eurodollar rate (based on the LIBOR), plus a spread.  PSE must
also pay a commitment fee on the unused portion of the facilities. The spread
and the commitment fee depend on PSE’s credit ratings as determined by S&P
and Moody’s credit ratings. Based on PSE’s credit ratings as of the date of this
report, the spread is 85 basis points and the commitment fee is 26 basis
points.  The $400.0 million working capital facility and $350.0
million credit agreement to support energy hedging allow for issuing standby
letters of credit up to the entire amount of the credit
agreements.  The $400.0 million working capital facility also serves
as a backstop for PSE’s commercial paper program.
 As of
September 30, 2009, PSE had no borrowings outstanding under either the working
capital or capital expenditure facilities and had a $20.0 million letter of
credit outstanding under the facility supporting energy
hedging.  Outside of the credit agreements, PSE had a $6.0 million
letter of credit through a bank in support of a long-term transmission
contract.
 
 PSE
Credit Agreements at February 5, 2009
 At
February 5, 2009, PSE had available unsecured revolving credit agreements in the
amounts of $500.0 million for working capital purposes and $350.0 million to
support energy hedging activities, each expiring in April 2012.  The
credit agreements provided credit support for letters of credit and commercial
paper.  At February 5, 2009, PSE had $249.9 million of loans
outstanding plus a $6.6 million letter of credit under the $500.0 million
facility and a $30.0 million letter of credit and no loans drawn under the
$350.0 million facility.  There was no commercial paper outstanding
under either facility.
 In August
2008, PSE entered into a nine-month, $375.0 million credit agreement with four
banks and as of February 5, 2009, PSE had fully drawn the $375.0 million
capacity under the agreement.
 At
February 5, 2009, PSE had a $200.0 million receivables securitization facility
which was set to expire in December 2010.  At February 5, 2009, $188.0
million was outstanding under the receivables securitization
facility.  The facility allowed receivables to be used as collateral
to secure short-term loans, not exceeding the lesser of $200.0 million or the
borrowing base of eligible receivables, which fluctuate with the seasonality of
energy sales to customers.  On February 6, 2009, the credit agreements
and securitization facility were repaid, terminated and were replaced with the
new post-merger facilities described above.
 
 Demand Promissory Note.On
June 1, 2006, PSE entered into an uncommitted revolving credit facility with its
parent, Puget Energy, pursuant to a Demand Promissory Note (Note) under which
PSE may borrow up to $30.0 million from Puget Energy.  Under the terms
of the Note, PSE pays interest on the outstanding borrowings based on the lowest
of the weighted-average interest rate of: (a) PSE’s outstanding commercial paper
interest rate or (b) PSE’s senior unsecured revolving credit
facility.  At September 30, 2009, the outstanding balance of the Note
was $22.9 million.  As of December 31, 2008, the outstanding balance
of the Note was $26.1 million.  This Note is unaffected by the
February 6, 2009 merger.
  Long-term
Funding and Restrictive Covenants
 Bond Issuances.  On
January 23, 2009, PSE issued $250.0 million of senior notes, secured by first
mortgage bonds. The bonds are non-callable, were placed with approximately 35
institutional investors, have a term of seven years and carry a 6.75% interest
rate. On September 11, 2009, PSE issued $350.0 million of senior notes, secured
by first mortgage bonds. The bonds are non-callable, were placed with
approximately 80 institutional investors, have a term of 30 years and carry a
5.757% interest rate.
 
 Dividend Payment
Restrictions.The payment of dividends by PSE to Puget Energy
is restricted by provisions of certain covenants applicable to long-term debt
contained in PSE’s electric and natural gas mortgage indentures.  At
September 30, 2009 approximately $439.5 million of unrestricted retained
earnings was available for the payment of dividends under the most restrictive
mortgage indenture covenant.  In addition, beginning February 6, 2009,
as approved in the Washington Commission merger order, PSE dividends may not be
declared or paid if PSE’s common equity ratio, calculated on a regulatory basis,
is 44.0% or below except to the extent a lower equity ratio is ordered by the
Washington Commission.  In addition, pursuant to the merger order, PSE
may not declare or make any distribution unless on the date of distribution
PSE’s corporate credit/issuer rating is investment grade (equal to or greater
than BBB- with S&P and Baa3 with Moody’s), or if its credit rating is below
investment grade, then PSE’s ratio of Earnings Before Interest, Tax,
Depreciation and Amortization (EBITDA) to interest for the most recently ended
four fiscal quarter periods prior to such date is equal to or greater than three
to one.  Puget Energy’s ability to pay dividends to its shareholder is
also limited by the merger order as well as by the terms of its credit
facilities, beginning February 6, 2009.  Pursuant to the merger order,
Puget Energy may not declare or make a distribution unless on such date Puget
Energy’s ratio of consolidated EBITDA to consolidated interest expense for the
four most recently ended fiscal quarters prior to such date is equal to or
greater than two to one.  At September 30, 2009, the Company met or
exceeded all restrictive test minimums required for the payment of
dividends.
 The type
and amount of future long-term financing for Puget Energy and PSE are limited by
provisions in their credit agreements and restated articles of incorporation as
well as PSE’s mortgage indentures.  Under its credit agreements, Puget
Energy is generally limited to permitted refinancings and borrowings under its
credit facilities and by restrictions placed upon its
subsidiaries.  One such restriction on PSE limits it to $500.0 million
of long-term debt per year plus any amount needed to refinance maturing
bonds.  Unused amounts under this limitation may be carried forward
into future years.  Puget Energy’s facilities contain a provision
whereby additional capital expenditure loans up to $750.0 million may, under
certain conditions, be made available after the $1.0 billion capital expenditure
commitment has been fully borrowed.
 
 PSE
issues long-term debt secured under electric and natural gas mortgage
indentures.   Under the most restrictive tests, at September 30,
2009, PSE could issue:
 
 ·
                approximately
      $661.0 million of additional first mortgage bonds under PSE’s electric
      mortgage indenture based on approximately $1.1 billion of electric
      bondable property available for issuance, subject to an interest coverage
      ratio limitation of 2.0 times net earnings available for interest (as
      defined in the electric utility mortgage), which PSE exceeded at September
      30, 2009; and
 ·
                approximately
      $652.0 million of additional first mortgage bonds under PSE’s natural gas
      mortgage indenture based on approximately $1.1 billion of gas bondable
      property available for issuance, subject to interest coverage ratio
      limitations of 1.75 times and 2.0 times net earnings available for
      interest (as defined in the natural gas utility mortgage), which PSE
      exceeded at September 30, 2009.
 
 At
September 30, 2009, PSE had approximately $5.3 billion in electric and natural
gas ratebase to support the interest coverage ratio limitation test for net
earnings available for interest.
  Credit
Ratings
 Neither
Puget Energy nor PSE have any debt outstanding that would accelerate debt
maturity upon a credit rating downgrade.  A ratings downgrade could
adversely affect the ability to renew existing, or obtain access to new credit
facilities and could increase the cost of such facilities.  For
example, under Puget Energy’s and PSE’s credit facilities, the borrowing costs
and commitment fee increase as their respective credit 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-2/P-3
ratings by S&P and Moody’s, respectively.  In addition, downgrades
in any or a combination of PSE’s debt ratings may prompt counterparties on a
contract by contract basis in the wholesale electric, wholesale natural gas and
financial derivative markets to require PSE to post a letter of credit or other
collateral, make cash prepayments, obtain a guarantee or provide other mutually
agreeable security.
 On
January 16, 2009, S&P raised its corporate credit rating on PSE to BBB from
BBB- while it also lowered its corporate credit rating on Puget Energy to BB+
from BBB-.   The rating actions reflected the anticipated
completion of the acquisition of Puget Energy and PSE by Puget Holdings, which
occurred on February 6, 2009.  In taking this action, S&P noted
that the acquisition was expected to increase total net debt by $850 million on
a consolidated basis while reducing debt at PSE.  At the same time,
S&P removed the both companies’ ratings from credit watch with negative
implications and revised its ratings outlook to stable.
 On
February 2, 2009, Moody’s downgraded the issuer rating of Puget Energy to Ba2
from Ba1 and affirmed the long-term ratings of PSE.  The ratings
downgrade at Puget Energy reflected Moody’s concern about the increase in
financial risk resulting from the additional debt being introduced from the
acquisition by Puget Holdings. The ratings outlook for both companies is
stable.
 On August
3, 2009, Moody’s upgraded the Senior Secured Debt rating of PSE to Baa1 from
Baa2.
 
 The
ratings of Puget Energy and PSE, as of October 30, 2009 were as
follows:
 
 RatingsS&P
                Moody’sPuget
      Sound Energy, Inc.Corporate
      credit/issuer rating
                BBB
                Baa3Senior
      secured debt
                A-
                Baa1Junior
      subordinated notes
                BB+
                Ba1Commercial
      paper
                A-2
                P-3Bank
      facilities
                BBB
                Baa3Ratings
      outlook
                Stable
                StablePuget
      Energy, Inc.Corporate
      credit/issuer rating
                BB+
                Ba2Bank
      facilities
                BB+
                Ba2Ratings
      outlook
                Stable
                Stable
 
 
 Other
 
 Regulation
and Rates
 On
October 16, 2009, PSE filed an accounting petition requesting that the
Washington Commission authorize the deferral and recovery of incremental costs
associated with protecting the Company’s infrastructure, facilitating public
safety, and preparing PSE’s electric and natural gas system in the Green River
Valley flood plain in anticipation of release of water from the U.S. Army Corps
(Corps) of Engineers’ Howard Hanson Dam (the Dam).  In the event of actual
flooding, PSE also petitioned the Washington Commission to allow the deferral of
costs associated with the repair and restoration of the electric and natural gas
system infrastructure affected by the flood waters.
  On
October 7, 2009, PSE filed an amended accounting petition requesting that the
Washington Commission authorize PSE to defer the net revenues from the sale of
renewable energy credits (RECs) and carbon financial
instruments  (collectively, REC Proceeds) and use the revenues to: (1)
provide funding for low income energy efficiency and renewable energy services;
(2) credit a portion of the REC Proceeds to the California Receivable; and (3)
provide a credit to customers by offsetting the REC Proceeds against a
regulatory asset.  The accounting petition is an amended petition to
the accounting petition originally filed in April 2007 that requested deferred
accounting treatment for renewable energy credits.
 On
September 30, 2009, PSE filed an accounting petition requesting that the
Washington Commission authorize PSE to normalize any Treasury grant dollars
received under Section 1503 of the American Recovery and Reinvestment Act of
2009 associated with the Wild Horse Expansion project.  Treasury
grants are tax free grants related to certain renewable energy infrastructure
that are available in lieu of the production tax credit allowed under the
Internal Revenue Code.
 On
September 24, 2009, the Washington Commission approved a revision to PSE’s
Residential and Farm Energy Exchange Benefit effective on October 1,
2009.  The tariff change revised the credit applied to residential and
small customer electric tariff schedules from $103.2 million to $81.7 million on
an annualized basis.  The Washington Commission also approved PSE’s
continuation of a residential exchange balancing account (for timing differences
related to the BPA payment versus the PSE rate credit) and applicable interest
computations on the balancing account.
 On
September 24, 2009 the Washington Commission approved PSE’s requested revisions
to its PGA tariff schedules resulting in a decrease of $198.1 million or 17.1%
on an annual basis in gas sales revenues effective October 1,
2009.  The rate decrease was the result of lower costs of natural gas
in the forward market and an increase of the credit for the accumulated PGA
payable balance.  The PGA rate change will impact PSE’s revenue but
will not impact its net income as the decreased revenue will be offset by
decreased purchased gas costs.
 On May
28, 2009, the Washington Commission approved a PGA rate decrease of $21.2
million or 1.7% annually effective June 1, 2009.  PGA rate changes do
not impact net income.
 On May 8,
2009, PSE filed a general rate case requesting recovery of increased electric
and natural gas revenue requirements.  PSE requested an electric
general rate increase of approximately $148.1 million or 7.4% annually, and an
increase in natural gas rates of $27.2 million or 2.2% annually.  On
August 3, 2009 PSE filed a correction to the natural gas rate request which
changed the rate increase to $30.4 million or 2.5%.  On September 28,
2009, PSE filed supplemental testimony that updated power costs and load
forecast, among other changes.  The supplemental filing changed the
requested electric rate increase to $153.6 million or 7.67%.  This
rate request includes an equity component of 48.0% and a requested return on
equity of 10.8%.  A final order from the Washington Commission is
expected by April 2010.
 On April
17, 2009, the Washington Commission issued an order approving and adopting a
settlement agreement that authorized PSE to defer certain ownership and
operating costs related to its purchase of the Mint Farm Generation Station
(Mint Farm) that will be incurred prior to PSE recovering such costs in electric
customer rates.  Under Washington State law, a jurisdictional electric
utility may defer the costs associated with purchasing and operating a natural
gas plant that complies with the greenhouse gas (GHG) emissions performance
standard until the plant is included in rates or for two years from the date of
purchase, whichever is sooner.  As of September 30, 2009, PSE had
established a regulatory asset of $17.1 million per the Washington Commission
order.  The prudence of the Mint Farm acquisition, recovery of costs
of Mint Farm and compliance with the GHG emissions performance standard will be
addressed in PSE’s general rate proceeding.
 On
September 25, 2008, the Washington Commission approved PSE’s requested revisions
to its PGA tariff schedules resulting in an increase of $108.8 million or 11.1%
on an annual basis in gas sales revenues effective October 1,
2008.  The rate increase was the result of higher costs of natural gas
in the forward market and a reduction of the credit for the accumulated PGA
payable balance.  The PGA rate change impacted PSE’s revenue but will
not impact its net income as the increased revenue will be offset by increased
purchased gas costs.
  Snoqualmie
Falls Project
 PSE
received a new 40-year operating license for its Snoqualmie Falls hydroelectric
project from the Federal Energy Regulatory Commission (FERC) in
2004.  The license contained an array of FERC-approved plans to
upgrade the facility.  Due to changed circumstances, on December 6,
2007, PSE filed an application for a non-capacity amendment to the license to
account for technology improvements and hydrologic and other
changes.  On June 1, 2009, FERC issued an order amending the license
that incorporates the changes requested by PSE.  This order is final
and no party sought rehearing or review.
 
 Pacific
Northwest Refund Proceeding
 In October 2000, PSE filed a complaint
at FERC (Docket No. EL01-10) against “all jurisdictional sellers” in the Pacific
Northwest seeking prospective price caps consistent with any result FERC ordered
for the California markets.   In April 2009, the United States
Court of Appeals for the Ninth Circuit (Ninth Circuit) rejected the requests for
rehearing filed in this matter and remanded the proceeding to
FERC.  FERC is now considering what response to take to the Court
remand order.  PSE, Powerex and several other sellers have petitioned
the US Supreme Court for review of the Ninth Circuit decision.  That
petition is unlikely to be decided before 2010.  PSE intends to
vigorously defend its position but is unable to predict the outcome of this
matter.
  Proceedings
Relating to the Bonneville Power Administration
 Like
other investor-owned utilities in the region, PSE has been a party to certain
agreements with the BPA that provide payments under its REP to PSE which PSE
passes through to its residential and small farm electric
customers.  Several actions in the Ninth Circuit against BPA asserted
that BPA acted contrary to law in connection with this REP, including with
respect to benefits received or to be received by PSE from BPA. After Ninth
Circuit decisions in those actions, BPA revisited certain REP determinations and
calculations relating to payments made in the 2001 to 2006
period.  PSE also has an agreement with BPA for going forward REP
payment amounts to 2012 and for the period 2012 to 2028 and has sought Ninth
Circuit review of the agreements related thereto.  The amounts of such
payments and the methods utilized in setting them are subject to FERC review or
judicial review, or both, and are subject to adjustment, which may affect the
amount of REP benefits paid or to be paid by BPA to PSE.  It is not
clear what impact, if any, these reviews or other REP-related litigation may
ultimately have on PSE.
  Outage Claim.  On
April 23, 2009, PSE experienced an outage predominantly in Skagit County,
Washington, that resulted in approximately 93,000 PSE customers losing electric
service for periods ranging from less than an hour to about six
hours.  Investigation of the outage determined that it was caused by a
failing transmission line connector.  PSE responded to customer
inquiries and filed various reports with regulatory bodies concerning the
event.  In addition, PSE filed a report with the WECC describing the
event, its cause and the remedial measures PSE has put in process to minimize
the potential for a similar event in the future.  Under the mandatory
reliability standards, WECC and NERC are empowered to conduct investigations of
outages and impose penalties if standards were violated.  PSE does not
believe that reliability standards were violated.  Both WECC and NERC
have indicated to PSE that their reviews are concluded and they consider the
matter closed.  Customer claims may ensue and the outcome of any such
proceeding is not known at this time.
  Potential
for Flooding in the Green River Valley
 The Dam,
located on the upper reach of the Green-Duwamish River, provides flood risk
reduction for the benefit of the Green River Valley of south King
County.  Formerly an agricultural area, the Green River Valley now is
home to substantial residential, commercial and industrial development in such
communities as Auburn, Kent, Renton, South Seattle and Tukwila, all of which are
within PSE’s gas and electric service territories.  In addition to
many gas and electric customers, the area is home to critical PSE
infrastructure, including transmission substations, distribution systems, and
key operational facilities housing over 200 employees.  As a result of
heavy rains in January 2009, which damaged a section of the Dam and the decision
by the Corps in July 2009 to reduce the Dam’s flood storage capacity pending the
completion of improvements to it, there is an increased risk to downstream
communities for higher flood levels during this and future storm seasons,
according to the Corps.  Working closely with the Corps, King County,
the many affected jurisdictions, and other agencies, PSE is preparing for the
possibility of flooding, potentially multiple times, that could disrupt service
to tens of thousands of electric and gas customers and damage substantial PSE
infrastructure.The
region has been advised by the Corps that there is an increased risk to
downstream communities for higher flood levels during this and future storm
seasons due to damage that occurred to the Dam in early 2009.  PSE is
preparing for the possibility of flooding, potentially multiple times, that
could disrupt service to tens of thousands of electric and gas customers and
damage substantial PSE infrastructure.  PSE filed an accounting
petition with the Washington Commission with respect to the costs incurred in
connection with such preparations, which include advance system protection,
repositioning of assets and employees, and other mitigation
work.  However, should a flood or floods in the Green River Valley
occur, PSE could incur both significant costs responding to the event and
repairing any damage it creates, as well as the loss of revenue from affected
customers.
  New
Accounting Pronouncements
 In
September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-12,
“Fair Value Measurements and Disclosures: Investments in Certain Entities that
Calculate Net Asset Value per Share (or Its Equivalent).”  The
standard allows the reporting entity, as a practical expedient, to measure the
fair value of investments that do not have readily determinable fair values on
the basis of the net asset value per share of the investment if the net asset
value of the investment is calculated in a matter consistent with Topic 946,
“Financial Services – Investment Companies.”  The standard requires
disclosures about the nature and risk of the investments and whether the
investments are probable of being sold at amounts different from the net asset
value per share.  The standard is effective for the first reporting
period ending after December 15, 2009, which will be December 31, 2009 for the
Company.
 In
September 2009, the FASB issued, ASU No. 2009-05, “Fair Value Measurements:
Measuring Liabilities at Fair Value.”  The standard reduces ambiguity
in financial reporting when measuring the fair value of liabilities. The
standard provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the techniques in
the standard.  As of September 30, 2009, the Company has determined
that the new standard has no impact to its consolidated financial position or
results of operations.
 In June
2009, FASB issued ASU No. 2009-01, Topic 105, “Generally Accepted Accounting
Principles amendments based on the Statement of Financial Standards No. 168 –
The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles.” With this ASU, the FASB Codification became the
authoritative source of GAAP.  The FASB Codification was effective for
interim and annual reporting periods ending after September 15, 2009, which is
September 30, 2009 for the Company.  The FASB Codification is not
expected to have a material impact on the financial reporting of the
Company.
 
 In June
2009, FASB issued a new standard on identifying Variable Interest Entities
(VIEs).  The new standard replaces a quantitative approach with a
qualitative approach to determine whether PSE’s variable interest or interests
give it a controlling financial interest in a VIE.  In addition, the
standard requires enhanced disclosures which will provide users of the financial
statements with more transparent information about an enterprise’s involvement
in a VIE.  The standard is effective for the first annual reporting
period beginning after November 15, 2009 and for interim periods within that
first annual reporting period, which will be the period ending March 31, 2010
for the Company.  The Company is currently assessing the impact of the
standard.
 In May
2009, FASB issued a new standard on subsequent events.  The standard
does not require significant changes regarding recognition or disclosure of
subsequent events but does require disclosure of the date through which
subsequent events have been evaluated for disclosure and
recognition.  The standard is effective for financial statements
issued after June 15, 2009 which was the quarter ended June 30, 2009 for the
Company.  The implementation of this standard did not have a
significant impact on the financial statements of the Company.  The
Company has performed an evaluation of subsequent events through November 3,
2009, which is the date
the financial statements in this report were issued.
 On April
9, 2009, FASB issued a standard on Interim Disclosures about Fair Value of
Financial Instruments.  The standard requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements.  The new standard
was effective for the Company as of June 30, 2009.
 On April
9, 2009, FASB issued a new standard which provides additional clarification on
determining fair value when the volume and level of activity for the asset or a
liability has significantly decreased and identifying transactions that are not
orderly.  The standard became effective for the Company as of June 30,
2009.  The standard provides additional guidance for estimating fair
value when the volume and level of activity for the asset or liability have
significantly decreased. The new standard also includes guidance on identifying
circumstances that indicate a transaction is not orderly.  As of June
30, 2009, the Company has determined that the new standard has no impact to its
consolidated financial position or results of operations.
 On
January 1, 2009, Puget Energy adopted ASC 805, “Business
Combinations.”  The objective of the standard is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. To accomplish that, the  standard
establishes principles and requirements for how the acquirer: (1) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; (2)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and (3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.
 On
December 30, 2008, FASB issued a standard that directs companies to provide
additional disclosures about plan assets of a defined benefit pension or other
postretirement plan.  The objectives of the disclosures are to
disclose the following: (1) how investment allocation decisions are made,
including the factors that are pertinent to an understanding of investment
policies and strategies; (2) major categories of plan assets; (3) inputs and
valuation techniques used to measure the fair value of plan assets; (4) effect
of fair value measurements using significant unobservable inputs (Level 3) on
changes in plan assets for the period; and (5) significant concentrations of
risk within plan assets.  The standard is effective for the fiscal
year December 15, 2009, which will be effective for the Company for the fiscal
year end December 31, 2009.  The Company is currently assessing the
impact of the standard.
 
  Item
      3.
                Quantitative
      and Qualitative Disclosure About Market
  Risk
  Energy
Portfolio Management
 PSE
maintains energy risk policies and procedures to manage commodity and volatility
risks and the related effects on credit, tax, accounting, financing and
liquidity. PSE’s Energy Management Committee establishes PSE’s risk management
policies and procedures and monitors compliance. The Energy Management Committee
is comprised of certain PSE officers and is overseen by the PSE Board of
Directors.
 PSE is
focused on commodity price exposure and risks associated with volumetric
variability in the gas and electric portfolios and the related effects noted
above.  It is not engaged in the business of assuming risk for the
purpose of speculative trading.  PSE hedges open gas and electric
positions to reduce both the portfolio risk and the volatility risk in
prices.  The exposure position is determined by using a probabilistic
risk system that models 250 simulations of how PSE’s gas and power portfolios
will perform under various weather, hydro and unit performance
conditions.  The objectives of the hedging strategy are
to:
 
 ·
                Ensure
      physical energy supplies are available to reliably and cost-effectively
      serve retail load;·
                Manage
      the energy portfolio prudently to serve retail load at overall least cost
      and limit undesiredimpacts
      on PSE’s customers
                  and
      shareholders;·
                Reduce
      power costs by extracting the value of PSE’s assets;
and·
                Meet
      the credit, liquidity, financing, tax and accounting requirements of
      PSE.
 
 
 ASC 815,
“Derivatives and Hedging” (ASC 815) requires a significant amount of disclosure
regarding PSE’s derivative activities and the nature of such derivatives impact
on PSE’s financial position, financial performance and cash
flows.  Such detail should serve as an accompaniment to Management’s
Discussion and Analysis (MD&A), which is located under Item 2 of this
report.  Further, and as a result of the ASC 815 disclosures, summary
metrics that may be included in this MD&A discussion may be further expanded
upon in the footnotes preceding the MD&A.
 PSE pursues various portfolio
optimization strategies, but is not in the business of assuming risk for the
purpose of realizing speculative trading revenues.  PSE’s portfolio of
owned and contracted electric generation resources exposes PSE and its retail
electric customers to some volumetric and commodity price risks within the
sharing mechanism of the PCA.  PSE’s natural gas retail customers are
served by natural gas purchase contracts which expose PSE’s customers to
commodity price risks through the PGA mechanism.  All purchased
natural gas costs are recovered through customer rates with no direct impact on
PSE. Therefore, wholesale market transactions are focused on balancing PSE’s
energy portfolio, reducing costs and risks where feasible and reducing
volatility.  PSE’s energy risk portfolio management function monitors
and manages these risks.  In order to manage risks effectively, PSE
enters into forward physical electricity and gas purchase and sale agreements,
and floating for fixed swap contracts that are related to its regulated electric
and gas portfolios.  The forward physical electricity contacts are
both fixed and variable (at index) while the physical natural gas contracts are
variable with investment grade counterparties that do not require collateral
calls on the contracts.  To fix the price of natural gas, PSE may
enter into natural gas floating for fixed swap (financial) contracts with
various counterparties.
 The
following table presents a summary of the fair value of both electric and
natural gas (used in both electric generation and in core gas sales) derivative
instruments that do not meet the NPNS exception at September 30, 2009 and
December 31, 2008, including contracts designated as cash flow hedges (at
September 30, 2009 PSE had no contracts designated as cash flow
hedges):
 
 Derivative
      Portfolio
                  (Dollars in
      Millions)
                Puget
      Energy
                  September
      30,
                  2009
                PSE
                  September
      30,
                  2009
                Predecessor
                  December
      31,
                  2008Current
      asset
                $     17.9
                $     17.9
                $     15.6Long-term
      asset
                16.5
                16.5
                6.7Total
      assets
                $     34.4
                $     34.4
                $     22.3Current
      liability
                $   202.8
                $  175.8
                $   236.9Long-term
      liability
                91.4
                91.4
                158.4Total
      liabilities
                $   294.2
                $  267.2
                $   395.3
 
 If it is
determined that it is uneconomical to operate PSE’s controlled electric
generating facilities in the future period, the fuel supply cash flow hedge
relationship is terminated and the hedge is de-designated which results in
recognition of future changes in value in the income statements.  As
these contracts are settled, amounts previously deferred in OCI are recognized
as energy costs and are included as part of the PCA mechanism.  For
further details regarding both the fair value of derivative instruments and the
impacts such instruments have on current period earnings and OCI (for cash flow
hedges), please see Note 4, “Accounting for Derivative Instruments and Hedging
Activities.”
 At
September 30, 2009, PSE had total assets of $25.2 million and total liabilities
of $109.6 million related to financial contracts used to economically hedge the
cost of physical natural gas purchased to serve natural gas
customers.  All fair value adjustments on derivatives relating to the
natural gas business have been reclassified to a deferred account in accordance
with ASC 980, “Regulated Operation” (ASC 980), due to the PGA
mechanism.  All increases and decreases in the cost of natural gas
supply are passed on to customers with the PGA mechanism.  As the
gains and losses on the hedges are realized in future periods, they will be
recorded as gas costs under the PGA mechanism.
 A
hypothetical 10.0% increase or decrease in market prices of natural gas and
electricity would change the fair value of Puget Energy and PSE derivative
contracts by $122.0 million and $118.6 million respectively, with a
corresponding after-tax change in other comprehensive income of $19.5 million
and $31.1 million respectively; and would impact the fair value of those
contracts marked-to-market in earnings by $24.4 million and $10.6 million,
respectively after-tax related to derivatives not designated as
hedges.  A discussion of the Level 3 valuation is included in Note 5,
“Fair Value Measurements.”
 
 Contingent
Features and Counterparty Credit Risk
 PSE is
exposed to credit risk primarily through buying and selling electricity and
natural gas to serve customers.  Credit risk is the potential loss
resulting from a counterparty’s non-performance under an
agreement.  PSE manages credit risk with policies and procedures for,
among other things, counterparty analysis, exposure measurement and exposure
monitoring and exposure mitigation.
 Where
deemed appropriate, PSE may request collateral or other security from its
counterparties to mitigate the potential credit default
losses.  Criterion employed in this decision include, among other
things, the perceived creditworthiness of the counterparty and the expected
credit exposure.  As of September 30, 2009, PSE held approximately
$0.7 million worth of standby letters of credit in support of various
electricity and renewable energy credit transactions.
 It is
possible that volatility in energy commodity prices could cause PSE to have
material credit risk exposures with one or more counterparties.  If
such counterparties fail to perform their obligations under one or more
agreements, PSE could suffer a material financial loss.  However, as
of September 30, 2009, approximately 93.66% of Puget Energy’s and 93.52% of
PSE’s energy and gas portfolio exposure, including NPNS transactions, is with
counterparties that are rated at least investment grade by the major rating
agencies and 6.34% of Puget Energy’s and 6.48% of PSE’s portfolio are either
rated below investment grade or are not rated by rating agencies.  PSE
assesses credit risk internally for counterparties that are not
rated.
 PSE has
entered into commodity master arrangements with its counterparties to mitigate
credit exposure to those counterparties.  PSE generally enters into
the following master arrangements:  (1) Western Systems Power Pool
agreements (WSPP) - standardized power sales contracts in the electric industry;
(2) International Swaps and Derivatives Association agreements (ISDA) -
standardized financial gas and electric contracts; and (3) North American Energy
Standards Board agreements (NAESB) - standardized physical gas
contracts.  PSE believes that entering into such agreements reduces
the risk of default by allowing a counterparty the ability to make only one net
payment.
 PSE
monitors counterparties that are experiencing financial problems, have
significant swings in credit default swap rates, have credit rating changes by
external rating agencies, or have changes in ownership.  Counterparty
credit risk impacts PSE’s decisions on derivative accounting
treatment.  A counterparty may have a deterioration of credit below
investment grade, potentially indicating that it is no longer probable that it
will fulfill its obligations under a contract (e.g., make a physical delivery
upon the contract’s maturity).  ASC 815 specifies the requirements for
derivative contracts to qualify for the NPNS scope exception. When performance
is no longer probable, based on the deterioration of counterparty’s credit, PSE
records the fair value of the contract on the balance sheet, with the
corresponding amount recorded in the income statement.
 Cash flow
hedge derivative treatment is also impacted by a counterparty’s deterioration of
credit under ASC 815 guidelines. If a forecasted transaction associated with a
cash flow hedge is no longer probable of occurring, based on deterioration of
credit, PSE would discontinue hedge accounting, record in earnings subsequent
changes in the derivative’s fair value and freeze amounts previously accounted
for in accumulated OCI.  If the probability of the transaction
occurring is remote, any amounts previously accounted for in accumulated OCI
would be reclassified into earnings.
 Should a
counterparty file for bankruptcy, which could be considered a default under
master arrangements, PSE may terminate related contracts.  Derivative
accounting entries previously recorded would be reversed in the financial
statements.  PSE would compute any termination receivable or payable,
based on the terms of existing master arrangements.
 PSE
computes credit reserves at a master agreement level (i.e. WSPP, ISDA or NAESB)
by counterparty.  PSE considers external credit ratings and market
factors, such as credit default swaps and bond spreads in determination of
reserves.  PSE recognizes that external ratings may not always reflect
how a market participant perceives a counterparty’s risk of
default.  PSE uses both default factors published by S&P and
factors derived through analysis of market risk, which reflect the application
of an industry standard recovery rate.  PSE selects a default factor
by counterparty at an aggregate master agreement level based on a weighted
average default tenor for that counterparty’s deals.  The default
tenor is used by weighting fair values and contract tenors for all deals for
each counterparty and coming up with an average value.   The
default factor used is dependent upon whether the counterparty is in a net asset
or a net liability position after applying the master agreement
levels.
 PSE
applies the counterparty’s default factor to compute credit reserves for
counterparties that are in a net asset position.  Moreover, PSE
calculates a non-performance risk on its derivative liabilities by using its
estimated incremental borrowing rate over the risk-free rate.  The
fair value of derivatives includes the impact of taking into account credit and
non-performance reserves.  As of September 30, 2009, PSE was in a net
liability position with the majority of their counterparties; as a result, the
default factors of counterparties did not have a significant impact on reserves
for the year.
 
 Interest
Rate Risk
 PSE
believes its interest rate risk primarily relates to the use of short-term debt
instruments, variable-rate notes and leases and anticipated long-term debt
financing needed to fund capital requirements.  PSE manages its
interest rate risk through the issuance of mostly fixed-rate debt of various
maturities.  PSE utilizes 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.  PSE may
enter into swap instruments or other financial hedge instruments to manage the
interest rate risk associated with these debts.  As of September 30,
2009, Puget Energy had seven interest rate swap contracts outstanding, and PSE
did not have any outstanding swap instruments.
 In
February 2009, Puget Energy entered into interest rate swap transactions to
hedge the risk associated with one-month LIBOR floating rate debt.  As
of December 31, 2008, the fair value of such instruments were zero as they had
not yet been executed, and as of September 30, 2009, the fair value of interest
rate swaps designated as cash flow hedges was a loss of $15.1
million.  This fair value considers the risk of Puget Energy’s
non-performance by using Puget Energy’s incremental borrowing rate on unsecured
debt over the risk-free rate in the valuation estimate.  The ending
balance in OCI includes a loss of $9.9 million after tax related to the interest
rate swaps designated as cash flow hedges during the current reporting
period.
 A
hypothetical 10% increase in three-month LIBOR would increase the fair value of
interest rate swaps by $17.3 million, with a corresponding after-tax increase in
unrealized gains recorded in OCI by $11.3 million.  A hypothetical 10%
decrease in interest rates would decrease the fair value of interest rate swaps
by $12.6 million, with a corresponding after-tax decrease in unrealized losses
recorded in OCI by $8.2 million.
 From time
to time PSE may enter into treasury locks or forward starting swap contracts to
hedge interest rate exposure related to an anticipated debt
issuance.  The ending balance in other comprehensive income related to
the forward starting swaps and previously settled treasury lock contracts at
September 30, 2009 is a net loss of $7.7 million after tax and accumulated
amortization.  This compares to a loss of $7.9 million in OCI after
tax as of December 31, 2008.
   Item
4.              Controls
and Procedures
  Puget
Energy
 Evaluation
of Disclosure Controls and Procedures
 Under the
supervision and with the participation of Puget Energy’s management, including
the President and Chief Executive Officer and the Executive Vice President and
Chief Financial Officer, Puget Energy has evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of September 30, 2009, the end of the period
covered by this report.  Based upon that evaluation, the President and
Chief Executive Officer and the Executive Vice President and Chief Financial
Officer of Puget Energy concluded that these disclosure controls and procedures
are effective.
  Changes
in Internal Control Over Financial Reporting
 There
have been no changes in Puget Energy’s internal control over financial reporting
during the quarter ended September 30, 2009 that have materially affected, or
are reasonably likely to materially affect, Puget Energy’s internal control over
financial reporting.
  Puget
Sound Energy
 Evaluation
of Disclosure Controls and Procedures
 Under the
supervision and with the participation of PSE’s management, including the
President and Chief Executive Officer and the Executive Vice President and Chief
Financial Officer, PSE has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of September 30, 2009, the end of the period covered by
this report.  Based upon that evaluation, the President and Chief
Executive Officer and the Executive Vice President and Chief Financial Officer
of PSE concluded that these disclosure controls and procedures are
effective.
  Changes
in Internal Control Over Financial Reporting
 There
have been no changes in PSE’s internal control over financial reporting during
the quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, PSE’s internal control over financial
reporting.
   PART
II           OTHER
INFORMATION
  Item
1.              Legal
Proceedings
  See the
Litigation Footnote of this Quarterly Report on Form
10-Q.  Contingencies arising out of the normal course of PSE’s
business exist at September 30, 2009.  Litigation is subject to
numerous uncertainties and PSE is unable to predict the ultimate outcome of
these matters.
   Item 1A.          
Risk
Factors
 
 There
have been no material changes from the risk factors set forth in Part II, Item
1A in Puget Energy’s Form 10-Q for the period ended June 30,
2009.   There have been no material changes from the risk factors
set forth in Part II, Item 1A in PSE’s Form 10-Q for the period ended June 30,
2009.
 
  Item
6.              Exhibits
 
 See
Exhibit Index for list of exhibits.
  
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, each registrant has
duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.
 
 PUGET
      ENERGY, INC.
                  PUGET
      SOUND ENERGY, INC./s/
      James W. EldredgeJames
      W. EldredgeVice
      President, Controller and Chief Accounting OfficerDate:  November
      3, 2009Chief
      accounting officer and officer duly authorized to sign this report on
      behalf of each registrant
 
 EXHIBIT
INDEX
 
 The following exhibits are filed
herewith:
 
 10.1
                Credit
      Agreement dated as of May 16, 2008 among Puget Merger Sub Inc., as
      borrower, Barclays Bank PLC, as Facility Agent, the other agents party
      thereto and the lenders party thereto.10.2
                Credit
      Agreement dated as of February 6, 2009 among Puget Sound Energy, Inc., as
      borrower, Barclays Bank PLC, as Facility Agent, the other agents party
      thereto and the lenders party thereto.12.1
                Statement
      setting forth computation of ratios of earnings to fixed charges (2004
      through 2008, January 1, 2009 - February 5, 2009 (Predecessor) and
      February 6, 2009 - September 30, 2009 (Successor)) for Puget
      Energy.12.2
                Statement
      setting forth computation of ratios of earnings to fixed charges (2004
      through 2008 and 12 months ended September 30, 2009) for
    PSE.31.1
                Chief
      Executive Officer certification of Puget Energy pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.31.2
                Chief
      Financial Officer certification of Puget Energy pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.31.3
                Chief
      Executive Officer certification of Puget Sound Energy pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.4
                Chief
      Financial Officer certification of Puget Sound Energy pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                Chief
      Executive Officer certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                Chief
      Financial Officer certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.