**-----------------------------------------------------------------------------------------------------------------------------**
** 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, 2001

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

 OR

  [  ]  TRANSITION   REPORT  PURSUANT  TO  SECTION  13  OR  15  (d)     OF THE SECURITIES EXCHANGE ACT OF 1934For theTransition period from ________ to _________                           Exact name of registrant as specified                                            I.R.S.                           in its charter, state of incorporation,                                        EmployerCommission                 address of principal executive offices,                                  IdentificationFile Number                Telephone                                                                        Number1-16305                    PUGET ENERGY, INC.                                                           91-1969407                           A Washington Corporation                           411 - 108th Avenue N.E.                           Bellevue, Washington 98004-5515                           (425) 454-63631-4393                     PUGET SOUND ENERGY, INC.                                                     91-0374630                           A Washington Corporation 411 - 108th                           Avenue N.E. Bellevue, Washington 98004-5515                           (425) 454-6363
Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file forsuch reports), and (2) has been subject to such filing requirements for the past90 days. Yes X No ____ 

As of September 30, 2001,(i) the number of shares of Puget Energy, Inc. (“Puget Energy”) commonstock outstanding was 86,703,331 ($.01 par value) and (ii) all of theoutstanding shares of Puget Sound Energy, Inc. (“PSE”) common stockwere held by Puget Energy. 
-----------------------------------------------------------------------------------------------------------------------------                                                      Table of Contents                                                      -----------------Filing FormatPart I.   Financial InformationItem 1.   Financial Statements          Puget Energy, Inc.              Consolidated Statements of Income - 3 months ended September 30, 2001 and 2000Consolidated Statements of Income - 9 months ended September 30, 2001 and 2000 Consolidated Statements of Comprehensive Income - 3 months endedSeptember 30, 2001 and 2000Consolidated Statements of Comprehensive Income - 9 months endedSeptember 30, 2001 and 2000 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 Consolidated Statements of Cash Flows - 9 months endedSeptember 30, 2001 and 2000          Puget Sound Energy, Inc.              Consolidated Statements of Income - 3 months ended September 30, 2001 and 2000Consolidated Statements of Income - 9 months ended September 30, 2001 and 2000Consolidated Statements of Comprehensive Income - 3 months endedSeptember 30, 2001 and 2000 Consolidated Statements of Comprehensive Income - 9 months endedSeptember 30, 2001 and 2000Consolidated Balance Sheets - September 30, 2001 and December 31, 2000Consolidated Statements of Cash Flows - 9 months endedSeptember 30, 2001 and 2000 Notes to Consolidated Financial StatementsItem 2.   Management's Discussion and Analysis of Financial Conditionand Results of OperationsItem 3.   Quantitative and Qualitative Disclosure About Market RiskPart II.  Other InformationItem 1.   Legal ProceedingsItem 6.   Exhibits and Reports on Form 8-KSignature                                                                                                                                             34Exhibit Index
**Filing Format**
     This  Quarterly  Report  on  Form  10-Q is a  combined  quarterly  report  being  filed  separately  by two  differentregistrants:  Puget Energy and PSE.  Puget Energy became the holding  company for PSE on January 1, 2001.  Any  references inthis report to the "Company" are to Puget Energy and PSE  collectively.  PSE makes no  representation  as to the  informationcontained in this report relating to Puget Energy and the subsidiaries of Puget Energy other than PSE and its subsidiaries.
Part 1        FINANCIAL INFORMATION Item 1.       Financial Statements              -------------------- PUGET ENERGY, INC.                                              CONSOLIDATED STATEMENTS OF INCOME                                           For the Three Months Ended September 30                                            (Thousands except per share amounts)                                                         (Unaudited)                                                                                      2001                  2000                                                                         ------------------      ----------------Operating Revenues:     Electric                                                                     $474,319              $886,696     Gas                                                                            91,778                72,798     Other                                                                          53,573                19,487                                                                         ------------------      ----------------          Total operating revenues                                                 619,670               978,981                                                                         ------------------      ----------------Operating Expenses:Energy costs:     Purchased electricity                                                         261,148               660,249     Purchased gas                                                                  50,976                35,885     Electric generation fuel                                                       67,949                55,381     Residential Exchange                                                          (19,270)               (7,983)Utility operations and maintenance                                                  64,213                55,947Other operations and maintenance                                                    47,881                19,393Depreciation and amortization                                                       54,195                49,677Conservation amortization                                                            1,440                 1,188FAS-133 unrealized (gain) loss on derivative instruments                               567                     -Taxes other than federal income taxes                                               38,671                42,556Federal income taxes                                                                 6,144                 9,090                                                                         ------------------      ----------------          Total operating expenses                                                 573,914               921,383                                                                         ------------------      ----------------Operating Income                                                                    45,756                57,598Other Income                                                                         7,892                 5,273                                                                         ------------------      ----------------Income Before Interest Charges                                                      53,648                62,871Interest Charges, Net of AFUDC                                                      46,839                43,876                                                                         ------------------      ----------------Net Income                                                                           6,809                18,995Less:  Preferred Stock Dividends Accrual                                             2,085                 2,229                                                                         ------------------      ----------------Income for Common Stock                                                             $4,724               $16,766                                                                         ==================      ================Common Shares Outstanding - Weighted Average                                        86,571                85,502                                                                         ==================      ================Basic Earnings Per Common Share                                                      $0.06                 $0.20                                                                         ==================      ================Diluted Earnings Per Common Share                                                    $0.05                 $0.20                                                                         ==================      ================                      The accompanying notes are an integral part of the financial statements.       PUGET ENERGY, INC.                                              CONSOLIDATED STATEMENTS OF INCOME                                           For the Nine Months Ended September 30                                            (Thousands except per share amounts)                                                         (Unaudited)                                                                                              2001                  2000                                                                                 ------------------      ----------------Operating Revenues:     Electric                                                                           $1,959,020            $1,762,543     Gas                                                                                   559,061               376,284     Other                                                                                 156,872                26,177                                                                                 ------------------      ----------------          Total operating revenues                                                       2,674,953             2,165,004                                                                                 ------------------      ----------------Operating Expenses:Energy costs:     Purchased electricity                                                               1,186,641             1,094,557     Purchased gas                                                                         371,769               190,273     Electric generation fuel                                                              233,467               106,034     Residential Exchange                                                                  (46,315)              (29,255)Utility operations and maintenance                                                         190,806               169,192Other operations and maintenance                                                           119,492                27,213Depreciation and amortization                                                              160,258               144,878Conservation amortization                                                                    4,645                 5,187FAS-133 unrealized (gain) loss on derivative instruments                                   (14,494)                    -Taxes other than federal income taxes                                                      154,057               144,984Federal income taxes                                                                        72,260                75,339                                                                                 ------------------      ----------------          Total operating expenses                                                       2,432,586             1,928,402                                                                                 ------------------      ----------------Operating Income                                                                           242,367               236,602Other Income                                                                                11,402                16,541                                                                                 ------------------      ----------------Income Before Interest Charges                                                             253,769               253,143Interest Charges, Net of AFUDC                                                             140,448               128,587                                                                                 ------------------      ----------------Income Before Cumulative Effect of Accounting Change                                       113,321               124,556Cumulative Effect of Implementation of FAS-133 Derivative Instruments   and Hedging Activities (net of tax)                                                      14,749                     -                                                                                 ------------------      ----------------Net Income                                                                                  98,572               124,556Less:  Preferred Stock Dividends Accrual                                                     6,328                 6,761                                                                                 ------------------      ----------------Income for Common Stock                                                                    $92,244              $117,795                                                                                 ==================      ================Common Shares Outstanding - Weighted Average                                                86,303                85,289                                                                                 ==================      ================Basic Earnings per Share Before Cumulative Effect of Accounting Change                       $1.24                 $1.38Cumulative Effect of Accounting Change                                                       (0.17)                    -                                                                                 ------------------      ----------------Basic Earnings Per Common Share                                                              $1.07                 $1.38                                                                                 ==================      ================Diluted Earnings per Share Before Cumulative Effect of Accounting Change                     $1.23                 $1.38Cumulative Effect of Accounting Change                                                       (0.17)                    -                                                                                 ------------------      ----------------Diluted Earnings Per Common Share                                                            $1.06                 $1.38                                                                                 ==================      ================                    The accompanying notes are an integral part of the financial statements.       PUGET ENERGY, INC.                                       CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                           For the Three Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                              2001                     2000                                                                                  -----------------         ----------------Net Income                                                                                  $6,809                  $18,995                                                                                  -----------------         ----------------Other comprehensive income, net of tax:     Unrealized holding losses arising during the period                                    (1,762)                 (1,053)     Reclassification adjustment for gains included in net income                               (5)                      -     FAS-133 unrealized losses during the period                                           (31,863)                      -     Reversal of FAS-133 unrealized gains settled during the period                         (4,481)                      -                                                                                  ------------------        ----------------       Other comprehensive income (loss)                                                    (38,111)                (1,053)         ------------------        ----------------Comprehensive Income (Loss)                                                                $(31,302)                $17,942                                                                                  ==================        ================                                                      PUGET ENERGY, INC.                                       CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                           For the Nine Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                        2001                     2000                                                                            -----------------         -----------------Net Income                                                                           $98,572                  $124,556                                                                            -----------------         -----------------Other comprehensive income, net of tax:     Unrealized holding gains (losses) arising during the period                      (3,169)                    1,212     Reclassification adjustment for gains included in net income                         (5)                   (3,160)     FAS-133 transition adjustment                                                    86,928                         -     FAS-133 unrealized losses during the period                                    (181,241)                        -     Reversal of FAS-133 unrealized gains settled during the period                 (147,816)                        -                                                                            -----------------         -----------------        Other comprehensive income (loss)                                            (45,303)                   (1,948)                                                                            -----------------         -----------------Comprehensive Income                                                                 $53,269                  $122,608                                                                            =================         =================                           The accompanying notes are an integral part of the financial statements.    PUGET ENERGY, INC.                                                 CONSOLIDATED BALANCE SHEETS                                                   (Dollars in Thousands)                                                         (Unaudited)                                                           ASSETS                                                                                  September 30,              December 31,                                                                                  -------------              ------------                                                                                           2001                      2000                                                                                           ----                      ----Utility Plant: (at original cost, including construction work in progress of$130,913 and $164,221 respectively)     Electric                                                                        $4,140,900                $4,054,551     Gas                                                                              1,520,254                 1,459,488     Common                                                                             361,541                   351,051     Less:  Accumulated depreciation and amortization                                (2,150,690)               (2,026,681)                                                                             --------------------    ----------------------          Net utility plant                                                           3,872,005                 3,838,409                                                                             -------------------     ---------------------Other Property and Investments                                                          295,499                   292,297                                                                             -------------------     ---------------------Current Assets:     Cash                                                                               102,361                    36,383     Accounts receivable, net                                                           229,208                   343,108     Unbilled revenue                                                                    71,576                   211,784     Materials and supplies, at average cost                                            110,074                    99,001     Purchased gas receivable                                                           113,255                    96,050     Current portion of FAS-133 unrealized gain                                          19,569                         -     Prepayments and other                                                               19,533                    11,607                                                                             -------------------     ---------------------          Total current assets                                                          665,576                   797,933                                                                             -------------------     ---------------------Long-Term Assets:     Regulatory asset for deferred income taxes                                         188,143                   207,350     Regulatory asset for PURPA buyout costs                                            244,181                   243,071     FAS-133 unrealized gain                                                              8,558                         -     Other                                                                              229,746                   177,609                                                                             -------------------     ---------------------          Total long-term assets                                                        670,628                   628,030                                                                             -------------------     ---------------------Total Assets                                                                         $5,503,708                $5,556,669                                                                             ===================     =====================                          The accompanying notes are an integral part of the financial statements.                                                      PUGET ENERGY, INC.                                                 CONSOLIDATED BALANCE SHEETS                                                   (Dollars in Thousands)                                                         (Unaudited)                                               CAPITALIZATION AND LIABILITIES                                                                           September 30,               December 31,                                                                           -------------               ------------                                                                                    2001                      2000                                                                                    ----                      ----Capitalization:    Common shareholders' investment:       Common stock $0.01 par value, 250,000,000 shares       authorized, 86,703,331 shares outstanding at September 30,       2001 and $10 stated value, 150,000,000 shares authorized,       85,903,791 shares outstanding at December 31, 2000                           $867                   $859,038    Additional paid-in capital                                                 1,351,475                    470,179    Earnings reinvested in the business                                           65,930                     92,673    Accumulated other comprehensive income (loss)                                (40,553)                     4,750    Preferred stock not subject to      mandatory redemption                                                        60,000                     60,000    Preferred stock subject to      mandatory redemption                                                        50,662                     58,162    Corporation obligated, mandatorily redeemable      preferred securities of subsidiary      trust holding solely junior subordinated      debentures of the corporation                                              300,000                    100,000    Long-term debt                                                             2,155,883                  2,170,797                                                                      -------------------      ---------------------           Total capitalization                                                3,944,264                  3,815,599                                                                      -------------------      ---------------------Current Liabilities:    Accounts payable                                                             154,479                    410,619    Short-term debt                                                              311,360                    378,316    Current maturities of long-term debt                                          92,587                     19,000    Accrued expenses:      Taxes                                                                       65,619                    103,996      Salaries and wages                                                          14,426                     17,445      Interest                                                                    55,261                     43,955    Current portion of FAS-133 unrealized loss                                    60,909                          -    Other                                                                         40,813                     26,685                                                                      -------------------      ---------------------          Total current liabilities                                              795,454                  1,000,016                                                                      -------------------      ---------------------Deferred Income Taxes                                                            596,512                    608,185                                                                      -------------------      ---------------------Other Deferred Credits                                                           160,911                    132,869                                                                      -------------------      ---------------------FAS-133 Unrealized Loss                                                            6,567                          -                                                                      -------------------      ---------------------Total Capitalization and Liabilities                                          $5,503,708                 $5,556,669                                                                      ===================      =====================                          The accompanying notes are an integral part of the financial statements.     PUGET ENERGY, INC.                                            CONSOLIDATED STATEMENTS OF CASH FLOWS                                           For the Nine Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                 2001                  2000                                                                                 ----                  ----Operating Activities:---------------------Net Income                                                                    $98,572              $124,556Adjustments to reconcile net income  to net cash provided by operating activities:     Depreciation and amortization                                            160,258               144,878     Deferred income taxes and tax credits - net                                7,534                (4,173)     Gain from sale of securities                                                   -                (6,476)     Other                                                                      8,421                24,704     Change in certain current assets and current liabilities,        net of effects of acquisitions by InfrastruX (Note 4)                 (50,016)              (15,766)------------------------------------------------------------------------------------------------------------          Net Cash Provided by Operating Activities                           224,769               267,723------------------------------------------------------------------------------------------------------------Investing Activities:---------------------     Construction expenditures - excluding equity AFUDC                      (194,883)             (223,153)     Additions to energy conservation program                                  (6,241)               (4,325)     Acquisitions by InfrastruX                                               (63,510)              (80,587)     Proceeds from sale of Centralia Plant                                          -                30,128     Proceeds from sale of investment in Cabot stock                                -                51,463     Repayment from/(Loan to) Schlumberger RMS                                 51,948                (1,325)     Proceeds from sale of securities                                               -                 6,757     Other                                                                    (10,382)               (7,452)-------------------------------------------------------------------------------------------------------------          Net Cash Used by Investing Activities                              (223,068)             (228,494)-------------------------------------------------------------------------------------------------------------Financing Activities:---------------------     Change in short-term debt - net                                          (67,753)              (59,702)     Dividends paid                                                          (106,147)             (107,764)     Issuance of trust preferred stock                                        200,000                     -     Redemption of preferred stock                                             (7,500)               (7,501)     Issuance of bonds and long term debt                                      52,470               250,000     Redemption of bonds and notes                                                  -              (140,980)     Other                                                                     (6,793)               (1,709)-------------------------------------------------------------------------------------------------------------          Net Cash Provided (Used) by Financing Activities                     64,277               (67,656)-------------------------------------------------------------------------------------------------------------Net Increase (Decrease) in Cash                                                65,978               (28,427)Cash at Beginning of Year                                                      36,383                65,707------------------------------------------------------------------------------------------------------------Cash at End of Period                                                        $102,361               $37,280============================================================================================================                          The accompanying notes are an integral part of the financial statements.     PUGET SOUND ENERGY, INC.                                              CONSOLIDATED STATEMENTS OF INCOME                                           For the Three Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                            2001                    2000                                                                -----------------      ------------------Operating Revenues:     Electric                                                           $474,319                $886,696     Gas                                                                  91,778                  72,798     Other                                                                   802                  19,487                                                                -----------------      ------------------          Total operating revenues                                       566,899                 978,981                                                                -----------------      ------------------Operating Expenses:Energy costs:     Purchased electricity                                               261,148                 660,249     Purchased gas                                                        50,976                  35,885     Electric generation fuel                                             67,949                  55,381     Residential Exchange                                                (19,270)                 (7,983)Utility operations and maintenance                                        64,213                  55,947Other operations and maintenance                                           1,423                  19,393Depreciation and amortization                                             52,060                  49,677Conservation amortization                                                  1,440                   1,188FAS-133 unrealized (gain) loss on derivative instruments                     567                       -Taxes other than federal income taxes                                     38,671                  42,556Federal income taxes                                                       5,362                   9,090                                                                -----------------      ------------------          Total operating expenses                                       524,539                 921,383                                                                -----------------      ------------------Operating Income                                                          42,360                  57,598Other Income                                                               8,885                   5,273                                                                -----------------      ------------------Income Before Interest Charges                                            51,245                  62,871Interest Charges, Net of AFUDC                                            45,771                  43,876                                                                -----------------      ------------------Net Income                                                                 5,474                  18,995Less:  Preferred Stock Dividends Accrual                                   2,085                   2,229                                                                -----------------      ------------------Income for Common Stock                                                   $3,389                 $16,766                                                                =================      ==================                    The accompanying notes are an integral part of the financial statements.   PUGET SOUND ENERGY, INC.                                              CONSOLIDATED STATEMENTS OF INCOME                                           For the Nine Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                 2001                    2000                                                                  --------------------      ------------------Operating Revenues:     Electric                                                              $1,959,020              $1,762,543     Gas                                                                      559,061                 376,284     Other                                                                     30,092                  26,177                                                                  --------------------      ------------------          Total operating revenues                                          2,548,173               2,165,004                                                                  --------------------      ------------------Operating Expenses:Energy costs:     Purchased electricity                                                  1,186,641               1,094,557     Purchased gas                                                            371,769                 190,273     Electric generation fuel                                                 233,467                 106,034     Residential Exchange                                                     (46,315)                (29,255)Utility operations and maintenance                                            190,806                 169,192Other operations and maintenance                                                8,042                  27,213Depreciation and amortization                                                 155,063                 144,878Conservation amortization                                                       4,645                   5,187FAS-133 unrealized (gain) loss on derivative instruments                      (14,494)                      -Taxes other than federal income taxes                                         154,057                 144,984Federal income taxes                                                           70,394                  75,339                                                                  --------------------      ------------------          Total operating expenses                                          2,314,075               1,928,402                                                                  --------------------      ------------------Operating Income                                                              234,098                 236,602Other Income                                                                   14,214                  16,541                                                                  --------------------      ------------------Income Before Interest Charges                                                248,312                 253,143Interest Charges, Net of AFUDC                                                137,936                 128,587                                                                  --------------------      ------------------Income Before Cumulative Effect of Accounting Change                          110,376                 124,556Cumulative Effect of Implementation of FAS-133 Derivative   Instruments and Hedging Activities (net of tax)                             14,749                       -                                                                  --------------------      ------------------Net Income                                                                     95,627                 124,556Less:  Preferred Stock Dividends Accrual                                        6,328                   6,761                                                                  --------------------      ------------------Income for Common Stock                                                       $89,299                $117,795                                                                  ====================      ==================                    The accompanying notes are an integral part of the financial statements.PUGET SOUND ENERGY, INC.                                       CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                           For the Three Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                   2001                    2000                                                                      -----------------       ------------------Net Income                                                                       $5,474                 $18,995                                                                      -----------------       ------------------Other comprehensive income, net of tax:     Unrealized holding losses arising during the period                         (1,762)                 (1,053)     Reclassification adjustment for gains included in net income                    (5)                      -     FAS-133 unrealized losses during the period                                (31,863)                      -     Reversal of FAS-133 unrealized gains settled during the period              (4,481)                      -                                                                      -----------------       ------------------        Other comprehensive income (loss)                                       (38,111)                 (1,053)                                                                      -----------------        -----------------Comprehensive Income (Loss)                                                    $(32,637)                $17,942                                                                      ===================      =================                                                  PUGET SOUND ENERGY, INC.                                       CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                           For the Nine Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                                   2001                    2000                                                                      -----------------       ------------------Net Income                                                                      $95,627                $124,556                                                                      -----------------       ------------------Other comprehensive income, net of tax:     Unrealized holding gains (losses) arising during the period                 (3,169)                  1,212     Reclassification adjustment for gains included in net income                    (5)                 (3,160)     FAS-133 transition adjustment                                              286,928                       -     FAS-133 unrealized losses during the period                               (181,241)                      -     Reversal of FAS-133 unrealized gains settled during the period            (147,816)                      -                                                                      ------------------      ------------------         Other comprehensive income (loss)                                      (45,303)                 (1,948                                                                      -------------------     ------------------Comprehensive Income                                                            $50,324                $122,608                                                                      ===================     ==================                          The accompanying notes are an integral part of the financial statements. PUGET SOUND ENERGY, INC.                                                 CONSOLIDATED BALANCE SHEETS                                                   (Dollars in Thousands)                                                         (Unaudited)                                                           ASSETS                                                                              September 30,              December 31,                                                                              -------------              ------------                                                                                       2001                      2000                                                                                       ----                      ----Utility Plant: (at original cost, including construction work in progress of$130,913 and $164,221 respectively)     Electric                                                                    $4,140,900                $4,054,551     Gas                                                                          1,520,254                 1,459,488     Common                                                                         361,541                   351,051     Less:  Accumulated depreciation and amortization                            (2,150,690)               (2,026,681)                                                                             ----------------    ----------------------          Net utility plant                                                       3,872,005                 3,838,409                                                                             ---------------     ---------------------Other Property and Investments                                                      146,572                   292,297                                                                             ---------------     ---------------------Current Assets:     Cash                                                                           100,013                    36,383     Accounts receivable, net                                                       180,807                   343,108     Unbilled revenue                                                                71,576                   211,784     Materials and supplies, at average cost                                        104,910                    99,001     Purchased gas receivable                                                       113,255                    96,050     Current portion of FAS-133 unrealized gain                                      19,569                         -     Prepayments and other                                                           15,222                    11,607                                                                             ---------------     ---------------------          Total current assets                                                      605,352                   797,933                                                                             ---------------     ---------------------Long-Term Assets:     Regulatory asset for deferred income taxes                                     188,143                   207,350     Regulatory asset for PURPA buyout costs                                        244,181                   243,071     FAS-133 unrealized gain                                                          8,558                         -     Other                                                                          229,746                   177,609                                                                             ---------------     ---------------------          Total long-term assets                                                    670,628                   628,030                                                                             ---------------     ---------------------Total Assets                                                                     $5,294,557                $5,556,669                                                                             ===============     =====================                          The accompanying notes are an integral part of the financial statements.                                                   PUGET SOUND ENERGY, INC.                                                 CONSOLIDATED BALANCE SHEETS                                                   (Dollars in Thousands)                                                         (Unaudited)                                               CAPITALIZATION AND LIABILITIES                                                                       September 30,               December 31,                                                                       -------------               ------------                                                                                2001                      2000                                                                                ----                      ----Capitalization:    Common shareholders' investment:       Common stock, $10 stated value,       150,000,000 shares authorized,       85,903,791 shares outstanding                                        $859,038                   $859,038    Additional paid-in capital                                               382,591                    470,179    Earnings reinvested in the business                                       82,153                     92,673    Accumulated other comprehensive income (loss)                            (40,553)                     4,750    Preferred stock not subject to      mandatory redemption                                                    60,000                     60,000    Preferred stock subject to      mandatory redemption                                                    50,662                     58,162    Corporation obligated, mandatorily redeemable      preferred securities of subsidiary      trust holding solely junior subordinated      debentures of the corporation                                          300,000                    100,000    Long-term debt                                                         2,083,191                  2,170,797                                                                   ------------------      ---------------------           Total capitalization                                            3,777,082                  3,815,599                                                                   ------------------      ---------------------Current Liabilities:    Accounts payable                                                         143,204                    410,619    Short-term debt                                                          301,571                    378,316    Current maturities of long-term debt                                      92,000                     19,000    Accrued expenses:      Taxes                                                                   63,647                    103,996      Salaries and wages                                                      14,426                     17,445      Interest                                                                55,261                     43,955    Current portion of FAS-133 unrealized loss                                60,909                          -    Other                                                                     20,005                     26,685                                                                   ------------------      ---------------------          Total current liabilities                                          751,023                  1,000,016                                                                   ------------------      ---------------------Deferred Income Taxes                                                        600,589                    608,185                                                                   ------------------      ---------------------Other Deferred Credits                                                       159,296                    132,869                                                                   ------------------      ---------------------FAS-133 Unrealized Loss                                                        6,567                          -                                                                   ------------------      ---------------------Total Capitalization and Liabilities                                      $5,294,557                 $5,556,669                                                                   ==================      =====================                          The accompanying notes are an integral part of the financial statements.   PUGET SOUND ENERGY, INC.                                            CONSOLIDATED STATEMENTS OF CASH FLOWS                                           For the Nine Months Ended September 30                                                   (Dollars in Thousands)                                                         (Unaudited)                                                                              2001                  2000                                                                              ----                  ----Operating Activities:---------------------Net Income                                                                 $95,627              $124,556Adjustments to reconcile net income  to net cash provided by operating activities:     Depreciation and amortization                                         155,063               144,878     Deferred income taxes and tax credits - net                            11,611                (4,173)     Gain from sale of securities                                                -                (6,476)     Other                                                                  19,512                24,704     Change in certain current assets and current liabilities (Note 4)     (48,378)              (15,766)---------------------------------------------------------------------------------------------------------          Net Cash Provided by Operating Activities                        233,435               267,723---------------------------------------------------------------------------------------------------------Investing Activities:---------------------     Construction expenditures - excluding equity AFUDC                   (194,883)             (223,153)     Additions to energy conservation program                               (6,241)               (4,325)     Acquisitions by InfrastruX                                                  -               (80,587)     Proceeds from sale of Centralia Plant                                       -                30,128     Proceeds from sale of investment in Cabot stock                             -                51,463     Repayment from/(Loan to) Schlumberger RMS                              51,948                (1,325)     Proceeds from sale of securities                                            -                 6,757     Other                                                                 (10,382)               (7,452)----------------------------------------------------------------------------------------------------------          Net Cash Used by Investing Activities                           (159,558)             (228,494)----------------------------------------------------------------------------------------------------------Financing Activities:---------------------     Change in short-term debt - net                                       (75,442)              (59,702)     Dividends paid                                                       (106,147)             (107,764)     Issuance of trust preferred stock                                     200,000                     -     Redemption of preferred stock                                          (7,500)               (7,501)     Issuance of bonds                                                           -               250,000     Redemption of bonds and notes                                         (14,619)             (140,980)     Other                                                                  (6,539)               (1,709)----------------------------------------------------------------------------------------------------------          Net Cash Used by Financing Activities                            (10,247)              (67,656)----------------------------------------------------------------------------------------------------------Net Increase (Decrease) in Cash                                             63,630               (28,427)Cash at Beginning of Year                                                   36,383                65,707---------------------------------------------------------------------------------------------------------Cash at End of Period                                                     $100,013               $37,280=========================================================================================================                          The accompanying notes are an integral part of the financial statements.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) General
     On   January  1,  2001,  PSEreorganized into a holding company structure.  This  reorganization  resulted inthe  creation  of  a  new  holding  company,  Puget  Energy.  Puget  Energy  wasincorporated  in the State of Washington and all of its operations are conductedthrough its subsidiaries.
     Pursuant      to     thereorganization, Puget Energy became the owner of all of PSE's outstanding commonstock.  Holders  of PSE's  existing  common  stock  exchanged  their  stock on aone-for-one  basis for common  stock of Puget  Energy.  Puget Energy is a publicutility holding company under the Public Utility Holding Company Act of 1935 butis exempt from registration under such Act.
(2) Summary ofConsolidation Policy
     The  consolidated  financial     statements  of Puget  Energy  include the  accounts of Puget Energy and itssubsidiaries, including PSE. PSE's consolidated financial statements include theaccounts of PSE and its subsidiaries.  The consolidated financial statements arepresented  after   elimination  of  all  significant   intercompany   items  andtransactions.  Certain  amounts  previously  reported have been  reclassified toconform with current  year  presentations  with no effect on total equity or netincome.

       The consolidated financialstatements contained in this Form 10-Q are unaudited. In the respective opinionsof the managements of Puget Energy and PSE, all adjustments necessary for a fairpresentation of the results for the interim periods have been reflected and wereof a normal recurring  nature.  These condensed  financial  statements should beread in conjunction  with the audited  financial  statements (and Notes thereto)included in the combined Puget Energy and PSE annual report on Form 10-K for theyear ended December 31, 2000.
(3) Earningsper Common Share
           Puget  Energy's  basicearnings per common share have been computed  based on weighted  average  commonshares  outstanding  of 86,571,000  and 86,303,000 for the three and nine monthsended  September 30, 2001 and  85,502,000  and 85,289,000 for the three and ninemonths ended September 30, 2000.
        Puget   Energy's  dilutedearnings per common share have been computed  based on weighted  average  commonshares  outstanding  of 86,995,000  and 86,717,000 for the three and nine monthsended  September 30, 2001,  and of 85,700,000  and  85,483,000 for the three andnine months ended  September 30, 2000,  respectively.  These shares  include thedilutive effect of securities related to employee and director equity plans.(4)Consolidated Statements of Cash Flows       The following provides additional information concerning cash flow activities:PUGET ENERGYNine Months Ended September 30                                                    2001                 2000------------------------------                                                    ----                 ----Changes in current assets and current liabilities, net of effects ofacquisitions by InfrastruX:  Accounts receivable and unbilled revenue                                    $271,004               $9,974  Materials and supplies                                                        (9,149)             (21,780)  Prepayments and other                                                         (7,406)              (6,460)  FAS-133 unrealized gain                                                       (2,781)                   -  Purchased gas receivable                                                     (17,205)              (9,170)  Accounts payable                                                            (264,423)              14,041  Accrued expenses and other                                                   (20,056)              (2,371)-------------------------------------------------------------------------------------------------------------Net change in current assets and current liabilities                          $(50,016)            $(15,766)===================================================================== ================== ====================Cash payments:  Interest (net of capitalized interest)                                      $128,961             $135,284  Income taxes                                                                 $62,900              $77,100-------------------------------------------------------------------------- ------------ --------------------PUGET SOUND ENERGYNine Months Ended September 30                                                    2001                 2000------------------------------                                                    ----                 ----Changes in current assets and current liabilities:  Accounts receivable and unbilled revenue                                    $278,366               $9,974  Materials and supplies                                                       (11,131)             (21,780)  Prepayments and other                                                         (5,308)              (6,460)  FAS-133 unrealized gain                                                       (2,781)                   -  Purchased gas receivable                                                     (17,205)              (9,170)  Accounts payable                                                            (256,494)              14,041  Accrued expenses and other                                                   (33,825)              (2,371)-------------------------------------------------------------------------------------------------------------Net change in current assets and current liabilities                          $(48,378)            $(15,766)====================================================================== ================= ====================Cash payments:  Interest (net of capitalized interest)                                      $126,448             $135,284  Income taxes                                                                 $61,445              $77,100-------------------------------------------------------------------------- ------------ --------------------(5) SegmentInformation
     The    Company    operatesprimarily in the Regulated Utility  Operations  business segment.  The Company'sregulated  utility  operation  generates,  purchases and sells  electricity  andpurchases,  transports  and sells natural gas. The Company's  service  territorycovers approximately 6,000 square miles in the State of Washington.
       The  other business segmentis non-utility lines of business which include specialized  contracting servicesto  utilities  (See Note 7) and real  estate  investment  and  development.  TheCompany is  continuing to grow the  specialized  contracting  services  businessthrough  acquisitions.  The assets of ConneXt,  the development and marketing ofcustomer  information and billing system software segment,  were sold during thethird quarter of 2001.  The third  quarter  results of 2001 include $8.0 millionafter-tax gain related to the ConneXt sale.  Reconciling  items between segmentsare not material.       Financial data for business segments are as follows:  (Dollars in Thousands)                                  Regulated         Three Months Ended September 30, 2001              Utility          Other              Total------------------------------------------------------------------------------------------------------  Revenues                                                 $566,097        $53,573           $619,670  Net Income                                                 (3,207)        10,016              6,809  Total Assets                                            5,144,140        359,568          5,503,708------------------------------------------------------------------------------------------------------                                                          Regulated         Three Months Ended September 30, 2000              Utility          Other              Total------------------------------------------------------------------------------------------------------  Revenues                                                 $959,494        $19,487           $978,981  Net Income                                                 20,233         (1,238)            18,995  Total Assets                                            4,988,882        235,694          5,224,576------------------------------------------------------------------------------------------------------  (Dollars in Thousands)                                  Regulated          Nine Months Ended September 30, 2001              Utility          Other              Total------------------------------------------------------------------------------------------------------  Revenues                                               $2,518,081       $156,872         $2,674,953  Net Income                                                 72,168         26,404             98,572  Total Assets                                            5,144,140        359,568          5,503,708------------------------------------------------------------------------------------------------------                                                          Regulated          Nine Months Ended September 30, 2000              Utility          Other              Total------------------------------------------------------------------------------------------------------  Revenues                                               $2,138,827        $26,177         $2,165,004  Net Income                                                123,704            852            124,556  Total Assets                                            4,988,882        235,694          5,224,576------------------------------------------------------------------------------------------------------(6) Accountingfor Derivative Instruments and Hedging Activities
     On  January 1,  2001,  PugetEnergy  adopted   Financial   Accounting   Standards  Board  Statement  No.  133"Accounting for Derivative  Instruments and Hedging Activities"  ("Statement No.133"),  as amended by Statement  No. 138.  Statement  No. 133 requires  that allderivative  instruments  be recorded  on the balance  sheet at their fair value.Puget Energy  enters into both  physical and  financial  contracts to manage itsenergy  resource  portfolio.  Certain  of  these  contracts  met the  derivativeclassification  requirements  of the statement and are reported at fair value onthe balance  sheet.  Beginning  with the  implementation  of Statement  No. 133,changes in the fair value of  derivatives  are  recorded  each period in currentearnings or other  comprehensive  income,  depending on whether a derivative  isdesignated as a qualifying  cash flow hedge under the  statement.  For the threemonth period ended September 30, 2001, Puget Energy recorded  approximately $0.6million pre-tax ($0.4 million  after-tax)  decrease to current earnings.  Due toa slight difference between forecasted and actual electric generation, PSE hasincluded in income  approximately $2.7 million of amounts previously included inother comprehensive income.
     For  the nine  months  endedSeptember 30, 2001, Puget Energy recognized the cumulative effect of this changein accounting  principle by recording an after-tax  decrease to current earningsof approximately $14.7 million. In addition, Puget Energy recorded approximately$14.5 million pre-tax ($9.4 million after-tax)  increase to current earnings forthe nine month  period  related to the  mark-to-market  of  electric  derivativetransactions and reversal of settled  contracts.  When the underlying  contractsgiving rise to the income statement gains are fulfilled over the next 12 months,the assets (included in other property and investments and current assets on thebalance sheets) established under Statement No. 133 will be reversed.
       For the three month periodended   September  30,  2001,   Puget  Energy   recorded  a  decrease  in  othercomprehensive income for electric energy contracts designated as qualifying cashflow hedges of  approximately  $36.3  million  after-tax for the change in theirmarket value. Puget Energy anticipates  approximately  $44.1 million of net lossrecorded in other  comprehensive  income at September 30, 2001 will reverse overthe following twelve months as the underlying contracts are settled and will, asa result, report a corresponding  decrease to current assets and liabilities andan increase to other comprehensive income for this reversal. The decrease in thecurrent assets and  liabilities  and an increase to other  comprehensive  incomewill have no net  effect on current  earnings  and the  economic  effects of thetransactions  will be recorded upon  settlement.  These estimates are based uponthe forward  market  prices for energy at  September  30,  2001.  Changes in themarket value of derivative  transactions  related to the retail gas business aredeferred under Puget Energy's Purchased Gas Adjustment mechanism and recorded inearnings as the transactions are executed under the PGA Incentive Mechanism.
       For the nine months  endedSeptember  30,  2001,  Puget Energy  recorded a net loss to other  comprehensiveincome of approximately  $42.1 million after-tax and with offsetting  entries toassets and  liabilities.  As contracts are settled,  the assets and  liabilitieswill  decrease  and  a   corresponding   amount  will  be  reversed  from  othercomprehensive income.
       In June 2001, the FinancialAccounting  Standards Board's Derivative  Implementation Group for Statement No.133 issued  guidance  under Issue No. C15 - "Normal  Purchase  and Normal  SalesException for Option-Type  Contracts and Forward  Contracts in Electricity" thatwould allow certain  purchase  power and sales  agreements,  including  capacitycontracts,  to be exempt under the normal purchase and normal sales exemption ofStatement No. 133  beginning in the third  quarter of 2001. If a contract  meetsthe criteria for normal purchase and normal sales  exemption,  then the contractis not  marked-to-market in current earnings or other comprehensive  income. PSEimplemented  Issue No. C15  effective  July 1,  2001.  The  previously  recordedamounts in other  comprehensive  income at June 30, 2001,  relating to contractsthat  meet the  requirements  of Issue  No.  C15  will  now be  reversed  as thecontracts settle per the provisions of Statement No. 133 and subsequent  changesin market value will not be recorded. For those contracts that meet the criteriaof Issue No. C15 that are entered into after June 30,  2001,  PSE will no longermark-to-market their changes.
     In    October   2001,   the     Financial Accounting Standards Board's Derivative  Implementation Group forStatement  No. 133 issued  tentative  guidance  under Issue C16 - "Applying  theNormal  Purchases and Normal Sales Exception to Contracts that Combine a ForwardContract and a Purchased Option Contract".  Issue C16 indicates that fuel supplycontracts that combine a forward  contract and a purchased option cannot qualifyfor the normal  purchase and normal sales  exception  because of the optionalityregarding the quantity of fuel to be delivered under the contract.  Issue C16 iseffective  April 1, 2002 for PSE. As a result,  these contracts will be requiredto be marked-to-market  through earnings.  PSE will be reviewing its fuel supplycontracts  to  determine  which will no longer  qualify as normal  purchase  andnormal sales contracts.(7)Acquisitions
     During  the third quarter of2000, InfrastruX Group Inc.  ("InfrastruX"),  a wholly-owned subsidiary of PugetEnergy,  acquired two utility infrastructure  construction companies for a totalprice of $87.7  million.  During  the  first  nine  months  of 2001,  InfrastruXacquired five additional companies for a total price of $71.4 million.
       The acquisitions have beenaccounted for using the purchase  method of  accounting  and,  accordingly,  theoperating  results  of these  companies  have been  included  in Puget  Energy'sconsolidated  financial  statements  since  their  acquisition  dates.  Goodwillrepresenting  the  excess  of  cost  over  the  net  tangible  and  identifiableintangible assets of the business was approximately $89.1 million at the time ofpurchase.  During 2001,  goodwill is being  amortized on a  straight-line  basisusing a 30-year life except for goodwill on  acquisitions  occurring  after June30, 2001, which is not amortized per Statement of Financial Accounting StandardsNo. 142 - "Goodwill and Other Intangible Assets" ("Statement No. 142"). With theimplementation  of  Statement  No.  142  in  January  2002,  Puget  Energy  willdiscontinue  amortizing all goodwill and, instead,  perform  impairment tests todetermine if goodwill  should be  written-down.  Goodwill  amortization  for thethree and nine  months  ended  September  30,  2001 were $0.6  million  and $1.7million,  respectively,  compared to $0.5  million for the three and nine monthsended  September 30, 2000.  The pro forma  combined  revenues,  net income,  andearnings  per common share of Puget  Energy  presented  below give effect to theacquisitions  as if they had occurred on January 1, 2000.  These results are notnecessarily indicative of the results of operations that would have occurred hadthe  acquisitions of these  companies been  consummated for the period for whichthey are being given effect.Unaudited  (Thousands, except per share amounts)    For the three months ended:                September 30, 2001         September 30, 2000---------------------------------------------------------------------------------------------  Operating Revenues                                    $ 626,206                $ 1,022,480  Net Income For Common Stock                               4,895                     16,743  Basic Earnings per Common Share                        $   0.06                   $   0.20  Diluted Earnings per Common Share                      $   0.06                   $   0.20Unaudited  (Thousands, except per share amounts)    For the nine months ended:                 September 30, 2001         September 30, 2000---------------------------------------------------------------------------------------------  Operating Revenues                                  $ 2,710,709                $ 2,323,198  Net Income For Common Stock                              92,829                    121,995  Basic Earnings per Common Share                        $   1.08                   $   1.43  Diluted Earnings per Common Share                      $   1.07                   $   1.43(8)     Other
     In  October 2000, PSE filed ashelf-registration statement with the Securities and Exchange Commission for theoffering,  on a delayed or  continuous  basis,  of up to $500 million  principalamount of Senior Notes secured by a pledge of First Mortgage Bonds, SubordinatedDebentures or Trust Preferred  Securities.  On November 9, 2000, PSE issued $260million principal amount of 7.69% Senior Medium-Term Notes,  Series C. The Notesare due  February 1, 2011.  On May 24, 2001,  PSE issued $200 million  principalamount of 8.40% Trust Preferred Securities.  The Trust Preferred Securities havea maturity date of June 30, 2041.
       In  June 2001,  InfrastruXsigned a credit  agreement with several banks for up to $150 million.  Under thecredit  agreement,  Puget  Energy is the  guarantor  of the line of  credit.  AtSeptember 30, 2001, InfrastruX had $70.0 million of borrowings outstanding underthe agreement  with a maturity date of June 30, 2004.  The interest rate on eachdraw from the line of credit is set at LIBOR plus 1.25%.  The  average  interestrate on the outstanding debt was 4.8% at September 30, 2001.
      In August 2001, SchlumbergerNorth America paid off their  outstanding  loan balance of $64.1 million due PSEunder  the  Schlumberger/CellNet  agreement.  The  loans  were  made  by  PSE toSchlumberger/CellNet  so  Schlumberger/CellNet  could finance an Automated MeterReading ("AMR") network system deployed in PSE's service territory.  The networksystem was used as collateral for the loan.
     In  July 2001, the FinancialAccounting  Standards Board issued  Statement No. 141 - "Business  Combinations"("Statement No. 141").  Statement No. 141  establishes  accounting and reportingstandards  for business  combinations  and  requires  all business  combinationsinitiated  after June 30, 2001 to be accounted for using the purchase  method ofaccounting.  While this  statement  may  result in  additional  disclosures  formaterial  acquisitions,  it will not impact the Company's  financial position orresults of operations.
       In July 2001, the FinancialAccounting  Standards  Board  issued  Statement  No. 142 -  "Goodwill  and OtherIntangible  Assets"  ("Statement  No.  142").   Statement  No.  142  establishesaccounting and reporting  standards for goodwill and other intangible assets forfiscal years  beginning  after  December 15, 2001  recognized  in the  Company'sfinancial  statements after this date.  Certain  provisions of Statement No. 142will be applied to goodwill and other intangible  assets acquired after June 30,2001.  Upon  adoption  of  Statement  No.  142,  the  Company  will  discontinueamortizing  goodwill  and,  instead,  perform  impairment  tests to determine ifgoodwill should be written down.
           In  August  2001,  theFinancial  Accounting Standards Board issued Statement No. 143 - "Accounting forAsset Retirement Obligations"  ("Statement No. 143"). Statement No. 143 requirescompanies  to  record  the fair  value of a  liability  for an asset  retirementobligation in the period in which the obligation is incurred. When the liabilityis  initially  recorded,  the company  will  capitalize  the cost as part of theasset's  carrying amount and expense the retirement  obligation over the asset'suseful life. The adoption of this statement is for fiscal years  beginning afterJune 15, 2002,  although earlier  adoption is encouraged.  The Company is in theprocess of determining the impacts of this statement.
     In    October   2001,   theFinancial  Accounting Standards Board issued Statement No. 144 - "Accounting forthe  Impairment  or  Disposal  of  Long-Lived  Assets"  ("Statement  No.  144").Statement  No.  144  supersedes  the  Financial   Accounting  Standards  Board'sStatement 121 -  "Accounting  for the  Impairment  of Long-Lived  Assets and forLong-lived  Assets to Be Disposed Of" and establishes a single accounting methodfor valuation of long-lived assets to be disposed of by sale.  Statement No. 144is effective for fiscal years beginning after December 15, 2001. The adoption ofthis  statement  is not  expected to have an impact on the  Company's  financialposition or results of operations.Item 2. Management's  Discussion and Analysis of Financial  Conditionand              Results              of              Operations-------------------------------------------------------------------------------------     
       The following discussion ofthe  Company's   financial   condition   and  results  of  operations   containsforward-looking  statements  that  involve  risks  and  uncertainties,  such  asstatements of the Company's  plans,  objectives,  expectations  and  intentions.Words such as  "anticipate,"  "believe,"  "expect,"  "future"  and  "intend" andsimilar expressions are used to identify  forward-looking  statements.  However,these words are not the  exclusive  means of  identifying  such  statements.  Inaddition,  any  statements  that  refer to  expectations,  projections  or othercharacterizations   of  future  events  or  circumstances  are   forward-lookingstatements.  The Company's  actual  results could differ  materially  from thoseanticipated in these forward-looking  statements for many reasons, including thefactors   described   below   and  under  the   caption   "Statement   RegardingForward-Looking  Statements"  at the end of Item 3. You should  not place  unduereliance on these forward-looking statements, which apply only as of the date ofthis Form 10-Q. Resultsof Operations
       Puget  Energy's net incomefor the three  months  ended  September  30, 2001 was $6.8  million on operatingrevenues  of  $619.7  million,  compared  with net  income of $19.0  million  onoperating  revenues of $979.0  million  for the same period in 2000.  Income forcommon  stock was $4.7 million for the third  quarter of 2001  compared to $16.8million for the third quarter of 2000.  Basic  earnings per share were $0.06 forthe third  quarter  of 2001  compared  to $0.20 for the third  quarter  of 2000.Diluted  earnings per share were $0.05 for the third quarter of 2001 compared to$0.20 for the third quarter of 2000.
     For  the first nine months of2001, Puget Energy's net income was $98.6 million on operating  revenues of $2.7billion,  compared  with net income of $124.6  million on operating  revenues of$2.2 billion for the  corresponding  period in 2000. Income for common stock was$92.2 million for the nine months ended  September  30, 2001 and $117.8  millionfor the same period in 2000.  Basic and diluted  earnings  per common share were$1.07 and $1.06 for the nine months  ended  September  30,  2001,  and $1.38 and$1.38, respectively, for the same period in 2000.
     Total  kilowatt-hour electricsales were 6.5 billion,  including  2.2 billion in sales to other  utilities andmarketers,  for the third quarter of 2001,  compared to 10.3 billion,  including5.5 billion in sales to other utilities and marketers,  for the third quarter of2000.  For the nine month  periods  ended  September  30,  2001 and 2000,  totalkilowatt-hour  sales were 20.7 billion,  including 6.0 billion in sales to otherutilities and  marketers,  and 26.5 billion,  including 10.7 billion in sales toother utilities and marketers, respectively.
         Total gas  volumes  were132.4 million therms,  including 45.1 million therms in  transportation  volumesfor the three months ended September 30, 2001, compared to 136.2 million therms,including  46.7 million therms of  transportation,  for the same period in 2000.For the nine months  ended  September  30,  2001,  total gas volumes  were 706.6million therms,  including 138.2 million therms of  transportation,  compared to742.8 million therms, including 154.7 million therms of transportation,  for thesame period in 2000.
         PSE's operating  revenuesand associated expenses are not generated evenly during the year.  Variations inenergy usage by consumers do occur from season to season and from month to monthwithin a season,  primarily  as a result of  weather  conditions.  PSE  normallyexperiences  its highest retail energy sales in the first and fourth quarters ofthe year.  Varying  wholesale  electric  prices and the amount of  hydroelectricenergy  supplies  available  to PSE  also  make  quarter-to-quarter  comparisonsdifficult.
         PSE meets its forecastedelectric supply needs throughout the year through PSE-owned electric  generationand by  obtaining  power  through  long-term  contracts,  annual  contracts  andshort-term markets. PSE meets its forecasted natural gas supply needs throughoutthe year through  PSE-owned gas storage and by purchasing  gas supplies  throughlong-term contracts,  annual contracts and short-term markets. PSE also performsrisk  management   activities  to  optimize  the  value  of  energy  supply  andtransmission  assets and to ensure that  physical  energy supply is available tomeet the customer  demand loads.  PSE also purchases  energy when demand exceedsavailable supplies in its portfolio; likewise PSE makes sales to other utilitiesand marketers when surplus energy is available.  These  transactions are part ofPSE's normal  operations to meet retail load.  Electric sales to other utilitiesand  marketers  vary by  quarter  and  year  depending  principally  upon  waterconditions for the generation of hydroelectric power, retail customer usage, theenergy  requirements  of other  utilities  and energy  market  conditions in thePacific  Northwest.  For  the  nine  months  ended  September  30,  2001,  PSE'sgeneration and energy delivered  contracts for  hydroelectric  energy was 36% or2,122,000  mWhs  below  normal  due  to  drought  conditions.   A  shortfall  inhydroelectric energy production increases electric generation fuel and operatingexpenses and purchased electricity expenses.
         Beginning  in the secondhalf of 2000, the West Coast wholesale energy market began  experiencing  energyprices that greatly exceeded  historical  norms,  reflecting  unfavorable  hydroconditions and increased consumer demand in California,  among other factors. Asa result,  certain of PSE's industrial  index-rate  electric  customers  reducedtheir  usage due to these high  prices.  Other  customers'  usage in general hasdeclined slightly due to energy conservation measures by PSE's customers. To theextent electric retail load is reduced,  PSE, when in a surplus power situation,has more  power to sell into the  wholesale  market  or when in a deficit  powersituation,  has to  purchase  less  power in the  wholesale  market  to meet itselectric retail load.
         On June 19,  2001,  FERCimplemented  price  controls on  wholesale  electricity  in the western  states.Several factors,  including the price controls, have contributed to the dramaticdecline in wholesale  electric  prices by the end of the second  quarter of 2001and,  therefore,  have greatly  diminished  the value of PSE's  excess  electricenergy during that period and into the foreseeable future. PSE and other westernutilities have filed an appeal asking FERC to review its June 19, 2001 order andmake  modifications  to the price  controls  to  stabilize  wholesale  prices inCalifornia and prevent the energy problems from spreading to other states.
          Temperatures  based  onheating-degree-days measured at Seattle-Tacoma airport during the three and ninemonth  periods  ended  September  30,  2001 were near  normal and 4% cooler thannormal, respectively.                                             Results of Operations of Puget Energy                                           Comparative Three and Nine Months Ended                                          September 30, 2001 vs. September 30, 2000                                                     Increase (Decrease)                                                       Three Month Period            Nine Month Period                                                       -----------------            -----------------                                                                    (Dollars in Millions)Operating revenue changes: General rate increases                                          $2.2                         $9.3 BPA Residential Purchase & Sale Agreement                        1.6                          5.5 Electric sales to other utilities and marketers               (303.3)                       213.7 Electric revenue sold at index rates                           (57.9)                        36.9 Electric revenue sold to conservation trust                      1.4                          2.0 Electric conservation incentive credit                          (9.9)                       (13.4) Electric load and other                                        (46.5)                       (57.5) Gas revenue                                                     19.0                        182.8 InfrastruX revenue                                              36.5                        110.5 Other revenue                                                   (2.4)                        20.1                                                            -----------                -----------     Total operating revenue change                            (359.3)                       509.9Operating expense changes: Energy costs:     Purchased electricity                                    (399.1)                        92.1     Purchased gas                                              15.1                        181.5     Electric generation fuel                                   12.6                        127.4     Residential exchange credit                               (11.3)                       (17.1) Utility operations and maintenance                              8.3                         21.6 InfrastruX operations and maintenance                          30.9                         95.8 Other operations and maintenance                               (2.4)                        (3.5) Depreciation and amortization                                   4.5                         15.4 Conservation amortization                                        .2                          (.5) FAS-133 unrealized (gain) loss                                   .6                        (14.5) Taxes other than federal income taxes                          (3.9)                         9.1 Federal income taxes                                           (3.0)                        (3.1)                                                           -----------                 -----------     Total operating expense change                           (347.5)                       504.2                                                           -----------                 -----------Other income (net of tax) change                                 2.6                         (5.1)Interest charges                                                 3.0                         11.9FAS-133 transition adjustment loss (net of tax)                    -                         14.7                                                           -----------                 -----------     Net income change                                        $(12.2)                      $(26.0)                                                           ===========                 ===========
The following is additionalinformation pertaining to the changes outlined in the above table. 
OperatingRevenues - Electric
         Electric revenues for thethree months ended September 30, 2001 were $474.3 million,  a decrease of $412.4million  compared to the same period in 2000.  Electric sales to other utilitiesand marketers in the western wholesale market,  including the Pacific Northwest,decreased  $303.3 million in the three months ended  September 30, 2001 comparedto the same period in 2000 due to decreased prices in the wholesale  electricitymarket,  while wholesale  sales volumes  declined by 3.4 billion kWh or 61.1% inthe three months ended  September  30, 2001 compared to the same period in 2000.Retail sales  volumes  declined 8.9% from 4.8 billion kWh in 2000 to 4.4 billionkWh in 2001.  Retail sales  revenue  decreased  25.3% as a result of lower ratespaid by  industrial  customers  on market  index  rates and  several  index ratecustomers  switching to  transportation  rate tariffs  beginning in July 2001 asallowed by a Washington  Commission  order dated April 5, 2001  authorizing  theestablishment of a transportation tariff.

         Electric revenues for thenine months ended September 30, 2001,  were $2.0 billion,  an increase of $196.5million or 11.1% over the same period in 2000. Electric sales to other utilitiesand marketers in the western market, including the Pacific Northwest,  increased$213.7 million in the nine months ended  September 30, 2001 compared to the sameperiod in 2000 due to increased prices in the wholesale electricity market whilewholesale  sales  volumes  declined  by 4.7  billion kWh or 44.0% as compared to2000.  Retail sales volumes  declined 7.0% from 15.8 billion kWh in 2000 to 14.7billion kWh in 2001.  Retail  sales  revenue  increased  slightly as a result ofhigher  rates paid by  industrial  customers  on market  index rate  tariffs andcontracts  offset by those customers  switching to  transportation  rate tariffsbeginning  in July 2001.  A 1.7%  increase in the number of  electric  customersserved also contributed to the increase in revenue.

         Electric  revenues in thethird  quarter of 2001  decreased  significantly  compared  to that of the thirdquarter of 2000 due to decreased  prices  related to wholesale  electric  energysales to other  utilities and  marketers and sales to customers  whose rates aretied to a market index.  Several  factors,  including the near  historically lowhydroelectric  conditions in the Pacific  Northwest  and the increased  consumerdemand in  California  had raised  wholesale  market prices on the West Coast tounprecedented  levels beginning in May 2000. Since June 2001, wholesale electricenergy prices have dramatically  declined due to several factors.  PSE continuesto operate without an electric rate adjustment mechanism.

         Electric  revenues  were     reduced by  approximately  $9.9 million and $13.4 million for the three andnine  months  ended  September  30,  2001,  respectively,  related to a customerconservation incentive credit which was approved by the Washington Commission onApril 25, 2001. The conservation incentive credit was to reduce customers' billsby $0.05 per kWh for each kWh  reduction  in excess of 10% from the same billingperiod in the prior year through  December 31,  2001.  On November 7, 2001,  theWashington  Commission  approved  PSE's  request to terminate  the  conservationincentive credit program effective November 8, 2001.     
         On April 25,  2001,  theWashington  Commission approved  "time-of-day"  rates for approximately  300,000residential  electric customers for the period May 1, 2001 through September 30,2001. On September 26, 2001, the Washington  Commission authorized the extensionof the "time-of-day"  rates pilot program for residential  customers through May31, 2002 and to allow approximately  20,000 business customers to participate ina "time-of-day"  rates program from October 1, 2001 through  September 30, 2002.In the order, if the cumulative revenues collected under  "time-of-day"  tariffsduring the  beginning  through the end of the programs  exceed the revenues thatwould  have  been  collected  under the  original  tariffs,  PSE must  defer anyovercollection and refund it to participating  customers.  Through September 30,2001,  revenues  billed under the  "time-of-day"  tariff have been slightly lessthan original tariffs by an immaterial  amount,  thus no deferred  liability wasestablished  at September 30, 2001.  Personal  Energy  ManagementTM  consumptioninformation  is available  to all classes of  customers.  Customers  are able tomonitor their energy usage and shift usage to low-demand off-peak periods.  Thisprogram reduces the demand for peak power generation.

         Revenues  from  electriccustomers  in the  first  nine  months  of  2001  and  2000  were  reduced  by aResidential  and Farm Energy  Exchange  credit  tariff in place since October 1,1995.  Under the rate plan approved by the  Washington  Commission in its mergerorder,  PSE  reflected in  customers'  bills the level of  Residential  Exchangebenefits in place at the time of the merger with  Washington  Energy  Company in1997. On January 29, 1997, PSE and Bonneville Power  Administration (BPA) signedan agreement under which PSE received  payments from BPA of  approximately  $235million  over an  approximately  five-year  period  that ended June 2001.  Thesepayments were recorded as a reduction of purchased electricity expenses.     
         On June  13,  2001,  theWashington   Commission  approved  an  amended  Residential  Purchase  and  SaleAgreement  between PSE and BPA,  under which  PSE's  residential  and small farmcustomers would receive benefits of federal power.  Completion of this agreementenables PSE to continue to provide,  and in fact increase,  effective January 1,2002,  the  Residential  and Farm  Energy  Exchange  credit.  Under the  amendedsettlement  agreement,  PSE will receive cash payments during the period July 1,2001  through  September  30, 2006 and benefits in the form of power and/or cashequivalent to  approximately  648 annual average MW from October 1, 2006 throughSeptember 30, 2011. The level and form of any federal benefits to be received byPSE's residential and small farm customers may vary, depending on the outcome ofregulatory and legal proceedings and reviews. For calendar 2001, the benefits ofthe Residential and Farm Energy Exchange credited to customers is anticipated tobe  approximately  $103.2  million as compared  to an  offsetting  reduction  inPurchased Electricity Expense of $72.9 million. Beginning July 1, 2001, the cashpayments received from BPA by PSE will be passed-through to eligible residentialand small farm customers,  with an offsetting reduction in Purchased ElectricityExpense recorded.  PSE expects payments from BPA spread monthly in the amount of$127.3  million for the period  January 2002 through  September  2002 and $702.2million for the period October 2002 through September 2006.
       To implement this agreementfor rate  purposes,  the  Washington  Commission  approved  tariff  revisions totransfer the Residential and Farm Energy Exchange credit in effect since October1, 1995 in the amount of 1.085 cents per kWh, to general rates effective July 1,2001.  Also approved was a  supplemental  Residential  and Farm Energy  Exchangecredit for eligible  residential and small farm customers.  This Residential andFarm Exchange Benefit Supplemental Rider will be a credit of 0.265 cents per kWhfor the period January 1, 2002 through  September 30, 2002,  0.600 cents per kWhfor the period  October 1, 2002 through May 31, 2006 and 1.050 cents per kWh forthe period June 1, 2006 through  September 30, 2006. The approval of the tariffsby the Washington Commission, effective July 1, 2001, was without predeterminingor  prejudicing  any  argument as to whether or how the terms of the  WashingtonCommission's  order dated  February 5, 1997,  regarding the merger of WashingtonNatural Gas Company  and Puget  Sound Power and Light  Company  into Puget SoundEnergy,  "have been  fulfilled,  or as of what  effective  date any  relief,  ifwarranted,  should be granted".  On October 17, 2001, the Public Counsel Sectionof the  Washington  State Attorney  General's  Office filed a complaint with theWashington Commission stating PSE has violated the Washington  Commission's 1997merger  order by  following  the  Commission's  order  issued  June 13,  2001 inconnection with the BPA Residential Exchange.  The Public Counsel's complaint isthat PSE's residential and small farm customers should receive both the benefitsof the  residential  exchange  credit in place  prior to June 30,  2001,  and inaddition,  the benefits of the amended  Residential  Purchase and Sale Agreementeffective July 1, 2001,  even though BPA is paying to PSE only the amounts underthe amended agreement.  If Public Counsel's position were upheld, PSE's electricrevenues for the last six months of 2001 would be reduced by approximately $47.9million.  While PSE believes this complaint is without  merit,  PSE is unable topredict the outcome of this proceeding.
         To meet customer demand,PSE's power supply  portfolio  includes net  purchases of power under  long-termsupply contracts.  However,  depending principally upon streamflow available forhydroelectric  generation and weather effects on customer  demand,  from time totime, PSE may have surplus power available for sale to wholesale customers.  PSEmanages its core energy portfolio through short and intermediate-term purchases,sales,  arbitrage and other risk  management  techniques.  PSE also operates itscombustion   turbine   plants   located  in  Western   Washington   when  it  iscost-effective  to do so. During the first nine months of 2001, PSE has operatedits  combustion  turbine plants  extensively  to meet retail load  requirements.PSE's Risk Management Committee oversees energy price risk matters.
         PSE operates  within thewestern  wholesale market and has made sales into the California  energy market.During the first quarter of 2001, PSE received  partial  payments for sales madein the fourth quarter of 2000. At December 31, 2000, PSE's  receivables from theCalifornia Independent System Operators (CAISO) and other  counter-parties,  netof reserves, were $41.8 million. At September 30, 2001, such receivables, net ofreserves, were approximately $26.6 million.Operating Revenues- Gas
        Gas operating revenues forthe three months ended  September  30, 2001  increased by $19.0 million from thesame period in 2000.  Total gas sales volumes  decreased 2.8% from 136.2 milliontherms in 2000 to 132.4  million  therms in 2001.  The  primary  reason  for theincrease  in gas sales  revenue  was higher  natural  gas prices that are passedthrough to customers in the Purchased  Gas  Adjustment  (PGA).  Increases in gasrates to all sales  customers  under the PGA of 30.2% and 26.4%  were  effectiveAugust 1, 2000 and January 12, 2001,  respectively.  Offsetting  this is an 8.9%decrease in gas rates under the PGA to all sales customers  effective  September1, 2001.
         For the nine months endedSeptember 30, 2001,  gas operating  revenues  increased  $182.8 million or 48.6%from $376.3  million in the nine months  ended  September  30,  2000,  to $559.1million in the nine months ended  September  30,  2001,  while total gas volumesdecreased  4.9%. The increase in revenues in the period was primarily due to nethigher natural gas rates as previously mentioned.OperatingRevenues - Other
         Other operating  revenuesfor the three and nine  months  ended  September  30,  2001  increased  by $34.1million and $130.6 million from the same periods in 2000. This increase in otheroperating  revenues was due primarily to InfrastruX,  which has acquired severalcompanies beginning in the third quarter of 2000.  InfrastruX  contributed to anincrease  of $36.5  million  and  $110.5  million  for the three and nine  monthperiods ended  September 30, 2001,  respectively,  and PSE's  subsidiary,  PugetWestern, Inc. contributed to an increase of $26.9 million from property sales inthe nine months of 2001.Operating Expenses
           Purchased  electricityexpenses  decreased $399.1 million for the three months ended September 30, 2001compared to the same  period in 2000 and  increased  $92.1  million for the ninemonths  ended  September  30,  2001  compared  to the same  period in 2000.  Thethree-month   period  decrease   reflects  the  dramatic  decline  of  wholesaleelectricity  prices since June 2001 from year-ago levels.  The nine month periodincrease was due  primarily to  increased  prices for non-firm  power from otherutilities  and  marketers in the West Coast power market during a period of nearhistoric  low  hydroelectric  conditions,  moderated by the decline of wholesaleelectricity prices from year-ago levels beginning in June 2001. In addition, PSEexperienced an 83 day unplanned outage of one of PSE's 104 MW combustion turbineelectric  generating units located at its Fredonia generating station during thefirst half of 2001.
        Purchased  gas  expensesincreased  $15.1 million and $181.5 million for the three and nine month periodsended  September 30, 2001 compared to the same periods in 2000. The increase wasdue primarily to the impact of increased gas costs,  which are passed through tocustomers through the PGA mechanism.
         Electric  generation fuelexpense  increased $12.6 million and $127.4 million for the three and nine monthperiods  ended  September  30, 2001  compared  to the same  periods in 2000 as aresult of increased  generation  and higher fuel costs at  PSE-owned  combustionturbine  facilities.  These facilities operated at much higher levels during thenine months ended  September 30, 2001 compared to the same period in 2000 due toadverse hydroelectric conditions.
         Utility  operations  andmaintenance  increased  $8.3  million  and $21.6  million for the three and ninemonth  periods  ended  September  30, 2001  compared to the same periods in 2000primarily   due  to  costs   related  to  the   Personal   Energy   ManagementTMenergy-efficiency  program,  increases  in  non-production  costs,  repair costsassociated  with the  earthquake in the Pacific  Northwest on February 28, 2001,and a net cost of $1.0  million  after  insurance  recovery of $11.8  million torepair the PSE-owned Fredonia  combustion turbine plant which was out of servicefrom February 21, 2001 through May 14, 2001. PSE has received a partial  paymentof $4.0  million  associated  with the  $11.8  million  insurance  claim  and isawaiting  payment on the remainder.  PSE's Personal  Energy  Management  programhelps to minimize  energy  purchases at peak times when electric  energy is mostcostly.
       InfrastruX's operations andmaintenance expenses for the three and nine months ended September 30, 2001 were$30.9 million and $95.8 million  higher than  comparable  periods in 2000 due tothe  activities of its  subsidiaries  that were acquired  beginning in the thirdquarter of 2000.
             Depreciation   andamortization  expense increased $4.5 million and $15.4 million for the three andnine month periods ended September 30, 2001 compared to the same periods in 2000due  primarily to the effects of new plant  placed into service  during the pastyear. Also contributing to the increase are the acquisitions by InfrastruX whichincreased depreciation and amortization by $1.5 million and $4.5 million for thethree and nine month periods, respectively.
           Financial   AccountingStandards Board Statement No. 133 ("Statement No.133") was adopted on January 1,2001.  During the three  months ended  September  30, 2001 a decrease to currentearnings of  approximately  $0.6 million  pre-tax ($0.4 million  after-tax)  wasrecognized   for  unrealized   losses   associated   with  electric   derivativetransactions during the quarter. During the nine months ended September 30, 2001an increase to current  earnings of  approximately  $14.5 million  pre-tax ($9.4million  after-tax) was recognized for unrealized gains associated with electricderivative transactions and a $14.7 million after-tax transition adjustment losswas recorded  during the nine months ended  September  30, 2001  resulting  fromrecognizing the cumulative effect of this change in accounting  principle.  (Forfurther discussion see Note 6).
         Taxes other than federalincome taxes decreased $3.9 million and increased $9.1 million for the three andnine month periods ended September 30, 2001 compared to the same periods in 2000primarily due to municipal and state excise taxes which are revenue based.Other Income
          Other  income,  net  offederal  income tax,  increased  $2.6 million and decreased $5.1 million for thethree and nine month  periods  ended  September  30,  2001  compared to the sameperiods in 2000,  due primarily to an $8 million gain from sale of the assets ofConneXt  to  Alliance  Data  Systems  offset  by  ConneXt's  operating  loss  ofapproximately  $1 million  through the date of the sale in the third  quarter of2001.  Other income also includes an increase in goodwill  amortization  expenserelated to  acquisitions  by  InfrastruX  during the three and nine months endedSeptember 30, 2001 of $0.1 million and $1.2 million, respectively.InterestCharges
         Interest  charges,  whichconsist of interest  and  amortization  on  long-term  debt and other  interest,increased  $3.0 million and $11.9  million for the three and nine month  periodsended  September  30,  2001  compared to the same  periods in 2000.  Interest onlong-term  debt  increased  $8.9 million and $22.6 million in the three and ninemonth periods ended  September 30, 2001 compared to the same period in 2000 as aresult of the issuance of $25 million 7.61% Senior Medium-Term Notes,  Series B,in September 2000, the issuance of $260 million 7.69% Senior  Medium-Term Notes,Series C, in  November  2000,  and the  issuance  of $200  million  8.40%  TrustPreferred Securities in May, 2001. Other Interest Expense decreased $5.9 millionand $10.7 million in the three and nine month  periods ended  September 30, 2001compared to the same periods in 2000 due primarily to interest offset related tothe PGA and lower interest rates on lower short term borrowing.CapitalExpenditures, Capital Resources and Liquidity
           Current   constructionexpenditures for generation,  transmission and distribution are designed to meetcontinuing customer growth and to improve  efficiencies of PSE's energy deliverysystems. Construction expenditures,  excluding equity AFUDC, were $194.9 millionfor the nine months ended  September 30, 2001 compared to $223.2 million for thesame period in 2000.  Capital  expenditures for the year are expected to be $247million.
        Puget Energy issued commonstock for the Company's  Stock Purchase and Dividend  Reinvestment  Plan of $6.4million  (265,400  shares) and $19.2 million  (799,680  shares) in the three andnine months ended September 30, 2001 compared to $6.6 million  (274,498  shares)and $16.6 million (716,485 shares) for the same periods in 2000.
        On September 30, 2001, PSEhad  available  $375.0  million in lines of credit  with  various  banks,  whichprovide credit support for outstanding bank loans and commercial paper of $201.1million, effectively reducing the available borrowing capacity under these linesof credit to $173.9 million. In addition,  PSE has agreements with several banksto borrow on an uncommitted, as available, basis at money-market rates quoted bythe banks.  There are no costs,  other than  interest,  for these  arrangements.There was $100.5 million  outstanding under these  arrangements at September 30,2001.
         On  September  30, 2001,InfrastruX and its  subsidiaries had available $166.5 million in lines of creditwith various banks,  which provide credit support for outstanding  bank loans of$79.8 million, effectively reducing the available borrowing capacity under theselines of credit to $86.7 million.
          Because  of  the  steepdecline in  wholesale  electric  prices  since June 30,  2001 and the record lowhydro conditions, PSE estimates that the value of its projected surplus electricsupply  has  declined  significantly.  That  decline  in value  increased  PSE'sprojected net power costs, resulting in a significant under recovery in rates ofthose  costs.  Therefore,  on  August  21,  2001,  PSE  made a  filing  with theWashington  Commission for emergency rate relief in the form of a  cost-recoverymechanism whereby customers'  electric bills would be linked to PSE's actual netpower costs.  Through this mechanism,  PSE sought to immediately begin deferringthe  difference  between  its net power costs and the  amounts  currently  beingrecovered   through  existing  customer  rates  and  reflect  these  amounts  incustomers' bills beginning  November 2001. This plan would remain in place untilPSE's general rate case,  which will be filed in November  2001, is decided.  OnOctober 4, 2001, the Washington Commission denied PSE's request.
         On October 12, 2001, PSEfiled a petition for reconsideration  and rehearing of the decision,  asking theWashington Commission to grant a hearing to hear evidence of the adverse impactson credit quality (because of the decline in earnings and cash flows),  costs tocustomers and, ultimately, the liquidity of the Company that denial of emergencyrelief,  and, thereby  continued under recovery of power costs,  would cause. OnOctober 24,  2001,  the  Washington  Commission  denied PSE's  petition.  PSE isexpected to file a general  rate case in November  2001.  General  rate cases inWashington state typically take 11 months to complete.  PSE also expects to filein November 2001 a request for interim rate relief. Without interim rate relief,the  projected  increase in PSE's net power costs for the  remainder of 2001 and2002 will result in significant  negative impacts on estimated electric margins.Current  estimates  of  expected  under  recovery  of power costs for the periodSeptember  through  December 31, 2001 and for calendar 2002 are $100 million and$175 million, respectively.
           On  October  8,  2001,Standard  &  Poor's  lowered its  long-term  ratings on Puget Energy and PSEfollowing  the  Washington  Commission's  order of October 4, 2001 denying PSE'srequest of August 21, 2001 for a power cost recovery  mechanism and interim raterelief.  On October 30, 2001,  Standard  &  Poor's  further  downgraded  itslong-term ratings of Puget Energy and PSE following the Washington  Commission'sorder of October 24, 2001, denying PSE's petition that the Washington Commissionreconsider their October 4, 2001 decision.
       On October 9, 2001, Moody'sInvestor  Service  placed  the rating of Puget  Energy and PSE under  review forpossible  downgrade as a result of the Washington  Commission's order of October4,  2001.  On  October  26,  2001,  Moody's  issued a report  stating  they werecontinuing  their review for possible  downgrade of its long-term  ratings untilthe Washington Commission acted on PSE's expected filing for interim rate relief(after PSE's general rate case filing November 2001).
         As a  result  of  recentrating agency  downgrades,  PSE's borrowing cost will increase and its access tocapital markets may become more limited.Other
      In October 2000, PSE filed ashelf-registration statement with the Securities and Exchange Commission for theoffering,  on a delayed or  continuous  basis,  of up to $500 million  principalamount of Senior Notes secured by a pledge of First Mortgage Bonds, SubordinatedDebentures or Trust preferred  Securities.  On November 9, 2000, PSE issued $260million principal amount of 7.69% Senior Medium-Term Notes,  Series C. The Notesare due  February 1, 2011.  On May 24, 2001,  PSE issued $200 million  principalamount of 8.40% Trust Preferred Securities.  The Trust Preferred Securities havea maturity date of June 30, 2041.
         On October 31,  2001,  aPurchased Gas Adjustment ("PGA") Incentive Mechanism in place since July 1, 1998expired. The PGA Incentive  Mechanism's purpose was to encourage competitive gaspurchasing  and  management of pipeline and gas storage in order to benefit bothcustomers and shareholders of PSE. PSE will consider whether to extend or revisethe  PGA  Incentive  Mechanism  in the  context  of its  upcoming  general  ratecase.
         On June  18,  2001,  theFederal  Energy  Regulatory  Commission  issued  an order  extending  its  pricemitigation  plan  for the  California  wholesale  sales to the  entire  11 statewestern  region.  Under the plan,  the market price of  wholesale  sales will bebased  upon  the bid  price  of the  highest  cost  gas-fired  unit  located  inCalifornia that is needed to serve the California Independent Systems Operator'sload when the generating  operating  reserves in California are below 7 percent.The bid price will reflect a published  gas cost plus an  additional  amount foroperating and maintenance expenses. The mitigation plan will terminate September30, 2002.
       On July 24, 2001, PSE fileda request with the Washington Commission to lower gas rates due to lower naturalgas costs  purchased for customers  under terms of the Purchased Gas  Adjustment(PGA)  mechanism.  On August 29,  2001,  the  Washington  Commission  approved adecrease in PSE natural gas rates by 8.9 % effective  September 1, 2001. The PGAmechanism  passes through to customers  increases or decreases in the gas supplyportion of the  natural gas  service  rates  based upon  changes in the price ofnatural gas purchased from  producers and wholesale  marketers or changes in gaspipeline  transportation  costs. PSE's gas margin and net income is not affectedby changes under the PGA.
         On July  25,  2001,  theFederal Energy Regulatory  Commission  (FERC) ordered an evidentiary  hearing todetermine  what refunds  California  energy  buyers are due for purchases in thespot markets operated by the California  Independent System Operator Corporationor the California Power Exchange Corporation covering the period October 2, 2000through June 20, 2001. The presiding Administrative Law Judge in this proceedinghas set a trial schedule through March 8, 2002 when the presiding AdministrativeLaw Judge will issue his finding of fact and record on the  matter.  PSE enteredinto transactions that may be subject to refund in this proceeding and is unableto  predict  the  outcome of this FERC  proceeding  or any  judicial  proceedingarising therefrom.
       On July 25, 2001, FERC alsoestablished a separate  preliminary  evidentiary  proceeding  for the purpose ofexploring whether there have been excessive charges for spot market sales in thePacific  Northwest for the period  December 25, 2000 through June 20, 2001.  Thepresiding  Administrative  Law Judge in this Pacific  Northwest  proceeding  hasissued a  recommendation  that refunds with respect to such charges  during suchperiod were not  warranted.  FERC is  reviewing  this  recommendation.  PSE madetransactions that may be subject to refund in this proceeding.  PSE is unable topredict the outcomes of this FERC proceeding or any judicial  proceeding arisingtherefrom.
             In   August   2001,Schlumberger  North  America  paid off their  outstanding  loan balance of $64.1million due PSE under the Schlumberger/CellNet agreement. The loans were made byPSE to Schlumberger/CellNet so Schlumberger/CellNet  could finance the AutomatedMeter Reading ("AMR") network system deployment in PSE's service territory.  Thenetwork system was used as collateral for the loan.
       On August 30, 2001, PSE andAlliance Data Systems Corp.  announced a contract under which Alliance Data willprovide data processing and billing  services for PSE. In providing  services toPSE under the 10-year agreement,  Alliance Data will use ConsumerLinX  software,PSE's  customer-information   software  developed  by  its  ConneXt  subsidiary.Alliance  Data  acquired  the  assets  of  ConneXt,  including  the  use  of theConsumerLinX  software for 10 years.  Alliance Data will offer  ConsumerLinX  aspart of its integrated,  single-source customer relationship management solutionfor large-scale, regulated utility clients.Item 3.Quantitative and Qualitative Disclosure About Market Risk
       Puget Energy is exposed tomarket risks, including changesin commodity prices and interest rates.CommodityPrice Risk
     PSE's    energy    relatedbusinesses are exposed to risks related to changes in commodity  prices. As partof its  business,  PSE markets  power to wholesale  customers  by entering  intocontracts  to purchase  or supply  electric  energy or natural gas at  specifieddelivery  points and at  specified  future  delivery  dates.  PSE's  energy riskmanagement function manages PSE's core electric and gas supply portfolio.
        PSE  manages  its  energysupply portfolio to achieve three primary objectives:     (i)     Ensure that  physical  energy  supplies  are  available to serve retail             customer requirements;     (ii)    Manage portfolio risks to limit undesired impacts on             PSE  financial  results;  and     (iii)   Optimize the value of PSE's  energy  supply             assets.
       The portfolio is subject tomajor sources of  variability  (e.g.,  hydro  generation,  temperature-sensitiveretail sales,  and market  prices for gas and power).  At certain  times,  thesesources of variability can mitigate  portfolio  imbalances;  at other times theycan exacerbate portfolio imbalances.
         Hedging  strategies  forPSE's energy supply portfolio interact with portfolio  optimization  activities.Some  hedges can be  implemented  in ways that retain  PSE's  ability to use itsenergy supply portfolio to produce  additional  value;  other hedges can only beachieved by forgoing optimization opportunities.
          The  prices  of  energycommodities are subject to fluctuations due to unpredictable  factors  includingweather,  generation  outages and other  factors that impact  supply and demand.This  commodity  price risk is a consequence  of purchasing  energy at fixed andvariable  prices and  providing  deliveries  at  different  tariff and  variableprices.  Costs associated with ownership and operation of production  facilitiesare another  component of this risk.  PSE may use forward  delivery  agreements,swaps and option  contracts  for the  purpose of hedging  commodity  price risk.Unrealized  changes  in the  market  value of these  derivatives  are  generallydeferred  and  recognized  upon  settlement  along  with the  underlying  hedgedtransaction.  Effective  January  1,  2001,  pursuant  to  Financial  AccountingStandards  Board Statement No. 133,  "Accounting for Derivative  Instruments andHedging Activities", which requires all derivative instruments to be recorded onthe balance sheet at fair value,  changes in the fair value of PSE's derivativeswill be recorded each period in current earnings or other comprehensive  income,depending on whether the  derivative is  designated as a qualifying  hedge underthe  statement.  PSE  does  not  consider  its  current  operation  to meet  thedefinition of trading  activities as described by the Emerging Issues Task Forceof the Financial  Accounting  Standards  Board Issue No. 98-10,  "Accounting forContracts Involved in Energy Trading and Risk Management Activities".
        At September 30, 2001, PSEhad an  after-tax  net  liability  of  approximately  $42.1  million  of  energycontracts  designated  as  qualifying  as cash flow  hedges and a  correspondingamount in other  comprehensive  income.  PSE also had energy contracts that weremarked-to-market  through current  earnings for the three and nine month periodsof $0.4 million and $5.3 million  after-tax which includes $14.7 million for thecumulative effect of the accounting change in the first quarter.  A hypothetical10% increase in the market  prices of natural gas and  electricity  prices wouldincrease the fair value of  qualifying  cash flow hedges by  approximately  $9.0million  after-tax and would have an immaterial  impact on current  earnings forthose contracts marked-to-market in earnings.
         In addition, PSE believesits current rate design,  including  the various  special  contracts and the PGAmechanism mitigate a portion of the commodity price risk.
         Market  risk is  managedsubject to parameters  established by the Board of Directors.  A Risk ManagementCommittee  separate from the units that manage these risks  monitors  compliancewith PSE's policies and  procedures.  In addition,  the Audit Committee of PSE'sBoard of Directors has oversight of the Risk Management Committee.Interest raterisk
           The  Company  believes     interest  rate  risk  of  the  Company  primarily  relates  to  the  use ofshort-term  debt  instruments  and new long-term debt  financing  needed to fundcapital  requirements.  The Company  manages its interest  rate risk through theissuance of mostly  fixed-rate  debt of various  maturities.  The  Company  doesutilize bank borrowings,  commercial paper and line of credit facilities to meetshort-term  cash  requirements.   These  short-term   obligations  are  commonlyrefinanced  with fixed rate bonds or notes when needed and when  interest  ratesare considered favorable.  The Company may enter into swap instruments to managethe interest rate risk associated with these debts.StatementRegarding Forward-Looking Statements
         The Company is includingthe following  cautionary  statement in this Form 10-Q to make applicable and totake  advantage  of  the  safe  harbor  provisions  of  the  Private  SecuritiesLitigation Reform Act of 1995 for any  forward-looking  statements made by or onbehalf of the Company. This report includes forward-looking  statements, such asstatements of the Company's  plans,  objectives,  expectations  and  intentions.Words such as  "anticipate,"  "believe,"  "expect,"  "future"  and  "intend" andsimilar expressions are used to identify  forward-looking  statements.  However,these words are not the  exclusive  means of  identifying  such  statements.  Inaddition,  any  statements  that  refer to  expectations,  projections  or othercharacterizations   of  future  events  or  circumstances  are   forward-lookingstatements.
       Forward-looking statementsinvolve risks and uncertainties  which could cause actual results or outcomes todiffer materially from those expressed. The Company's expectations,  beliefs andprojections  are expressed in good faith and are believed by the Company to havea reasonable basis,  including without limitation,  management's  examination ofhistorical  operating trends, data contained in records and other data availablefrom  third  parties,   but  there  can  be  no  assurance  that  the  Company'sexpectations, beliefs or projections will be achieved or accomplished.
          In  addition  to  otherfactors and matters discussed  elsewhere in this report,  some important factorsthat could cause actual results or outcomes for the Company to differ materiallyfrom those discussed in forward-looking statements include:     o prevailing legislative developments, governmental policies and regulatory       actions with  respect to allowed  rates of return,  financings,  or industry and       rate  structures;     o weather and  hydroelectric  conditions;     o wholesale energy       prices;     o effectof  competition;     o changes in and compliance with environmental       and  endangered species laws and policies;     o population growth  rates and       demographic patterns;     o capital market conditions; and     o legal and regulatory       proceedings.
           Any   forward-lookingstatement  speaks  only as of the date on which  such  statement  is made,  and,except as required by law, the Company  undertakes  no  obligation to update anyforward-looking  statement to reflect events or circumstances  after the date onwhich such  statement  is made or to reflect  the  occurrence  of  unanticipatedevents.  New  factors  emerge  from  time to  time  and it is not  possible  formanagement to predict all such factors, nor can it assess the impact of any suchfactor on the  business or the extent to which any  factor,  or  combination  offactors,  may cause  results to differ  materially  from those  contained in anyforward-looking statement.PART II OTHERINFORMATIONItem 1.Legal Proceedings
       On October 17,  2001,  the     Public Counsel Section of the Washington  State Attorney  General's  Officefiled a complaint  with the Washington  Commission  stating PSE has violated theWashington  Commission's  1997 merger order by following the Commission's  orderissued June 13, 2001 in connection with the BPA Residential Exchange. The PublicCounsel's  complaint is that PSE's  residential and small farm customers  shouldreceive the benefits of the  residential  exchange credit in place prior to June30, 2001 in addition to the  benefits of the amended  Residential  Purchase  andSale  Agreement  effective  July 1, 2001,  thus  providing  PSE's  customers thebenefits  twice.  If Public  Counsel's  position  were  upheld,  PSE's  electricrevenues for the last six months of 2001 would be reduced by approximately $47.9million.  While PSE believes this complaint is without merit, PSE is unable topredict the outcome of this proceeding.
         Contingencies arising outof the normal course of the Company's  business exist at September 30, 2001. Theultimate  resolution of these issues is not expected to have a material  adverseimpact on the  financial  condition,  results of  operations or liquidity of theCompany.Item 6.       Exhibits and Reports on Form 8-K              --------------------------------      (a)     See Exhibit Index for list of exhibits.      (b)     Reports on Form 8-K              Filed by Puget Energy:              ---------------------              Form 8-K dated July 19, 2001, Item 5 - Other Events, related to the release              of second quarter earnings.              Filed by Puget Energy & Puget Sound Energy:              ------------------------------------------              Form 8-K  dated  August  30,  2001,  Item 5 - Other  Events,  related  to a              strategic partnership with Alliance Data Systems.              Form 8-K dated August 30,  2001,  Item 5 - Other  Events,  related to Puget              Sound Energy  filing a rate design  proposal with the  Washington  Utilities And              Transportation Commission for recovering net power costs.              Form 8-K dated  September 19, 2001,  Item 5 - Other Events,  related to the              Washington   Utilities  and  Transportation   Commission  Order  establishing  a              procedural hearing on the rate design proposal filed August 21, 2001. SIGNATURES
  Pursuant to the  requirements of the Securities  ExchangeAct of 1934,  each  registrant  has duly  caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
 PUGET ENERGY, INC. PUGET SOUND ENERGY, INC.
James W. Eldredge                                                            

  -----------------------------
 James W. Eldredge  Corporate Secretary and Chief Accounting Officer 
Date: November 9, 2001

    Chief accounting officer and officer duly authorized to sign     this report on behalf of each registrantEXHIBIT INDEX-------------The following exhibits are filed herewith:     12-1  Statement  setting forth  computation  of ratios of earnings to fixed           charges  (1996  through 2000 and 12 months ended  September  30, 2001) for Puget           Energy.     12-2  Statement  setting forth  computation  of ratios of earnings to fixed           charges (1996 through 2000 and 12 months ended September 30, 2001) for PSE.