---

#### 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 March 31, 2003

       OR

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

For the transition period from __________ to __________

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

|1-16305 | PUGET ENERGY, INC.              | 91-1969407
|------- | ------------------------------- | ----------
|        | A Washington Corporation.       |           
|        | 411 - 108th Avenue N.E.         |           
|        | Bellevue, Washington 98004-5515 |           
|        | (425) 454-6363                  |           

|1-4393 | PUGET SOUND ENERGY, INC.        | 91-0374630
|------ | ------------------------------- | ----------
|       | A Washington Corporation.       |           
|       | 411 - 108th Avenue N.E.         |           
|       | Bellevue, Washington 98004-5515 |           
|       | (425) 454-6363                  |           

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

Indicate by check mark whether the  registrant is an  accelerated  filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X       No ____

As of March 31, 2003, (i)
the number of shares of Puget Energy, Inc. (Puget Energy) common stock
outstanding was 93,835,422 ($.01 par value) and (ii) all of the outstanding
shares of Puget Sound Energy, Inc. (PSE) common stock were held by Puget Energy.

---

|Table of Contents                  
|-----------------------------------
|                                   
|Filing Format                      
|                                   
|Forward-Looking Statements         
|                                   
|Part I.                            
|Item 1.                            
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|Item 2.                            
|                                   
|                                   
|Item 3.                            
|                                   
|Item 4.                            
|                                   
|Part II.                           
|Item 1.                            
|Item 6.                            
|                                   
|Signature                          
|Certification of Puget Energy      
|Certification of Puget Sound Energy
|Exhibit Index                      
|                                   

# 

Filing Format
        This
Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two
different registrants Puget Energy and PSE. Any references in this report to the
Company are to Puget Energy and PSE collectively. PSE makes no representation
as to the information contained in this report relating to Puget Energy and the
subsidiaries of Puget Energy other than PSE and its subsidiaries.

FORWARD-LOOKING
STATEMENTS
        Puget
Energy, Inc. (Puget Energy) and Puget Sound Energy, Inc. (PSE) are including the following
cautionary statement in this Form 10-Q to make applicable and to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by or on behalf of Puget Energy or PSE. This report
includes forward-looking statements, which are statements of expectations, beliefs, plans,
objectives, assumptions of future events or performance. Words or phrases such as
anticipates, believes, estimates, expects,
intends, plans, predicts, projects,
will likely result, will continue or similar expressions identify
forward-looking statements. 

        Forward-looking
statements involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed. Puget Energys and PSEs expectations,
beliefs and projections are expressed in good faith and are believed by Puget Energy and
PSE, as applicable, to have a reasonable basis, including without limitation,
managements examination of historical operating trends, data contained in records
and other data available from third parties, but there can be no assurance that Puget
Energys and PSEs expectations, beliefs or projections will be achieved or
accomplished. 

        In
addition to other factors and matters discussed elsewhere in this report, some important
factors that could cause actual results or outcomes for Puget Energy and PSE to differ
materially from those discussed in forward-looking statements include:

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

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

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

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

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

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

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

| | the
stability and liquidity of wholesale energy markets generally, including the requirements
for PSE to post collateral to support its energy portfolio transactions and the effect of
price controls by FERC on the availability and price of wholesale energy purchases and
sales in the western United States;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

|        |                      
|------- | ---------------------
|PART I  | FINANCIAL INFORMATION
|Item 1. | Financial Statements 

PUGET ENERGY, INC.CONSOLIDATED STATEMENTS OF INCOME 
For the Three Months Ended March 31
(Thousands except per share amounts) 
(Unaudited)

|                                                                         | 2003 | 2002
|------------------------------------------------------------------------ | ---- | ----
|Operating Revenues:                                                      |      |     
|Electric                                                                 |      |     
|Gas                                                                      |      |     
|Other                                                                    |      |     
|                                                                        
|Total operating revenues                                                 |      |     
|                                                                        
|Operating Expenses:                                                      |      |     
|Energy costs:                                                            |      |     
|Purchased electricity                                                    |      |     
|Purchased gas                                                            |      |     
|Electric generation fuel                                                 |      |     
|Residential Exchange                                                     |      |     
|Unrealized (gain) loss on derivative instruments                         |      |     
|Utility operations and maintenance                                       |      |     
|Other operations and maintenance                                         |      |     
|Depreciation and amortization                                            |      |     
|Conservation amortization                                                |      |     
|Taxes other than income taxes                                            |      |     
|Income taxes                                                             |      |     
|                                                                        
|Total operating expenses                                                 |      |     
|                                                                        
|Operating Income                                                         |      |     
|Other income                                                             |      |     
|                                                                        
|Income Before Interest Charges and Minority Interest                     |      |     
|Interest charges, net of AFUDC                                           |      |     
|Minority interest in earnings of consolidated subsidiary                 |      |     
|                                                                        
|Income Before Cumulative Effect of Accounting Change                     |      |     
|Cumulative effect of implementation of an accounting change, net of tax  |      |     
|                                                                        
|Net Income                                                               |      |     
|Less:  preferred stock dividends accrual                                 |      |     
|                                                                        
|Income for Common Stock                                                  |      |     
|                                                                        
|Basic common shares outstanding - weighted average                       |      |     
|Diluted common shares outstanding - weighted average                     |      |     
|                                                                        
|Basic earnings per share before cumulative effect of accounting change   |      |     
|Cumulative effect of accounting change                                   |      |     
|                                                                        
|Basic earnings per share                                                 |      |     
|                                                                        
|Diluted earnings per share before cumulative effect of accounting change |      |     
|Cumulative effect of accounting change                                   |      |     
|                                                                        
|Diluted earnings per share                                               |      |     
|                                                                        

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

PUGET ENERGY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                                           | 2003 | 2002
|-------------------------------------------------------------------------- | ---- | ----
|Net Income                                                                 |      |     
|                                                                          
|Other comprehensive income, net of tax:                                    |      |     
|Unrealized holding losses arising on marketable securities during the      |      |     
|period                                                                     |      |     
|Reclassification adjustment for realized gains on marketable securities    |      |     
|included in net income                                                     |      |     
|Foreign currency translation adjustment                                    |      |     
|Unrealized gains on derivative instruments during the period               |      |     
|Reversal of unrealized losses on derivative instruments settled during the |      |     
|period                                                                     |      |     
|                                                                          
|Other comprehensive income                                                 |      |     
|                                                                          
|Comprehensive Income                                                       |      |     
|                                                                          

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

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

|                                                                             | March 31,2003 | December 31,2002
|---------------------------------------------------------------------------- | ------------- | ----------------
|Utility Plant: (at original cost, including construction work in progress of |               |                 
|$117,734 and $108,658 respectively)                                          |               |                 
|Electric                                                                     |               |                 
|Gas                                                                          |               |                 
|Common                                                                       |               |                 
|Less:  Accumulated depreciation and amortization                             |               |                 
|                                                                            
|Net utility plant                                                            |               |                 
|                                                                            
|Other Property and Investments:                                              |               |                 
|Goodwill, net                                                                |               |                 
|Intangibles, net                                                             |               |                 
|Non-utility                                                                  |               |                 
|Other assets                                                                 |               |                 
|                                                                            
|Total other property and investments                                         |               |                 
|                                                                            
|Current Assets:                                                              |               |                 
|Cash                                                                         |               |                 
|Restricted cash                                                              |               |                 
|Accounts receivable, net                                                     |               |                 
|Unbilled revenue                                                             |               |                 
|Materials and supplies, at average cost                                      |               |                 
|Current portion of unrealized gain on derivative instruments                 |               |                 
|Prepayments and other                                                        |               |                 
|                                                                            
|Total current assets                                                         |               |                 
|                                                                            
|Other Long-Term Assets:                                                      |               |                 
|Regulatory asset for deferred income taxes                                   |               |                 
|Regulatory asset for PURPA contract buyout costs                             |               |                 
|Unrealized gain on derivative instruments                                    |               |                 
|Other                                                                        |               |                 
|                                                                            
|Total other long-term assets                                                 |               |                 
|                                                                            
|Total Assets                                                                 |               |                 
|                                                                            

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

PUGET ENERGY, INC.
CONSOLIDATED BALANCE SHEETS 
(Dollars in Thousands)
(Unaudited)CAPITALIZATION AND LIABILITIES

|                                                                        | March 31,2003 | December 31, 2002
|----------------------------------------------------------------------- | ------------- | -----------------
|Capitalization:                                                         |               |                  
|Common shareholders' investment:                                        |               |                  
|Common stock $0.01 par value, 250,000,000 shares authorized, 93,835,422 |               |                  
|and 93,642,659 shares outstanding                                       |               |                  
|Additional paid-in capital                                              |               |                  
|Earnings reinvested in the business                                     |               |                  
|Accumulated other comprehensive income                                  |               |                  
|Preferred stock not subject to mandatory redemption                     |               |                  
|Preferred stock subject to mandatory redemption                         |               |                  
|Corporation obligated, mandatorily redeemable preferred securities of   |               |                  
|subsidiary trust holding solely junior subordinated debentures of the   |               |                  
|corporation                                                             |               |                  
|Long-term debt                                                          |               |                  
|                                                                       
|Total capitalization                                                    |               |                  
|                                                                       
|Minority interest in equity of a consolidated subsidiary                |               |                  
|                                                                       
|Current Liabilities:                                                    |               |                  
|Accounts payable                                                        |               |                  
|Short-term debt                                                         |               |                  
|Current maturities of long-term debt                                    |               |                  
|Purchased gas liability                                                 |               |                  
|Accrued expenses:                                                       |               |                  
|Taxes                                                                   |               |                  
|Salaries and wages                                                      |               |                  
|Interest                                                                |               |                  
|Current portion of unrealized loss on derivative instruments            |               |                  
|Other                                                                   |               |                  
|                                                                       
|Total current liabilities                                               |               |                  
|                                                                       
|Long-Term Liabilities:                                                  |               |                  
|Deferred income taxes                                                   |               |                  
|Other deferred credits                                                  |               |                  
|                                                                       
|Total long-term liabilities                                             |               |                  
|                                                                       
|Total Capitalization and Liabilities                                    |               |                  
|                                                                       

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

PUGET ENERGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                              | 2003 | 2002
|------------------------------------------------------------- | ---- | ----
|Operating Activities:                                         |      |     
|Net Income                                                    |      |     
|Adjustments to reconcile net income to net cash provided      |      |     
|by operating activities:                                      |      |     
|Depreciation and amortization                                 |      |     
|Deferred federal and state income taxes and tax credits - net |      |     
|Net unrealized gains on derivative instruments                |      |     
|Other                                                         |      |     
|Cash collateral received from energy supplier                 |      |     
|Change in certain current assets and current liabilities:     |      |     
|Accounts receivable and unbilled revenue                      |      |     
|Materials and supplies                                        |      |     
|Prepayments and other                                         |      |     
|Purchase gas receivable/liability                             |      |     
|Accounts payable                                              |      |     
|Taxes payable                                                 |      |     
|Accrued expenses and other                                    |      |     
|                                                             
|Net Cash Provided by Operating Activities                     |      |     
|                                                             
|Investing Activities:                                         |      |     
|Construction and capital expenditures-excluding equity AFUDC  |      |     
|Additions to energy conservation program                      |      |     
|Acquisitions by InfrastruX, net of cash acquired              |      |     
|Restricted cash                                               |      |     
|Investment in variable rate bonds                             |      |     
|Other                                                         |      |     
|                                                             
|Net Cash Used by Investing Activities                         |      |     
|                                                             
|Financing Activities:                                         |      |     
|Change in short-term debt - net                               |      |     
|Dividends paid                                                |      |     
|Redemption of preferred stock                                 |      |     
|Redemption of trust preferred securities                      |      |     
|Issuance of bonds                                             |      |     
|Redemption of bonds and long term debt                        |      |     
|Issuance costs of bonds and other                             |      |     
|                                                             
|Net Cash Used by Financing Activities                         |      |     
|                                                             
|Net Decrease in Cash                                          |      |     
|Cash at Beginning of Year                                     |      |     
|                                                             
|Cash at End of Period                                         |      |     
|                                                             
|Supplemental Cash Flow Information:                           |      |     
|Cash payments for:                                            |      |     
|Interest (net of capitalized interest)                        |      |     
|Income taxes                                                  |      |     
|                                                             

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

PUGET SOUND ENERGY, INC.CONSOLIDATED STATEMENTS OF INCOME 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                                        | 2003 | 2002
|----------------------------------------------------------------------- | ---- | ----
|Operating Revenues:                                                     |      |     
|Electric                                                                |      |     
|Gas                                                                     |      |     
|Other                                                                   |      |     
|                                                                       
|Total operating revenues                                                |      |     
|                                                                       
|Operating Expenses:                                                     |      |     
|Energy costs:                                                           |      |     
|Purchased electricity                                                   |      |     
|Purchased gas                                                           |      |     
|Electric generation fuel                                                |      |     
|Residential Exchange                                                    |      |     
|Unrealized (gain) loss on derivative instruments                        |      |     
|Utility operations and maintenance                                      |      |     
|Other operations and maintenance                                        |      |     
|Depreciation and amortization                                           |      |     
|Conservation amortization                                               |      |     
|Taxes other than income taxes                                           |      |     
|Income taxes                                                            |      |     
|                                                                       
|Total operating expenses                                                |      |     
|                                                                       
|Operating Income                                                        |      |     
|Other income                                                            |      |     
|                                                                       
|Income Before Interest Charges                                          |      |     
|Interest charges, net of AFUDC                                          |      |     
|                                                                       
|Income Before Cumulative Effect of Accounting Change                    |      |     
|Cumulative effect of implementation of an accounting change, net of tax |      |     
|                                                                       
|Net Income                                                              |      |     
|Less: preferred stock dividends accrual                                 |      |     
|                                                                       
|Income for Common Stock                                                 |      |     
|                                                                       

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

PUGET SOUND ENERGY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                             | 2003 | 2002
|------------------------------------------------------------ | ---- | ----
|Net Income                                                   |      |     
|                                                            
|Other comprehensive income, net of tax:                      |      |     
|Unrealized holding losses on marketable securities arising   |      |     
|during the period                                            |      |     
|Reclassification adjustment for realized gains on marketable |      |     
|securities included in net income                            |      |     
|Unrealized gains on derivative instruments during the period |      |     
|Reversal of unrealized losses on derivative instruments      |      |     
|settled during the period                                    |      |     
|                                                            
|Other comprehensive income                                   |      |     
|                                                            
|Comprehensive Income                                         |      |     
|                                                            

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

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

|                                                                             | March 31,2003 | December 31,2002
|---------------------------------------------------------------------------- | ------------- | ----------------
|Utility Plant: (at original cost, including construction work in progress of |               |                 
|$117,734 and $108,658 respectively)                                          |               |                 
|Electric                                                                     |               |                 
|Gas                                                                          |               |                 
|Common                                                                       |               |                 
|Less:  Accumulated depreciation and amortization                             |               |                 
|                                                                            
|Net utility plant                                                            |               |                 
|                                                                            
|Other Property and Investments                                               |               |                 
|                                                                            
|Current Assets:                                                              |               |                 
|Cash                                                                         |               |                 
|Restricted cash                                                              |               |                 
|Accounts receivable, net                                                     |               |                 
|Unbilled revenue                                                             |               |                 
|Materials and supplies, at average cost                                      |               |                 
|Current portion of unrealized gain on derivative instruments                 |               |                 
|Prepayments and other                                                        |               |                 
|                                                                            
|Total current assets                                                         |               |                 
|                                                                            
|Other Long-Term Assets:                                                      |               |                 
|Regulatory asset for deferred income taxes                                   |               |                 
|Regulatory asset for PURPA contract buyout costs                             |               |                 
|Unrealized gain on derivative instruments                                    |               |                 
|Other                                                                        |               |                 
|                                                                            
|Total other long-term assets                                                 |               |                 
|                                                                            
|Total Assets                                                                 |               |                 
|                                                                            

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

|                                                             | March 31, 2003 | December 31,2002
|------------------------------------------------------------ | -------------- | ----------------
|Capitalization:                                              |                |                 
|Common shareholders' investment:                             |                |                 
|Common stock, $10 stated value, 150,000,000 shares           |                |                 
|authorized, 85,903,791 shares outstanding                    |                |                 
|Additional paid-in capital                                   |                |                 
|Earnings reinvested in the business                          |                |                 
|Accumulated other comprehensive income                       |                |                 
|Preferred stock not subject to mandatory redemption          |                |                 
|Preferred stock subject to mandatory redemption              |                |                 
|Corporation obligated, mandatorily redeemable preferred      |                |                 
|securities of subsidiary trust holding solely junior         |                |                 
|subordinated debentures of the corporation                   |                |                 
|Long-term debt                                               |                |                 
|                                                            
|Total capitalization                                         |                |                 
|                                                            
|Current Liabilities:                                         |                |                 
|Accounts payable                                             |                |                 
|Short-term debt                                              |                |                 
|Current maturities of long-term debt                         |                |                 
|Purchased gas liability                                      |                |                 
|Accrued expenses:                                            |                |                 
|Taxes                                                        |                |                 
|Salaries and wages                                           |                |                 
|Interest                                                     |                |                 
|Current portion of unrealized loss on derivative instruments |                |                 
|Other                                                        |                |                 
|                                                            
|Total current liabilities                                    |                |                 
|                                                            
|Long-Term Liabilities:                                       |                |                 
|Deferred income taxes                                        |                |                 
|Other deferred credits                                       |                |                 
|                                                            
|Total long-term liabilities                                  |                |                 
|                                                            
|Total Capitalization and Liabilities                         |                |                 
|                                                            

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

PUGET SOUND ENERGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                          | 2003 | 2002
|--------------------------------------------------------- | ---- | ----
|Operating Activities:                                     |      |     
|Net Income                                                |      |     
|Adjustments to reconcile net income                       |      |     
|to net cash provided by operating activities:             |      |     
|Depreciation and amortization                             |      |     
|Deferred federal income taxes and tax credits - net       |      |     
|Net unrealized gains on derivative instruments            |      |     
|Other                                                     |      |     
|Cash collateral received from energy supplier             |      |     
|Change in certain current assets and current liabilities: |      |     
|Accounts receivable and unbilled revenue                  |      |     
|Materials and supplies                                    |      |     
|Prepayments and other                                     |      |     
|Purchased gas receivable/liability                        |      |     
|Accounts payable                                          |      |     
|Taxes payable                                             |      |     
|Accrued expenses and other                                |      |     
|                                                         
|Net Cash Provided by Operating Activities                 |      |     
|                                                         
|Investing Activities:                                     |      |     
|Construction expenditures - excluding equity AFUDC        |      |     
|Additions to energy conservation program                  |      |     
|Restricted cash                                           |      |     
|Investment in variable rate bonds                         |      |     
|Other                                                     |      |     
|                                                         
|Net Cash Used by Investing Activities                     |      |     
|                                                         
|Financing Activities:                                     |      |     
|Change in short-term debt - net                           |      |     
|Dividends paid                                            |      |     
|Issuance of bonds                                         |      |     
|Redemption of preferred stock                             |      |     
|Redemption of trust preferred securities                  |      |     
|Redemption of bonds                                       |      |     
|Issuance cost of bonds and other                          |      |     
|                                                         
|Net Cash Used by Financing Activities                     |      |     
|                                                         
|Net Decrease in Cash                                      |      |     
|Cash at Beginning of Year                                 |      |     
|                                                         
|Cash at End of Period                                     |      |     
|                                                         
|Supplemental Cash Flow Information:                       |      |     
|Cash payments for:                                        |      |     
|Interest (net of capitalized interest)                    |      |     
|Income taxes (net of refunds)                             |      |     
|                                                         

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

# COMBINED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# (1)      Summary of
Consolidation Policy

BASIS OF PRESENTATION 

        Puget
Energy is an exempt public utility holding company under the Public Utility Holding
Company Act of 1935. Puget Energy owns Puget Sound Energy (PSE) and is a majority owner of
InfrastruX Group, Inc. (InfrastruX), a Washington corporation. 

        The
consolidated financial statements of Puget Energy include the accounts of Puget Energy and
its subsidiaries, PSE and InfrastruX. Puget Energy holds all the common shares of PSE and
holds a majority interest in InfrastruX. The results of PSE and InfrastruX are presented
on a consolidated basis. PSEs consolidated financial statements include the accounts
of PSE and its subsidiaries. Puget Energy and PSE are collectively referred to herein as
the Company. The consolidated financial statements are presented after
elimination of all significant intercompany items and transactions. Minority interests of
InfrastruXs operating results are reflected in Puget Energys consolidated
financial statements. Certain amounts previously reported have been reclassified to
conform with current year presentations with no effect on total equity or net income. 

        The
consolidated financial statements contained in this Form 10-Q are unaudited. In the
respective opinions of the managements of Puget Energy and PSE, all adjustments necessary
for a fair presentation of the results for the interim periods have been reflected and
were of a normal recurring nature. These condensed financial statements should be read in
conjunction with the audited financial statements (and the Combined Notes thereto)
included in the combined Puget Energy and PSE annual report on Form 10-K for the year
ended December 31, 2002, which is available at the Securities and Exchange Commission
website at www.sec.gov or at Puget Energys website at www.pse.com.

(2)     
          Earnings per Common Share(Puget Energy Only)

Puget
Energys basic earnings per common share have been computed based on weighted average
common shares outstanding of 93,740,000 and 87,175,000 for the three months ended March
31, 2003 and 2002, respectively. 

        Puget
Energys diluted earnings per common share have been computed based on weighted
average common shares outstanding of 94,172,000 and 87,408,000 for the three months ended
March 31, 2003 and 2002, respectively. These shares include the dilutive effect of
securities related to employee and director equity plans.

(3)    
          Segment Information(Puget Energy Only)

Puget
Energy operates in primarily two business segments: Regulated Utility Operations, or PSE,
and Construction Services, or InfrastruX. Puget Energys regulated utility operation
generates, purchases, transports and sells electricity, and purchases, transports and
sells natural gas. The service territory of PSE covers approximately 6,000 square miles in
Washington State. InfrastruX specializes in contracting services to other gas and electric
utilities primarily in the mid-west, Texas and the eastern United States. 

        The
other principal non-utility line of business, which is a PSE subsidiary, is a real estate
investment and development company. Reconciling items between segments are not material.

Financial
data for business segments are as follows:

|(Dollars in Thousands)Three Months Ended March 31, 2003 | PSE | InfrastruX | Other | Total    
|------------------------------------------------------- | --- | ---------- | ----- | ---------
|                                                       
|Revenues                                                |     |            | $     | 604,785  
|Depreciation and amortization                           |     |            |       | 54,532   
|Income tax                                              |     |            |       | 34,497   
|Operating income                                        |     |            |       | 93,815   
|Interest charges, net of AFUDC                          |     |            |       | 46,356   
|Net income                                              |     |            |       | 47,981   
|Goodwill, net                                           |     |            |       | --       
|Total assets                                            |     |            |       | 5,206,704
|                                                       

|Three Months Ended March 31, 2002 | PSE | InfrastruX | Other | Total  
|--------------------------------- | --- | ---------- | ----- | -------
|                                 
|Revenues                          |     |            | $     | 677,740
|Depreciation and amortization     |     |            |       | 53,674 
|Income tax                        |     |            |       | 20,089 
|Operating income                  |     |            |       | 74,474 
|Interest charges, net of AFUDC    |     |            |       | 49,343 
|Net income                        |     |            |       | 25,619 
|                                 

|At December 31, 2002 | PSE | InfrastruX | Other | Total    
|-------------------- | --- | ---------- | ----- | ---------
|                    
|Goodwill, net        |     |            | $     | --       
|Total assets         |     |            |       | 5,208,487
|                    

# (4)     Accounting for
Derivative Instruments and Hedging Activities

The
Company has adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138. SFAS No. 133 requires that all contracts considered to be derivative
instruments be recorded on the balance sheet at their fair value. The Company enters into
both physical and financial contracts to manage its energy resource portfolio including
forward physical and financial contracts, option contracts and swaps. The majority of
these contracts qualify for the normal purchase and normal sale exception. 

        During
the three months ended March 31, 2003 and 2002, the Company recorded an increase in
earnings for the change in the market value of derivative instruments not meeting cash
flow hedge criteria of approximately $0.5 million pre-tax ($0.3 million after-tax) and
$11.5 million pre-tax ($7.5 million after-tax), respectively. The $11.5 million pre-tax
gain in 2002 represented the reversal of unrealized losses on gas hedge contracts that
were de-designated in the fourth quarter of 2001 and the reversal of the mark-to-market
unrealized loss on physical electric contracts at December 31, 2001 that were settled in
the first quarter of 2002. 

        The
Company has two contracts outstanding with a counterparty whose senior unsecured debt
ratings are below investment grade. The first contract is a fixed for floating price
natural gas swap contract for which the Company has collected a collateral deposit in the
amount of $25.7 million from the counterparty to guarantee performance. The financial
contract will expire in June 2008 and is accounted for as a cash flow hedge under SFAS No.
133. The second is a physical gas supply contract expiring in December 2008, which has
been designated as a normal purchase under SFAS No. 133. The counterparty has continuously
performed on both contracts since the contracts were entered into in 2000 and the Company
believes the risk of non-performance by the counterparty to be remote. The Company will
continue to monitor the performance of the counterparty.

(5)    
          Intangibles(Puget Energy Only)

Identifiable
intangible assets acquired as a result of acquisitions of companies are amortized over the
expected useful lives of the assets, which range from five to 20 years. Identifiable
intangible assets are as follows:

|                                        |                  |                         |               
|--------------------------------------- | ---------------- | ----------------------- | --------------
|At March 31, 2003(Dollars in thousands) | GrossIntangibles | AccumulatedAmortization | NetIntangibles
|                                       
|Covenant not to compete                 |                  | $  3,878                |               
|Developed technology                    |                  | 14,190                  |               
|Contractual customer relationships      |                  | 3,042                   |               
|Patents                                 |                  | 814                     |               
|                                       
|Total                                   |                  | $21,924                 |               
|                                        |                 

|                                          |                  |                         |               
|----------------------------------------- | ---------------- | ----------------------- | --------------
|At December 31,2002(Dollars in thousands) | GrossIntangibles | AccumulatedAmortization | NetIntangibles
|                                         
|Covenant not to compete                   |                  | $  3,908                |               
|Developed technology                      |                  | 14,190                  |               
|Contractual customer relationships        |                  | 3,042                   |               
|Patents                                   |                  | 793                     |               
|                                         
|Total                                     |                  | $21,933                 |               
|                                          |                 

The
identifiable intangible amortization expense for the three months ended March 31, 2003 was
$0.5 million compared to $0.3 million for the same period of 2002. The identifiable
intangible assets amortization for future periods based on the current acquisitions will
be:

|(Dollars in thousands)         | 2003 | 2004   | 2005 | 2006   | 2007 | 2008  
|------------------------------ | ---- | ------ | ---- | ------ | ---- | ------
|                              
|Future Intangible Amortization |      | $1,376 |      | $1,876 |      | $1,860

# (6)     Asset Retirement
Obligation

On
January 1, 2003 the Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires legal obligations associated with the retirement
of long-lived assets to be recognized at their fair value at the time that the obligations
are incurred. Upon initial recognition of a liability, that cost is capitalized as part of
the related long-lived asset and allocated to expense over the useful life of the asset.
The Company recorded an after-tax charge to income of $0.2 million in the first quarter of
2003 for the cumulative effect of the accounting change. 

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

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

|For the three months ended(Dollars in thousands)    | March 31,2003
|--------------------------------------------------- | -------------
|                                                   
|Asset retirement obligation at beginning of quarter | $            
|Liability recognized in transition                  |              
|Accretion expense                                   |              
|                                                    |              
|Asset retirement obligation at end of quarter       | $            
|                                                    |              

The
pro forma asset retirement obligation liability balances as if SFAS No. 143 had been
adopted on January 1, 2001 (rather than January 1, 2003) are as follows:

|(Dollars in thousands)                                                             
|-----------------------------------------------------------------------------------
|                                                                                   
|Pro forma amounts of liability for asset retirement obligation at December 31, 2001
|Pro forma amounts of liability for asset retirement obligation at December 31, 2002

The
pro forma income statement effect as if SFAS No. 143 had been adopted on January 1, 2001
(rather than January 1, 2003) is as follows:

|(Dollars in thousands, except per share)Three months ended March 31 | 2003 | 2002
|------------------------------------------------------------------- | ---- | ----
|                                                                   
|Income for common stock, as reported                                |      |     
|Add: FAS 143 transition adjustment, net of tax                      |      |     
|Less: Pro forma accretion expense, net of tax                       |      |     
|                                                                    |     
|Pro forma income for common stock                                   |      |     
|                                                                    |     
|Earnings per share:                                                 |      |     
|Basic as reported                                                   |      |     
|Diluted as reported                                                 |      |     
|Basic pro forma                                                     |      |     
|Diluted pro forma                                                   |      |     

# (7)     Stock Compensation

The
Company has various stock compensation plans which, as allowed by SFAS No. 123,
Accounting for Stock-Based Compensation, are accounted for in accordance with
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The exercise price of stock option grants outstanding was the market
value of the stock on the date of grant, so no compensation expense was recorded in the
income statement for the options. There was, however, compensation expense related to
other stock compensation plans. Had the Company used the fair value method of accounting
specified by SFAS No. 123, net income and earnings per share would have been as follows:

|(Dollars in thousands, except per share)Three months ended March 31                     | 2003 | 2002
|--------------------------------------------------------------------------------------- | ---- | ----
|                                                                                       
|Income for common stock, as reported                                                    |      |     
|Add: Total stock-based employee compensation expense included in net income, net of tax |      |     
|Less: Total stock-based employee compensation expense per the fair value                |      |     
|method of SFAS 123, net of tax                                                          |      |     
|                                                                                        |     
|Pro forma income for common stock                                                       |      |     
|                                                                                        |     
|Earnings per share:                                                                     |      |     
|Basic as reported                                                                       |      |     
|Diluted as reported                                                                     |      |     
|Basic pro forma                                                                         |      |     
|Diluted pro forma                                                                       |      |     

# (8)     New Accounting
Pronouncements

In
January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 
Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51  Consolidated Financial
Statements to certain entities in which equity investors do not have controlling
interest or sufficient equity at risk for the entity to finance its activities without
additional financial support. This Interpretation requires that if a business entity has a
controlling financial interest in a variable interest entity the financial statements must
be included in the consolidated financial statements of the business entity. The adoption
of this Interpretation for all interests in variable interest entities created after
January 31, 2003 is effective immediately. For variable interest entities created before
February 1, 2003, it is effective June 15, 2003. The Company is in the process of
determining the impacts of this Interpretation but does not anticipate any material change
as a result of the new Interpretation. 

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

# (9)     Other

On
April 9, 2003, the Washington Commission approved an increase in the Purchased Gas
Adjustment (PGA) gas rates of approximately $103.6 million annually or 20.1%. The PGA
mechanism passes through to customers increases or decreases in the gas supply portion of
the natural gas service rates based upon changes in gas prices. PSEs gas margin and
net income is not affected by the change in the PGA rates. The PGA increase became
effective April 10, 2003.

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

The
following discussion of the Companys financial condition and results of operations
contains forward-looking statements that involve risks and uncertainties, such as
statements of the Companys plans, objectives, expectations and intentions. Words
such as anticipate, believe, expect,
future and intend and similar expressions are used to identify
forward-looking statements. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. The Companys actual results could differ materially from
those anticipated in these forward-looking statements for many reasons, including the
factors described below and under the caption Forward-Looking Statements at
the beginning of this report. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Form 10-Q.

# Results of Operations

Puget EnergyAll
of the operations of Puget Energy are conducted through its subsidiaries, PSE and
InfrastruX. Puget Energys net income for the three months ended March 31, 2003 was
$44.6 million on operating revenues of $676.0 million, compared with net income of $26.5
million on operating revenues of $739.1 million for the same period in 2002. Net income
for common stock was $42.7 million for the first quarter of 2003 compared to $24.5 million
for the first quarter of 2002. Basic and diluted earnings per share were $0.46 and $0.45,
respectively, for the first quarter of 2003 compared to $0.28 for the first quarter of
2002. 

        Net
income for common stock was positively impacted by an increase in PSEs net income
for common stock of $22.5 million for the three months ended March 31, 2003 compared to
the same period in 2002, due primarily to the favorable impact of general tariff rate
increases that became effective on July 1, 2002 for PSEs electric customers and
September 1, 2002 for PSEs gas customers. PSE also incurred a significant
under-recovery of electric power supply costs from customers in the first quarter of 2002.
Net income for common stock was negatively impacted by a decrease in InfrastruXs net
income for common stock (net of minority interest) of $4.4 million for the three months
ended March 31, 2003 compared to the same period in 2002 due to severe winter weather and
snow accumulation in the Northeast and Midwest and extremely wet winter conditions in the
South, resulting in a significant slowdown in construction work.

# 

Puget Sound Energy The
table below sets forth changes in the results of operations for Puget Sound Energy and its
subsidiaries.

Comparative Three Months Ended 
March 31, 2003 vs. March 31, 2002 
Increase (Decrease) 
(Dollars in Millions)

|                                                       | 
|------------------------------------------------------ | 
|Operating revenue changes:                             | 
|Electric general rate increase                         | 
|BPA Residential Exchange Credit                        | 
|Electric sales to other utilities and marketers        | 
|Electric conservation trust credit                     | 
|Electric transportation revenue                        | 
|Electric load and other                                | 
|                                                      
|Total electric operating change                        | 
|                                                      
|Gas PGA rate and load change                           | 
|Gas general rate increase in base rates                | 
|Gas transportation revenue and other                   | 
|                                                      
|Total gas operating change                             | 
|                                                      
|Total operating revenue change                         | 
|                                                      
|Operating expense changes:                             | 
|Energy costs:                                          | 
|Purchased electricity                                  | 
|Purchased gas                                          | 
|Electric generation fuel                               | 
|Residential exchange power cost credit                 | 
|Unrealized (gain) loss on derivative instruments       | 
|Utility operations and maintenance:                    | 
|Production operations and maintenance                  | 
|Personal energy management expenses                    | 
|Low income program pass through expenses               | 
|Other utility operations and maintenance               | 
|Other operations and maintenance                       | 
|Depreciation and amortization                          | 
|Conservation amortization                              | 
|Taxes other than income taxes                          | 
|Income taxes                                           | 
|                                                      
|Total operating expense change                         | 
|Other income change (net of tax)                       | 
|Interest charges change                                | 
|Cumulative effect of an accounting change (net of tax) | 
|                                                      
|Net income change                                      | 
|                                                      

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

Operating Revenues
 Electric

        Electric
operating revenues for the three months ended March 31, 2003 were $417.0 million, an
increase of $53.7 million compared to the same period in 2002 due primarily to wholesale
electric sales to other utilities and marketers which increased $40.2 million due to
higher surplus volumes and higher prices in the wholesale electricity market. Wholesale
sales volumes increased by 712.5 million kWh or 125.3% to 1.3 billion kWh as a result of
warmer-than-normal temperatures in the Pacific Northwest which provided excess electric
energy supplies for sales to the wholesale market as a result of reduction in retail
sales. Temperatures based on heating-degree-days measured at Seattle-Tacoma airport during
the three month period ended March 31, 2003 were 10.7% warmer than normal as compared to
heating-degree-days being 4.3% cooler than normal during the three month period ended
March 31, 2002. Retail sales revenue decreased $7.2 million which included the effect of a
4.6% electric general rate increase effective July 1, 2002 that increased electric revenue
by approximately $10.6 million in 2003. Retail sales volume decreased 2.8% to 5.3 billion
kWh from 5.5 billion kWh for the same period in 2002. 

        On
June 20, 2002, the Washington Commission approved and adopted the settlement stipulation
in the general rate case, putting new rates into effect on July 1, 2002. PSE established a
PCA mechanism in the rate case settlement. The PCA mechanism will account for differences
in PSEs modified actual power costs relative to a power cost baseline. The mechanism
will account for a sharing of costs and benefits that are graduated over four levels of
power cost variances, with an overall cap of $40 million (+/-) over the four year period
July 1, 2002 through June 30, 2006 plus 1% of the excess over $40 million. PSEs
share of the cost through March 31, 2003 was $16.7 million, $11.6 million of which was
incurred in the first quarter of 2003. The factors influencing the variability of power
costs included in the proposal are primarily weather and market related. 

        On
June 11, 2001, PSE and the BPA entered into an amended settlement agreement regarding the
Residential Purchase and Sale Program, under which PSEs residential and small farm
customers would continue to receive benefits of federal power. Completion of this
agreement enabled PSE to continue to provide a Residential and Farm Energy Exchange Credit
to residential and small farm customers. The amended settlement agreement provides that,
for its residential and small farm customers, PSE will receive (a) cash payment benefits
during the period July 1, 2001 through September 30, 2006 and (b) benefits in the form of
power or cash payments during the period October 1, 2006 through September 30, 2011. 

        Under
the Residential Purchase and Sale Program, PSE reduces residential and small farm
customers revenue on a per kWh basis through the Residential and Farm Energy Exchange
Credit. The credit has no impact on PSEs electric margin or net income as a
corresponding reduction is included in purchased electricity expenses. The Residential
Purchase and Sale Program provides PSEs residential and small farm customers
benefits of lower-cost federal power. 

        On
June 17, 2002, PSE entered into an agreement with the BPA which amended the payment
provisions of the amended settlement agreement to provide for conditional deferral of
payment by BPA of certain amounts to be paid under the original agreement. Under the
modified agreement, BPA will defer paying a portion of the benefits it would have
otherwise paid. The amount of benefits deferred will be $3.5 million each month for the
eight-month period beginning February 2003, for a total deferral of $27.7 million.
Contemporaneously with entering into this agreement with PSE, BPA is entering into other
agreements similar to the agreement with PSE through which other investor-owned utilities
and BPA are agreeing to BPAs deferral of payments in their fiscal year 2003. The
total cumulative amount to be deferred under the agreement with PSE and other such
agreements equals $55 million, an amount that will help BPA address its current financial
difficulties. Absent certain adjustments, BPA will begin paying back the amount deferred
with interest over the sixty-month period beginning October 2006. In January 2003, PSE
filed revised tariff sheets with the Washington Commission to reflect this modification to
the agreement between PSE and the BPA. The Washington Commission accepted the tariff
changes and the Rider credit was changed to $0.01740 per kWh, from $0.01817 per kWh, for
the period February 15, 2003 through September 30, 2006. In February 2003, BPA commenced a
rate case that may affect the level of residential exchange benefits for PSEs
customers. 







        For
the three months ended March 31, 2003, the benefits of the Residential and Farm Energy
Exchange credited to customers were $55.1 million with a related offset to power costs.
PSE received payments from BPA in the amount of $37.0 million during the three months
ended March 31, 2003. The difference between the customers credit and the amount
received from BPA reduces the previously deferred amount owed to customers. The aggregated
deferred amount is recorded on PSEs balance sheet as restricted cash. Absent certain
adjustments, the modified amended settlement agreement will provide for payments from BPA
in the amount of $630.6 million for the period January 2003 through September 2006 and for
pass-through to eligible residential and farm customers of the same amount. 

        There
are several actions in the U.S. Ninth Circuit Court of Appeals against BPA, in which the
petitioners assert that BPA acted contrary to law or without authority in deciding to
enter into, or in entering into or performing, a number of contracts, including the
contract between BPA and PSE. BPA rates used in such contract between BPA and PSE for
determining the amounts of money to be paid to PSE as residential exchange benefits during
the period October 1, 2001 through September 30, 2006 have been confirmed,
approved and allowed to go into effect by FERC on an interim basis, subject to refund with
interest. It is not clear what impact, if any, review of such rates and the
above-described U.S. Ninth Circuit Court of Appeals actions may have on PSE. PSE and other
investor owned utilities are presently negotiating a potential settlement of the U.S.
Ninth Circuit actions, whereby the litigation would be dismissed and BPAs discretion
over the level of 2007-2011 benefits would be reduced in consideration of a reduction in
current period benefits. PSE cannot presently predict the outcome of the settlement
negotiations. 

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

        During
the three months ended March 31, 2003, PSE collected and remitted to a grantor trust $3.9
million as compared to $3.1 million for the same period in 2002 as a result of PSEs
1995 sale of future electric revenues associated with its investment in conservation
assets in its electric general rate tariff. The impact of the sale of revenue was offset
by reductions in conservation amortization and interest expenses. The principal amount
owed by the trust to its bondholders was $15.2 million at March 31, 2003.

        PSE
operates within the western wholesale market and has made sales into the California energy
market. During the fourth quarter of 2000, PSE made such sales to the California energy
market on which the receivable amount is still outstanding. At March 31, 2003, PSEs
receivable from the California Independent System Operators (CAISO) and other
counter-parties, net of reserves, was $25.3 million.

Operating Revenues Gas
        Retail
gas revenue for the three months ended March 31, 2003 decreased by $127.4 million from the
same period in 2002, which included the effect of a 5.8% gas general rate increase
effective September 1, 2002 that increased gas revenue by approximately $14.8 million in
2003. Retail gas sales volumes decreased 15.5% from 346.9 million therms in 2002 to 293.1
million therms in 2003 due primarily to warmer temperatures in the Pacific Northwest. 

        Purchased
Gas Adjustment (PGA) rates charged to customers were lower in the three months ended March
31, 2003 compared to the same period in 2002 as a result of rate decreases of 7.3% and
12.5%, which took effect September 1, 2002 and November 1, 2002, respectively. Gas supply
costs are passed through to customers in the PGA. The PGA mechanism passes through to
customers increases or decreases in the gas supply portion of the natural gas service
rates based upon changes in the price of natural gas purchased from producers and
wholesale marketers or changes in gas pipeline transportation costs. On April 9, 2003, the
Washington Commission approved an increase in natural gas supply rates under the PGA
mechanism. The increase of approximately $103.6 million or 20.1% on overall revenues
became effective April 10, 2003.

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

Operating Expenses
        Purchased
electricityexpenses increased $58.4 million for the three months ended March 31, 2003
compared to the same period in 2002. PSEs hydroelectric production and related power
costs in 2003 have been negatively impacted by below normal winter precipitation and snow
pack in the Pacific Northwest region associated with an El Nino weather condition. The
April 17, 2003 seasonal water supply forecast published by the National Weather Service
indicated that the total forecast runoff into the Grand Coulee reservoir for the period
January through July 2003 would be 86% of normal. This compares to 108% of normal for the
same period in 2002. The National Weather Service forecast runoff into the Grand Coulee
reservoir for the later period of April through September 2003 is similar to the January
through July 2003 period and is expected to be 85% of normal assuming average
precipitation during the period. Primarily due to adverse hydro conditions in 2003, the
Company anticipates reaching the $40 million cumulative cap under the Power Cost
Adjustment (PCA) mechanism by the end of 2003. Under the PCA mechanism, further increases
in variable power costs through June 30, 2006 would be apportioned 99% to customers and 1%
to PSE. PSEs share of power costs, in excess of those set in rates, through March
31, 2003 was $16.7 million. 

        Purchased
gas expenses decreased $117.8 million for the three months ended March 31, 2003
compared to the same period in 2002. The decrease was due to lower consumption volumes as
a result of warmer than normal temperatures and the impact of decreased gas costs, which
are passed through to customers through the PGA mechanism. The PGA allows PSE to recover
expected gas costs. PSE defers, as a receivable or liability, any gas costs that exceed or
fall short of the amount in PGA rates and accrues interest under the PGA. The PGA balance
was a liability at March 31, 2002 of $56.3 million compared to a liability balance at
March 31, 2003 of $33.0 million. 

        Electric
generation fuel expense decreased $50.1 million for the three months ended March 31,
2003 compared to the same period in 2002 due to lower fuel costs for PSE controlled
gas-fired generation facilities related to the reduction of generation at those
facilities. 

        Residential
exchange credits associated with the Residential Purchase and Sale Agreement with BPA
increased $9.9 million in 2003 when compared to 2002, due to an increase in the
Residential and Farm Energy Exchange credit rate as compared to 2002. For further details,
see the amended Residential Purchase and Sale Agreement between PSE and BPA discussion in
Operating Revenues  Electric. 

        Unrealized
gains on derivative instruments decreased $11.0 million in 2003 compared to 2002 as
the first three months of 2002 included an $11.5 million pre-tax gain as compared to $0.5
million for the same period in 2003. The 2002 gain represented the reversal of unrealized
losses on gas hedge contracts that were de-designated in the fourth quarter of 2001 and
the reversal of the mark-to-market unrealized loss on physical electric contracts at
December 31, 2001 that were settled in the first quarter of 2002. 

        The
Company has two contracts outstanding with a counterparty whose senior unsecured debt
ratings are below investment grade. The first contract is a fixed for floating price
natural gas swap contract for which the Company has collected a collateral deposit in the
amount of $25.7 million from the counterparty to guarantee performance. The financial
contract will expire in June 2008 and is accounted for as a cash flow hedge under SFAS No.
133. The second is a physical gas supply contract expiring in December 2008, which has
been designated as a normal purchase under SFAS No. 133. The counterparty has continuously
performed on both contracts since the contracts were entered into in 2000 and the Company
believes the risk of non-performance by the counterparty to be remote. The Company will
continue to monitor the performance of the counterparty. 

        PSEs
Personal Energy ManagementTM energy-efficiency program costs
decreased $2.2 million for the three months ended March 31, 2003 compared to the same
period in 2002, reflecting a decreased emphasis on the program in light of relatively
moderate energy prices and cancellation of the Time of Use program in November 2002.

        A
new Low-income Program approved by the Washington Commission in the general rate
case settlement began in July 2002 which resulted in increased costs of $2.7 million for
the three months ended March 31, 2003 compared to the same period in 2002. These costs are
fully recovered in retail rates beginning at the programs inception on July 1, 2002
for electric and September 1, 2002 for gas. 



        Other
utility operations and maintenance costs increased $3.4 million for the three months
ended March 31, 2003 compared to the same period in 2002 due primarily to an increase of
$1.6 million in electric-service restoration costs related to storm damage, $3.6 million
in increased vegetation management, meter reading, customer collection and uncollectible
accounts expenses and other costs, offset by PSE employee severance costs totaling $4.0
million related to strategic outsourcing of operations work to service providers in the
first quarter of 2002 which did not recur in 2003. In addition, PSE recorded an estimated
net curtailment gain in the first quarter of 2002 which did not recur in 2003 of $2.2
million for Statement of Financial Accounting Standards No. 88 
Employers Accounting for Settlement and Curtailment of Defined Benefit Pension
Plans and for Termination Benefits and Statement of Financial Accounting Standards
No. 106  Employers Accounting for Postretirement Benefits Other than
Pensions as calculated by PSEs actuary. 

        Depreciation
and amortizationexpense for PSE increased $0.9 million for the three months ended
March 31, 2003 compared to the same period in 2002 due primarily to the effects of new
plant placed into service during the past year. 

        Conservation
amortization expense increased $5.6 million for the three months ended March 31, 2003
compared to the same period in 2002 due to increased conservation expenditures. These
costs are recovered in an electric conservation rider and a gas conservation tracker
mechanism with no impact to earnings. 

        Taxes
other than income taxes decreased $8.3 million for the three months ended March 31,
2003 compared to the same period in 2002 primarily due to lower municipal and state excise
taxes which are revenue based. 

        Income
taxes increased $14.1 million for the three months ended March 31, 2003 compared to
the same period in 2002 as a result of higher pre-tax operating income.

Interest Charges
        Interest
charges, which consist of interest and amortization on long-term debt and other interest,
decreased $3.0 million for the three months ended March 31, 2003 compared to the same
period in 2002. Interest on long-term debt decreased $2.1 million in the three months
ended March 31, 2003 compared to the same period in 2002 primarily as a result of the
maturity in 2002 of $107 million of Medium Term Notes with interest rates ranging from
7.07% to 7.91% per year. Other interest expense decreased $0.9 million in the three months
ended March 31, 2003 compared to the same period in 2002 due primarily to lower weighted
average interest rates and lower average daily short-term borrowings.

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

Comparative Three Months Ended 
March 31, 2003 vs. March 31, 2002 
Increase (Decrease) 
(Dollars in Millions)

|                                 | 
|-------------------------------- | 
|Operating revenue change:        | 
|Other operating revenue          | 
|                                
|Operating expense changes:       | 
|Other operations and maintenance | 
|Depreciation and amortization    | 
|Taxes other than income taxes    | 
|Income taxes                     | 
|                                
|Total operating expense change   | 
|Interest charges change          | 
|Minority interest change         | 
|                                
|Net income change                | 
|                                

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

InfrastruX
revenueincreased $9.9 million for the three months ended March 31, 2003 compared to
the same period in 2002 due primarily to acquisitions of several companies during 2002,
which contributed to an increase of $13.1 million. This increase was offset by lower
revenues from existing companies attributable to severe winter weather and snow
accumulation in the Northeast and Midwest and to extremely wet winter conditions in the
South, resulting in a significant slowdown in utility construction work. InfrastruX
operations are seasonal, with its highest revenues typically in the second and third
quarters of the year. 

        InfrastruX
operation and maintenance expenses increased $16.2 million for the three months ended
March 31, 2003 compared to the same period in 2002 due to the additional costs related to
acquired companies and weather-related problems in the first quarter of 2003 that impacted
efficiency and productivity. 

        Depreciation
and amortization expense increased by $1.1 million for the three months ended March
31, 2003 compared to the same period in 2002 due to acquisitions during 2002 and
additional assets placed in service to support growth. 

        Taxes
other than income taxes increased $0.8 million for the three months ended March 31,
2003 compared to the same period in 2002 due primarily to increases in payroll tax
resulting from an increased workforce from acquired companies. 

        Income
taxes decreased $3.7 million for the three months ended March 31, 2003 compared to the
same period in 2002 due to the tax benefit associated with the first quarter 2003 net loss
compared to tax expense on net income for the same period in 2002. 

        Interest
charges increased $0.3 million for the three months ended March 31, 2003 compared to
the same period in 2002 due to an increase in the amount drawn on InfrastruXs
revolving credit facilities primarily used for funding acquisitions.

# Capital Expenditures,
Capital Resources and Liquidity

Capital Requirements
Contractual Obligations and Commercial Commitments
        Puget
Energy.The following are Puget Energy's aggregate consolidated (including PSE)
contractual obligations and commercial commitments as of March 31, 2003:

|Puget Energy                                 | Payments Due Per Period
|-------------------------------------------- | -----------------------
|                                             |                        
|Contractual Obligations(Dollars in millions) | Total                  
|                                            
|Long-term debt (1)                           |                        
|Short-term debt                              |                        
|Trust preferred securities (2)               |                        
|Preferred dividends (3)                      |                        
|Service contract obligations                 |                        
|Capital lease obligations                    |                        
|Non-cancelable operating leases              |                        
|Fredonia combustion turbines lease (4)       |                        
|Energy purchase obligations                  |                        
|Financial hedge obligations                  |                        
|                                             |                        
|Total contractual cash obligations           |                        

|                                            | Amount of CommitmentExpiration Per Period
|------------------------------------------- | -----------------------------------------
|                                            |                                          
|Commercial Commitments(Dollars in millions) | Total                                    
|                                           
|Guarantees (5)                              |                                          
|Liquidity facilities - available (6)        |                                          
|Lines of credit - available (7)             |                                          
|Energy operations letter of credit (8)      |                                          
|                                            |                                          
|Total commercial commitments                |                                          

---

|(1) | The
2003 long-term debt includes $63 million in first mortgage bonds that had
          maturity dates in 2012, 2022 and 2023 which have been called for redemption by
          PSE in April 2003. The redemption dates are scheduled for May ($60 million) and
          August 2003 ($3 million).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In
1997 and 2001, PSE formed Puget Sound Energy Capital Trust I and Puget Sound
          Energy Capital Trust II, respectively, for the sole purpose of issuing and
          selling preferred securities (Trust Securities) and issuing common securities
to           PSE. The proceeds from the sale of Trust Securities were used by the Trusts
to           purchase Junior Subordinated Debentures (Debentures) from PSE. The
Debentures           are the sole assets of the Trusts and PSE owns all common securities
of the           Trusts.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On
January 7, 2003, the Board of Directors of PSE declared a dividend payable on
          April 1, 2003 for preferred stock outstanding on March 14, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(5) | In
June 2001, InfrastruX signed a credit agreement with several banks to provide
          up to $150 million in financing. Under the credit agreement, Puget Energy is
the           guarantor of the line of credit.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | At
March 31, 2003, PSE had available a $250.0 million liquidity facility, which           in
part provides credit support for outstanding commercial paper totaling $34.3
          million and an outstanding letter of credit totaling $0.5 million, thereby
          effectively reducing the available borrowing capacity under this liquidity
          facility to $215.2 million. At March 31, 2003, the Company also had available
          $140.9 million of receivables for sale under its three year $150.0 million
          receivables securitization facility. See Accounts Receivable
          Securitization Program under Off-Balance Sheet Arrangements          below
for further discussions.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | InfrastruX
had $179.8 million in lines of credit with various banks, which fund           capital
requirements of InfrastruX and its subsidiaries. InfrastruX and its
          subsidiaries had outstanding loans of $142.3 million, effectively reducing the
          available borrowing capacity under these lines of credit to $37.5 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | In
May 2002, PSE provided an energy trading counterparty a letter of credit in           the
amount of $0.5 million to satisfy the counterpartys credit           requirements
following PSEs senior unsecured debt downgrade in October           2001. The
letter of credit has been renewed and expires on March 15, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Puget Sound Energy                           | Payments Due Per Period
|-------------------------------------------- | -----------------------
|                                             |                        
|Contractual Obligations(Dollars in millions) | Total                  
|                                            
|Long-term debt (1)                           |                        
|Short-term debt                              |                        
|Trust preferred securities (2)               |                        
|Preferred dividends (3)                      |                        
|Service contract obligations                 |                        
|Non-cancelable operating leases              |                        
|Fredonia combustion turbines lease (4)       |                        
|Energy purchase obligations                  |                        
|Financial hedge obligations                  |                        
|                                             |                        
|Total contractual cash obligations           |                        

|                                            | Amount of CommitmentExpiration Per Period
|------------------------------------------- | -----------------------------------------
|                                            |                                          
|Commercial Commitments(Dollars in millions) | Total                                    
|                                           
|Liquidity facilities - available (5)        |                                          
|Energy operations letter of credit (6)      |                                          
|                                            |                                          
|Total commercial commitments                |                                          

---

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

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

|(3) | See
note (3) above.
|--- | -------------------

|(4) | See
note (4) above.
|--- | -------------------

|(5) | See
note (6) above.
|--- | -------------------

|(6) | See
note (8) above.
|--- | -------------------

# 

Off-Balance Sheet
ArrangementsConservation Trust. In
1995, PSE sold a stream of future electric revenues associated with $202.3 million of its
investment in conservation assets in its electric general rate tariff to a grantor trust
in order to obtain financing at rates superior to those otherwise available. As a result
of this sale, PSE collects these revenues from its electric customers and remits them to
the trust. During the three months ended March 31, 2003, PSE collected and remitted to the
grantor trust $3.9 million as compared to $3.1 million for the same period in 2002. The
impact of the sale of revenue was offset by reductions in conservation amortization and
interest expenses. The principal amount owed by the trust to its bondholders was $15.2
million at March 31, 2003.

Accounts Receivable
Securitization Program.In order to provide a source of liquidity for PSE at
attractive cost of capital rates, in December 2002, PSE entered into a Receivables Sales
Agreement with Rainier Receivables, Inc., a wholly owned subsidiary of PSE, pursuant to
which PSE sold all of its utility customers accounts receivable and unbilled utility
revenues to Rainier Receivables. Concurrently with entering into the Receivables Sales
Agreement, Rainier Receivables entered into a Receivables Purchase Agreement with PSE and
several financial institutions. The Receivables Purchase Agreement allows Rainier
Receivables to sell the receivables purchased from PSE to the financial institutions. The
amount of receivables sold by Rainier Receivables is not permitted to exceed
$150 million at any time.

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

        The
receivables securitization facility has a three year term, but is terminable by PSE and
Rainier Receivables upon notice to the receivables purchasers. At March 31, 2003 there
were no amounts outstanding under the accounts receivable securitization facility and the
maximum receivables available for sale was $140.9 million.

Fredonia 3 and 4 Operating
Lease.PSE leases two combustion turbines for its Fredonia 3 and 4 electric
generation facility pursuant to a master lease that was amended for this purpose in April
2001. The lease has a term expiring in 2011, but can be cancelled by PSE after three
years. Payments under the lease vary with changes in the London inter-bank offered rate
(LIBOR). At March 31, 2003, PSEs outstanding balance under the lease was $61.0
million. Lease payments assume a LIBOR of 1.31%. The expected residual value under the
lease is the lesser of $37.4 million or 60% of the cost of the equipment. In the event the
equipment is sold to a third party upon termination of the lease and the aggregate sales
proceeds are less than the unamortized value of the equipment, PSE would be required to
pay the lessor contingent rent in an amount equal to the deficiency up to a maximum of 87%
of the unamortized value of the equipment.

Utility Construction Program.Current utility construction expenditures for generation, transmission and
distribution are designed to meet continuing customer growth and to improve efficiencies
of PSEs energy delivery systems. Construction expenditures, excluding equity
Allowance for Funds Used During Construction (AFUDC), were $66.5 million for the three
months ended March 31, 2003. PSE expects construction expenditures will be approximately
$272 million, $325 million and $280 million in 2003, 2004 and 2005, respectively. In
addition, PSE anticipates spending up to $250 million for new generating resources in late
2003 or early 2004, subject to regulatory approval of the resources and related new
revenue requirements. The purchase of any generating resource would be funded through the
issuance of long-term debt and equity. PSE may arrange short-term bridge financing for the
resources pending the sale of equity and long-term debt. Construction expenditure
estimates are subject to periodic review and adjustment in light of changing economic,
regulatory, environmental and conservation factors.

Other Additions.Other
property, plant and equipment additions were $2.2 million for the three months ended March
31, 2003. Puget Energy expects InfrastruXs capital additions to be $16.6 million in
2003. Construction expenditure estimates are subject to periodic review and adjustment in
light of changing economic, regulatory, environmental, and conservation factors.

Refinancings.PSE
refinanced $138.5 million of its outstanding 5.875% to 7.25% series of
          Pollution Control Bonds on March 11, 2003. The remaining $23.4 million of
          outstanding Pollution Control Bonds was refinanced on April 1, 2003. These
          outstanding Pollution Control Bonds were refinanced with the proceeds from the
          issuance of two new series of Pollution Control Bonds: (1) $138.5 million 5.00%
          series and (2) $23.4 million 5.10% series. Each of these new series of
Pollution           Control Bonds matures on March 1, 2031.

Capital ResourcesCash From Operations.Cash
generated from operations (net of dividends and AFUDC) totaled $141.8 million for the
three months ended March 31, 2003, and provided 197.5% of the $71.8 million of utility
construction expenditures (net of AFUDC) and other capital expenditure requirements for
that period. 

        Puget
Energy and PSE expect to continue financing the utility construction program and other
capital expenditure requirements with internally generated funds and externally financed
capital.

Financing Program.Financing
utility construction requirements and operational needs is dependent upon the cost and
availability of external funds through capital markets and from financial institutions.
Access to funds is dependent upon factors such as general economic conditions, regulatory
authorizations and policies, and Puget Energys and PSEs credit ratings. The
Company expects to meet capital and operational needs for the balance of 2003 with cash
generated from operations and short-term borrowings under its liquidity facilities.

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

| | approximately
$977.2 million of additional first mortgage bonds, at an assumed interest rate of 5.92%
on a ten-year first mortgage bond due to a limitation of the interest coverage ratio (PSE
has approximately $1.4 billion of electric and gas bondable property available for use
for issuance of up to $854.4 million of first mortgage bonds, subject to the interest
coverage ratio limitation of 2.0 times net earnings available for interest. PSEs
interest coverage ratio at March 31, 2003 was 2.8 times net earnings available for
interest);
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | approximately
$404.3 million of additional preferred stock at an assumed dividend rate of 7.75 %; and
|- | -----------------------------------------------------------------------------------------------------

| | approximately
$262.6 million of unsecured long-term debt.
|- | ---------------------------------------------------------

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

        The
current ratings of Puget Energy and PSE, as of May 13, 2003, are:

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

*No ratings provided

Moodys
Investors Service has stated that its negative outlook is based upon uncertainty about the
outcome of investigations by FERC of western power markets.

Shelf Registrations. In
February 2002, Puget Energy and PSE filed a shelf registration statement with the
Securities and Exchange Commission for the offering, on a delayed or continuous basis, of
up to $500 million of:

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

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

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

| | trust
preferred securities of PSE.
|- | ----------------------------------

On
November 5, 2002, Puget Energy sold 5.75 million shares of common stock in a public
offering. The net proceeds of approximately $114.6 million were invested in PSE to reduce
its debt.

Liquidity Facilities and Commercial Paper.PSEs short-term borrowings and sales
of commercial paper are used to provide working capital and funding of utility
construction program. 

        On
December 23, 2002, PSE entered into a $250 million unsecured 364-day credit agreement with
various banks and a $150 million 3-year receivables securitization program. These
facilities replaced PSEs entire $375 million bank line of credit which was scheduled
to terminate on February 13, 2003. At March 31, 2003, PSE had available $390.9 million of
liquidity facilities, which in part provide credit support for outstanding commercial
paper of $34.3 million and an outstanding letter of credit of $0.5 million, effectively
reducing the available borrowing capacity under the liquidity facilities to $356.1
million. 

        In
June 2001, InfrastruX signed a three-year credit agreement with several banks to provide
up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In
addition, InfrastruXs subsidiaries have an additional $29.8 million in lines of
credit with various banks. Borrowings available for InfrastruX are used to fund
acquisitions and working capital requirements of InfrastruX and its subsidiaries. At March
31, 2003, InfrastruX and its subsidiaries had outstanding loans of $142.3 million,
effectively reducing the available borrowing capacity under these lines of credit to $37.5
million.

Stock Purchase and Dividend
Reinvestment Plan.Puget Energy has a stock purchase and dividend reinvestment plan
pursuant to which shareholders and other interested investors may invest cash and cash
dividends in shares of Puget Energys common stock. Since new shares of common stock
may be purchased directly from Puget Energy, funds received may be used for general
corporate purposes. Puget Energy issued common stock from the Stock Purchase and Dividend
Reinvestment Plan of $3.8 million (192,765 shares) for the three months ended March 31,
2003 compared to $6.5 million (304,114 shares) for the same period in 2002. The decrease
in the Stock Purchase and Dividend Reinvestment Plan from 2003 to 2002 was largely
attributable to the reduction of the common stock dividend on May 15, 2002 to a quarterly
dividend of $0.25 per share.

Proceedings Relating to
the Western Power Market 
California Independent System Operator (CAISO) Receivable and California Proceedings

        PSE
operates within the western wholesale market and made sales into the California energy
market during the fourth quarter of 2000 through the CAISO. In 2001, PG&E and Southern
California Edison defaulted on payment obligations owed to various energy suppliers,
including the CAISO. The CAISO in turn defaulted on its payment obligations to PSE and
various other energy suppliers. On March 1, 2002, Southern California Edison
paid its past due energy obligations to the CAISO and various other parties; however,
those funds were not used to pay the outstanding balance of the CAISO obligations to PSE.
PSE is continuing to pursue recovery of the CAISO receivable. 

        On
October 1, 2002, the CAISO determined a refund was due to PSE totaling $2.2 million in
connection with a FERC order of August 27, 2002 that determined parties that paid the
CAISO transmission access charges for energy delivered into the CAISOs control area
in calendar 2000 had been overcharged by the CAISO. PSE received $1.1 million of this
refund on October 8, 2002, which was credited to the CAISO receivable, reducing the
receivable balance recorded by PSE to $66.8 million. PSE has a bad debt reserve and a
transaction fee reserve totaling $41.5 million in connection with the CAISO receivable,
such that the net receivable at March 31, 2003 was $25.3 million. The balance of the
refund has not been paid by the CAISO. 

        On
July 25, 2001, FERC ordered an evidentiary hearing (Docket No. EL00-95) to determine the
amount of refunds due to California energy buyers, including the CAISO, for purchases made
in the spot markets operated by the CAISO during the period October 2, 2000
through June 20, 2001. On December 12, 2002, the Administrative Law Judge
conducting the hearings issued his certification of proposed findings on California refund
liability to FERC. The appendix to the certification indicated that the net cash position
as of March 2002 for PSE would be an amount due to PSE of $61.9 million, and the refund
PSE would owe to the CAISO would be $26.3 millionmaking a net receivable for PSE of
$35.6 million. The appendix calculations did not include, however, two stipulations and/or
findings from the body of the opinion that excluded certain PSE transactions from refund
liability, primarily because they were not spot market transactions. Applying
those stipulations would reduce the refund PSE would owe by $6.4 million, and make the net
PSE receivable approximately $42.0 million. The certification also stated that the amounts
owing should be adjusted for interest, a calculation the Administrative Law Judge did not
make. 
        The
FERC Staff issued a report in August 2002 (Docket No. PA02-2) that, among other things,
recommended that FERC modify the methodology for calculating refunds in the California
refund proceeding (Docket No. EL00-95) by adopting an assumed price for the cost of
natural gas equal to producing basin spot prices plus transportation costs. This
methodology of calculating the cost of natural gas would reduce the amount owed by the
CAISO to PSE for sales made during 2000 and 2001. 

        On
March 26, 2003, FERC issued an Order on Proposed Findings on Refund Liability in Docket
EL00-95 that substantially adopted the recommendations made by the Administrative Law
Judge on December 12, 2002, as discussed above, with the major exception of the fact that
the Order also substantially adopts the FERC Staff gas price recommendation from the
August 2002 report. The March 26 Order is also silent as to the two PSE transactions that
were stipulated and found to be outside the spot market. PSE filed a motion
for clarification and/or rehearing on the two stipulated transactions on April 25, 2003
that were not addressed in the order. The total gross revenue associated with the two
non-spot transactions subject to the stipulation is approximately $26 million.
If (1) the stipulation excluding those transactions from refunds is not upheld, (2) the
mitigated prices including gas price adjustments are applied, and (3) related increases
are made to PSEs application for recovery of PSEs fuel costs, the cumulative
effect would be to increase the amount of refunds owed by PSE to the CAISO by
approximately $15 million. In addition, there would be substantial reductions to the
interest owed to PSE because of the much lower principal balance due. Making all of those
assumptions would, according to PSEs current estimates, reduce PSEs California
receivable by over $17 million, making the total receivable approximately $8 million. 

        Assuming
that the stipulation and findings as to PSEs two non-spot transactions
are upheld, the March 26 and April 22 orders do not appear to materially adjust the net
receivable from the CAISO recorded by PSE. Based upon the order PSE has estimated a range
related to the CAISO receivable to be between $24.4 million and $25.3 million, including
interest on past due amounts. Given the number of parties involved and the issues at
stake, a rehearing of the March 26 Order and ultimate appeals of that order to federal
appeals courts are expected. Indeed, more than 70 appeals from this proceeding are already
pending before the Ninth or District of Columbia circuits. The appellate process could
delay ultimate resolution of these claims for more than another year. 

        The
March 26 Order permits generators that wish to recover fuel costs above the amount set
using the Staff methodology to submit their actual cost data by May 12, 2003.
FERC issued an Order Clarifying Fuel Cost Allowance on April 22, 2003 that further elaborates
as to which fuel cost data is to be supplied.  PSE reviewed its fuel cost data and filed
documents to recover its actual fuel costs above the amount set using the Staff methodology.
The March 26 Order contemplates a rehearing
process, followed by a recalculation (settlements and billing process) by the
CAISO of amounts owed and owing by or to each market participant. The March 26 Order
defers that process until after FERC makes a final decision in the casewhich is
expected to occur in the second quarter of 2003. Thus, PSE will not receive the CAISO
statement of the amount that CAISO believes is owed or owing to PSE for a few months at
least. 

        On
November 20, 2002, FERC issued an Order on Motion for Discovery Order in the EL00-95
docket that granted a motion to allow parties to adduce additional evidence
into the refund proceedings that is either indicative or counter-indicative of
market manipulation. On December 19, 2002, in the EL01-10 docket (the Pacific
Northwest refund proceeding), FERC issued a similar Order on Motions to Reopen Evidentiary
Record for the purpose of allowing parties to submit additional evidence concerning
potential refunds for spot market bilateral sales transactions in the Pacific
Northwest, and to provide all parties an opportunity to ensure that all
relevant evidence is adduced in this proceeding, but also to bring closure and certainty
to this proceeding  fairly and quickly. On March 3, 2003 the California
parties reiterated their allegations of market manipulation against approximately 60
companies including PSE. Certain parties also filed such allegations in the Pacific
Northwest refund proceeding on that date. PSE and virtually all market participants
replied to the March 3 filings in both dockets on March 20, 2003. The March 26 Order on
Proposed Findings on Refund Liability expressly defers treatment of the March 3 and March
20 filings until after FERC has had an opportunity to review them. Also on March 26 in its
public meeting, FERC discussed the Pacific Northwest refund proceeding and appeared to
reach a consensus that the docket should go forward in some manner. No order has been
issued in that respect as of May 6, 2003. The March 26 FERC Order contemplates one
or more additional enforcement actions against entities found to have committed market
manipulation in violation of the CAISO or PX tariffs. No timetable for initiating
any such proceedings has been announced. 

        On
March 26, 2003, FERC Staff issued its Final Report on Price Manipulation in Western
Markets in Docket PA02-2. The more than 400-page Final Report recommends, among other
things, further proceedings against approximately 37 companies alleged to be involved in
relationships with Enron or having engaged in similar improper market manipulation
strategies. PSE appears on some lists of potential parties that allegedly profited from
usage of certain strategies, and is on the list of 37 companies. On numerous occasions,
including in PSEs filings in docket EL00-95 on March 20, 2003, PSE has reported
PSEs use of Enron as a scheduling coordinator for transactions in the California
energy markets to FERC, particularly in the period before PSE became a scheduling
coordinator in the CAISO market in early 2000. PSE has denied any involvement in improper
trading schemes or market manipulation. Based upon the FERC Staff Final Report, FERC
issued orders to show cause to certain entities on March 26. PSE was not among those
parties, but FERC has indicated it is not finished with its investigation process. 

        On
May 31, 2002, FERC conditionally dismissed a complaint filed on March 20, 2002 by the
California Attorney General in Docket EL02-71 that alleged violations of the Federal Power
Act by FERC and all sellers (including PSE) of electric power and energy into California.
The complaint asserted that FERCs adoption and implementation of market rate
authority was flawed and, as a result, that individual sellers such as PSE were liable for
sales of energy at rates that were unjust and unreasonable. The condition for
dismissal was that all sellers re-file transaction summaries of sales to and purchases
from certain California entities during 2000 and 2001. PSE re-filed such transaction
summaries in July 2002. The order of dismissal is now on appeal to the U.S. Ninth Circuit
Court of Appeals. 

        On
the same day as FERCs order in Docket EL02-71 was entered, the California Attorney
General announced it had filed individual complaints against a number of sellers,
including PSE, in California Superior Court in San Francisco. That complaint alleges that
PSEs sales to California violated the requirements of the Federal Power Act and
that, as such, the sales also violated certain sections of the California Business
Practices Act forbidding unlawful business practices. The complaint asserts that each such
violation subjects PSE to a fine of up to $2,500 plus an award of
attorneys fees and asserts that there were thousands of such violations.
PSE has removed that suit to federal court and has moved to dismiss it on the grounds that
the issues are within the exclusive or primary jurisdiction of FERC. On March 25, 2003,
the motion to dismiss PSE was granted, the district judge ruling that all the claims made
were subject to the exclusive jurisdiction of FERC. The California Attorney General has
appealed that ruling to the U.S. Ninth Circuit Court of Appeals. 

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

Other Proceedings

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

        In
October 2002, PSE provided information in response to a request by the U.S. Commodity
Futures Trading Commission (CFTC) for information about a limited number of specific
transactions with regional counterparties which have been the subject of an investigation
by the CFTC. PSEs own review of these trades concluded that all the transactions
were lawful and served normal business purposes. In January 2003, PSE was asked to provide
additional information to the CFTC, primarily concerning the results of any PSE internal
investigation as to its trading activities and reports to indices. PSE responded to that
request by providing information in February 2003. 

        In
December 2002, PSE was named as one of more than 30 defendants in two class actions, one
filed in the federal district court in Seattle and the other in Multnomah County Circuit
Court in Oregon. PSE was served with the complaint and summons in the Washington federal
court case on February 3, 2003, but as of May 6, 2003 had not been served in the Oregon
case. Nonetheless, the Oregon case was removed to Oregon federal court by Reliant Energy
Services on February 5, 2003. The complaints allege that they are brought on behalf of all
retail customers in Washington and Oregon, respectively, and seek relief against the
defendants (each of which is a seller of electric energy at wholesale in certain markets)
for unfair or deceptive acts, fraud by concealment, negligence and
for an accounting. No specific amounts of damages are pled in the complaints. Motions to
transfer the cases to California, where other similar class actions are pending, are
scheduled to be heard before the panel for Multi-District Litigation on May 29, 2003. In
early May 2003, the plaintiffs in both cases filed motions for voluntary dismissal. Those
motions are expected to be heard before the end of May 2003. The motions expressly reserve
the right to refile the complaints. 

        PSE
cannot predict the outcome of any of these ongoing proceedings relating to the western
power markets, or whether the ultimate impact on PSE will be material.

|     
|-----
|Other

On
March 31, 2003, PSE released for public comment its least-cost plan for meeting
customers energy needs through a diversified mix of energy supplies. The plan was
open for 30 days of public comment before review by the Washington Commission. After
incorporating the comments from the Washington Commission staff, key stakeholder groups,
and the public, PSEs plan was filed with the Washington Commission on April 30, 2003
and will be revised in August 2003 to incorporate forthcoming energy-efficiency data. PSE
is actively reviewing new generating resources alternatives. 

        On
July 31, 2002, FERC issued its Notice of Proposed Rulemaking on Remedying Undue
Discrimination through Open Access Transmission Service and Standard Electricity Market
Design (SMD NOPR). The SMD NOPR would have major implications for the delivery of electric
energy throughout the U.S if enacted in its proposed form. Major elements of FERCs
proposal include: (a) the use of Network Access Service to replace the existing network
and point-to-point services. All customers, including load-serving entities on behalf of
bundled retail load, would be required to take network service under a new pro forma
tariff; (b) Vertically integrated utilities would be required to retain Independent
Transmission Providers to administer the new tariff and functionally operate transmission
systems; (c) The formation of Regional State Advisory Committees and other regional
entities to coordinate the planning, certification and siting of new transmission
facilities in cooperation with states. State regulators and industry representatives have
pointed out that the Western North American electricity market has unique characteristics
that may not readily lend itself to the Standard Market Design proposed by FERC. FERC has
expressed its willingness to offer regional flexibility in its order on RTO West, Docket
Nos. RT01-35-005 and RT01-35-007, issued September 18, 2002. In April 2003, FERC issued a
white paper responding to concerns of state regulators regarding the impact of the SMD
proposal on the Western market.

Item 3.    Quantitative and
Qualitative Disclosure About Market Risk

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

Portfolio Management.The
nature of serving regulated customers with its wholesale portfolio of owned and contracted
resources does expose the Company to some volumetric and commodity price risks. The
Companys energy risk management function monitors and manages these risks using
analytical models and tools. The Company manages its energy supply portfolio to achieve
three primary objectives:

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

| | (ii) | Manage
portfolio risks to limit undesired impacts on the           Companys financial
results and to stabilize earnings; and
| | ---- | -----------------------------------------------------------------------------------------------------------------------------

| | (iii) | Optimize
the value of the Companys energy supply assets.
| | ----- | ---------------------------------------------------------

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

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

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

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

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

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

        At
March 31, 2003, the Company had an after-tax net asset of approximately $10.8 million of
energy contracts designated as qualifying cash flow hedges and a corresponding unrealized
gain amount in other comprehensive income. The Company also had energy contracts that were
marked-to-market through current earnings for the first quarter of 2003 of $0.3 million
after-tax. A hypothetical 10% increase in the market prices of natural gas and electricity
would increase the fair value of qualifying cash flow hedges by approximately $5.9 million
after-tax and would increase current earnings for those contracts marked-to-market in
earnings by an immaterial amount.

Interest Rate Risk.The
Company believes its interest rate risk primarily relates to the use of short-term debt
instruments, variable rate leases and long-term debt financing needed to fund capital
requirements. The Company manages its interest rate risk through the issuance of mostly
fixed-rate debt of various maturities. The Company does utilize bank borrowings,
commercial paper and line of credit facilities to meet short-term cash requirements. These
short-term obligations are commonly refinanced with fixed-rate bonds or notes when needed
and when interest rates are considered favorable. The Company may enter into swap
instruments to manage the interest rate risk associated with these debts and did not have
any swap instruments outstanding as of March 31, 2003.

# 

Item 4.    Controls and
Procedures Evaluation of disclosure controls
and procedures.Under the supervision and with the participation of Puget
Energys and PSEs management, including the Companies Chief Executive
Officer and Chief Financial Officer, Puget Energy and PSE have evaluated the effectiveness
of the Companies disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934) within 90 days of the filing date of this
quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer of Puget Energy and PSE concluded that these disclosure controls and
procedures are effective.

Changes in internal controls.There have been no significant changes in Puget Energys or PSEs internal
controls or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

PART II OTHER INFORMATIONItem 1.     Legal Proceedings
See
the section titled Proceedings Relating to the Western Power Market under Item
2 Managements Discussion and Analysis of Financial Conditions and Results of
Operations of this Quarterly Report on Form 10-Q. 

        Contingencies
arising out of the normal course of the Companys business exist at March 31, 2003.
The ultimate resolution of these issues is not expected to have a material adverse impact
on the financial condition, results of operations or liquidity of the Company.

Item 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 & Puget Sound Energy:
| | -------------------------------------------

| | Form 8-K
dated January 15, 2003, Item 5  Other Events, related to the completion of new
liquidity facilities and impact of forecasted adverse hydroelectric conditions. 
Form 8-K
dated February 12, 2003, Item 5  Other Events, related to the release of year-end
earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# SIGNATURES

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

|                   |                                                                                                      
|------------------ | -----------------------------------------------------------------------------------------------------
|                   | PUGET ENERGY, INC.                                                                                   
|                   | PUGET SOUND ENERGY, INC.                                                                             
|                   |                                                                                                      
|                   | /s/ James W. Eldredge                                                                                
|                   |                                                                                                      
|                   | James W. Eldredge                                                                                    
|                   | Corporate Secretary and Chief Accounting Officer                                                     
|                   |                                                                                                      
|Date: May 14, 2003 | Chief accounting officer and officer duly
authorized to sign this report on behalf of each registrant

# CERTIFICATIONS OF
PUGET ENERGY

I, Stephen P. Reynolds, certify that:

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

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

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

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

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

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

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

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

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

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

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

|                   |                                      
|------------------ | -------------------------------------
|Date: May 14, 2003 |                                      
|                   |                                      
|                   | /s/ Stephen P. Reynolds              
|                   |                                      
|                   | Stephen P. Reynolds                  
|                   | President and Chief Executive Officer

I, Stephen A. McKeon, certify that:

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

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

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

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

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

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

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

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

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

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

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

|                   |                               
|------------------ | ------------------------------
|Date: May 14, 2003 |                               
|                   |                               
|                   | /s/ Stephen A. Mckeon         
|                   |                               
|                   | Stephen A. McKeon             
|                   | Sr. Vice President Finance and
|                   | Chief Financial Officer       

# CERTIFICATIONS OF
PUGET SOUND ENERGY

I, Stephen P. Reynolds, certify that:

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

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

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

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

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

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

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

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

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

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

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

|                   |                                      
|------------------ | -------------------------------------
|Date: May 14, 2003 |                                      
|                   |                                      
|                   | /s/ Stephen P. Reynolds              
|                   |                                      
|                   | Stephen P. Reynolds                  
|                   | President and Chief Executive Officer

I, Stephen A. McKeon, certify that:

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

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

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

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

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

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

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

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

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

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

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

|                   |                               
|------------------ | ------------------------------
|Date: May 14, 2003 |                               
|                   |                               
|                   | /s/ Stephen A. Mckeon         
|                   |                               
|                   | Stephen A. McKeon             
|                   | Sr. Vice President Finance and
|                   | Chief Financial Officer       

# EXHIBIT INDEX

The following exhibits are filed
herewith:

| | 12-1 | Statement
setting forth computation of ratios of earnings to fixed charges (1998 through 2002 and
12 months ended March 31, 2003) for Puget Energy.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 12-2 | Statement
setting forth computation of ratios of earnings to fixed charges (1998 through 2002 and
12 months ended March 31, 2003) for PSE.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 99-1 | Chief
Executive  Officer  certification  pursuant to 18 U.S.C.  section 1350, as adopted
 pursuant to section 906 of                      the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 99-2 | Chief
Financial  Officer  certification  pursuant to 18 U.S.C.  section 1350, as adopted
 pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------