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, 2007**
              
              **OR**




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








**For
                the Transition period from ________ to
                _________**








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








1-16305
            **PUGET
                ENERGY, INC.**
              A
                Washington Corporation
              10885
                NE 4thStreet, Suite 1200
              Bellevue,
                Washington 98004-5591
              (425)
                454-6363
            91-1969407








1-4393
            **PUGET
                SOUND ENERGY, INC.**
              A
                Washington Corporation
              10885
                NE 4thStreet, Suite 1200
              Bellevue,
                Washington 98004-5591
              (425)
                454-6363
            91-0374630





Indicate
      by check mark whether the registrants: (1) have filed all reports required
      to be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrants were
      required to file such reports), and (2) have been subject to such filing
      requirements for the past 90 days.




Puget
                Energy, Inc.
            Yes
            /X/
            No
            /
                /
            
            Puget
                Sound Energy, Inc.
            Yes
            /X/
            No
            /
                /





Indicate
      by check mark whether registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.




Puget
                Energy, Inc.
            Large
                accelerated filer
            /X/
            Accelerated
                filer
            /
                /
            Non-accelerated
                filer
            /
                /Puget
                Sound Energy, Inc.
            Large
                accelerated filer
            /
                /
            Accelerated
                filer
            /
                /
            Non-accelerated
                filer
            /X/





Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2)


Puget
                Energy, Inc.
            Yes
            /
                /
            No
            /X/
            
            Puget
                Sound Energy, Inc.
            Yes
            /
                /
            No
            /X/





As
      of
      April 26, 2007, (i) the number of shares of Puget Energy, Inc. common stock
      outstanding was 116,859,674 ($.01 par value) and (ii) all of the outstanding
      shares of Puget Sound Energy, Inc. common stock were held by Puget Energy,
      Inc.








**Table
      of Contents**


**Definitions****Filing
                Format****Forward
                Looking
                Statements****Part
                I.**
            **Financial
                Information****Item
                1.**
            **Financial
                Statements****Puget
                Energy, Inc.**Consolidated
                Statements of Income - Three Months Ended
                March 31, 2007 and 2006Consolidated
                Statements of Comprehensive Income - Three Months EndedMarch
                31, 2007 and 2006Consolidated
                Balance Sheets - March 31, 2007 and December
                31, 2006Consolidated
                Statements of Cash Flows - Three Months Ended
                March 31, 2007 and 2006**Puget
                Sound Energy, Inc.**Consolidated
                Statements of Income - Three Months Ended
                March 31, 2007 and 2006Consolidated
                Statements of Comprehensive Income - Three Months EndedMarch
                31, 2007 and 2006Consolidated
                Balance Sheets - March 31, 2007 and December
                31, 2006Consolidated
                Statements of Cash Flows - Three Months
                Ended March 31, 2007 and 2006**Notes**Combined
                Notes to Consolidated Financial
                Statements**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition**
              **and
                Results of Operations****Item
                3.**
            **Quantitative
                and Qualitative Disclosure About Market
                Risk****Item
                4.**
            **Controls
                and Procedures****Part
                II.**
            **Other
                Information****Item
                1.**
            **Legal
                Proceedings****Item
                1A.**
            **Risk
                Factors****Item
                6.**
            **Exhibits****Signatures****Exhibit
                Index**








**DEFINITIONS**





AFUDC
            Allowance
                for Funds Used During ConstructionBPA
            Bonneville
                Power AssociationCAISO
            California
                Independent System OperatorFASB
            Financial
                Accounting Standards BoardFERC
            Federal
                Energy Regulatory CommissionFIN
            Financial
                Accounting Standards Board InterpretationGAAP
            Generally
                Accepted Accounting PrinciplesInfrastruX
            InfrastruX
                Group, Inc.kWh
            Kilowatt
                HourLIBOR
            London
                Interbank Offered RateMW
            Megawatt
                (one MW equals one thousand kW)MWh
            Megawatt
                Hour (one MWh equals one thousand kWh)PCA
            Power
                Cost AdjustmentPCORC
            Power
                Cost Only Rate CasePGA
            Purchased
                Gas AdjustmentPSE
            Puget
                Sound Energy, Inc.PSE
                Funding
            PSE
                Funding, Inc.PTC
            Production
                Tax CreditPuget
                Energy
            Puget
                Energy, Inc.Tenaska
            Tenaska
                Power Fund, L.P.SFAS
            Statement
                of Financial Accounting StandardsWashington
                Commission
            Washington
                Utilities and Transportation
                Commission








**FILING
      FORMAT**


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


Forward-looking
      statements involve risks and uncertainties that could cause actual results
      or
      outcomes to differ materially from those expressed. Puget Energy’s and PSE’s
      expectations, beliefs and projections are expressed in good faith and are
      believed by Puget Energy and PSE, as applicable, to have a reasonable basis,
      including without limitation management’s examination of historical operating
      trends, data contained in records and other data available from third parties;
      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:





·
            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, cost recovery, industry and rate structures, transmission
                and generation business structures within PSE, acquisition and disposal
                of
                assets and facilities, operation, maintenance and construction of
                electric
                generating facilities, operation of distribution and transmission
                facilities (gas and electric), licensing of hydroelectric operations
                and
                gas storage facilities, recovery of other capital investments, recovery
                of
                power and gas costs, recovery of regulatory assets and present or
                prospective wholesale and retail competition;·
            Changes
                in, adoption of and compliance with laws and regulations, including
                decisions and policies concerning the environment, climate change,
                emissions, natural resources, and fish and wildlife (including the
                Endangered Species Act);·
            The
                ability to recover changes in enacted federal, state or local tax
                laws
                through revenue in a timely manner;·
            Natural
                disasters, such as hurricanes, earthquakes, floods, fires and landslides,
                which can interrupt service and/or cause temporary supply disruptions
                and/or price spikes in the cost of fuel and raw materials;·
            Commodity
                price risks associated with procuring natural gas and power in wholesale
                markets that impact customer loads;·
            Wholesale
                market disruption, which may result in a deterioration of market
                liquidity, increase the risk of counterparty default, affect the
                regulatory and legislative process in unpredictable ways, negatively
                affect wholesale energy prices and/or impede PSE’s ability to manage its
                energy portfolio risks and procure energy supply, affect the availability
                and access to capital and credit markets and/or impact delivery of
                energy
                to PSE from its suppliers;·
            Financial
                difficulties of other energy companies and related events, which
                may
                affect the regulatory and legislative process in unpredictable ways
                and
                also adversely affect the availability of and access to capital and
                credit
                markets and/or impact delivery of energy to PSE from it
                suppliers;·
            The
                effect of wholesale market structures (including, but not limited
                to,
                regional market designs or transmission organizations) or other related
                federal initiatives;·
            PSE
                electric or gas distribution system failure, which may impact PSE’s
                ability to deliver energy supply to its customers;·
            Changes
                in weather conditions in the Pacific Northwest, which could have
                effects
                on customer usage and PSE’s revenues, thus impacting net
                income;·
            Weather,
                which can have a potentially serious impact on PSE’s ability to procure
                adequate supplies of gas, fuel or purchased power to serve its customers
                and on the cost of procuring such supplies;·
            Variable
                hydro conditions, which can impact streamflow and PSE’s ability to
                generate electricity from hydroelectric facilities;·
            Plant
                outages, which can have an adverse impact on PSE’s expenses with respect
                to repair costs, added costs to replace energy or higher costs associated
                with dispatching a more expensive resource;·
            The
                ability of gas or electric plant to operate as intended;·
            The
                ability to renew contracts for electric and gas supply and the price
                of
                renewal;·
            Blackouts
                or large curtailments of transmission systems, whether PSE’s or others’,
                which can affect PSE’s ability to deliver power or natural gas to its
                customers;·
            The
                ability to restart generation following a regional transmission
                disruption;·
            Failure
                of the interstate gas pipeline delivering to PSE’s system, which may
                impact PSE’s ability to adequately deliver gas supply to its customers;·
            The
                amount of collection, if any, of PSE’s receivables from the California
                Independent System Operator (CAISO) and other parties and the amount
                of
                refunds found to be due from PSE to the CAISO or other parties;·
            Industrial,
                commercial and residential growth and demographic patterns in the
                service
                territories of PSE;·
            General
                economic conditions in the Pacific Northwest, which might impact
                customer
                consumption or affect PSE’s accounts receivable;·
            The
                loss of significant customers or changes in the business of significant
                customers, which may result in changes in demand for PSE’s services;·
            The
                impact of acts of God, terrorism, flu pandemic or similar significant
                events;·
            Capital
                market conditions, including changes in the availability of capital
                or
                interest rate fluctuations;·
            Employee
                workforce factors, including strikes, work stoppages, availability
                of
                qualified employees or the loss of a key executive;·
            The
                ability to obtain adequate insurance coverage and the cost of such
                insurance;·
            Future
                losses related to corporate guarantees provided by Puget Energy as
                a part
                of the sale of its InfrastruX subsidiary; and·
            The
                ability to maintain effective internal controls over financial reporting.




Any
      forward-looking statement speaks only as of the date on which such statement
      is
      made, and, except as required by law, Puget Energy and PSE undertake no
      obligation to update any forward-looking statement to reflect events or
      circumstances after the date on which such statement is made or to reflect
      the
      occurrence of unanticipated events. New factors emerge from time to time and
      it
      is not possible for management to predict all such factors, nor can it assess
      the impact of any such factor on the business or the extent to which any factor,
      or combination of factors, may cause results to differ materially from those
      contained in any forward-looking statement. You are also advised to consult
      Item
      1A-“Risk Factors” in our report on Form 10-K for the year ended December 31,
      2006.





**PART
      I**  **FINANCIAL
      INFORMATION**





Item
      1.  **Financial
      Statements**





**PUGET
      ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF INCOME


(Dollars
      in thousands except per share amounts)


(Unaudited)




Three
                      Months Ended
                    March
                      31,2007
                  
                  2006Operating
                      Revenues:Electric
                  
                  $
                  527,619
                  
                  $
                  467,424Gas
                  
                  
                  467,009
                  
                  
                  406,588Non-utility
                      operating revenues
                  
                  
                  9,276
                  
                  
                  4,136Total
                      operating revenues
                  
                  
                  1,003,904
                  
                  
                  878,148Operating
                      Expenses:Energy
                      costs:Purchased
                      electricity
                  
                  
                  282,092
                  
                  
                  252,125Electric
                      generation fuel
                  
                  
                  26,058
                  
                  
                  21,584Residential
                      exchange
                  
                  
                  (34,478
                  )
                  
                  (56,633
                  )Purchased
                      gas
                  
                  
                  310,647
                  
                  
                  266,679Net
                      unrealized (gain)loss on derivative instruments
                  
                  
                  (5,782
                  )
                  
                  975Utility
                      operations and maintenance
                  
                  
                  98,171
                  
                  
                  87,368Non-utility
                      expense and other
                  
                  
                  2,130
                  
                  
                  793Depreciation
                      and amortization
                  
                  
                  69,609
                  
                  
                  63,884Conservation
                      amortization
                  
                  
                  10,328
                  
                  
                  8,048Taxes
                      other than income taxes
                  
                  
                  87,069
                  
                  
                  79,739Total
                      operating expenses
                  
                  
                  845,844
                  
                  
                  724,562Operating
                      income
                  
                  
                  158,060
                  
                  
                  153,586Other
                      income (deductions):Other
                      income
                  
                  
                  4,764
                  
                  
                  3,340Other
                      expense
                  
                  
                  (1,031
                  )
                  
                  (1,476
                  )Interest
                      charges:AFUDC
                  
                  
                  2,416
                  
                  
                  2,022Interest
                      expense
                  
                  
                  (51,261
                  )
                  
                  (43,712
                  )Income
                      from continuing operations before income taxes
                  
                  
                  112,948
                  
                  
                  113,760Income
                      tax expense
                  
                  
                  33,887
                  
                  
                  40,187Income
                      from continuing operations
                  
                  
                  79,061
                  
                  
                  73,573Income
                      from discontinued segment (net of tax)
                  
                  
                  --
                  
                  
                  18,947Net
                      income before cumulative effect of accounting change
                  
                  
                  79,061
                  
                  
                  92,520Cumulative
                      effect of implementation of accounting change (net of tax)
                  
                  
                  --
                  
                  
                  89Net
                      income
                  
                  $
                  79,061
                  
                  $
                  92,609Common
                      shares outstanding weighted average (in thousands)
                  
                  
                  116,479
                  
                  
                  115,725Diluted
                      shares outstanding weighted average (in thousands)
                  
                  
                  116,974
                  
                  
                  116,190Basic
                      earnings per common share before cumulative effect of accounting
                      change
                  
                  $
                  0.68
                  
                  $
                  0.64Basic
                      earnings per common share from discontinued operations
                  
                  
                  --
                  
                  
                  0.16Cumulative
                      effect from accounting change
                  
                  
                  --
                  
                  
                  --Basic
                      earnings per common share
                  
                  $
                  0.68
                  
                  $
                  0.80Diluted
                      earnings per common share before cumulative effect of accounting
                      change
                  
                  $
                  0.68
                  
                  $
                  0.63Diluted
                      earnings per common share from discontinued operations
                  
                  
                  --
                  
                  
                  0.16Cumulative
                      effect from accounting change
                  
                  
                  --
                  
                  
                  --Diluted
                      earnings per common share
                  
                  $
                  0.68
                  
                  $
                  0.79





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





**PUGET
      ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME


(Dollars
      in thousands)


(Unaudited)





Three
                Months Ended
              March
                31,2007
            
            2006Net
                income
            
            $
            79,061
            
            $
            92,609Other
                comprehensive income, net of tax at 35%:Foreign
                currency translation adjustment, net of tax of $0
            
            
            --
            
            
            (17
            )Unrealized
                gain from pension and postretirement plans, net of tax of $642 and
                $0,
                respectively
            
            
            1,193
            
            
            --Net
                unrealized gains (losses) on derivative instruments during the period,
                net
                of tax of $1,914 and $(2,844), respectively
            
            
            3,554
            
            
            (5,281
            )Reversal
                of net unrealized gains (losses) on derivative instruments settled
                during
                the period, net of tax of $1,653 and $(4,096),
                respectively
            
            
            3,070
            
            
            (7,607
            )Amortization
                of cash flow hedge contracts to earnings, net of tax of $43 and $103,
                respectively
            
            
            80
            
            
            191Deferral
                of cash flow hedges related to the power cost adjustment mechanism,
                net of
                tax of $0 and $2,992, respectively
            
            
            --
            
            
            5,557Other
                comprehensive income (loss)
            
            
            7,897
            
            
            (7,157
            )Comprehensive
                income
            
            $
            86,958
            
            $
            85,452




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





**PUGET
      ENERGY, INC.**


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands)








**ASSETS**





March
                31,
              2007
              (Unaudited)
            
            December
                31,
              2006Utility
                plant: (at original cost, including construction work in progress
                of$230,341
                and $206,459, respectively)Electric
            
            $
            5,522,388
            
            $
            5,334,368Gas
            
            
            2,183,902
            
            
            2,146,048Common
                plant
            
            
            464,439
            
            
            458,262Less:
                Accumulated depreciation and amortization
            
            
            (2,822,541
            )
            
            (2,757,632
            )Net
                utility plant
            
            
            5,348,188
            
            
            5,181,046Other
                property and investments
            
            
            152,085
            
            
            151,462Current
                assets:Cash
            
            
            26,884
            
            
            28,117Restricted
                cash
            
            
            840
            
            
            839Accounts
                receivable, net of allowance for doubtful accounts
            
            
            210,904
            
            
            253,613Secured
                pledged accounts receivable
            
            
            162,000
            
            
            110,000Unbilled
                revenues
            
            
            141,714
            
            
            202,492Purchased
                gas adjustment receivable
            
            
            --
            
            
            39,822Materials
                and supplies, at average cost
            
            
            51,134
            
            
            43,501Fuel
                and gas inventory, at average cost
            
            
            59,229
            
            
            115,752Unrealized
                gain on derivative instruments
            
            
            29,520
            
            
            16,826Prepayments
                and other
            
            
            11,065
            
            
            9,228Deferred
                income taxes
            
            
            --
            
            
            1,175Total
                current assets
            
            
            693,290
            
            
            821,365Other
                long-term assets:Restricted
                cash
            
            
            3,859
            
            
            3,814Regulatory
                asset for deferred income taxes
            
            
            110,927
            
            
            115,304Regulatory
                asset for PURPA contract buyout costs
            
            
            161,086
            
            
            167,941Unrealized
                gain on derivative instruments
            
            
            4,821
            
            
            6,934Power
                cost adjustment mechanism
            
            
            6,461
            
            
            6,357Other
            
            
            590,583
            
            
            611,816Total
                other long-term assets
            
            
            877,737
            
            
            912,166Total
                assets
            
            $
            7,071,300
            
            $
            7,066,039





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





**PUGET
      ENERGY, INC.**


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands)





**CAPITALIZATION
      AND LIABILITIES**





March
                31,
              2007
              (Unaudited)
            
            December
                31,
              2006Capitalization:Common
                shareholders’ investment:Common stock $0.01 par value, 250,000,000 shares authorized, 116,851,075
                and 116,576,636 shares outstanding, respectively
            
            $
            1,169
            
            $
            1,166Additional
                paid-in capital
            
            
            1,973,748
            
            
            1,969,032Earnings
                reinvested in the business
            
            
            222,441
            
            
            172,529Accumulated
                other comprehensive loss, net of tax at 35%
            
            
            (18,801
            )
            
            (26,698
            )Total
                shareholders’ equity
            
            
            2,178,557
            
            
            2,116,029Redeemable
                securities and long-term debt:Preferred stock subject to mandatory redemption
            
            
            1,889
            
            
            1,889Junior subordinated debentures of the corporation payable to a subsidiary
                trust holding mandatorily redeemable preferred securities
            
            
            --
            
            
            37,750Long-term debt
            
            
            2,608,360
            
            
            2,608,360Total redeemable securities and long-term debt
            
            
            2,610,249
            
            
            2,647,999Total capitalization
            
            
            4,788,806
            
            
            4,764,028Current
                liabilities:Accounts
                payable
            
            
            285,164
            
            
            379,579Short-term
                debt
            
            
            461,495
            
            
            328,055Current
                maturities of long-term debt
            
            
            25,000
            
            
            125,000Current
                maturities of junior subordinated debentures of the
                corporation
            
            
            37,750
            
            
            --Accrued
                expenses:Purchased gas liability
            
            
            3,844
            
            
            --Taxes
            
            
            86,225
            
            
            54,977Salaries and wages
            
            
            16,056
            
            
            32,122Interest
            
            
            54,087
            
            
            36,915Unrealized
                loss on derivative instruments
            
            
            9,581
            
            
            70,596Deferred
                income taxes
            
            
            5,053
            
            
            --Other
            
            
            55,304
            
            
            43,889Total current liabilities
            
            
            1,039,559
            
            
            1,071,133Long-term
                liabilities:Deferred
                income taxes
            
            
            749,985
            
            
            745,095Unrealized
                loss on derivative instruments
            
            
            8
            
            
            415Other
                deferred credits
            
            
            492,942
            
            
            485,368Total long-term liabilities
            
            
            1,242,935
            
            
            1,230,878Total
                capitalization and liabilities
            
            $
            7,071,300
            
            $
            7,066,039





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





**PUGET
      ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Dollars
      in thousands, Unaudited)





Three
                Months Ended
              March
                31,2007
            
            2006Operating
                activities:Net
                income
            
            $
            79,061
            
            $
            92,609Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            69,609
            
            
            63,884Deferred
                income taxes and tax credits, net
            
            
            11,243
            
            
            (11,267
            )Net
                unrealized (gain) loss on derivative instruments
            
            
            (5,782
            )
            
            975Amortization
                of gas pipeline capacity assignment
            
            
            (2,690
            )
            
            --Non-cash
                return on regulatory assets
            
            
            (1,823
            )
            
            --Impairment
                on InfrastruX investment
            
            
            --
            
            
            (7,269
            )Decrease
                in residential exchange program
            
            
            (8,111
            )
            
            (12,746
            )Chelan
                PUD contract initiation prepayment
            
            
            --
            
            
            (89,000
            )Power
                cost adjustment mechanism
            
            
            (104
            )
            
            (7,499
            )Cash
                collateral paid from energy suppliers
            
            
            --
            
            
            (14,850
            )Storm
                damage deferred costs
            
            
            (16,759
            )
            
            (6,983
            )Other
            
            
            17,675
            
            
            6,715Change
                in certain current assets and liabilities:Accounts
                receivable and unbilled revenue
            
            
            51,487
            
            
            51,861Materials
                and supplies
            
            
            (7,633
            )
            
            (122
            )Fuel
                and gas inventory
            
            
            56,523
            
            
            45,085Prepayments
                and other
            
            
            (1,837
            )
            
            (5,231
            )Purchased
                gas adjustment receivable/payable
            
            
            43,666
            
            
            (5,079
            )Accounts
                payable
            
            
            (94,415
            )
            
            (4,913
            )Taxes
                payable
            
            
            31,248
            
            
            23,055Accrued
                expenses and other
            
            
            7,036
            
            
            19,175Net
                cash provided by operating activities
            
            
            228,394
            
            
            138,400Investing
                activities:Construction
                and capital expenditures - excluding equity AFUDC
            
            
            (239,681
            )
            
            (105,389
            )Energy
                efficiency expenditures
            
            
            (8,964
            )
            
            (6,884
            )Cash
                proceeds from property sales
            
            
            57
            
            
            --Refundable
                cash received for customer construction projects
            
            
            4,456
            
            
            2,554Restricted
                cash
            
            
            (46
            )
            
            (1
            )Other
            
            
            322
            
            
            6,255Net
                cash used by investing activities
            
            
            (243,856
            )
            
            (103,465
            )Financing
                activities:Change
                in short-term debt and leases, net
            
            
            133,440
            
            
            (13,157
            )Dividends
                paid
            
            
            (26,255
            )
            
            (25,929
            )Issuance
                of common stock
            
            
            1,940
            
            
            1,788Issuance
                of bonds and notes
            
            
            --
            
            
            1,264Redemption
                of bonds, notes and leases
            
            
            (100,000
            )
            
            --Issuance
                and redemption costs of bonds and other
            
            
            5,104
            
            
            137Net
                cash provided by financing activities
            
            
            14,229
            
            
            (35,897
            )Net
                increase (decrease) in cash
            
            
            (1,233
            )
            
            (962
            )Cash
                at beginning of year
            
            
            28,117
            
            
            22,897Cash
                at end of period
            
            $
            26,884
            
            $
            21,935Supplemental
                cash flow information:Cash
                paid for interest (net of capitalized interest)
            
            $
            32,009
            
            $
            30,823Income
                taxes paid
            
            
            --
            
            
            30,000





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





**PUGET
      SOUND ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF INCOME


(Dollars
      in thousands)


(Unaudited)





Three
                Months Ended
              March
                31,2007
            
            2006Operating
                revenues:Electric
            
            $
            527,619
            
            $
            467,424Gas
            
            
            467,009
            
            
            406,588Non-utility
                operating revenues
            
            
            9,276
            
            
            4,136Total
                operating revenues
            
            
            1,003,904
            
            
            878,148Operating
                expenses:Energy
                costs:Purchased
                electricity
            
            
            282,092
            
            
            252,125Electric
                generation fuel
            
            
            26,058
            
            
            21,584Residential
                exchange
            
            
            (34,478
            )
            
            (56,633
            )Purchased
                gas
            
            
            310,647
            
            
            266,679Unrealized
                (gain) loss on derivative instruments
            
            
            (5,782
            )
            
            975Utility
                operations and maintenance
            
            
            98,171
            
            
            87,368Non-utility
                expense and other
            
            
            1,967
            
            
            258Depreciation
                and amortization
            
            
            69,609
            
            
            63,884Conservation
                amortization
            
            
            10,328
            
            
            8,048Taxes
                other than income taxes
            
            
            87,069
            
            
            79,739Total
                operating expenses
            
            
            845,681
            
            
            724,027Operating
                income
            
            
            158,223
            
            
            154,121Other
                income (deductions):Other
                income
            
            
            4,764
            
            
            3,340Other
                expense
            
            
            (1,031
            )
            
            (1,476
            )Interest
                charges:AFUDC
            
            
            2,416
            
            
            2,022Interest
                expense
            
            
            (51,261
            )
            
            (43,712
            )Interest
                expense on Puget Energy note
            
            
            (336
            )
            
            --Income
                before income taxes
            
            
            112,775
            
            
            114,295Income
                tax expense
            
            
            33,998
            
            
            40,545Net
                income before cumulative effect of accounting change
            
            $
            78,777
            
            $
            73,750Cumulative
                effect of implementation of accounting change (net of tax)
            
            
            --
            
            
            89Net
                income
            
            $
            78,777
            
            $
            73,839





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





**PUGET
      SOUND ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME


(Dollars
      in thousands)


(Unaudited)





Three
                Months Ended
              March
                31,2007
            
            2006Net
                income
            
            $
            78,777
            
            $
            73,839Other
                comprehensive income, net of tax at 35%:Unrealized
                gain from pension and postretirement plans, net of tax of $642 and
                $0,
                respectively
            
            
            1,193
            
            
            --Net
                unrealized gains (losses) on derivative instruments during the period,
                net
                of tax of $1,914 and $(2,844), respectively
            
            
            3,554
            
            
            (5,281
            )Reversal
                of net unrealized gains (losses) on derivative instruments settled
                during
                the period, net of tax of $1,653 and $(4,096),
                respectively
            
            
            3,070
            
            
            (7,607
            )Amortization
                of cash flow hedge contracts to earnings, net of tax of $43 and $103,
                respectively
            
            
            80
            
            
            191Deferral
                of cash flow hedges related to the power cost adjustment mechanism,
                net of
                tax of $0 and $2,992, respectively
            
            
            --
            
            
            5,557Other
                comprehensive income (loss)
            
            
            7,897
            
            
            (7,140
            )Comprehensive
                income
            
            $
            86,674
            
            $
            66,699





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





**PUGET
      SOUND ENERGY, INC.**


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands)





**ASSETS**





March
                31,
              2007
              (Unaudited)
            
            December
                31,
              2006Utility
                plant: (at original cost, including construction work in progress
                of
                $230,341 and $206,459, respectively)Electric
            
            $
            5,522,388
            
            $
            5,334,368Gas
            
            
            2,183,902
            
            
            2,146,048Common
                plant
            
            
            464,439
            
            
            458,262Less:
                Accumulated depreciation and amortization
            
            
            (2,822,541
            )
            
            (2,757,632
            )Net
                utility plant
            
            
            5,348,188
            
            
            5,181,046Other
                property and investments
            
            
            152,085
            
            
            151,462Current
                assets:Cash
            
            
            26,684
            
            
            28,092Restricted
                cash
            
            
            840
            
            
            839Accounts
                receivable, net of allowance for doubtful accounts
            
            
            210,904
            
            
            253,613Secured
                pledged accounts receivable
            
            
            162,000
            
            
            110,000Unbilled
                revenues
            
            
            141,714
            
            
            202,492Purchased
                gas adjustment receivable
            
            
            --
            
            
            39,822Materials
                and supplies, at average cost
            
            
            51,134
            
            
            43,501Fuel
                and gas inventory, at average cost
            
            
            59,229
            
            
            115,752Unrealized
                gain on derivative instruments
            
            
            29,520
            
            
            16,826Prepayments
                and other
            
            
            10,490
            
            
            8,659Deferred
                income taxes
            
            
            --
            
            
            1,175Total
                current assets
            
            
            692,515
            
            
            820,771Other
                long-term assets:Regulatory
                asset for deferred income taxes
            
            
            110,927
            
            
            115,304Regulatory
                asset for PURPA contract buyout costs
            
            
            161,086
            
            
            167,941Unrealized
                gain on derivative instruments
            
            
            4,821
            
            
            6,934Power
                cost adjustment mechanism
            
            
            6,461
            
            
            6,357Other
            
            
            590,413
            
            
            611,598Total
                other long-term assets
            
            
            873,708
            
            
            908,134Total
                assets
            
            $
            7,066,496
            
            $
            7,061,413





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





**PUGET
      SOUND ENERGY, INC.**


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands)





**CAPITALIZATION
      AND LIABILITIES**





March
                31,
              2007
              (Unaudited)
            
            December
                31,
              2006Capitalization:Common
                shareholder’s investment:Common
                stock ($10 stated value) - 150,000,000 shares authorized, 85,903,791
                shares outstanding
            
            $
            859,038
            
            $
            859,038Additional
                paid-in capital
            
            
            998,289
            
            
            996,737Earnings
                reinvested in the business
            
            
            315,728
            
            
            263,206Accumulated
                other comprehensive loss, net of tax at 35%
            
            
            (18,801
            )
            
            (26,698
            )Total
                shareholder’s equity
            
            
            2,154,254
            
            
            2,092,283Redeemable
                securities and long-term debt:Preferred
                stock subject to mandatory redemption
            
            
            1,889
            
            
            1,889Junior
                subordinated debentures of the corporation payable to a subsidiary
                trust
                holding mandatorily redeemable preferred securities
            
            
            --
            
            
            37,750Long-term
                debt
            
            
            2,608,360
            
            
            2,608,360Total
                redeemable securities and long-term debt
            
            
            2,610,249
            
            
            2,647,999Total
                capitalization
            
            
            4,764,503
            
            
            4,740,282Current
                liabilities:Accounts
                payable
            
            
            285,007
            
            
            379,494Short-term
                debt
            
            
            461,495
            
            
            328,055Short-term
                note owed to Puget Energy
            
            
            24,376
            
            
            24,303Current
                maturities of long-term debt
            
            
            25,000
            
            
            125,000Current
                maturity of junior subordinated debentures of the
                corporation
            
            
            37,750
            
            
            --Accrued
                expenses:Purchased
                gas liability
            
            
            3,844
            
            
            --Taxes
            
            
            86,829
            
            
            55,365Salaries
                and wages
            
            
            15,788
            
            
            31,591Interest
            
            
            54,203
            
            
            37,031Unrealized
                loss on derivative instruments
            
            
            9,581
            
            
            70,596Deferred
                income taxes
            
            
            5,053
            
            
            --Other
            
            
            55,305
            
            
            43,889Total
                current liabilities
            
            
            1,064,231
            
            
            1,095,324Long-term
                liabilities:Deferred
                income taxes
            
            
            753,828
            
            
            749,033Unrealized
                loss on derivative instruments
            
            
            8
            
            
            415Other
                deferred credits
            
            
            483,926
            
            
            476,359Total
                long-term liabilities
            
            
            1,237,762
            
            
            1,225,807Total
                capitalization and liabilities
            
            $
            7,066,496
            
            $
            7,061,413


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





**PUGET
      SOUND ENERGY, INC.**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Dollars
      in thousands)


(Unaudited)




Three
                  Months Ended
                March
                  31,2007
              
              2006Operating
                  activities:Net
                  income
              
              $
              78,777
              
              $
              73,839Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              69,609
              
              
              63,884Deferred
                  income taxes and tax credits, net
              
              
              11,148
              
              
              (1,101
              )Net
                  unrealized (gain) loss on derivative instruments
              
              
              (5,782
              )
              
              975Amortization
                  of gas pipeline capacity assignment
              
              
              (2,690
              )
              
              --Non-cash
                  return on regulatory assets
              
              
              (1,823
              )
              
              --Decrease
                  in residential exchange program
              
              
              (8,111
              )
              
              (12,746
              )Accrual
                  of contract initiation payments
              
              
              --
              
              
              (89,000
              )Power
                  cost adjustment mechanism
              
              
              (104
              )
              
              (7,499
              )Cash
                  collateral paid from energy suppliers
              
              
              --
              
              
              (14,850
              )Storm
                  damage deferred costs
              
              
              (16,759
              )
              
              (6,983
              )Other
              
              
              17,586
              
              
              7,622Change
                  in certain current assets and liabilities:Accounts
                  receivable and unbilled revenue
              
              
              51,487
              
              
              57,085Materials
                  and supplies
              
              
              (7,633
              )
              
              (537
              )Fuel
                  and gas inventory
              
              
              56,523
              
              
              45,085Prepayments
                  and other
              
              
              (1,833
              )
              
              (2,128
              )Purchased
                  gas adjustment receivable/payable
              
              
              43,666
              
              
              (5,079
              )Accounts
                  payable
              
              
              (94,487
              )
              
              (7,310
              )Taxes
                  payable
              
              
              31,464
              
              
              22,016Accrued
                  expenses and other
              
              
              7,298
              
              
              22,242Net
                  cash provided by operating activities
              
              
              228,336
              
              
              145,515Investing
                  activities:Construction
                  expenditures - excluding equity AFUDC
              
              
              (239,681
              )
              
              (101,268
              )Energy
                  efficiency expenditures
              
              
              (8,964
              )
              
              (6,884
              )Cash
                  proceeds from property sales
              
              
              57
              
              
              --Restricted
                  cash
              
              
              (1
              )
              
              (1
              )Refundable
                  cash received for customer construction projects
              
              
              4,456
              
              
              2,554Other
              
              
              322
              
              
              6,273Net
                  cash used by investing activities
              
              
              (243,811
              )
              
              (99,326
              )Financing
                  activities:Change
                  in short-term debt, net
              
              
              133,440
              
              
              (15,400
              )Loan
                  from Puget Energy
              
              
              73
              
              
              --Dividends
                  paid
              
              
              (26,255
              )
              
              (31,356
              )Investment
                  from Puget Energy
              
              
              1,705
              
              
              1,569Issuance
                  of bonds and notes
              
              
              --
              
              
              161Redemption
                  of bonds and notes
              
              
              (100,000
              )
              
              --Issuance
                  and redemption cost of bonds and other
              
              
              5,104
              
              
              --Net
                  cash provided by financing activities
              
              
              14,067
              
              
              (45,026
              )Net
                  increase in cash
              
              
              (1,408
              )
              
              1,163Cash
                  at beginning of year
              
              
              28,092
              
              
              16,709Cash
                  at end of period
              
              $
              26,684
              
              $
              17,872Supplemental
                  cash flow information:Cash
                  paid for interest (net of capitalized interest)
              
              $
              32,009
              
              $
              28,394Income
                  taxes paid
              
              
              --
              
              
              30,000




*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, Inc. (Puget Energy) is a holding company that owns Puget Sound Energy
      (PSE) and until May 7, 2006, InfrastruX Group, Inc. (InfrastruX). PSE is a
      public utility incorporated in the state of Washington that furnishes electric
      and gas services in a territory covering 6,000 square miles, primarily in the
      Puget Sound region.


The
      2007
      consolidated financial statements of Puget Energy reflect the accounts of Puget
      Energy and its subsidiary, PSE. PSE’s consolidated financial statements include
      the accounts of PSE and its subsidiaries. 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. Certain amounts previously reported have been reclassified to
      conform to current year presentations with no effect on total equity or net
      income. The reclassification relates to the income statements of Puget Energy
      and PSE, which have been changed from a utility presentation format based on
      Federal Energy Regulatory Commission (FERC) guidelines to a presentation based
      on generally accepted accounting principles (GAAP).


The
      2006
      consolidated financial statements of Puget Energy reflect the accounts of Puget
      Energy and its subsidiaries, PSE and InfrastruX. Puget Energy holds all the
      common shares of PSE and until May 7, 2006, a 90.9% interest in InfrastruX.
      The
      results of PSE and InfrastruX are presented on a consolidated basis. The
      financial position and results of operations for InfrastruX are presented as
      discontinued operations. At the time that it was owned by Puget Energy,
      InfrastruX was a non-regulated utility construction service company incorporated
      in the state of Washington, which provides construction services to the electric
      and gas utility industries primarily in the midwest, Texas, south-central and
      eastern United States regions.


The
      consolidated financial statements contained in this Form 10-Q are unaudited.
      In
      the respective opinions of the management of Puget Energy and PSE, all
      adjustments necessary for a fair statement of the results for the interim
      periods have been reflected and were of a normal recurring nature. These
      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,
      2006.


The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements, and the reported
      amounts of revenues and expenses during the reporting period. Actual results
      could differ from those estimates.


PSE
      collected Washington State excise taxes (which are a component of general retail
      rates) and municipal taxes of $74.6 million and $64.7 million for the three
      months ended March 31, 2007 and March 31, 2006, respectively. The Company’s
      policy is to report such taxes on a gross basis in operating
      revenues and
      taxes other than income taxes in the accompanying consolidated statements of
      income.








**(2)**
            **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 116,479,000 for the three months ended
      March 31, 2007 and 115,725,000 for the three months ended March 31, 2006.


Puget
      Energy’s diluted earnings per common share have been computed based on weighted
      average common shares outstanding and issuable upon exercise of options or
      expiration of vesting periods of 116,974,000 for the three months ended March
      31, 2007 and 116,190,000 for the three months ended March 31, 2006. These shares
      include the dilutive effect of securities related to employee and director
      equity plans.








**(3)**
            **Accounting
                for Derivative Instruments and Hedging
                Activities**





Statement
      of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires that all contracts
      considered to be derivative instruments be recorded on the balance sheet at
      their fair value. The Company enters into contracts to manage its energy
      resource portfolio and interest rate exposure including forward physical and
      financial contracts, option contracts and swaps. The majority of these contracts
      qualify for the normal purchase normal sale (NPNS) exception to derivative
      accounting rules if they meet certain criteria. Generally, NPNS applies if
      PSE
      deems the counterparty creditworthy, has energy resources within the western
      region to allow for physical delivery of the energy and if the transaction
      is
      within PSE’s forecasted load requirements. Those contracts that do not meet NPNS
      exception or cash flow hedge criteria are marked-to-market to current earnings
      in the income statement, subject to deferral under SFAS No. 71, “Accounting for
      the Effects of Certain Types of Regulation,” for energy related derivatives due
      to the Power Cost Adjustment (PCA) mechanism and Purchased Gas Adjustment (PGA)
      mechanism.


The
      nature of serving regulated electric customers with its wholesale portfolio
      of
      owned and contracted electric generation resources exposes the Company and
      its
      customers to some volumetric and commodity price risks within the sharing
      mechanism of the PCA. The Company’s energy risk portfolio management function
      monitors and manages these risks using analytical models and tools. The Company
      is not engaged in the business of assuming risk for the purpose of realizing
      speculative trading revenues. Therefore, wholesale market transactions are
      focused on balancing the Company’s energy portfolio, reducing costs and risks
      where feasible and reducing volatility in wholesale costs and margin in the
      portfolio. In order to manage risks effectively, the Company enters into
      physical and financial transactions which are appropriate for the service
      territory of the Company and are relevant to its regulated electric and gas
      portfolios.


During
      the three months ended March 31, 2007, the Company recorded an increase in
      earnings for the change in the market value of derivative instruments not
      meeting NPNS or cash flow hedge criteria of approximately $5.8 million compared
      to a decrease in earnings of approximately $1.0 million for the three months
      ended March 31, 2006. The $5.8 million increase in the first quarter 2007 was
      primarily derived from a reversal of a loss reserve related to a physically
      delivered gas supply contract for electric generation. The counterparty’s
      financial outlook has changed and delivery is now probable through the life
      of
      the contract. This contract involves monthly delivery of natural gas and will
      be
      marked-to-market through earnings until its expiration in June 2008. The
      mark-to-market gain that was recorded is the difference between the forward
      market price of natural gas and the contract price for natural gas based on
      volumes purchased. As the contract gets closer to termination in June 2008,
      the
      gain will reverse due to settlement of the contract on a monthly basis and
      the
      mark-to-market value will decrease as long as the price for natural gas is
      at or
      near the current forward market prices of natural gas.


At
      March
      31, 2007, the Company had a net unrealized gain recorded in other comprehensive
      income of $11.5 million after-tax related to energy contracts which meet the
      criteria for designation as cash flow hedges under SFAS No. 133. The amount
      of
      cash flow hedges associated with these energy contracts that will reverse and
      be
      settled into the income statement during 2007 is approximately $6.2 million.
      At
      March 31, 2007, PSE had a short-term asset of $14.9 million and a long-term
      asset of $3.4 million as well as short-term liability of $0.6 million related
      to
      energy contracts designated as cash flow hedges that represent forward financial
      purchases of gas supply for electric generation from PSE-owned electric plants
      in future periods. If it is determined that it is uneconomical to run the plants
      in the future period, the hedging relationship is ended and the cash flow hedge
      is de-designated and any unrealized gains and losses are recorded in the income
      statement. Gains and losses when these de-designated cash flow hedges are
      settled are recognized in energy costs and are included as part of the PCA
      mechanism.


At
      March
      31, 2007, the Company also had a short-term asset of $10.2 million and a
      short-term liability of approximately $8.9 million related to the hedge of
      gas
      contracts to serve natural gas customers. All mark-to-market adjustments
      relating to the natural gas business have been reclassified to a deferred
      account in accordance with SFAS No. 71 due to the PGA mechanism. The PGA
      mechanism passes increases and decreases in the cost of natural gas supply
      to
      customers. As the gains and losses on the hedges are realized in future periods,
      they will be recorded as gas costs under the PGA mechanism.


The
      ending balance in other comprehensive income related to previously settled
      treasury interest rate swap contracts at March 31, 2007 was a loss of $8.4
      million after-tax and accumulated amortization.








**(4)**
            **Stock
                Compensation**





The
      Company’s Long-Term Incentive Plan (LTI Plan), which is shareholder approved,
      was established in 1995 and amended and restated in 2005 and approved by
      shareholders. The LTI Plan applies to officers and key employees of the Company
      and awards granted under this plan include stock awards, performance awards
      or
      other stock-based awards as defined by the plan. Any shares awarded are either
      purchased on the open market or newly issued. The 2006 and 2007 LTI Plan cycles
      included grants of restricted stock, which was added to reduce the volatility
      of
      the plans. The maximum number of shares that may be purchased or newly issued
      shares for the LTI Plan is 4,200,000.





**Performance
      Share Grants**


The
      Company awards performance share grants annually under the LTI Plan which vest
      at the end of three years. The number of shares awarded and expense recorded
      depends on Puget Energy’s performance as compared to other companies and service
      quality indices for customer service. Compensation expense related to
      performance share grants was $1.1 million and $(0.6) million for the three
      months ended March 31, 2007 and 2006, respectively. The fair value of the 2006
      and 2007 performance share grants takes into consideration the historical
      performance of the performance share grants and prospective analysis using
      the
      Capital Asset Pricing Model and expected EPS growth rates. The 2005 performance
      shares classified as equity awards were valued using the Black-Scholes option
      pricing model and the liability awards were valued using market price of Puget
      Energy stock.


Performance
      shares activity for the three months ended March 31, 2007 was as
      follows:





Number
                of Shares
            
            Weighted-Average
                Fair Value Per SharePerformance
                Shares Outstanding at December 31, 2006 includes:2005-2007
                LTI Plan Cycle
            
            228,976
            
            $
            21.202006-2008
                LTI Plan Cycle
            
            149,235
            
            $
            24.77Total
                at December 31, 2006:
            
            378,2112007-2009
                LTI Plan Cycle Granted
            
            139,398
            
            $
            24.74Vested
            
            --
            
            
            --Cancelled
            
            --
            
            
            --Forfeited
            
            --
            
            
            --Performance
                Shares Outstanding at March 31, 2007:
            
            517,609
            
            $
            23.18





Plan
      participants meeting the Company’s stock ownership guidelines can elect to be
      paid up to 50.0% of the share award in cash. The portion of the performance
      share grants that can be paid in cash is classified and accounted for as a
      liability. As a result, the compensation expense of these liability awards
      is
      recognized over the performance period based on the fair value (i.e. cash value)
      of the award, and is periodically updated based on expected ultimate cash
      payout. Compensation cost recognized during the performance period for the
      liability portion of the performance grants is based on the closing price of
      the
      Company’s common stock on the date of measurement and the number of months of
      service rendered during the period. The equity portion is valued at the closing
      price of the Company’s common stock on the grant date.





**Restricted
      Stock**


In
      the
      first quarter 2007, the Company granted 96,472 shares of restricted stock under
      the LTI Plan. Under the 2007 grant, the shares vest 15.0% on the January 1,
      2008, 25.0% on January 1, 2009 and the remaining 60.0% on January 1, 2010.


Restricted
      stock activity for the three months ended March 31, 2007 was as
      follows:





Number
                of Shares
            
            Weighted-Average
                Fair Value Per ShareRestricted
                Stock Outstanding at December 31, 2006:
            
            205,656
            
            $
            22.02Granted
            
            96,472
            
            $
            24.70Vested
            
            (33,753
            )
            $
            22.30Restricted
                Stock Outstanding at March 31, 2007:
            
            268,375
            
            $
            22.95





Compensation
      expense related to the restricted shares was $0.4 million and $0.5 million
      for
      the three months ended March 31, 2007 and 2006, respectively. Dividends are
      paid
      on all outstanding shares of restricted stock and are accounted for as a Puget
      Energy common stock dividend, not as compensation expense. The fair value of
      the
      restricted stock is based on the closing price of the Company’s common stock on
      the date of grant.








**(5)**
            **Retirement
                Benefits**





On
      September 29, 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans.” SFAS No. 158 was effective for
      fiscal years ending after December 15, 2006, which was the year ended December
      31, 2006 for the Company. SFAS No. 158 was adopted prospectively as required
      by
      the statement.


The
      Company has a defined benefit pension plan with a cash balance feature covering
      substantially all PSE employees. Benefits are a function of age, salary and
      service. Puget Energy also maintains a non-qualified supplemental retirement
      plan for officers and certain director-level employees.


The
      following table summarizes the net periodic benefit cost for the three months
      ended March 31:





Pension
                Benefits
            
            Other
                Benefits(Dollars
                in thousands)
            
            2007
            
            2006
            
            2007
            
            2006Service
                cost
            
            $
            3,263
            
            $
            3,061
            
            $
            91
            
            $
            86Interest
                cost
            
            
            6,570
            
            
            6,167
            
            
            379
            
            
            358Expected
                return on plan assets
            
            
            (9,750
            )
            
            (9,434
            )
            
            (205
            )
            
            (182
            )Amortization
                of prior service cost
            
            
            511
            
            
            585
            
            
            134
            
            
            134Recognized
                net actuarial (gain) loss
            
            
            1,173
            
            
            1,253
            
            
            (56
            )
            
            (127
            )Amortization
                of transition obligation
            
            
            --
            
            
            --
            
            
            105
            
            
            105Net
                periodic benefit cost
            
            $
            1,767
            
            $
            1,632
            
            $
            448
            
            $
            374





The
      Company previously disclosed in its financial statements for the year ended
      December 31, 2006 that it expected contributions by the Company to fund the
      pension and other benefits plans for the year ending December 31, 2007 to be
      $4.5 million and $0.3 million, respectively. During the three months ended
      March
      31, 2007, the actual cash contributions to the pension plans were $0.5 million.
      Based on this activity, the Company anticipates contributing an additional
      $4.0
      million to the Company’s non-qualified pension plan in 2007. The full amount of
      the pension plan funding for 2007 is for the Company’s non-qualified
      supplemental retirement plan.


During
      the three months ended March 31, 2007, actual other post-retirement medical
      benefit plan contributions were less than $0.5 million and the Company does
      not
      expect to make additional contributions for the remaining period of 2007.








**(6)**
            **Income
                Taxes**





In
      July
      2006, FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109,” which clarifies the
      accounting for uncertainty in income taxes recognized in the financial
      statements in accordance with FASB Statement No. 109, “Accounting for Income
      Taxes.” FIN 48 requires the use of a two-step approach for recognizing and
      measuring tax positions taken or expected to be taken in a tax return. First,
      a
      tax position should only be recognized when it is more likely than not, based
      on
      technical merits, that the position will be sustained upon examination by the
      taxing authority. Second, a tax position, that meets the recognition threshold,
      should be measured at the largest amount that has a greater than 50% likelihood
      of being sustained.


FIN
      48
      was effective for the Company as of January 1, 2007. As of the date of adoption,
      the Company had no material unrecognized tax benefits but accrued $6.6 million
      in interest expense related to tax deductions for certain capitalized internal
      labor and related overhead costs previously deducted before repayment in 2005
      and 2006.  Additionally, the Company has accrued $0.4 million in
      interest expense for the three months
      ended March 31, 2007 related
      to the tax deductions for the capitalized internal labor and
      overheads.


In
      its
      2001 tax return, PSE claimed a deduction when it changed its tax accounting
      method with respect to capitalized internal labor and overheads. Under the
      new
      method, the Company could immediately deduct certain costs that it had
      previously capitalized. In the IRS audit of the Company’s 2001, 2002 and 2003
      federal income tax returns, the IRS disallowed the deduction, citing Revenue
      Ruling 2005-53. The Company believes the original deductions were valid as
      filed
      and has formally appealed the IRS adjustment. The Company repaid the tax
      benefits in 2005 and 2006 as provided in the new Regulations, issued on August
      2, 2005 (Regulation 1.263(a)-1). At December 31, 2006, the full tax benefit
      had
      been repaid. The IRS national office is in the process of establishing
      settlement guidelines which will apply to its settlement offers on this issue.
      It is possible that this issue could be resolved in the next 12
      months.


Based
      on
      prior Washington Utilities and Transportation Commission (Washington Commission)
      orders on this issue, it is management’s expectation that if the IRS is
      ultimately successful in challenging some portion of the deductions the Company
      could request rate recovery of the regulatory asset.


For
      federal income tax purposes, the Company has open tax years from 2001 through
      2007. The Company continues its policy of classifying interest and
      penalties as interest and penalties expense in the financial
      statements.








**(7)**
            **Regulation
                and Rates**





On
      March
      20, 2007, PSE submitted a Power Cost Only Rate Case (PCORC) filing to request
      approval of an updated power cost baseline rate beginning September 2007. The
      PCORC filing also requested recovery of Goldendale ownership and operating
      costs
      through retail electric rates. The requested electric rate increase is $64.7
      million or 3.7% annually. PSE estimates that the PCORC order will be issued
      in
      the third quarter 2007.


On
      April
      11, 2007, the Washington Commission approved PSE’s petition for issuance of an
      accounting order that authorizes PSE to defer certain costs the Company will
      incur related to its purchase of the Goldendale Generating Station (Goldendale)
      during the period prior to the ownership and operating costs are being
      considered for inclusion in PSE’s retail electric rates in the PCORC. PSE
      established a regulatory asset of $1.1 million at March 31, 2007.


On
      January 5, 2007, the Washington Commission issued its order in PSE’s electric
      general rate case filed in February 2006, approving a general rate decrease
      for
      electric customers of $22.8 million or 1.3% annually. The rates for electric
      customers are effective beginning January 13, 2007. In its order, the Washington
      Commission approved a weighted cost of capital of 8.4%, or 7.06% after-tax,
      and
      a capital structure that included 44.0% common equity with a return on equity
      of
      10.4%. The Washington Commission had earlier approved (on June 28, 2006) a
      PCORC
      increase of $96.1 million annually effective July 1, 2006.


On
      June
      20, 2002, the Washington Commission approved a PCA mechanism that triggers
      if
      PSE’s costs to provide customers’ electricity falls outside certain bands
      established in an electric rate case. The cumulative maximum pre-tax earnings
      exposure due to power cost variations over the four-year period ending June
      30,
      2006 was limited to $40.0 million plus 1.0% of the excess. In October 2005,
      the
      Washington Commission approved a shift to an annual PCA measurement period
      from
      January through December starting in 2007. On January 5, 2007, the Washington
      Commission approved the PCA mechanism for continuation under the same annual
      graduated scale without a cumulative cap for excess power costs. All significant
      variable power supply cost variables (hydroelectric and wind generation, market
      price for purchased power and surplus power, natural gas and coal fuel price,
      generation unit forced outage risk and transmission cost) are included in the
      PCA mechanism.


On
      January 5, 2007, the Washington Commission issued its order in PSE’s gas general
      rate case, granting an increase for gas customers of $29.5 million or 2.8%
      annually, effective beginning January 13, 2007. In its order the Washington
      Commission approved the same weighted cost of capital of 8.4% or 7.06% after-tax
      and capital structure that included 44.0% common equity with a return on equity
      of 10.4%, consistent with the Company’s electric operations.








**(8)**
            **Litigation**





**Residential
      Exchange.** Petitioners
      in several actions in the U.S. Ninth Circuit Court of Appeals (Ninth Circuit)
      against Bonneville Power Administration (BPA) asserted that BPA acted contrary
      to law or without authority in deciding to enter into, or in entering into
      or
      performing or implementing, a number of agreements, including the amended
      settlement agreement (and the May 2004 agreement) between BPA and PSE regarding
      the BPA Residential Purchase and Sale Program. BPA rates used in such agreements
      between BPA and PSE for determining the amounts of money to be paid to PSE
      by
      BPA under such agreements during the period October 1, 2001 through September
      30, 2006 have been confirmed, approved and allowed to go into effect by FERC.
      Petitioners in several actions in the U.S. Ninth Circuit Court of Appeals
      against BPA, also asserted that BPA acted contrary to law in adopting or
      implementing the rates or rate adjustment clause upon which the benefits
      received or to be received from BPA during the October 1, 2001 through September
      30, 2006 period are based. The parties to these various actions presented oral
      arguments to the U.S. Ninth Circuit Court of Appeals in November 2005. A number
      of parties have claimed that the BPA rates proposed or adopted in the BPA rate
      proceeding to develop BPA rates to be used in the agreements for determining
      the
      amounts of money to be paid to PSE by BPA during the period October 1, 2006
      through September 30, 2009 are contrary to law and that BPA acted contrary
      to
      law or without authority in deciding to enter into, or in entering into or
      performing or implementing such agreements. It is not clear what impact, if
      any,
      development or review of such rates, review of such agreements and the above
      described Ninth Circuit actions may have on PSE. On
        May 3,
        2007, the Ninth Circuit issued an opinion in *Portland
        Gen. Elec. v. BPA* ,
        No.
        01-70003, in which proceeding the actions of BPA in entering into settlement
        agreements, regarding the BPA Residential Purchase and Sale Program, with
        PSE
        and with other investor-owned utilities were challenged. In this opinion,
        the
        Ninth Circuit granted petitions for review and held the settlement agreements
        entered into between BPA and the investor-owned utilities being challenged
        in
        that proceeding to be inconsistent with statute. On May 3, 2007, the Ninth
        Circuit also issued an opinion in *Golden
        Northwest Aluminum v. BPA* ,
        No.
        03-73426, in which proceeding the petitioners sought review of BPA’s 2002-06
        power rates. In this opinion, the Ninth Circuit granted petitions for review
        and
        held that BPA unlawfully shifted onto its preference customers the costs
        of its
        settlements with the investor-owned utilities. It is not clear what impact
        these
        opinions may have on PSE.
 **Colstrip
      Matter.** In May
      2003, approximately 50 plaintiffs brought an action against the owners of
      Colstrip which has since been amended to add additional claims. The lawsuit
      alleges that certain domestic water wells, groundwater and the Colstrip water
      supply pond were contaminated by seepage from a Colstrip Units 1 & 2
      effluent holding pond, that seepage from Colstrip Units 1 & 2 have decreased
      property values and that seepage from the Colstrip water supply pond caused
      structural damage to buildings and toxic mold. Discovery is ongoing. On March
      29, 2007, a second complaint was filed on behalf of three ranchers alleging
      damage due to the Units’ 3 & 4 effluent holding pond.


**Proceedings
      Relating to the Western Power Market.** PSE is
      vigorously defending each case in the western power market proceedings.
      Litigation is subject to numerous uncertainties and PSE is unable to predict
      the
      ultimate outcome of these matters. Accordingly, there can be no guarantee that
      these proceedings, either individually or in the aggregate, will not materially
      and/or adversely affect PSE’s financial condition, results of operations or
      liquidity.


*California
      Receivable and California Refund Proceedings.***** While
      there have been no material litigation events relating to PSE during the first
      quarter 2007, FERC has continued to express support for the Ninth Circuit’s
      settlement process and several other parties announced settlements during the
      quarter.  PSE is defending its position while continuing to monitor
      developments in these proceedings.


*Wah
      Chang Suit.* This
      is
      an appeal pending in the United States Court of Appeals for the Ninth Circuit.
      Issues include whether the district court correctly dismissed Wah Chang’s
      complaint against PSE and other energy sellers alleging market manipulation,
      antitrust violations, and breach of contract. Oral argument took place on April
      10, 2007 and the parties await a decision from the court.








**(9)**
            **Related
                Party Transaction**





On
      June
      1, 2006, PSE entered into a revolving credit facility with its parent, Puget
      Energy, in the form of a Demand Promissory Note (Note). Through the Note, PSE
      may borrow up to $30.0 million from Puget Energy, subject to approval by Puget
      Energy. Under the terms of the Note, PSE pays interest on the outstanding
      borrowings based on the lowest of the weighted average interest rate of (a)
      PSE’s outstanding commercial paper interest rate; (b) PSE’s senior unsecured
      revolving credit facility; or (c) the interest rate available under the
      receivable securitization facility of PSE Funding, Inc., a PSE subsidiary,
      which
      is the London Interbank Offered Rate (LIBOR) plus a marginal rate. At March
      31,
      2007, the outstanding balance of the Note was $24.4 million and the interest
      rate was 5.52%. The outstanding balance and the related interest under the
      Note
      are eliminated by Puget Energy upon consolidation of PSE’s financial
      statements.








**(10)**
            **Financings**





In
      March
      2007, PSE entered into a five-year, $350 million credit agreement with a group
      of banks. The agreement is used to support the Company’s energy hedging
      activities. Pursuant to the Washington Commission order in PSE’s electric and
      gas general rate cases issued on January 5, 2007, the costs of this hedging
      credit facility will be recovered through the PCA and PGA mechanisms. Under
      the
      terms of the credit agreement, PSE pays a floating interest rate on outstanding
      borrowings based either on the agent bank’s prime rate or on LIBOR plus a
      marginal rate based on PSE’s long-term credit rating at the time of borrowing.
      The facility can also be used to provide letters of credit. PSE pays a
      commitment fee on any unused portion of the credit agreement also based on
      long-term credit ratings of PSE.


In
      March
      2005, PSE entered into a five-year, $500 million unsecured credit agreement
      with
      a group of banks. In March 2007, PSE restated this credit agreement to extend
      the expiration date to April 2012. The agreement is primarily used to provide
      credit support for commercial paper and letters of credit. The terms of this
      agreement, as restated, are essentially identical to those contained in the
      $350
      million facility.


On
      April
      17, 2007, PSE notified the trustee of its 8.231% Capital Trust Preferred
      Securi ties
      (classified as Junior Subordinated Debentures of the Corporation Payable to
      a
      Subsidiary Trust Holding Mandatorily Redeemable Preferred Securities on the
      balance sheet) of its intent to redeem the Securities remaining outstanding
      on
      June 1, 2007. The purpose of the redemption is to help reduce interest costs
      by
      retiring higher cost debt. The remaining $37.8 million of the Securities
      outstanding will be redeemed on June 1, 2007 at a 4.12% premium, or $40.8
      million, plus accrued interest on the redemption date.








**(11)**
            **Discontinued
                Operations and Corporate Guarantees**(Puget
                Energy Only)





On
      May 7,
      2006, Puget Energy sold InfrastruX to an affiliate of Tenaska Power Fund, L.P.
      (Tenaska). Puget Energy accounted for InfrastruX as a discontinued operation
      under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” in 2006.


As
      part
      of the transaction, Puget Energy made certain representations and warranties
      concerning InfrastruX. Puget Energy obtained a representation and warranty
      insurance policy and deposited $3.7 million into an escrow account to serve
      as
      retention under the policy At March 31, 2007, restricted cash in the escrow
      account was $3.9 million which is included in Puget Energy’s balance sheets,
      representing management’s estimate of the aggregate fair value of Puget Energy’s
      maximum exposure related to those representations and warranties. Should Tenaska
      make any such claims against Puget Energy, payment for the claims would be
      made
      from the escrow account. The representation and warranty obligation expires
      May
      7, 2008.


Puget
      Energy also agreed to indemnify Tenaska for certain costs and expenses incurred
      after closing by InfrastruX related to an investigation of one of InfrastruX’s
      subsidiary companies. Under the indemnity agreement, Puget Energy is also liable
      for refunding a portion of the purchase price paid by Tenaska for InfrastruX
      if
      the subsidiary does not achieve certain operating results during the measurement
      year. The maximum obligation of Puget Energy for defense costs and a refund
      of a
      portion of the purchase price is capped at $15.0 million. Tenaska has notified
      Puget Energy that 2008 will be the measurement year for purposes of calculating
      the potential purchase price refund obligation. At March 31, 2007, a liability
      in the amount of $5.0 million is included in the accompanying balance sheets;
      that amount represents Puget Energy’s estimate of the fair value of the amount
      potentially payable using a probability-weighted approach to a range of future
      cash flows. The obligation expires May 7, 2011.


Puget
      Energy also provided an environmental guarantee as part of the sale agreement.
      Under the terms of the agreement, Tenaska will be responsible for the first
      $0.1
      million of environmental claims, Tenaska and Puget Energy will share the next
      $6.4 million equally and Puget Energy will be responsible for the next $3.5
      million. Puget Energy believes it will not have a future loss in connection
      with
      the environmental guarantee.


The
      following table summarizes Puget Energy’s income from discontinued
      operations:




Three
                  Months Ended
                March
                  31,(Dollars
                  in Thousands)
              
              2007
              
              2006Revenues
              
              
              --
              
              $
              92,070Goodwill
                  impairment
              
              
              --
              
              
              --Operating
                  expenses (including interest expense)
              
              
              --
              
              
              (87,899
              )Pre-tax
                  income
              
              
              --
              
              
              4,171Income
                  tax expense
              
              
              --
              
              
              (1,257
              )Puget
                  Energy carrying value adjustment of InfrastruX
              
              
              --
              
              
              7,269Puget
                  Energy cost of sale related to InfrastruX, net of tax
              
              
              --
              
              
              (937
              )Puget
                  Energy deferred tax basis adjustment of InfrastruX
              
              
              --
              
              
              9,966Minority
                  interest in income of discontinued operations
              
              
              --
              
              
              (265
              )Income
                  from discontinued operations
              
              
              --
              
              $
              18,947





In
      accordance with SFAS No. 144, InfrastruX discontinued depreciation and
      amortization of its assets effective February 8, 2005. This discontinuation
      of
      depreciation and amortization resulted in $4.8 million ($3.1 million after-tax)
      lower depreciation and amortization expense than otherwise would have been
      recorded as continuing operations for the three months ended March 31, 2006.
      Puget Energy did not record any amortization expense related to the intangible
      assets of InfrastruX in 2006.








**(12)**
            **Other**





FASB
      Interpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN 46R)
      requires that if a business entity has a controlling financial interest in
      a
      variable interest entity, the financial statements of the variable interest
      entity must be included in the consolidated financial statements of the business
      entity. The Company has evaluated its power purchase agreements and determined
      that three counterparties may be considered variable interest entities.
      Consistent with FIN 46R, PSE submitted requests for information to those
      parties; however, the parties have refused to submit to PSE the necessary
      information for PSE to determine whether they meet the requirements of a
      variable interest entity. PSE also determined that it does not have a
      contractual right to such information. PSE will continue to submit requests
      for
      information to the counterparties in accordance with FIN 46R.


For
      the
      three power purchase agreements that may be considered variable interest
      entities under FIN 46R, PSE is required to buy all the generation from these
      plants, subject to displacement by PSE, at rates set forth in the power purchase
      agreements. If at any time the counterparties cannot deliver energy to PSE,
      PSE
      would have to buy energy in the wholesale market at prices which could be higher
      or lower than the power purchase agreement prices. PSE’s purchased electricity
      expense for the three months ended March 31, 2007 and 2006 for these three
      entities was $66.6 million and $58.8 million, respectively.


The
      US
      Environmental Protection Agency required states to produce regulations by
      November 15, 2006 to bring their mercury emissions in line with those mandated
      by the Clean Air Mercury Rule. The Montana Board of Environmental Review
      approved the state’s regulation to limit mercury emissions from coal-fired
      plants on October 16, 2006. The new rule takes a two-tiered approach to reducing
      mercury emissions, allowing power plants burning lower-quality lignite coal
      to
      release more emissions than plants burning cleaner sub-bituminous coal, such
      as
      Colstrip. The new rule has a more stringent limit than the federal rule (0.9
      lbs/Trillion British thermal unit (TBtu), instead of the federal 1.4 lbs/TBtu),
      but includes a cap-and-trade provision as well as alternative emission limits
      for plants that have tried to meet the new standards but have demonstrated
      that
      they cannot. The Colstrip owners are still evaluating the potential impact
      of
      the new rule and have not determined whether the new rule will be
      appealed.


In
      November 2006, PSE’s Crystal Mountain Generation Station had an accidental
      release of approximately 18,000 gallons of diesel oil. PSE crews and consultants
      responded and worked with applicable state and federal agencies to control
      and
      remove the spilled product. Due to snow and other weather conditions, complete
      recovery of diesel is not feasible until later in 2007. However, the remaining
      recoverable diesel is presumed to be contained within a limited area and largely
      embedded in soils under the generator station. Total removal costs as of March
      31, 2007 were approximately $10.5 million. PSE is currently projecting the
      total
      remediation cost to be approximately $15.0 million. At March 31, 2007, PSE
      had
      an insurance receivable recorded in the amount of $12.6 million associated
      with
      the Crystal Mountain electric generating facility oil spill. PSE management
      will
      be filing proof of loss claims with insurers once damage repair costs are known
      within an acceptable level of precision.








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 “anticipates,” “believes,”
“estimates,” “expects,” “future,” “intends,” “plans,” “projects,” “predicts,”
“will likely result,” and “will continue” and similar expressions are used to
      identify forward-looking statements. However, these words are not the exclusive
      means of identifying such statements. In addition, any statements that refer
      to
      expectations, projections or other characterizations of future events or
      circumstances are forward-looking statements. 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.*








**Overview**





Puget
      Energy, Inc. (Puget Energy) is an energy services holding company and all of
      its
      operations are conducted through its subsidiary Puget Sound Energy (PSE), a
      regulated electric and gas utility company. Until May 7, 2006, Puget Energy
      owned a 90.9% interest in InfrastruX Group, Inc. (InfrastruX), a utility
      construction and services company that was sold to an affiliate of Tenaska
      Power
      Fund, L.P. (Tenaska). Puget Energy is substantially dependent upon the results
      of PSE since PSE is its most significant asset. PSE is the largest electric
      and
      natural gas utility in the state of Washington, primarily engaged in the
      business of electric transmission, distribution, generation and natural gas
      distribution. Puget Energy’s business strategy is to generate stable earnings
      and cash flow by offering reliable electric and gas service in a cost effective
      manner through PSE.





**Puget
      Sound Energy**


PSE
      generates revenues from the sale of electric and gas services, mainly to
      residential and commercial customers within Washington State. 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 and subsequently higher
      power costs during the winter heating season in the first and fourth quarters
      of
      the year and its lowest sales in the third quarter of the year. Varying
      wholesale electric prices and the amount of hydroelectric energy supplies
      available to PSE also make quarter-to-quarter comparisons difficult.


As
      a
      regulated utility company, PSE is subject to Federal Energy Regulatory
      Commission (FERC) and Washington Utilities and Transportation Commission
      (Washington Commission) regulation which may impact a large array of business
      activities, including limitation of future rate increases related to retail
      rates, transmission rates and wholesale power sales; directed accounting
      requirements that could negatively impact earnings; licensing of PSE-owned
      generation facilities; and other FERC and Washington Commission directives
      that
      may impact PSE’s long-term goals. In addition, PSE is subject to risks inherent
      to the utility industry as a whole, including weather changes affecting
      purchases and sales of energy; outages at owned and non-owned generation plants
      where energy is obtained; storms or other events which can damage gas and
      electric distribution and transmission lines; wholesale market stability over
      time and significant evolving environmental legislation.


PSE’s
      main operational objective is to provide reliable, safe and cost-effective
      energy to its customers. To help accomplish this objective, PSE is implementing
      a strategy to be more self-sufficient in energy generation resources. PSE is
      continually exploring new electric-power resource generation and long-term
      purchase power agreements to meet this goal on an ongoing basis. On February
      21,
      2007, PSE acquired the Goldendale Generating Station (Goldendale), a 277
      megawatt (MW) capacity natural gas generating facility in the state of
      Washington, from the Calpine Corporation through its bankruptcy proceeding.
      PSE
      paid $120.0 million for the generating facility and transaction costs totaling
      $2.4 million. PSE is seeking recovery of this acquisition in its current Power
      Cost Only Rate Case (PCORC) filed March 20, 2007. The resolution of the PCORC
      is
      expected by September 2007; in the meantime, the Washington Commission has
      authorized deferral of certain costs the Company will incur related to its
      purchase of Goldendale from March 15, 2007.


In
      August
      2006, PSE announced the selection of seven projects for further discussion
      and
      possible negotiation as a result of the 2005 RFP process. In aggregate, these
      outside sources, if completed, would generate approximately 1,100 MW of
      long-term power supply. The outcome of such discussion and negotiation are
      not
      known at this time.





**Non-GAAP
      Financial Measures**


The
      following discussion includes financial information prepared in accordance
      with
      generally accepted accounting principles (GAAP), as well as two other financial
      measures, Electric Margin and Gas Margin, that are considered “non-GAAP
      financial measures.” Generally, a non-GAAP financial measure is a numerical
      measure of a Company’s financial performance, financial position or cash flows
      that exclude (or include) amounts that are included in (or excluded from) the
      most directly comparable measure calculated and presented in accordance with
      GAAP. The presentation of Electric Margin and Gas Margin is intended to
      supplement investors’ understanding of the Company’s operating performance.
      Electric Margin and Gas Margin are used by the Company to determine whether
      the
      Company is collecting the appropriate amount of energy costs from its customers
      to allow recovery of operating costs. PSE’s Electric Margin and Gas Margin
      measures may not be comparable to other companies’ Electric Margin and Gas
      Margin measures. Furthermore, these measures are not intended to replace
      operating income as determined in accordance with GAAP as an indicator of
      operating performance.








**Results
      of Operations**


**Puget
      Energy**


All
      the
      operations of Puget Energy are conducted through PSE and until May 7, 2006,
      InfrastruX. Net income for the three months ended March 31, 2007 was $79.1
      million on operating revenues of $1.0 billion compared to net income of $92.6
      million on operating revenues from continuing operations of $878.1 million
      for
      the same period in 2006. Net income for 2006 includes the results of
      discontinued operations for InfrastruX.


Basic
      and
      diluted earnings per share for the three months ended March 31, 2007 were $0.68
      compared to basic and diluted earnings per share for the three months ended
      March 31, 2006 of $0.80 and $0.79, respectively. Net income for the three months
      ended March 31, 2006 benefited from income from discontinued operations of
      $18.9
      million. Net income for the three months ended March 31, 2007 was impacted
      by
      decreased electric margins of $5.2 million compared to the same period in 2006.
      Net income was also negatively impacted by an increase of $10.8 million related
      to utility operation and maintenance, a $5.7 million increase in depreciation
      and amortization and a $7.2 million increase in interest expense due to higher
      debt levels. Offsetting the increase in expenses were increases in gas margins
      of $10.2 million compared to the same period in 2006 primarily due to a 2.8%
      general rate increase and an increase in gas therm volume sales, a $5.8 million
      unrealized gain from a gas supply contract and lower effective tax rate due
      to
      recovery of PTCs.





**Puget
      Sound Energy**


PSE’s
      operating revenues and associated expenses are not generated evenly during
      the
      year. Variations in energy usage by customers occur from season to season and
      from month to month within a season, primarily as a result of weather
      conditions. PSE normally experiences its highest retail energy sales and
      subsequently higher power costs during the winter heating season in the first
      and fourth quarters of the year, and its lowest sales in the third quarter
      of
      the year. Power costs recovery is seasonal, with underrecovery normally in
      the
      first and fourth quarters and overrecovery in the second and third quarters.
      Varying wholesale electric prices and the amount of hydroelectric energy
      supplies available to PSE also make quarter-to-quarter comparisons difficult.





**Energy
      Margins**


The
      following table displays the details of electric margin changes for the three
      months ended March 31, 2007 compared to the same period in 2006. Electric margin
      is electric sales to retail and transportation customers less pass-through
      tariff items and revenue-sensitive taxes, and the cost of generating and
      purchasing electric energy sold to customers, including transmission costs
      to
      bring electric energy to PSE’s service territory.





Electric
                Margin(Dollars
                in Millions)
              Three
                Months Ended March 31,
            
            2007
            
            2006
            
            Change
            
            Percent
              ChangeElectric
                operating revenue1
            
            $
            527.6
            
            $
            467.4
            
            $
            60.2
            
            
            12.9
            %Less:
                Other electric operating revenue
            
            
            (11.0
            )
            
            (13.7
            )
            
            2.7
            
            
            19.7Add:
                Other electric revenue-gas supply resale
            
            
            1.7
            
            
            5.9
            
            
            (4.2
            )
            
            (71.2
            )Total
                electric revenue for margin
            
            
            518.3
            
            
            459.6
            
            
            58.7
            
            
            12.8Adjustments
                for amounts included in revenue:Pass-through
                tariff items
            
            
            (11.2
            )
            
            (8.6
            )
            
            (2.6
            )
            
            (30.2
            )Pass-through
                revenue-sensitive taxes
            
            
            (36.6
            )
            
            (31.9
            )
            
            (4.7
            )
            
            (14.7
            )Net
                electric revenue for margin
            
            
            470.5
            
            
            419.1
            
            
            51.4
            
            
            12.3Minus
                power costs:Purchased
                electricity1
            
            
            (282.1
            )
            
            (252.1
            )
            
            (30.0
            )
            
            (11.9
            )Electric
                generation fuel1
            
            
            (26.1
            )
            
            (21.6
            )
            
            (4.5
            )
            
            (20.8
            )Residential
                exchange1
            
            
            34.5
            
            
            56.6
            
            
            (22.1
            )
            
            (39.0
            )Total
                electric power costs
            
            
            (273.7
            )
            
            (217.1
            )
            
            (56.6
            )
            
            26.1Electric
                margin2
            
            $
            196.8
            
            $
            202.0
            
            $
            (5.2
            )
            
            (2.6
            )%


____________________________


1
            *As
                reported on PSE’s Consolidated Statement of
                Income.*2
            *Electric
                margin does not include any allocation for amortization/depreciation
                expense or electric generation operation and maintenance
                expense.*




Electric
      margin decreased $5.2 million for the three months ended March 31, 2007 compared
      to the same period in 2006 primarily due to underrecovery of net power costs
      under the PCA mechanism which decreased margin by $13.4 million and to PTCs
      provided to customers which decreased revenue by $4.8 million. PTCs that are
      provided to customers through lower rates are recovered through a lower
      effective tax rate. These decreases were partially offset by a $6.8 million
      increase in margin due to the PCORC rate increase of 5.9% effective July 1,
      2006
      and variance in customer class mix usage and a $6.3 million increase in margin
      due to a 2.9% increase in retail kWh sales.


The
      following table displays the details of gas margin changes for the three months
      ended March 31, 2007 compared to the same period in 2006. Gas margin is gas
      sales to retail and transportation customers less pass-through tariff items
      and
      revenue-sensitive taxes, and the cost of gas purchased, including gas
      transportation costs to bring gas to PSE’s service territory.




Gas
                Margin(Dollars
                in Millions)
              Three
                Months Ended March 31,
            
            2007
            
            2006
            
            Change
            
            Percent
              ChangeGas
                operating revenue1
            
            $
            467.0
            
            $
            406.6
            
            $
            60.4
            
            
            14.9
            %Less:
                Other gas operating revenue
            
            
            (4.8
            )
            
            (4.3
            )
            
            (0.5
            )
            
            (11.6
            )Total
                gas revenue for margin
            
            
            462.2
            
            
            402.3
            
            
            59.9
            
            
            14.9Adjustments
                for amounts included in revenue:Pass-through
                tariff items
            
            
            (3.1
            )
            
            (2.6
            )
            
            (0.5
            )
            
            (19.2
            )Pass-through
                revenue-sensitive taxes
            
            
            (38.0
            )
            
            (32.7
            )
            
            (5.3
            )
            
            (16.2
            )Net
                gas revenue for margin
            
            
            421.1
            
            
            367.0
            
            
            54.1
            
            
            14.7Less:
                Purchased gas costs1
            
            
            (310.6
            )
            
            (266.7
            )
            
            (43.9
            )
            
            (16.5
            )Gas
                margin2
            
            $
            110.5
            
            $
            100.3
            
            $
            10.2
            
            
            10.1
            %


____________________________


1
              *As
                  reported on PSE’s Consolidated Statement of
                  Income.*2
              *Gas
                  margin does not include any allocation for amortization/depreciation
                  expense or electric generation operations and maintenance
                  expense.*


Gas
      margin increased $10.2 million for the three months ended March 31, 2007
      compared to the same period in 2006 primarily due to a 2.8% general rate
      increase effective January 13, 2007 which increased margin $7.2 million, a
      3.9%
      increase in gas therm volume sales which contributed $3.9 million to margin
      and
      customer mix and pricing which decreased margin by $0.9 million.





**Electric
      Operating Revenues**


The
      table
      below sets forth changes in electric operating revenues for PSE for the three
      months ended March 31, 2007 compared to the same period in 2006.





(Dollars
                in Millions)
              Three
                Months Ended March 31,
            
            2007
            
            2006
            
            Change
            
            Percent
              ChangeElectric
                operating revenues:Residential
                sales
            
            $
            292.0
            
            $
            241.9
            
            $
            50.1
            
            
            20.7
            %Commercial
                sales
            
            
            199.5
            
            
            182.8
            
            
            16.7
            
            
            9.1Industrial
                sales
            
            
            27.1
            
            
            26.3
            
            
            0.8
            
            
            3.0Other
                retail sales, including unbilled revenue
            
            
            (23.5
            )
            
            (15.8
            )
            
            (7.7
            )
            
            (48.7
            )Total
                retail sales
            
            
            495.1
            
            
            435.2
            
            
            59.9
            
            
            13.8Transportation
                sales
            
            
            2.3
            
            
            2.7
            
            
            (0.4
            )
            
            (14.8
            )Sales
                to other utilities and marketers
            
            
            19.2
            
            
            15.8
            
            
            3.4
            
            
            21.5Other
            
            
            11.0
            
            
            13.7
            
            
            (2.7
            )
            
            (19.7
            )Total
                electric operating revenues
            
            $
            527.6
            
            $
            467.4
            
            $
            60.2
            
            
            12.9
            %





Electric
      retail sales increased $59.9 million for the three months ended March 31, 2007
      compared to the same period in 2006 due primarily to rate increases related
      to
      the PCORC rate increase of July 1, 2006 offset by the electric general rate
      decrease of January 13, 2007 and increased retail sales volumes. The electric
      tariff changes provided $18.3 million to electric operating revenues for the
      three months ended March 31, 2007 compared to the same period in 2006. Retail
      electricity usage increased 171,802 megawatt hours (MWh) or 2.9% for the three
      months ended March 31, 2007 compared to the same period in 2006, which resulted
      in an approximate $12.7 million increase in electric operating revenue. The
      increase in electricity usage was related to 2.2% higher average number of
      customers served in 2007 compared to 2006. During the three month period ended
      March 31, 2007, the benefits of the Residential and Farm Energy Exchange Benefit
      credited to customers reduced electric operating revenues by $36.1 million
      compared to $59.3 million for the same period in 2006. During the three months
      ended March 31, 2007, PTCs credited to customers reduced electric operating
      revenues by $8.7 million compared to $3.9 million for the same period in 2006.
      The PTCs also lower the effective federal tax rate with no impact on earnings.
      This credit also reduced power costs by a corresponding amount with no impact
      on
      earnings. Transportation sales decreased by $0.4 million for the three months
      ended March 31, 2007 compared to the same period in 2006 due to a decrease
      in
      sales volume of 6,672 MWh or 1.3%.


Sales
      to
      other utilities and marketers increased $3.4 million for the three months ended
      March 31, 2007 compared to the same period in 2006 due to an increase in sales
      volume of 96,816 MWh or 30.3% and an increase in wholesale market prices in
      2007
      compared to 2006.


Other
      electric revenues decreased $2.7 million for the three months ended March 31,
      2007 compared to the same period in 2006, primarily due to gains from Tenaska
      and other non-core gas financial hedges in 2006 that did not recur in 2007.


The
      following electric rate changes were approved by the Washington Commission
      in
      2007 and 2006:




Type
                  of Rate
                Adjustment
              
              Effective
                  Date
              
              Average
                Percentage
                  Increase
                in
                  Rates
              
              Annual
                  Increase
                in
                  Revenues
                (Dollars
                  in Millions)Power
                  Cost Only Rate Case
              
              
              July
                  1, 2006
              
              5.9
              %
              
              $
              45.31Electric
                  General Rate Case
              
              
              January
                  13, 2007
              
              (1.3
              )%
              
              
              (22.8)


____________________________


1
              *The
                  rate increase is for the period July 1, 2006 through December 31,
                  2006.
                  The annualized basis of the PCORC rate increase is $96.1
                  million.*





**Gas
      Operating Revenues**


The
      table
      below sets forth changes in gas operating revenues for PSE for the three months
      ended March 31, 2007 compared to the same period in 2006.




(Dollars
                  in Millions)
                Three
                  Months Ended March 31,
              
              2007
              
              2006
              
              Change
              
              Percent
                ChangeGas
                  operating revenues:Residential
                  sales
              
              $
              300.9
              
              $
              265.1
              
              $
              35.8
              
              
              13.5
              %Commercial
                  sales
              
              
              135.5
              
              
              116.8
              
              
              18.7
              
              
              16.0Industrial
                  sales
              
              
              22.3
              
              
              16.8
              
              
              5.5
              
              
              32.7Total
                  retail sales
              
              
              458.7
              
              
              398.7
              
              
              60.0
              
              
              15.0Transportation
                  sales
              
              
              3.5
              
              
              3.6
              
              
              (0.1
              )
              
              (2.8
              )Other
              
              
              4.8
              
              
              4.3
              
              
              0.5
              
              
              11.6Total
                  gas operating revenues
              
              $
              467.0
              
              $
              406.6
              
              $
              60.4
              
              
              14.9
              %




Gas
      retail sales increased $60.4 million for the three months ended March 31, 2007
      compared to the same period in 2006 due to higher purchased gas adjustment
      (PGA)
      mechanism rates, the approval of a 2.8% general gas rate increase effective
      January 13, 2007 and increased customer gas usage. The Washington Commission
      approved a PGA mechanism rate increase effective September 27, 2006 that
      increased rates 10.2% annually. The PGA mechanism passes through to customers
      increases or decreases in the gas supply portion of the natural gas service
      rates based upon changes in the price of natural gas purchased from producers
      and wholesale marketers or changes in gas pipeline transportation costs. PSE’s
      gas margin and net income are not affected by changes under the PGA mechanism.
      For the three months ended March 31, 2007, the effects of the PGA mechanism
      rate
      increases provided an increase of $36.6 million in gas operating revenues.
      The
      gas general rate case provided an additional $7.2 million in gas revenues for
      the three months ended March 31, 2007 as compared to the same period in 2006.
      The remaining increase in gas retail revenues was primarily due to higher gas
      sales of 15.3 million therms or $15.7 million for the three months ended March
      31, 2007 compared to the same period in 2006, which was related to a 2.7%
      increase in customers.


The
      following gas rate adjustments were approved by the Washington Commission in
      2007 and 2006:





Type
                of Rate
              Adjustment
            
            Effective
                Date
            
            Average
              Percentage
                Increase
              in
                Rates
            
            Annual
                Increase
              in
                Revenues
              (Dollars
                in Millions)Purchased
                Gas Adjustment
            
            
            September
                27, 2006
            
            10.2
            %
            
            $
            95.1Gas
                General Rate Case
            
            
            January
                13, 2007
            
            2.8
            %
            
            
            29.5





**Operating
      Expenses**


The
      table
      below sets forth significant changes in operating expenses for PSE and its
      subsidiaries for the three months ended March 31, 2007 compared to the same
      period in 2006.




**(**Dollars
                in Millions)
              Three
                Months Ended March 31,
            ****
            2007
            ****
            2006
            ****
            Change
            ****
            Percent
              ChangePurchased
                electricity
            
            $
            282.1
            
            $
            252.1
            
            $
            30.0
            
            
            11.9
            %Electric
                generation fuel
            
            
            26.1
            
            
            21.6
            
            
            4.5
            
            
            20.8Residential
                exchange credit
            
            
            (34.5
            )
            
            (56.6
            )
            
            22.1
            
            
            39.0Purchased
                gas
            
            
            310.6
            
            
            266.7
            
            
            43.9
            
            
            16.5Unrealized
                (gain) loss on derivative instruments
            
            
            (5.8
            )
            
            1.0
            
            
            (6.8
            )
            
            *Utility
                operations and maintenance
            
            
            98.2
            
            
            87.4
            
            
            10.8
            
            
            12.4Non-utility
                expense and other
            
            
            2.0
            
            
            0.3
            
            
            1.7
            
            
            *Depreciation
                and amortization
            
            
            69.6
            
            
            63.9
            
            
            5.7
            
            
            8.9Conservation
                amortization
            
            
            10.3
            
            
            8.0
            
            
            2.3
            
            
            28.8Taxes
                other than income taxes
            
            
            87.1
            
            
            79.7
            
            
            7.4
            
            
            9.3


____________________________


*
            *Percent
                change not applicable or
                meaningful*





**Purchased
      electricity** expenses
      increased $30.0 million for the three months ended March 31, 2007 compared
      to
      the same period in 2006. The increase for the three months ended March 31,
      2007
      was primarily the result of higher wholesale market prices and increased
      purchase volumes which caused underrecovery of power costs of $13.6 million
      due
      to the PCA sharing bands being reset at January 2007. For the three months
      ended
      March 31, 2006, power cost did not impact costs as PSE was at the maximum
      exposure under the PCA mechanism. PSE is allowed to recover power cost through
      the PCA mechanism on a shared basis with customers if actual costs are higher
      than the normalized level established in rates. Total purchased power for the
      three months ended March 31, 2007 increased 136,941 MWh or 2.9% compared to
      the
      same period in 2006. Increases in purchases contributed $19.3 million to the
      increase for the three months ended March 31, 2007. The increase also reflects
      the deferral of excess power costs of $7.2 million in 2006. Increase in
      transmission and other expenses contributed $3.3 million due in part to
      increased kWh sales to customers.


The
      April
      mid-month Runoff Forecast published by the National Weather Service Northwest
      River Forecast Center indicated that the total forecasted runoff above Grand
      Coulee Reservoir for the period January through July 2007 would be at 105%
      of
      normal. PSE’s hydroelectric production and related power costs in 2006 were
      positively impacted by above-normal precipitation and snow pack in the Pacific
      Northwest region, which resulted in the runoff above Grand Coulee Reservoir
      to
      be 106% of normal.


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


**Electric
      generation fuel** expense
      increased $4.5 million for the three months ended March 31, 2007 compared to
      the
      same period in 2006. The increase for the three months ended March 31, 2007
      was
      primarily the result of an increase of $2.3 million in the cost of natural
      gas
      and due to higher volumes of electricity generated at PSE-controlled combustion
      turbine generating facilities and an increase in the cost of coal at Colstrip
      generating facilities of $2.2 million compared to the same period in 2006.


**Residential
      exchange credits** associated with the Residential Purchase and Sale Agreement with BPA decreased
      $22.1 million for the three months ended March 31, 2007 compared to the same
      period in 2006 as a result of lower residential and small farm customer electric
      credit in rates effective October 1, 2006. The residential exchange credit
      is a
      pass-through tariff item with a corresponding credit in electric operating
      revenue; thus, it has no impact on electric margin or net income.


**Purchased
      gas** expenses
      increased $43.9 million for the three months ended March 31, 2007 compared
      to
      the same period in 2006 primarily due to an increase in PGA rates as approved
      by
      the Washington Commission and higher customer therm sales. The PGA mechanism
      allows PSE to recover expected gas costs, and defer, as a receivable or
      liability, any gas costs that exceed or fall short of this expected gas cost
      amount in PGA mechanism rates, including accrued interest. The PGA mechanism
      payable balance at March 31, 2007 was $3.8 million compared to a receivable
      balance at December 31, 2006 of $39.8 million. PSE is authorized by the
      Washington Commission to accrue carrying costs on PGA receivable balances.
      A
      receivable balance in the PGA mechanism reflects an underrecovery of market
      gas
      cost through rates. A payable balance reflects overrecovery of market gas cost
      through rates.


**Unrealized
      (gain) loss on derivative instruments** increased
      $6.8 million for **** the
      three
      months ended March 31, 2007 compared to the same period in 2006 primarily as
      a
      result of the reversal of a loss reserve related to a physical gas supply
      contract for PSE’s electric generating facilities. The mark-to-market gain that
      was recorded is the difference between the forward market price of natural
      gas
      and the contract price for natural gas based on volumes purchased. As the
      contract gets closer to termination in June 2008, the gain will reverse due
      to
      settlement of the contract on a monthly basis and the mark-to-market value
      will
      decrease as long as the price for natural gas is at or near the current forward
      market prices of natural gas.


**Utility
      operations and maintenance** expense
      increased $10.8 million for the three months ended March 31, 2007 compared
      to
      the same period in 2006. The increase was a result of higher operating and
      maintenance costs at PSE’s generating facilities, due to the addition of the
      Wild Horse wind project (Wild Horse) which began operations on December 22,
      2006
      and higher expenses related to operating and maintaining PSE’s energy delivery
      system. Wild Horse operations and maintenance expense is fully recovered in
      rates. For the three months ended March 31, 2007 and 2006, electric storm damage
      costs were higher than historical averages and in both periods PSE exceeded
      the
      $7.0 million operation and maintenance expense threshold. As a result, PSE
      will
      defer any qualifying electric storm damage costs during the remainder of 2007
      for future recovery in rates.


**Non-utility
      expense and other** increased $1.7 million for the three months ended March 31, 2007 compared to
      the
      same period in 2006 primarily due to an increase in PSE’s long-term incentive
      plan costs of $1.7 million.


**Depreciation
      and amortization** expense
      increased $5.7 million for the three months ended March 31, 2007, compared
      to
      the same period in 2006 primarily as a result of placing Wild Horse into service
      on December 22, 2006 and additional utility plant placed in service over the
      last 12 months.


**Conservation
      amortization** increased $2.3 million for the three months ended March 31, 2007, compared
      to
      the same period in 2006 due to higher authorized recovery of electric
      conservation expenditures. Conservation amortization is a pass-through tariff
      item with no impact on earnings.


**Taxes
      other than income taxes** increased $7.4 million for the three months ended March 31, 2007, compared
      to
      the same period in 2006 due primarily to increases in revenue-based Washington
      State excise tax and municipal tax due to increased operating revenues. Revenue
      sensitive Washington State excise and municipal taxes have no impact on
      earnings. Excluding the impact of revenue sensitive taxes, taxes other than
      income taxes decreased $2.6 million primarily as a result of updating 2006
      levy
      rates based on property tax billings.





**Other
      Income, Interest Charges and Income Tax Expense**


The
      table
      below sets forth significant changes in other income, interest charges and
      income taxes for PSE and its subsidiaries for the three months ended March
      31,
      2007 compared to the same period in 2006.





(Dollars
                in Millions)
              Three
                Months Ended March 31,
            
            2007
            
            2006
            
            Change
            
            Percent
              ChangeOther
                income
            
            $
            4.8
            
            $
            3.3
            
            $
            1.5
            
            
            45.5
            %Interest
                charge
            
            
            (49.2
            )
            
            (41.7
            )
            
            (7.5
            )
            
            (18.0
            )Income
                tax expense
            
            
            34.0
            
            
            40.5
            
            
            (6.5
            )
            
            (16.0
            )





**Other
      income** increased
      $1.5 million for the three months ended March 31, 2007 compared to the same
      period in 2006 primarily due to an increase on the return of the Chelan PUD
      regulatory asset offset by a decrease in the return on capitalized overhead
      tax
      payments.


**Interest
      expense** increased
      $7.5 million due primarily to an increase in outstanding debt. At March 31,
      2007, debt outstanding totaled $3.2 billion compared to March 31, 2006 debt
      level of $2.5 billion which reflected additional borrowing related to Wild
      Horse
      wind project, Goldendale Generating Station, pre-payment associated with the
      Chelan PUD long-term purchase power agreement and system restoration expense
      incurred as a result of a severe December 2006 wind storm.


**Income
      tax expense** decreased
      $6.5 million for the three months ended March 31, 2007 compared to the same
      period in 2006 due primarily to higher tax credits associated with the
      production of wind-powered energy. The PTCs for the three months ended March
      31,
      2007 were $8.1 million compared to $3.8 million for the same period in 2006.
      These additional credits were made available due to the addition of Wild Horse,
      which was placed in service in December 2006.








**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, 2007:





****Puget Energy
            
            
            
            
            
            
            Payments
                Due Per PeriodContractual
                Obligations
              (Dollars
                in Millions)
            Total
            
            2007
            
            2008-
              2009
            
            2010-
              2011
            
            2012
                &
              ThereafterLong-term
                debt including interest
            
            
            
            $
            5,343.7
            
            
            
            
            $
            194.3
            
            
            
            
            $
            654.8
            
            
            
            
            $
            740.9
            
            
            
            
            $
            3,753.7Short-term
                debt including interest
            
            
            
            
            461.6
            
            
            
            
            
            461.6
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            --Junior subordinated debentures payable to a subsidiary trust including
                interest1
            
            
            
            
            42.4
            
            
            
            
            
            42.4
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            --Mandatorily
                redeemable preferred stock
            
            
            
            
            1.9
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            1.9Service
                contract obligations
            
            
            
            
            153.3
            
            
            
            
            
            23.1
            
            
            
            
            
            69.0
            
            
            
            
            
            45.7
            
            
            
            
            
            15.5Non-cancelable
                operating leases
            
            
            
            
            121.6
            
            
            
            
            
            11.6
            
            
            
            
            
            51.6
            
            
            
            
            
            22.2
            
            
            
            
            
            36.2Fredonia
                combustion turbines lease2
            
            
            
            
            63.9
            
            
            
            
            
            4.6
            
            
            
            
            
            12.5
            
            
            
            
            
            46.8
            
            
            
            
            
            --Energy
                purchase obligations
            
            
            
            
            6,600.0
            
            
            
            
            
            789.3
            
            
            
            
            
            1,951.9
            
            
            
            
            
            1,163.0
            
            
            
            
            
            2,695.8Contract initiation payment/collateral requirement
            
            
            
            
            18.5
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            18.5
            
            
            
            
            
            --Financial
                hedge obligations
            
            
            
            
            17.8
            
            
            
            
            
            9.5
            
            
            
            
            
            8.3
            
            
            
            
            
            --
            
            
            
            
            
            --Purchase
                obligations
            
            
            
            
            32.7
            
            
            
            
            
            10.0
            
            
            
            
            
            22.7
            
            
            
            
            
            --
            
            
            
            
            
            --Non-qualified pension and other benefits funding
            
            
            
            
            45.5
            
            
            
            
            
            4.9
            
            
            
            
            
            7.4
            
            
            
            
            
            9.1
            
            
            
            
            
            24.1Total
                contractual cash obligations
            
            
            
            $
            12,902.9
            
            
            
            
            $
            1,551.3
            
            
            
            
            $
            2,778.2
            
            
            
            
            $
            2,046.2
            
            
            
            
            $
            6,527.2




Puget Energy
            
            
            
            
            
            
            Amount
                of Commitment
              Expiration
                Per PeriodCommercial
                Commitments
              (Dollars
                in Millions)
            Total
            
            2007
            
            2008-
              2009
            
            2010-
              2011
            
            2012
                &
              ThereafterIndemnity
                agreements3
            
            
            
            $
            8.9
            
            
            
            
            $
            --
            
            
            
            
            $
            3.9
            
            
            
            
            $
            --
            
            
            
            
            $
            5.0Credit
                agreement - available4
            
            
            
            
            542.2
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            542.2Receivable
                securitization facility5
            
            
            
            
            38.0
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            38.0
            
            
            
            
            
            --Energy
                operations letter of credit
            
            
            
            
            8.3
            
            
            
            
            
            8.3
            
            
            
            
            
            --
            
            
            
            
            
            --
            
            
            
            
            
            --Total
                commercial commitments
            
            
            
            $
            597.4
            
            
            
            
            $
            8.3
            
            
            
            
            $
            3.9
            
            
            
            
            $
            38.0
            
            
            
            
            $
            547.2


________________________


1
              *In
                  1997, PSE formed Puget Sound Energy Capital Trust I for the sole
                  purpose
                  of issuing and selling preferred securities (Trust Securities)
                  to
                  investors and issuing common securities to PSE. The proceeds from
                  the sale
                  of Trust Securities were used by the Trust 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. The
                  Company
                  will redeem the outstanding Debentures on June 1,
                  2007.*2
              *See
                  “Fredonia 3 and 4 Operating Lease” under “Off-Balance Sheet Arrangements”
                  below.*3
              *Under
                  the InfrastruX sale agreement, Puget Energy is obligated for certain
                  representations and warranties concerning InfrastruX’s business and
                  anti-trust inquiries. The fair value of the business warranty is
                  $3.9
                  million at March 31, 2007 and the obligation expires on May 7,
                  2008.********Puget Energy also agreed
                  to
                  indemnify the buyer relating to an inquiry of an InfrastruX subsidiary
                  and
                  the fair value of the warranty was $5.0 million at March 31, 2007.
                  See
                  “InfrastruX” above for further discussion.*4
              *At
                  March 31, 2007, PSE had available a $500.0 million and a $350.0
                  unsecured
                  credit agreement expiring in April 2012. The credit agreements
                  provide
                  credit support for letters of credit and commercial paper. At March
                  31,
                  2007, PSE had $8.3 million for an outstanding letter of credit
                  and $299.5
                  million commercial paper outstanding, effectively reducing the
                  available
                  borrowing capacity to $542.2 million.*5
              *At
                  March 31, 2007, PSE had available a $200.0 million receivables
                  securitization facility that expires in December 2010. $162.0 million
                  was
                  outstanding under the receivables securitization facility at March
                  31,
                  2007 thus leaving $38.0 million available. The facility allows
                  receivables
                  to be used as collateral to secure short-term loans, not exceeding
                  the
                  lesser of $200.0 million or the borrowing base of eligible receivables,
                  which fluctuate with the seasonality of energy sales to customers.
                  See
                  “Receivables Securitization Facility” below for further discussion.*




**Puget
      Sound Energy.** The
      following are PSE’s aggregate contractual obligations and commercial commitments
      as of March 31, 2007:




Puget
                    Sound Energy
                
                
                
                
                
                
                Payments
                    Due Per PeriodContractual
                    Obligations
                  (Dollars
                    in Millions)
                Total
                
                2007
                
                2008-
                  2009
                
                2010-
                  2011
                
                2012
                    &
                  ThereafterLong-term
                    debt including interest
                
                
                
                $
                5,343.7
                
                
                
                
                $
                194.3
                
                
                
                
                $
                654.8
                
                
                
                
                $
                740.9
                
                
                
                
                $
                3,753.7Short-term
                    debt including interest
                
                
                
                
                486.0
                
                
                
                
                
                486.0
                
                
                
                
                
                --
                
                
                
                
                
                --
                
                
                
                
                
                --Junior subordinated debentures payable to a subsidiary trust
                    including
                    interest1
                
                
                
                
                42.4
                
                
                
                
                
                42.4
                
                
                
                
                
                --
                
                
                
                
                
                --
                
                
                
                
                
                --Mandatorily
                    redeemable preferred stock
                
                
                
                
                1.9
                
                
                
                
                
                --
                
                
                
                
                
                --
                
                
                
                
                
                --
                
                
                
                
                
                1.9Service
                    contract obligations
                
                
                
                
                153.3
                
                
                
                
                
                23.1
                
                
                
                
                
                69.0
                
                
                
                
                
                45.7
                
                
                
                
                
                15.5Non-cancelable
                    operating leases
                
                
                
                
                121.6
                
                
                
                
                
                11.6
                
                
                
                
                
                51.6
                
                
                
                
                
                22.2
                
                
                
                
                
                36.2Fredonia
                    combustion turbines lease2
                
                
                
                
                63.9
                
                
                
                
                
                4.6
                
                
                
                
                
                12.5
                
                
                
                
                
                46.8
                
                
                
                
                
                --Energy
                    purchase obligations
                
                
                
                
                6,600.0
                
                
                
                
                
                789.3
                
                
                
                
                
                1,951.9
                
                
                
                
                
                1,163.0
                
                
                
                
                
                2,695.8Contract initiation payment/collateral requirement
                
                
                
                
                18.5
                
                
                
                
                
                --
                
                
                
                
                
                --
                
                
                
                
                
                18.5
                
                
                
                
                
                --Financial
                    hedge obligations
                
                
                
                
                17.8
                
                
                
                
                
                9.5
                
                
                
                
                
                8.3
                
                
                
                
                
                --
                
                
                
                
                
                --Purchase
                    obligations
                
                
                
                
                32.7
                
                
                
                
                
                10.0
                
                
                
                
                
                22.7
                
                
                
                
                
                --
                
                
                
                
                
                --Non-qualified pension and other benefits funding
                
                
                
                
                45.5
                
                
                
                
                
                4.9
                
                
                
                
                
                7.4
                
                
                
                
                
                9.1
                
                
                
                
                
                24.1Total
                    contractual cash obligations
                
                
                
                $
                12,927.3
                
                
                
                
                $
                1,575.7
                
                
                
                
                $
                2,778.2
                
                
                
                
                $
                2,046.2
                
                
                
                
                $
                6,527.2
 
 Puget Sound Energy
                  
                  
                  
                  
                  
                  
                  Amount
                      of Commitment
                    Expiration
                      Per PeriodCommercial
                      Commitments
                    (Dollars
                      in Millions)
                  Total
                  
                  2007
                  
                  2008-
                    2009
                  
                  2010-
                    2011
                  
                  2012
                      &
                    ThereafterCredit
                      agreement - available3
                  
                  
                  
                  $
                  542.2
                  
                  
                  
                  
                  $
                  --
                  
                  
                  
                  
                  $
                  --
                  
                  
                  
                  
                  $
                  --
                  
                  
                  
                  
                  $
                  542.2Receivable
                      securitization facility4
                  
                  
                  
                  
                  38.0
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  38.0
                  
                  
                  
                  
                  
                  --Energy
                      operations letter of credit
                  
                  
                  
                  
                  8.3
                  
                  
                  
                  
                  
                  8.3
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  --Total
                      commercial commitments
                  
                  
                  
                  $
                  588.5
                  
                  
                  
                  
                  $
                  8.3
                  
                  
                  
                  
                  $
                  --
                  
                  
                  
                  
                  $
                  38.0
                  
                  
                  
                  
                  $
                  542.2
 _____________________
 1
                *See
                    note 1 under Puget Energy above.*2
                *See
                    note 2 under Puget Energy above.*3
                *See
                    note 4 under Puget Energy above.*4
                *See
                    note 5 under Puget Energy
                    above.*




**Off-Balance
      Sheet Arrangements**


**Fredonia
      3 and 4 Operating Lease** **.** PSE
      leases two combustion turbines for its Fredonia 3 and 4 electric generating
      facility pursuant to a master operating lease that was amended for this lease
      in
      April 2001. The lease has a term expiring in 2011, but can be canceled by PSE
      at
      any time. Payments under the lease vary with changes in the London Interbank
      Offered Rate (LIBOR). At March 31, 2007, PSE’s outstanding balance under the
      lease was $50.4 million. 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**


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) and customer refundable
      contributions, were $239.7 million for the three months ended March 31, 2007.
      Utility construction expenditures, excluding AFUDC and excluding new generation
      resources other than the Wild Horse project (which will be determined as the
      Company proceeds through the integrated resource planning process) are
      anticipated to be as follows in 2007, 2008 and 2009:





Capital
                Expenditure Estimates
              (Dollars
                in Millions)
            
            2007
            
            2008
            
            2009Energy
                delivery, technology and facilities
            
            $
            530
            
            $
            555
            
            $
            640New
                resources
            
            
            120
            
            
            70
            
            
            210Total
                expenditures
            
            $
            650
            
            $
            625
            
            $
            850





The
      proposed utility construction expenditures and any new generation resource
      expenditures that may be incurred are anticipated to be funded with a
      combination of cash from operations, short-term debt, long-term debt and equity.
      Construction expenditure estimates, including any new generation resources,
      are
      subject to periodic review and adjustment in light of changing economic,
      regulatory, environmental and efficiency factors.





**Capital
      Resources**


**Cash
      From Operations**


Cash
      generated from operations for the quarter ended March 31, 2007 was $228.4
      million which is 91.9% of the $248.6 million used for utility construction
      expenditures and other capital expenditures. For the three months ended March
      31, 2006, cash generated from operations was $138.4 million which is 123.2%
      of
      the $112.3 million used for utility construction expenditures and other capital
      expenditures.


The
      overall cash generated from operating activities for the three months ended
      March 31, 2007 increased $90.0 million compared to the same period in 2006.
      The
      increase was primarily the result of costs incurred in 2006 that did not recur
      in 2007, including the Chelan PUD contract initiation payment of $89.0 million
      and cash collateral repaid to energy suppliers of $14.9 million. Also
      contributing to the increase were collection of the purchased gas receivable
      of
      $48.7 million and $30.0 million in income taxes paid in the first quarter 2006
      compared to none paid in the same period in 2007. The increase was partially
      offset by a decrease in accounts payable of $89.5 million.





**Financing
      Program**


Financing
      utility construction requirements and operational needs are 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.





**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, 2007, PSE could issue:


·
            approximately
                $362 million of additional first mortgage bonds under PSE’s electric
                mortgage indenture based on approximately $603 million of electric
                bondable property available for issuance, subject to an interest
                coverage
                ratio limitation of 2.0 times net earnings available for interest
                (as
                defined in the electric utility mortgage), which PSE exceeded at
                March 31,
                2007;


·
            approximately
                $365 million of additional first mortgage bonds under PSE’s gas mortgage
                indenture based on approximately $608 million of gas bondable property
                available for issuance, subject to interest coverage ratio limitations
                of
                1.75 times and 2.0 times net earnings available for interest (as
                defined
                in the gas utility mortgage), which PSE exceeded at March 31,
                2007;


·
            approximately
                $841 million of additional preferred stock at an assumed dividend
                rate of
                6.9%; and


·
            approximately
                $686 million of unsecured long-term
                debt.


At
      March
      31, 2007, PSE had approximately $4.2 billion in electric and gas ratebase to
      support the interest coverage ratio limitation test for net earnings available
      for interest.




**Credit
      Ratings**


Neither
      Puget Energy nor PSE has any debt outstanding that would accelerate debt
      maturity upon a credit rating downgrade. A ratings downgrade could adversely
      affect the ability to renew existing, or obtain access to new credit facilities
      and could increase the cost of such facilities. For example, under PSE’s
      revolving credit facility, the borrowing costs 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. In
      addition, downgrades in PSE’s debt ratings may prompt counterparties to require
      PSE to post a letter of credit or other collateral, make cash prepayments,
      obtain a guarantee or provide other security.


The
      ratings of Puget Energy and PSE, as of April 26, 2007, were as
      follows:





RatingsStandard
                & Poor’s
            Moody’s**Puget
                Sound Energy**Corporate
                credit/issuer rating
            BBB-
            Baa3Senior
                secured debt
            BBB
            Baa2Shelf
                debt senior secured
            BBB
            (P)Baa2Trust
                preferred securities
            BB
            Ba1Preferred
                stock
            BB
            Ba2Commercial
                paper
            A-3
            P-2Revolving
                credit facility
            *
            Baa3Ratings
                outlook
            Stable
            Stable**Puget
                Energy**Corporate
                credit/issuer rating
            BBB-
            Ba1


__________________


* *Standard
      & Poor’s does not rate credit facilities* .





**Shelf
      Registrations, Long-Term Debt and Common Stock Activity**


On
      April
      17, 2007, PSE notified the trustee of its 8.231% Capital Trust Preferred
      Securi ties
      (classified as Junior Subordinated Debentures of the Corporation Payable to
      a
      Subsidiary Trust Holding Mandatorily Redeemable Preferred Securities on the
      balance sheet) of its intent to redeem the remaining $37.8 million of the
      Securities on June 1, 2007 at a 4.12% premium, or $40.8 million, plus accrued
      interest on the redemption date.





**Liquidity
      Facilities and Commercial Paper**


PSE’s
      short-term borrowings and sales of commercial paper are used to provide working
      capital fund utility construction programs and support the Company’s energy
      hedging activities.





**PSE
      Credit Facilities**


The
      Company has three committed credit facilities that provide, in aggregate, $1.05
      billion in short-term borrowing capability. These include a $500.0 million
      credit agreement, a $200.0 million accounts receivable securitization facility
      and a $350.0 million credit agreement to support hedging activity.





**Credit
      Agreements.** In March
      2007, PSE entered into a five-year, $350.0 million credit agreement with a
      group
      of banks. The agreement is used to support the Company’s energy hedging
      activities and may also be used to provide letters of credit. The interest
      rate
      on outstanding borrowings is based either on the agent bank’s prime rate or on
      LIBOR plus a marginal rate related to PSE’s long-term credit rating at the time
      of borrowing. PSE pays a commitment fee on any unused portion of the credit
      agreement also related to on long-term credit ratings of PSE. At March 31,
      2007,
      there were no borrowings or letters of credit outstanding under the credit
      facility.


In
      March
      2005, PSE entered into a five-year, $500.0 million unsecured credit agreement
      with a group of banks. In March 2007, PSE restated this credit agreement to
      extend the expiration date to April 2012. The agreement is primarily used to
      provide credit support for commercial paper and letters of credit. The terms
      of
      this agreement as restated, are essentially identical to those contained in
      the
      $350.0 million facility. At March 31, 2007, there was $8.3 million outstanding
      under a letter of credit and $299.5 million commercial paper outstanding,
      effectively reducing the available borrowing capacity under the credit
      agreements to $542.2 million.





**Receivables
      Securitization Facility.** PSE
      entered into a five-year Receivable Sales Agreement with PSE Funding, Inc.
      (PSE
      Funding), a wholly owned subsidiary, on December 20, 2005. Pursuant to the
      Receivables Sales Agreement, PSE sells all of its utility customer accounts
      receivable and unbilled utility revenues to PSE Funding. In addition, PSE
      Funding entered into a Loan and Servicing Agreement with PSE and two banks.
      The
      Loan and Servicing Agreement allows PSE Funding to use the receivables as
      collateral to secure short-term loans, not exceeding the lesser of $200.0
      million or the borrowing base of eligible receivables which fluctuate with
      the
      seasonality of energy sales to customers. All loans from this facility will
      be
      reported as short-term debt in the financial statements. The PSE Funding
      facility expires in December 2010, and is terminable by PSE and PSE Funding
      upon
      notice to the banks. During the three months ended March 31, 2007, PSE Funding
      borrowed a cumulative amount of $236.0 million secured by accounts receivable.
      There was $162.0 million in loans that were secured by accounts receivable
      pledged at March 31, 2007. The borrowing base of eligible receivables at March
      31, 2007 was $38.0 million.





**Demand
      Promissory Note** **.** On
      June
      1, 2006, PSE entered into an uncommitted revolving credit facility with its
      parent, Puget Energy, pursuant to which PSE may borrow up to $30 million from
      Puget Energy. Under the terms of the Note, PSE pays interest on the outstanding
      borrowings based on the lowest of the weighted average interest rate of (a)
      PSE’s outstanding commercial paper interest rate; (b) PSE’s senior unsecured
      revolving credit facility; or (c) the interest rate available under the
      receivable securitization facility of PSE Funding, Inc., a PSE subsidiary.
      At
      March 31, 2007, the outstanding balance of the Note was $24.4 million. The
      outstanding balance and the related interest under the Note are eliminated
      by
      Puget Energy upon consolidation of PSE’s financial statements.





**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 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 under the Stock Purchase
      and Dividend Reinvestment Plan of $3.2 million (130,896 shares) for the three
      months ended March 31, 2007, compared to $3.5 million (166,900 shares) for
      the
      three months ended March 31, 2006.





**Common
      Stock Offering Programs**


To
      provide additional financing options, Puget Energy entered into agreements
      in
      July 2003 with two financial institutions under which Puget Energy may offer
      and
      sell shares of its common stock from time to time through these institutions
      as
      sales agents, or as principals. Sales of the common stock, if any, may be made
      by means of negotiated transactions or in transactions that may be deemed to
      be
“at-the-market” offerings as defined in Rule 415 promulgated under the
      Securities Act of 1933, including in ordinary brokers’ transactions on the New
      York Stock Exchange at market prices.





**Other**





**FERC
      Hydroelectric Projects and Licenses**


**Baker
      River project.** The
      Baker
      River project’s current annual license expires on April 30, 2007, and PSE
      submitted an application for a new license to FERC on April 30, 2004. On
      November 30, 2004, PSE and 23 parties, (federal, state and local governmental
      organizations, Native American Indian tribes, environmental and other
      non-governmental entities) filed a proposed comprehensive settlement agreement
      on all issues relating to the relicensing of the Baker River project. The
      proposed settlement includes a set of proposed license articles and, if approved
      by FERC without material modification, would allow for a new license of 45
      years
      or more. The proposed settlement would require an investment of approximately
      $360.0 million over the next 30 years (capital expenditures and operations
      and
      maintenance cost) in order to implement the conditions of the new license.
      The
      proposed settlement is subject to additional regulatory approvals yet to be
      attained from various agencies and other contingencies that have yet to be
      resolved. FERC has not yet ruled on the proposed settlement and its ultimate
      outcome remains uncertain.





**White
      River project.** The
      White
      River project was operated as a hydropower facility until 2004. PSE is actively
      seeking to sell the project and the municipal water rights associated with
      the
      project to one or more entities. In June 2003, the Washington State Department
      of Ecology (Ecology) approved an application for new municipal water rights
      related to the White River project reservoir. After an appeal in July 2004,
      this
      decision was remanded back to Ecology for further analysis of non-hydropower
      operations. On December 21, 2006, PSE entered into a Purchase and Sale Agreement
      with the Cascade Land Conservancy to sell certain rights and interests in a
      portion of former project properties; the closing of the sale is subject to
      contingencies that have yet to be resolved. On April 7, 2004, the Washington
      Commission approved PSE’s recovery on the unamortized White River plant
      investment. At March 31, 2007, the White River project net book value totaled
      $70.1 million, which included $43.0 million of net utility plant, $17.0 million
      of capitalized FERC licensing costs, $5.4 million of costs related to
      construction work in progress and $2.1 million related to dam operations and
      safety. On February 18, 2005, the Washington Commission approved the recovery
      of
      the White River net utility plant costs but did not allow current recovery
      of
      FERC licensing costs and other related costs until all costs associated with
      selling the White River plant and any sales proceeds are known. Any proceeds
      from the sale of the White River assets and water rights will reduce the balance
      of the deferred regulatory asset. Neither the outcome of this matter nor any
      potential associated financial impacts can be predicted at this
      time.





**Snoqualmie
      Falls project.** The
      Snoqualmie Falls project was granted a new 40-year operating license by FERC
      on
      June 29, 2004. On July 29, 2004, the Snoqualmie Tribe filed a request for
      rehearing of the new license and a request to stay the FERC license. On March
      1,
      2005, FERC issued an Order on Rehearing and Dismissing Stay Request. Appeals
      to
      the U.S. Court of Appeals by the Snoqualmie Tribe and by PSE have been
      consolidated. Oral arguments were held on February 8, 2007. An adverse ruling
      from the Court or adverse action by FERC if the license issuance is remanded
      could impact PSE’s future use of this generating asset.





**Electric
      Regulation and Rates**


**Power
      Cost Only Rate Case.** On March
      20, 2007, PSE submitted a Power Cost Only Rate Case (PCORC) filing to request
      approval of an updated power cost baseline rate beginning September 2007. The
      PCORC filing also requested recovery of Goldendale ownership and operating
      costs
      through retail electric rates. The requested electric rate increase is $64.7
      million or 3.7% annually. PSE estimates that the PCORC order will be issued
      in
      the third quarter 2007.





**Accounting
      Petition.** On April
      11, 2007, the Washington Commission approved PSE’s petition for issuance of an
      accounting order that authorizes PSE to defer certain costs the Company will
      incur related to its purchase of the Goldendale Generating Station (Goldendale)
      before the ownership and operating costs are included in PSE’s electric retail
      customer rates. PSE established a regulatory asset of $1.1 million at March
      31,
      2007.





**Electric
      General Rate Case.** On
      January 5, 2007, the Washington Commission issued its order in PSE’s electric
      general rate case filed in February 2006, approving a general rate decrease
      for
      electric customers of $22.8 million or 1.3% annually. The rates for electric
      customers are effective beginning January 13, 2007. In its order, the Washington
      Commission approved a weighted cost of capital of 8.4%, or 7.06% after-tax,
      and
      a capital structure that included 44.0% common equity with a return on equity
      of
      10.4%. The Washington Commission had earlier approved (on June 28, 2006) a
      power
      cost only rate case (PCORC) increase of $96.1 million annually effective July
      1,
      2006.





**Production
      Tax Credit** . On
      October 30, 2006, PSE revised its PTC electric tariff to increase the credit
      to
      customers from $13.1 million to $28.8 million, effective January 1, 2007. The
      credit is based on expected wind generation and reflects the true-up of prior
      years’ credits provided to customers versus credits for actual wind generation
      taken for federal income taxes and the addition of Wild Horse to the wind
      portfolio.





**PCA
      Mechanism.** On June
      20, 2002, the Washington Commission approved a PCA mechanism that triggers
      if
      PSE’s costs to provide customers’ electricity falls outside certain bands
      established in an electric rate case. The cumulative maximum pre-tax earnings
      exposure due to power cost variations over the four-year period ending June
      30,
      2006 was limited to $40.0 million plus 1.0% of the excess. On January 5, 2007,
      the Washington Commission approved the PCA mechanism for continuation under
      the
      same annual graduated scale without a cumulative cap for excess power costs.
      All
      significant variable power supply cost variables (hydroelectric and wind
      generation, market price for purchased power and surplus power, natural gas
      and
      coal fuel price, generation unit forced outage risk and transmission cost)
      are
      included in the PCA mechanism. The PCA mechanism apportions increases or
      decreases in power costs, on a calendar year basis, between PSE and its
      customers on a graduated scale:




Annual
                  Power
                Cost
                  Variability
              
              Customers’
                  Share
              
              Company’s
                  Share1+/-
                  $20 million
              
              0
              %
              
              100
              %+/-
                  $20 - $40 million
              
              50
              %
              
              50
              %+/-
                  $40 - $120 million
              
              90
              %
              
              10
              %+/-
                  $120 million
              
              95
              %
              
              5
              %
 _____________________
 1
              *Over
                  the four-year period July 1, 2002 through June 30, 2006, the Company’s
                  share of pre-tax power cost variations is capped at a cumulative
                  $40
                  million plus 1% of the excess. Power cost variation after June
                  30, 2006
                  will be apportioned on an annual basis, on the graduated scale
                  without a
                  cumulative cap.*


**Gas
      Regulation and Rates**


**Gas
      General Rate Case.** On
      January 5, 2007, the Washington Commission issued its order in PSE’s gas general
      rate case, granting an increase for gas customers of $29.5 million or 2.8%
      annually, effective January 13, 2007. In its order the Washington Commission
      approved the same weighted cost of capital of 8.4% or 7.06% after-tax and
      capital structure that included 44.0% common equity with a return on equity
      of
      10.4%, consistent with the Company’s electric operations.





**Proceedings
      Relating to the Western Power Market**


Puget
      Energy’s and PSE’s Report on Form 10-K for the year ended December 31, 2006
      include a summary relating to the western power market proceedings. The
      following discussion provides a summary of material developments in these
      proceedings that occurred during and subsequent to the period covered by this
      report. PSE is vigorously defending each of these cases. Litigation is subject
      to numerous uncertainties and PSE is unable to predict the ultimate outcome
      of
      these matters. Accordingly, there can be no guarantee that these proceedings,
      either individually or in the aggregate, will not materially and/or adversely
      affect PSE’s financial condition, results of operations or
      liquidity.


*California
        Receivable and California Refund Proceedings.* While
        there have been no material litigation events relating to PSE during the
        first
        quarter 2007, FERC has continued to express support for the Ninth Circuit’s
        settlement process and several other parties announced settlements during
        the
        quarter.  PSE is defending its position while continuing to monitor
        developments in these proceedings.




*Wah
      Chang Suit.* This
      is
      an appeal pending in the United States Court of Appeals for the Ninth Circuit.
      Issues include whether the district court correctly dismissed Wah Chang’s
      complaint against PSE and other energy sellers alleging market manipulation,
      antitrust violations, and breach of contract. Oral argument took place on April
      10, 2007 and the parties await a decision from the court.




**Colstrip
      Matters**


In
      May
      2003, approximately 50 plaintiffs brought an action against the owners of
      Colstrip which has since been amended to add additional claims. The lawsuit
      alleges that certain domestic water wells, groundwater and the Colstrip water
      supply pond were contaminated by seepage from a Colstrip Units 1 & 2
      effluent holding pond, that seepage from Colstrip Units 1 & 2 have decreased
      property values and that seepage from the Colstrip water supply pond caused
      structural damage to buildings and toxic mold. Discovery is ongoing. On March
      29, 2007, a second complaint was filed on behalf of three ranchers alleging
      damage due to the Units’ 3 & 4 effluent holding pond.


On
      May
      18, 2005, the Environmental Protection Agency (EPA) enacted the Clean Air
      Mercury Rule (CAMR) that will permanently cap and reduce mercury emissions
      from
      coal-fired power plants. The Montana Board of Environmental Review approved
      the
      state’s regulation to limit mercury emissions from coal-fired plants on October
      16, 2006. The new rule has a more stringent limit than the federal rule
      (0.9 lbs/TBtu, instead of the federal 1.4 lbs/TBtu), but includes a
      cap-and-trade provision as well as alternative emission limits for plants that
      have tried to meet the new standards but have demonstrated that they cannot.
      The
      Colstrip owners are still evaluating the potential impact of the new rule and
      it
      is still unknown whether the new rule will be appealed. Preliminary treatment
      technology studies undertaken by the Colstrip owners estimate that PSE’s portion
      of the capital costs to comply with the new rule could be as much as
      $75.0 million, but this number could change as new information becomes
      available.


In
      December 2003, the EPA issued an Administrative Consent Order (ACO) which
      alleged violation of the Clean Air Act permit at Colstrip since 1980. The permit
      required Colstrip to submit, for review and approval by the EPA, an analysis
      and
      proposal for reducing emissions of nitrogen oxide to address visibility concerns
      upon the occurrence of certain triggering events. The EPA asserts that
      regulations it promulgated in 1980 triggered this requirement. Although Colstrip
      owners believe that the ACO is unfounded, the Colstrip owners entered into
      negotiations with the EPA and the Northern Cheyenne Tribe, and in March 2007,
      a
      proposed Consent Decree was lodged with the Montana Federal District Court.
      The
      agreement requires installation of low nitrogen oxide equipment on Colstrip
      Units 3 & 4, payment of a non-material penalty and financing of an energy
      efficient project on the Northern Cheyenne reservation. The estimated total
      additional cost to PSE is $2.65 million.


On
      June
      15, 2005, the EPA issued the Clean Air Visibility Rule to address regional
      haze
      or regionally-impaired visibility caused by multiple sources over a wide area.
      The rule defines Best Available Retrofit Technology requirements for electric
      generating units, including presumptive limits for sulfur dioxide, particulate
      matter and nitrogen oxide controls for large units. In February 2007 Colstrip
      was notified by EPA that Colstrip Units 1 & 2 were determined to be subject
      to the BART requirements and was required to submit a BART engineering analysis
      for Colstrip 1 & 2 by May 2007. PSE cannot yet determine the need for or
      costs of additional controls to comply with this rule, but they could be
      significant.





**Critical
      Accounting Policies and Estimates**


In
      July
      2006, Financial Accounting Standards Board (FASB) issued Interpretation No.
      48
      (FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
      Statement No. 109,” which clarifies the accounting for uncertainty in income
      taxes recognized in the financial statements in accordance with FASB Statement
      No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on recognition
      threshold and measurement attributed to a tax position taken or expected to
      be
      taken in a tax return. The tax positions should only be recognized when it
      is
      more likely than not, based on technical merits, that the position will be
      sustained upon examination by the taxing authority. FIN 48 was effective for
      the
      Company as of January 1, 2007. The Company has performed a review of all open
      tax years (2001 through 2007) and identified one tax position that must be
      reported under the provisions of FIN 48. The Company has determined that the
      proper amount of interest to accrue under FIN 48 is $6.6 million as of January
      1, 2007. See discussion at Note 6, “Income Taxes.”







Item
      3. **Quantitative
      and Qualitative Disclosure About Market Risk**





**Energy
      Portfolio Management**


The
      Company has energy risk policies and procedures to manage commodity and
      volatility risks. The Company’s Energy Management Committee establishes the
      Company’s energy risk management policies and procedures, and monitors
      compliance. The Energy Management Committee is comprised of certain Company
      officers and is overseen by the Audit Committee of the Company’s Board of
      Directors.


The
      Company is focused on commodity price exposure and risks associated with
      volumetric variability in the gas and electric portfolios. It is not engaged
      in
      the business of assuming risk for the purpose of speculative trading. The
      Company hedges open gas and electric positions to reduce both the portfolio
      risk
      and the volatility risk in prices. The exposure position is determined by using
      a probabilistic risk system that models 100 scenarios of how the Company’s gas
      and power portfolios will perform under various weather, hydro and unit
      performance conditions. The objective of the hedging strategy is
      to:





·
            ensure
                physical energy supplies are available to reliably and cost-effectively
                serve retail load;·
            prudent
                management of energy portfolio risks to serve retail load at overall
                least
                cost and limit undesired impacts on PSE’s customers and shareholders;
                and·
            reduce
                power costs by extracting the value of the Company’s
                assets.





At
      March
      31, 2007, the Company had a short-term asset of $14.9 million and a long-term
      asset of $3.4 million as well as a short-term liability of $0.6 million related
      to energy contracts designated as cash flow hedges that represent forward
      financial purchases of gas supply for electric generation from PSE-owned
      electric plants in future periods. These
      contracts were designated as qualifying cash flow hedges and a corresponding
      unrealized gain of $11.5 million, net of tax, was recorded in other
      comprehensive income. If
      it is
      determined that it is uneconomical to run the plants in the future period,
      the
      hedging relationship is ended and the cash flow hedge is de-designated and
      any
      unrealized gains and losses are recorded in the income statement. Gains and
      losses, when these de-designated cash flow hedges are settled, are recognized
      in
      energy costs and are included as part of the PCA mechanism.


At
      March
      31, 2007, the Company had a short-term asset of $10.2 million and a short-term
      liability of $8.9 million related to the hedges of gas contracts to serve
      natural gas customers. All mark-to-market adjustments relating to the natural
      gas business have been reclassified to a deferred account due to the PGA
      mechanism. All increases and decreases in the cost of natural gas supply are
      passed on to customers with the PGA mechanism. As the gains and losses on the
      hedges are realized in future periods, they will be recorded as gas costs under
      the PGA mechanism.


During
      the three months ended March 31, 2007, the Company recorded an increase in
      earnings of $5.8 million related to the reversal of a loss reserve for a
      physical delivered gas supply contract for electric generation that did not
      meet
      Normal Purchase Normal Sales (NPNS) or cash flow hedge criteria. The
      mark-to-market gain that was recorded is the difference between the forward
      market price of natural gas and the contract price for natural gas based on
      volumes purchased. As the contract gets closer to termination in June 2008,
      the
      gain will reverse due to settlement of the contract on a monthly basis and
      the
      mark-to-market value will decrease as long as the price for natural gas is
      at or
      near the current forward market prices of natural gas. A
      hypothetical 10.0% decrease in the market prices of natural gas and electricity
      would decrease the fair value of qualifying cash flow hedges and comprehensive
      income by $7.1 million after tax and would decrease the fair value of those
      contracts marked-to-market in earnings by $0.9 million after tax.





**Credit
      Risk**


The
      Company is exposed to credit risk primarily through buying and selling
      electricity and gas to serve its customers. Credit risk is the potential loss
      resulting from counterparty’s non-performance under an agreement. The Company
      manages credit risk with policies and procedures for, among other things,
      counterparty analysis, exposure measurement, exposure monitoring and exposure
      mitigation.


It
      is
      possible that extreme volatility in energy commodity prices could cause the
      Company to have sub-optimal credit risk exposures with one or more
      counterparties. If such counterparties fail to perform their obligations under
      one or more agreements, the Company could suffer a material financial loss.
      However, as of March 31, 2007, approximately 99% of the Company’s energy
      portfolio was rated investment grade or higher by Standard & Poor's Ratings
      Services and/or Moody's Investor Services, Inc.





**Interest
      Rate Risk**


The
      Company believes its interest rate risk primarily relates to the use of
      short-term debt instruments, variable-rate notes and leases and anticipated
      long-term debt financing needed to fund capital requirements. The Company
      manages its interest rate risk through the issuance of mostly fixed-rate debt
      of
      various maturities. The Company utilizes commercial paper, line of credit
      facilities and accounts receivable securitization 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 or other financial hedge
      instruments to manage the interest rate risk associated with these debts.


The
      ending balance in other comprehensive income related to the forward starting
      swaps and previously settled treasury lock contracts at March 31, 2007 was
      a net
      loss of $8.4 million after-tax and accumulated amortization. All financial
      hedge
      contracts of this type are reviewed by senior management and presented to the
      Securities Pricing Committee of the Board of Directors and are approved prior
      to
      execution.








Item
      4.  **** **Controls
      and Procedures**





**Puget**  **Energy**


**Evaluation
      of Disclosure Controls and Procedures**


Under
      the
      supervision and with the participation of Puget Energy’s management, including
      the Chairman, President and Chief Executive Officer and the Senior Vice
      President Finance and Chief Financial Officer, Puget Energy has evaluated the
      effectiveness of its disclosure controls and procedures (as defined in Rule
      13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2007,
      the
      end of the period covered by this report. Based upon that evaluation, the
      Chairman, President and Chief Executive Officer and the Senior Vice President
      Finance and Chief Financial Officer of Puget Energy concluded that these
      disclosure controls and procedures are effective.





**Changes
      in Internal Control Over Financial Reporting**


There
      have been no changes in Puget Energy’s internal control over financial reporting
      during the quarter ended March 31, 2007 that have materially affected, or are
      reasonably likely to materially affect, Puget Energy’s internal control over
      financial reporting.





**Puget
      Sound Energy**


**Evaluation
      of Disclosure Controls and Procedures**


Under
      the
      supervision and with the participation of PSE’s management, including the
      Chairman, President and Chief Executive Officer and the Senior Vice President
      Finance and Chief Financial Officer, PSE has evaluated the effectiveness of
      its
      disclosure controls and procedures (as defined in Rule 13a-15(e) under the
      Securities Exchange Act of 1934) as of March 31, 2007, the end of the period
      covered by this report. Based upon that evaluation, the Chairman, President
      and
      Chief Executive Officer and the Senior Vice President Finance and Chief
      Financial Officer of PSE concluded that these disclosure controls and procedures
      are effective.





**Changes
      in Internal Control Over Financial Reporting**


There
      have been no changes in PSE’s internal control over financial reporting during
      the quarter ended March 31, 2007, that have materially affected, or are
      reasonably likely to materially affect, PSE’s internal control over financial
      reporting.









**PART
      II**  **OTHER
      INFORMATION**





Item
      1.  **Legal
      Proceedings**


See
      the
      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 Report on Form 10-Q. Contingencies arising out of the normal
      course of the Company’s business exist at March 31, 2007. The ultimate
      resolution of these issues in part or in the aggregate is not expected to have
      a
      material adverse impact on the financial condition, results of operations or
      liquidity of the Company.








Item
      1A.  **Risk
      Factors**


The
      following risk factor is an update to the previously disclosed risk factors
      by
      Puget Energy and PSE in their Form 10-K, Item 1A for the period ending December
      31, 2006.





**Costs
      of compliance with environmental, climate change, and endangered species laws
      are significant and the cost of compliance with new laws and regulations and
      the
      incurrence of associated liabilities could adversely affect PSE’s results of
      operations.**


PSE’s
      operations are subject to extensive federal, state and local laws and
      regulations relating to environmental, climate change, and endangered species
      protection. To comply with these legal requirements, PSE must spend significant
      sums on measures including resource planning, remediation, monitoring, pollution
      control equipment, and emissions related abatement and fees. New environmental,
      climate change, and endangered species laws and regulations affecting PSE’s
      operations may be adopted, and new interpretations of existing laws and
      regulations could be adopted or become applicable to PSE or its facilities,
      which may substantially increase environmental, climate change, and endangered
      species expenditures made by PSE in the future. Compliance with these or other
      future regulations could require significant capital expenditures by PSE and
      adversely affect PSE’s financial position, results of operations, cash flows and
      liquidity. In addition, PSE may not be able to recover all of its costs for
      such
      expenditures through electric and natural gas rates at current levels in the
      future.


With
      respect to endangered species laws, the listing or proposed listing of several
      species of salmon in the Pacific Northwest is causing a number of changes to
      the
      operations of hydroelectric generating facilities on Pacific Northwest rivers,
      including the Columbia River. These changes could reduce the amount, and
      increase the cost, of power generated by hydroelectric plants owned by PSE
      or in
      which PSE has an interest and increase the cost of the permitting process for
      these facilities.


Under
      current law, PSE is also generally responsible for any on-site liabilities
      associated with the environmental condition of the facilities that it currently
      owns or operates or has previously owned or operated, regardless of whether
      the
      liabilities arose before, during or after the time the facility was owned or
      operated. The incurrence of a material environmental liability or the new
      regulations governing such liability could result in substantial future costs
      and have a material adverse effect on PSE’s results of operations and financial
      condition.


Specific
      to climate change, Washington State has adopted both a renewable portfolio
      standard and greenhouse gas legislation (Governor Gregoire has indicated she
      intends to sign this bill), including a performance standard provision. Recent
      U.S. Supreme Court decisions related to climate change have also drawn greater
      attention to this issue at the federal, state, and local level. PSE cannot
      yet
      determine the costs of compliance with the recently enacted legislation.








Item
      6.  **Exhibits**


See
      Exhibit Index for list of exhibits.





**SIGNATURES**


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







**PUGET
                ENERGY, INC.****PUGET
                SOUND ENERGY, INC.****/s/
                James W. Eldredge****James
                W. Eldredge**Vice
                President, Corporate Secretary and Chief Accounting
                OfficerDate:
                May 3, 2007Chief
                accounting officer and officer duly authorized to sign this report
                on
                behalf of each registrant





**EXHIBIT
      INDEX**


The
      following exhibits are filed herewith:





12.1
            Statement
                setting forth computation of ratios of earnings to fixed charges
                (2002
                through 2006 and 12 months ended March 31, 2007) for Puget
                Energy.12.2
            Statement
                setting forth computation of ratios of earnings to fixed charges
                (2002
                through 2006 and 12 months ended March 31, 2007) for
                PSE.31.1
            Chief
                Executive Officer certification of Puget Energy pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 2002.31.2
            Chief
                Financial Officer certification of Puget Energy pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 2002.31.3
            Chief
                Executive Officer certification of Puget Sound Energy pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.4
            Chief
                Financial Officer certification of Puget Sound Energy pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Chief
                Executive Officer certification pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Chief
                Financial Officer certification pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.