---

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, 2004
                     
                      
     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 N.E. 4th Street, Suite 1200
          Bellevue, Washington 98004-5591
          (425) 454-6363       | 91-1969407                                                                                       
|                                       
|1-4393                                  | PUGET SOUND ENERGY, INC.
          A Washington Corporation
          10885 N.E. 4th Street, Suite 1200
          Bellevue, Washington 98004-5591
          (425) 454-6363 | 91-0374630                                                                                       

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

Indicate by check mark whether Puget Energy,  Inc. is an  accelerated  filer (as defined in Rule 12b-2 of the Exchange  Act).
YesX No

Indicate by check mark whether Puget Sound  Energy,  Inc. is an  accelerated  filer (as defined in Rule 12b-2 of the Exchange
Act). Yes NoX

As of March 31, 2004,  (i) the number of shares of Puget Energy,  Inc.  common stock  outstanding  was  99,267,213  ($.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         
|--------------------------
|                          
|Filing Format             
|                          
|Forward-Looking Statements
|                          
|Part I.                   
|Item 1.                   
|                          
|                          
|                          
|                          
|                          
|                          
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|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|Item 2.                   
|                          
|                          
|Item 3.                   
|                          
|Item 4.                   
|                          
|Part II.                  
|Item 1.                   
|Item 6.                   
|                          
|Signatures                
|Exhibit Index             
|                          

Filing Format
        This
Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two
different registrants, Puget Energy, 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 and PSE are including the following cautionary statements in this Form 10-Q to make
applicable and to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of
Puget Energy or PSE. This report includes forward-looking statements, which are statements
of expectations, beliefs, plans, objectives, assumptions of future events or performance.
Words or phrases such as anticipates, believes,
estimates, expects, intends, plans,
predicts, projects, will likely result, will
continue or similar expressions identify forward-looking statements. 
        Forward-looking
statements involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed. Puget Energys and PSEs expectations,
beliefs and projections are expressed in good faith and are believed by Puget Energy and
PSE, as applicable, to have a reasonable basis, including without limitation
managements examination of historical operating trends, data contained in records
and other data available from third parties; but there can be no assurance that Puget
Energys and PSEs expectations, beliefs or projections will be achieved or
accomplished. 
        In
addition to other factors and matters discussed elsewhere in this report, some important
factors that could cause actual results or outcomes for Puget Energy and PSE to differ
materially from those discussed in forward-looking statements include:

Risks
relating to the regulated utility business (PSE)

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

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

| | wholesale
market disruption, which may result in a deterioration in market liquidity, increase the
risk of counterparty default, affect the regulatory and legislative process in
unpredictable ways, limit the availability of and access to capital credit markets,
affect wholesale energy prices and/or impede PSEs ability to manage its energy
portfolio risks;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

| | 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 have an impact on PSEs ability to deliver load to its customers; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
ability to relicense FERC hydro projects at a cost-effective level.
|- | -----------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

Risks relating to both
the regulated and non-regulated businesses

| | the
impact of acts of terrorism or similar significant events;
|- | --------------------------------------------------------------

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

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

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

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

| | changes
in, and compliance with, environmental and endangered species laws, regulations,
decisions and policies concerning the environment, natural resources, and fish and
wildlife (including the Endangered Species Act);
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | the
ability to obtain and keep patent or other intellectual property rights to generate
revenue;
|- | ------------------------------------------------------------------------------------------------

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

| | the
impacts of natural disasters such as earthquakes, hurricanes or landslides.
|- | -------------------------------------------------------------------------------

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

PART I      FINANCIAL INFORMATION

Item 1.Financial
Statements

|PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31
(Thousands except per share amounts)
(Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                         
|Operating Revenues:                                                                                                                      
|Electric                                                                                                                                 
|Gas                                                                                                                                      
|Non-utility construction services                                                                                                        
|Other                                                                                                                                    
|                                                                                                                                         
|Total operating revenues                                                                                                                 
|                                                                                                                                         
|Operating Expenses:                                                                                                                      
|Energy costs:                                                                                                                            
|Purchased electricity                                                                                                                    
|Purchased gas                                                                                                                            
|Electric generation fuel                                                                                                                 
|Residential Exchange                                                                                                                     
|Unrealized gain on derivative instruments                                                                                                
|Utility operations and maintenance                                                                                                       
|Other operations and maintenance                                                                                                         
|Depreciation and amortization                                                                                                            
|Conservation amortization                                                                                                                
|Taxes other than income taxes                                                                                                            
|Income taxes                                                                                                                             
|                                                                                                                                         
|Total operating expenses                                                                                                                 
|                                                                                                                                         
|Operating Income                                                                                                                         
|Other income, net of tax                                                                                                                 
|                                                                                                                                         
|Income before interest charges and minority interest                                                                                     
|                                                                                                                                         
|Interest Charges:                                                                                                                        
|AFUDC                                                                                                                                    
|Interest charges                                                                                                                         
|Mandatorily redeemable securities interest expense                                                                                       
|                                                                                                                                         
|Total interest charges                                                                                                                   
|                                                                                                                                         
|Minority interest in earnings of consolidated subsidiary                                                                                 
|                                                                                                                                         
|Net income before cumulative effect of accounting change                                                                                 
|Cumulative effect of implementation of an accounting change, net of tax                                                                  
|                                                                                                                                         
|Net income                                                                                                                               
|Less:  preferred stock dividends accrual                                                                                                 
|                                                                                                                                         
|Income for common stock                                                                                                                  
|                                                                                                                                         
|Basic common shares outstanding - weighted average                                                                                       
|Diluted common shares outstanding - weighted average                                                                                     
|                                                                                                                                         
|Basic earnings per common share before cumulative effect of accounting change                                                            
|Cumulative effect of accounting change                                                                                                   
|                                                                                                                                         
|Basic earnings per common share                                                                                                          
|                                                                                                                                         
|Diluted earnings per common share before cumulative effect of accounting change                                                          
|Cumulative effect of accounting change                                                                                                   
|                                                                                                                                         
|Diluted earnings per common share                                                                                                        
|                                                                                                                                         

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

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

|                                                                    
|--------------------------------------------------------------------
|Net Income                                                          
|                                                                    
|Other comprehensive income, net of tax:                             
|Unrealized holding losses arising on marketable securities          
|during the period                                                   
|Foreign currency translation adjustment                             
|Unrealized gains on derivative instruments during the period        
|Reversal of unrealized (gain) loss on derivative instruments settled
|during the period                                                   
|Deferral related to PCA mechanism                                   
|                                                                    
|Other comprehensive income                                          
|                                                                    
|Comprehensive Income                                                
|                                                                    

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

PUGET ENERGY, INC.

CONSOLIDATED BALANCE SHEETS 
(Dollars in Thousands) 
(Unaudited) ASSETS

|                                                                             | March 31,
2004 | December 31,
2003
|---------------------------------------------------------------------------- | -------------- | -----------------
|Utility Plant: (at original cost, including construction work in progress of |                |                  
|$120,706 and $121,622, respectively)                                         |                |                  
|Electric                                                                     |                |                  
|Gas                                                                          |                |                  
|Common                                                                       |                |                  
|Less:  Accumulated depreciation and amortization                             |                |                  
|                                                                            
|Net utility plant                                                            |                |                  
|                                                                            
|Other property and investments:                                              |                |                  
|Investment in Bonneville Exchange Power Contract                             |                |                  
|Goodwill, net                                                                |                |                  
|Intangibles, net                                                             |                |                  
|Non-utility property, net                                                    |                |                  
|Other                                                                        |                |                  
|                                                                            
|Total other property and investments                                         |                |                  
|                                                                            
|Current assets:                                                              |                |                  
|Cash                                                                         |                |                  
|Restricted cash                                                              |                |                  
|Accounts receivable, net of allowance for doubtful accounts                  |                |                  
|Unbilled revenue                                                             |                |                  
|Materials and supplies, at average cost                                      |                |                  
|Current portion of unrealized gain on derivative instruments                 |                |                  
|Prepayments and other                                                        |                |                  
|                                                                            
|Total current assets                                                         |                |                  
|                                                                            
|Other long-term assets:                                                      |                |                  
|Regulatory asset for deferred income taxes                                   |                |                  
|Regulatory asset for PURPA buyout costs                                      |                |                  
|Unrealized gain on derivative instruments                                    |                |                  
|PCA mechanism                                                                |                |                  
|Other                                                                        |                |                  
|                                                                            
|Total other long-term assets                                                 |                |                  
|                                                                            
|Total assets                                                                 |                |                  
|                                                                            

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

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

|                                                                        | March 31,
2004 | December 31,
2003
|----------------------------------------------------------------------- | -------------- | -----------------
|Capitalization:                                                         |                |                  
|Common shareholders' investment:                                        |                |                  
|Common stock $0.01 par value, 250,000,000 shares authorized, 99,267,213 |                |                  
|and 99,074,070 shares outstanding, respectively                         |                |                  
|Additional paid-in capital                                              |                |                  
|Earnings reinvested in the business                                     |                |                  
|Accumulated other comprehensive income (loss) - net of tax              |                |                  
|                                                                       
|Total shareholders' equity                                              |                |                  
|                                                                       
|Redeemable securities and long term debt:                               |                |                  
|Preferred stock subject to mandatory redemption                         |                |                  
|Junior subordinated debentures of the corporation payable to a          |                |                  
|subsidiary trust holding mandatorily redeemable preferred securities    |                |                  
|Long-term debt                                                          |                |                  
|                                                                       
|Total redeemable securities and long-term debt                          |                |                  
|                                                                       
|Total capitalization                                                    |                |                  
|                                                                       
|Minority interest in a consolidated subsidiary                          |                |                  
|                                                                       
|Current liabilities:                                                    |                |                  
|Accounts payable                                                        |                |                  
|Short-term debt                                                         |                |                  
|Current maturities of long-term debt                                    |                |                  
|Purchased gas liability                                                 |                |                  
|Accrued expenses:                                                       |                |                  
|Taxes                                                                   |                |                  
|Salaries and wages                                                      |                |                  
|Interest                                                                |                |                  
|Current portion of unrealized loss on derivative instruments            |                |                  
|Other                                                                   |                |                  
|                                                                       
|Total current liabilities                                               |                |                  
|                                                                       
|Long-term liabilities:                                                  |                |                  
|Deferred income taxes                                                   |                |                  
|Other deferred credits                                                  |                |                  
|                                                                       
|Total long-term liabilities                                             |                |                  
|                                                                       
|Total capitalization and liabilities                                    |                |                  
|                                                                       

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

PUGET ENERGY, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Three Months Ended March 31 
(Dollars in Thousands) 
(Unaudited)

|                                                                                  | 2004 | 2003
|--------------------------------------------------------------------------------- | ---- | ----
|Operating activities:                                                             |      |     
|Net income                                                                        |      |     
|Adjustments to reconcile net income to net cash provided by operating activities: |      |     
|Depreciation and amortization                                                     |      |     
|Deferred income taxes and tax credits - net                                       |      |     
|Net unrealized gain on derivative instruments                                     |      |     
|Cash collateral received from energy supplier                                     |      |     
|Other                                                                             |      |     
|Change in certain current assets and liabilities:                                 |      |     
|Accounts receivable and unbilled revenue                                          |      |     
|Materials and supplies                                                            |      |     
|Prepayments and other                                                             |      |     
|Purchase gas liability                                                            |      |     
|Accounts payable                                                                  |      |     
|Taxes payable                                                                     |      |     
|Accrued expenses and other                                                        |      |     
|                                                                                 
|Net cash provided by operating activities                                         |      |     
|                                                                                 
|Investing activities:                                                             |      |     
|Construction and capital expenditures-excluding equity AFUDC                      |      |     
|Energy conservation expenditures                                                  |      |     
|Restricted cash                                                                   |      |     
|Investment in variable rate bonds                                                 |      |     
|Other                                                                             |      |     
|                                                                                 
|Net cash used by investing activities                                             |      |     
|                                                                                 
|Financing activities:                                                             |      |     
|Change in short-term debt - net                                                   |      |     
|Dividends paid                                                                    |      |     
|Issuance of common stock                                                          |      |     
|Issuance of bonds and long-term debt                                              |      |     
|Redemption of preferred stock                                                     |      |     
|Redemption of trust preferred securities                                          |      |     
|Redemption of bonds and long-term debt                                            |      |     
|Other                                                                             |      |     
|                                                                                 
|Net cash used by financing activities                                             |      |     
|                                                                                 
|Net decrease in cash                                                              |      |     
|Cash at beginning of year                                                         |      |     
|                                                                                 
|Cash at end of period                                                             |      |     
|                                                                                 
|Supplemental cash flow information:                                               |      |     
|Cash payments for:                                                                |      |     
|Interest (net of capitalized interest)                                            |      |     
|Income taxes                                                                      |      |     
|                                                                                 

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

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

|                                                                        | 2004 | 2003
|----------------------------------------------------------------------- | ---- | ----
|Operating revenues:                                                     |      |     
|Electric                                                                |      |     
|Gas                                                                     |      |     
|Other                                                                   |      |     
|                                                                       
|Total operating revenues                                                |      |     
|                                                                       
|Operating expenses:                                                     |      |     
|Energy costs:                                                           |      |     
|Purchased electricity                                                   |      |     
|Purchased gas                                                           |      |     
|Electric generation fuel                                                |      |     
|Residential Exchange                                                    |      |     
|Unrealized gain on derivative instruments                               |      |     
|Utility operations and maintenance                                      |      |     
|Other operations and maintenance                                        |      |     
|Depreciation and amortization                                           |      |     
|Conservation amortization                                               |      |     
|Taxes other than income taxes                                           |      |     
|Income taxes                                                            |      |     
|                                                                       
|Total operating expenses                                                |      |     
|                                                                       
|Operating income                                                        |      |     
|Other income, net of tax                                                |      |     
|                                                                       
|Income before interest charges                                          |      |     
|                                                                       
|Interest charges:                                                       |      |     
|AFUDC                                                                   |      |     
|Interest charges                                                        |      |     
|Mandatorily redeemable securities interest expense                      |      |     
|                                                                       
|Total interest charges                                                  |      |     
|                                                                       
|Net income before cumulative effect of accounting change                |      |     
|Cumulative effect of implementation of an accounting change, net of tax |      |     
|                                                                       
|Net income                                                              |      |     
|Less: preferred stock dividends accrual                                 |      |     
|                                                                       
|Income for common stock                                                 |      |     
|                                                                       

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

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

|                                                                             | 2004 | 2003
|---------------------------------------------------------------------------- | ---- | ----
|Net income                                                                   |      |     
|                                                                            
|Other comprehensive income, net of tax:                                      |      |     
|Unrealized holding losses on marketable securities arising during the period |      |     
|Unrealized gains on derivative instruments during the period                 |      |     
|Reversal of unrealized (gain) loss on derivative instruments settled during  |      |     
|the period                                                                   |      |     
|Deferral related to PCA mechanism                                            |      |     
|                                                                            
|Other comprehensive income                                                   |      |     
|                                                                            
|Comprehensive income                                                         |      |     
|                                                                            

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

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

|                                                                             | March 31,
2004 | December 31,
2003
|---------------------------------------------------------------------------- | -------------- | -----------------
|Utility plant: (at original cost, including construction work in progress of |                |                  
|$120,706 and $121,622, respectively)                                         |                |                  
|Electric                                                                     |                |                  
|Gas                                                                          |                |                  
|Common                                                                       |                |                  
|Less:  Accumulated depreciation and amortization                             |                |                  
|                                                                            
|Net utility plant                                                            |                |                  
|                                                                            
|Other property and investments                                               |                |                  
|                                                                            
|Current assets:                                                              |                |                  
|Cash                                                                         |                |                  
|Restricted cash                                                              |                |                  
|Accounts receivable, net of allowance for doubtful accounts                  |                |                  
|Unbilled revenue                                                             |                |                  
|Materials and supplies, at average cost                                      |                |                  
|Current portion of unrealized gain on derivative instruments                 |                |                  
|Prepayments and other                                                        |                |                  
|                                                                            
|Total current assets                                                         |                |                  
|                                                                            
|Other long-term assets:                                                      |                |                  
|Regulatory asset for deferred income taxes                                   |                |                  
|Regulatory asset for PURPA buyout costs                                      |                |                  
|Unrealized gain on derivative instruments                                    |                |                  
|PCA mechanism                                                                |                |                  
|Other                                                                        |                |                  
|                                                                            
|Total other long-term assets                                                 |                |                  
|                                                                            
|Total assets                                                                 |                |                  
|                                                                            

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

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

|                                                                          | March 31,
2004 | December 31,
2003
|------------------------------------------------------------------------- | -------------- | -----------------
|Capitalization:                                                           |                |                  
|Common shareholder's investment:                                          |                |                  
|Common stock ($10 stated value) - 150,000,000 shares authorized,          |                |                  
|85,903,791 shares outstanding                                             |                |                  
|Additional paid-in capital                                                |                |                  
|Earnings reinvested in the business                                       |                |                  
|Accumulated other comprehensive income (loss) - net of tax                |                |                  
|                                                                         
|Total shareholder's equity                                                |                |                  
|                                                                         
|Redeemable securities and long term debt:                                 |                |                  
|Preferred stock subject to mandatory redemption                           |                |                  
|Junior subordinated debentures of the corporation payable to a subsidiary |                |                  
|trust holding mandatorily redeemable preferred securities                 |                |                  
|Long-term debt                                                            |                |                  
|                                                                         
|Total redeemable securities and long-term debt                            |                |                  
|                                                                         
|Total capitalization                                                      |                |                  
|                                                                         
|Current liabilities:                                                      |                |                  
|Accounts payable                                                          |                |                  
|Short-term debt                                                           |                |                  
|Current maturities of long-term debt                                      |                |                  
|Purchased gas liability                                                   |                |                  
|Accrued expenses:                                                         |                |                  
|Taxes                                                                     |                |                  
|Salaries and wages                                                        |                |                  
|Interest                                                                  |                |                  
|Current portion of unrealized loss on derivative instruments              |                |                  
|Other                                                                     |                |                  
|                                                                         
|Total current liabilities                                                 |                |                  
|                                                                         
|Long-term liabilities:                                                    |                |                  
|Deferred income taxes                                                     |                |                  
|Other deferred credits                                                    |                |                  
|                                                                         
|Total long-term liabilities                                               |                |                  
|                                                                         
|Total capitalization and liabilities                                      |                |                  
|                                                                         

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

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

|                                                   | 2004 | 2003
|-------------------------------------------------- | ---- | ----
|Operating activities:                              |      |     
|Net income                                         |      |     
|Adjustments to reconcile net income to net cash    |      |     
|provided by operating activities:                  |      |     
|Depreciation and amortization                      |      |     
|Deferred income taxes and tax credits - net        |      |     
|Net unrealized gain on derivative instruments      |      |     
|Cash collateral received from energy supplier      |      |     
|Other                                              |      |     
|Change in certain current assets and liabilities:  |      |     
|Accounts receivable and unbilled revenue           |      |     
|Materials and supplies                             |      |     
|Prepayments and other                              |      |     
|Purchased gas liability                            |      |     
|Accounts payable                                   |      |     
|Taxes payable                                      |      |     
|Accrued expenses and other                         |      |     
|                                                  
|Net cash provided by operating activities          |      |     
|                                                  
|Investing activities:                              |      |     
|Construction expenditures - excluding equity AFUDC |      |     
|Energy conservation expenditures                   |      |     
|Restricted cash                                    |      |     
|Cash received from sale of securities              |      |     
|Other                                              |      |     
|                                                  
|Net cash used by investing activities              |      |     
|                                                  
|Financing activities:                              |      |     
|Change in short-term debt - net                    |      |     
|Dividends paid                                     |      |     
|Issuance of bonds                                  |      |     
|Redemption of preferred stock                      |      |     
|Redemption of trust preferred securities           |      |     
|Redemption of bonds and long term debt             |      |     
|Other                                              |      |     
|                                                  
|Net cash used by financing activities              |      |     
|                                                  
|Net decrease in cash                               |      |     
|Cash at beginning of year                          |      |     
|                                                  
|Cash at end of period                              |      |     
|                                                  
|Supplemental cash flow information:                |      |     
|Cash payments for:                                 |      |     
|Interest (net of capitalized interest)             |      |     
|Income taxes                                       |      |     
|                                                  

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

COMBINED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(1)   Summary of
Consolidation Policy

BASIS OF PRESENTATIONPuget
Energy, Inc. (Puget Energy) is an exempt public utility holding company under the Public
Utility Holding Company Act of 1935. Puget Energy owns Puget Sound Energy, Inc. (PSE) and
is a majority owner of InfrastruX Group, Inc. (InfrastruX). PSE is a public utility
incorporated in the State of Washington and furnishes electric and gas services in a
territory covering 6,000 square miles, primarily in the Puget Sound region. InfrastruX is
a non-regulated 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 of Puget Energy include the accounts of Puget Energy and
its subsidiaries, PSE and InfrastruX. Puget Energy holds all the common shares of PSE and
holds a majority interest in InfrastruX. The results of PSE and InfrastruX are presented
on a consolidated basis. PSEs consolidated financial statements include the accounts
of PSE and its subsidiaries. Puget Energy and PSE are collectively referred to herein as
the Company. The consolidated financial statements are presented after
elimination of all significant intercompany items and transactions. Minority interests of
InfrastruXs operating results are reflected in Puget Energys consolidated
financial statements. Certain amounts previously reported have been reclassified to
conform with current year presentations with no effect on total equity or net income. 
        The
consolidated financial statements contained in this Form 10-Q are unaudited. In the
respective opinions of the managements of Puget Energy and PSE, all adjustments necessary
for a fair presentation of the results for the interim periods have been reflected and
were of a normal recurring nature. These condensed financial statements should be read in
conjunction with the audited financial statements (and the Combined Notes thereto)
included in the combined Puget Energy and PSE annual report on Form 10-K for the year
ended December 31, 2003.

(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 99,169,000 and 93,740,000 for the three months ended March
31, 2004 and 2003, respectively. 
        Puget
Energys diluted earnings per common share have been computed based on weighted
average common shares outstanding of 99,637,000 and 94,172,000 for the three months ended
March 31, 2004 and 2003, respectively. These shares include the dilutive effect of
securities related to employee and director equity plans.

(3)  
          Segment Information (Puget Energy Only)

Puget
Energy operates in primarily two business segments: regulated utility operations, or PSE,
and utility construction services, or InfrastruX. Puget Energys regulated utility
operation generates, purchases, transports and sells electricity and purchases, transports
and sells natural gas. One minor non-utility business segment, a PSE subsidiary, which is
a real estate investment and development company, is described as other. Reconciling items
between segments are not material. Financial data for business segments are as follows:

|(Dollars in Thousands)
Three Months Ended March 31, 2004 | PSE | InfrastruX | Other | Total    
|-------------------------------------------------------- | --- | ---------- | ----- | ---------
|Revenues                                                 |     |            | $     | 668,187  
|Depreciation and amortization                            |     |            |       | 55,807   
|Income tax                                               |     |            |       | 39,220   
|Operating income                                         |     |            |       | 108,801  
|Interest charges, net of AFUDC                           |     |            |       | 42,015   
|Net income                                               |     |            |       | 66,854   
|                                                        
|Goodwill, net at March 31, 2004                          |     |            | $     | --       
|Total assets at March 31, 2004                           |     |            |       | 5,308,778
|                                                        

|Three Months Ended March 31, 2003 | PSE | InfrastruX | Other | Total  
|--------------------------------- | --- | ---------- | ----- | -------
|Revenues                          |     |            | $     | 569,461
|Depreciation and amortization     |     |            |       | 54,532 
|Income tax                        |     |            |       | 34,497 
|Operating income                  |     |            |       | 93,815 
|Interest charges, net of AFUDC    |     |            |       | 46,356 
|Net income                        |     |            |       | 47,981 
|                                 

|At December 31, 2003 | PSE | InfrastruX | Other | Total    
|-------------------- | --- | ---------- | ----- | ---------
|Goodwill, net        |     |            | $     | --       
|Total asset          |     |            |       | 5,257,157
|                    

(4)   Accounting for
Derivative Instruments and Hedging Activities

Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138 and SFAS No. 149,
requires that all contracts considered to be derivative instruments be recorded on the
balance sheet at their fair value. The Company enters into both physical and financial
contracts to manage its energy resource portfolio including forward physical and financial
contracts, option contracts and swaps. The majority of these contracts qualify for the
normal purchase and normal sale exception. 
        During
the three months ended March 31, 2004, the Company recorded an increase in earnings for
the change in the market value of derivative instruments not meeting cash flow hedge
criteria of approximately $0.1 million compared to an increase in earnings of
approximately $0.5 million for the three months ended March 31, 2003. 
        PSE
has a contract with a counterparty whose debt ratings have been below investment grade
since 2002. The contract, a physical gas supply contract for one of PSEs electric
generating facilities, was marked-to-market beginning in the fourth quarter of 2003.
Although the counterparty continues to fully perform on the physical supply contract, the
counterpartys credit ratings have remained weak. Prior to October 1, 2003, the
contract was designated as a normal purchase under SFAS No. 133. PSE has concluded that it
is appropriate to reserve the marked-to-market gain on this contract due to the credit
quality of the counterparty in accordance with SFAS No. 133 guidance, as management deemed
that delivery is not probable through the term of the contract, which expires in December
2008. 
        Another
physical gas supply contract for one of PSEs electric generating facilities was
marked-to-market in the first quarter of 2004. The counterparty notified PSE in the first
quarter of 2004 that it believes it will be unable to deliver physical gas supply
beginning November 2005 through the end of the contract in June 2008. PSE concluded that
it is no longer probable that the counterparty will perform on this contract through the
end of term of the contract. The contract was previously designated as a normal purchase
under SFAS No. 133. PSE has also concluded that it is appropriate to reserve a portion of
the marked-to-market gain on this contract due to the risk of the counterparty not
performing, as delivery is not probable through the end of the contract. As a result, PSE
recorded an unrealized gain, net of a reserve, of $10.1 million in the first quarter of
2004. However, as a result of the power cost adjustment mechanism, 99% of the net
unrealized gain was deferred due to the Company reaching the $40 million cap under the
Power Cost Adjustment (PCA) mechanism.

(5)  
          Intangibles (Puget Energy Only)

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

|                                         |                  
|---------------------------------------- | -----------------
|At March 31, 2004
(Dollars in thousands) | Gross
Intangibles
|Covenant not to compete                  |                  
|Developed technology                     |                  
|Contractual customer relationships       |                  
|Patents                                  |                  
|                                        
|Total                                    |                  
|                                         |                  

|                                            |                  
|------------------------------------------- | -----------------
|At December 31, 2003
(Dollars in thousands) | Gross
Intangibles
|Covenant not to compete                     |                  
|Developed technology                        |                  
|Contractual customer relationships          |                  
|Patents                                     |                  
|                                           
|Total                                       |                  
|                                            |                  

The
identifiable intangible asset amortization expense for the three months ended March 31,
2004 and March 31, 2003 was $0.5 million. The identifiable intangible assets amortization
for future periods based on the current acquisitions will be:

|(Dollars in thousands)         | 2004 | 2005      | 2006 | 2007      | 2008
|------------------------------ | ---- | --------- | ---- | --------- | ----
|Future Intangible Amortization |      | $   1,672 |      | $   2,086 |     

(6)   Asset Retirement
Obligation

On
January 1, 2003 the Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires legal obligations associated with the retirement
of long-lived assets to be recognized at their fair value at the time that the obligations
are incurred. Upon initial recognition of a liability, that cost is capitalized as part of
the related long-lived asset and allocated to expense over the useful life of the asset.
The Company recorded an after-tax charge to income of $0.2 million in the first quarter of
2003 for the cumulative effect of the accounting change. 
        The
Company identified various asset retirement obligations at January 1, 2003, which were
included in the cumulative effect of the accounting change. The Company has an obligation
(1) to dismantle two leased electric generation turbine units and deliver the turbines to
the nearest railhead at the termination of the lease in 2009; (2) to remove certain
structures as a result of re-negotiations with the Department of Natural Resources of a
now expired lease; (3) to replace or line all cast iron pipes in its service territory by
2007 as a result of a 1992 Washington Commission order; and (4) to restore ash holding
ponds at a jointly-owned coal-fired electric generating facility in Montana.

The
following table describes all changes to the Companys asset retirement obligation
liability during the first quarter 2004:

|(Dollars in thousands)
At March 31, 2004         | Amount
|------------------------------------------------ | ------
|Asset retirement obligation at December 31, 2003 |       
|Liability recognized in the period               |       
|Liability settled in the period                  |       
|Accretion expense                                |       
|                                                 |       
|Asset retirement obligation at March 31, 2004    |       
|                                                 |       

(7)  
          Stock Compensation (Puget Energy Only)

The
Company has various stock-based compensation plans which prior to 2003 were accounted for
according to Accounting Principles Board (APB) No. 25, Accounting for Stock Issued
to Employees, and related interpretations as allowed by SFAS No. 123,
Accounting for Stock-Based Compensation. In 2003, the Company adopted the fair
value based accounting of SFAS No. 123 using the prospective method under the guidance of
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. The Company is applying SFAS No. 123 accounting prospectively to stock
compensation awards granted in 2003 and future years, while grants that were made in years
prior to 2003 will continue to be accounted for using the intrinsic value method of APB
No. 25. Had the Company used the fair value method of accounting specified by SFAS No. 123
for all grants at their grant date rather than prospectively implementing SFAS No. 123,
net income and earnings per share would have been as follows:

|                                                      | Three Months EndedMarch 31
|----------------------------------------------------- | --------------------------
|(Dollars in thousands, except per share)              | 2004                      
|                                                     
|Income for common stock, as reported                  |                           
|Add: Total stock-based employee compensation expense 
|included in net income, net of tax                    |                           
|Less: Total stock-based employee compensation expense
|per the fair value method of SFAS 123, net of tax     |                           
|                                                      |                           
|Pro forma income for common stock                     |                           
|                                                      |                           
|Earnings per share:                                   |                           
|Basic as reported                                     |                           
|Diluted as reported                                   |                           
|Basic and diluted pro forma                           |                           

(8)   Retirement Benefits

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

|                                             
|---------------------------------------------
|(Dollars in thousands)                       
|Service cost                                 
|Interest cost                                
|Expected return on plan assets               
|Amortization of prior service cost           
|Recognized net actuarial (gain) loss         
|Amortization of transition (asset) obligation
|Special recognition of prior service costs   
|                                             
|Net periodic benefit cost (income)           
|                                             

The
Company previously disclosed in its financial statements for the year ended December 31,
2003 that it expected pension plan contributions to be $11.1 million in 2004. During the
first quarter 2004, the actual cash contributions to the pension plans were $0.5 million.
In addition, some plan participants chose lump sum pension payments of $9.7 million and
deferred them under the Companys deferred compensation plan. Based on this activity,
the Company anticipates contributing an additional $0.9 million to the pension plans in
2004. The full amount of contributions and planned contributions to the pension plans for
2004 is for the Companys non-qualified supplemental retirement plan. 
        The
Company also disclosed in its financial statements for the year ended December 31, 2003
that it expects to make insignificant contributions to other post-retirement benefit plans
in 2004. During the first quarter of 2004, actual contributions were $0.4 million and the
Company expects to make additional contributions of $1.2 million for a total of $1.6
million in 2004.

(9)   New Accounting
Pronouncements

In
January 2003, the FASB issued Financial Interpretation No. 46 Consolidation of
Variable Interest Entities (FIN 46), as further revised in December 2003 with FIN
46R, which clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have a controlling interest or sufficient equity at risk for the entity
to finance its activities without additional financial support. FIN 46 requires that if a
business entity has a controlling financial interest in a variable interest entity, the
financial statements must be included in the consolidated financial statements of the
business entity. The adoption of FIN 46 for all interests in variable interest entities
created after January 31, 2003 was effective immediately. For variable interest entities
created before February 1, 2003, it was effective July 1, 2003. The adoption of FIN 46R
was effective March 31, 2004. The Company has evaluated its contractual arrangements and
determined PSEs 1995 conservation trust off-balance sheet financing transaction
meets this guidance, and therefore it was consolidated in the third quarter of 2003. As a
result, revenues increased while conservation amortization and interest expense increased
by the corresponding amount with no impact on earnings. FIN 46R also impacted the
treatment of the Companys mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debentures of the corporation (trust
preferred securities). Previously, these trust preferred securities were consolidated into
the Companys operations. As a result of FIN 46R, these securities have been
deconsolidated and were classified as junior subordinated debentures of the corporation
payable to a subsidiary trust holding mandatorily redeemable preferred securities in the
fourth quarter of 2003. This change had no impact on the Companys results of
operations. The Company evaluated its purchase power agreements and determined
that three counterparties may be considered variable interest entities. As a
result, PSE submitted requests for information to those parties; however, the parties
refused to submit to PSE the necessary information for PSE to determine whether they meet
the requirements of a variable interest entity. 
        In
December 2003, SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132R), was revised to include various additional
disclosure requirements. SFAS No. 132R is effective for fiscal years ending after December
15, 2003.
        The
Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) at its July
2003 meeting came to a consensus concerning EITF Issue No. 03-11, Reporting Realized
Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and
Not Held for Trading Purposes as Defined in Issue No. 02-03. The
consensus reached was that determining realized gains and losses on physically settled
derivative contracts not held for trading purposes reported in the income statement on a
gross or net basis is a matter of judgment that depends on the relevant facts and
circumstances. Based on the guidance in EITF No. 03-11, the Company determined that its
non-trading derivative instruments should be reported net and implemented this treatment
effective January 1, 2004. Consequently, both electric revenues and purchased electricity
have been reduced by $35.3 million in the first quarter 2003 to reflect the netting
addressed by EITF No. 03-11 with no effect on net income.

(10)   Other

For
the three purchase power 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 purchase power 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 purchase power agreement prices.  PSE's
purchased electricity expense for the three months ended March 31, 2004 for these three
entities was $67.5 million.
        On April 23, 2004, the acquisition of a 49.85%
interest in the Fredrickson I generating facility was approved by FERC.  Prior to that approval, on
April 7, 2004, the Washington Commission issued an order in PSEs power cost only
rate case granting approval for the acquisition of the Fredrickson I generating
facility as well.  As a result of these approvals, PSE anticipates completing
the acquisition in the second quarter of 2004.  In its order, the Washington Commission found the
acquisition to be prudent and the cost associated with the generating facility reasonable. The costs
associated with the generating facility, including projected baseline gas costs, are
approved for recovery in rates. The Washington Commission, however, reserved its
determination of certain issues related to the Tenaska and Encogen generating facilities
to a subsequent order. PSE requested clarification on other issues in the power cost only
rate case that were not addressed in the April 7, 2004 order, but was denied clarification
on these issues until resolution of the Tenaska and Encogen fixed costs in the proceeding.
As described in an exhibit in the rate proceeding, the Washington Commission staff and PSE
agreed on all power cost adjustments except those related to the Tenaska and Encogen
generating facilities. Those items agreed to in the proceeding would increase rates by
$54.5 million. 
        PSE
believes that the fuel cost disallowances relating to Encogen and Tenaska proposed by the
Washington Commission staff are legally and factually deficient and PSE filed its rebuttal
case on February 13, 2004. These costs are currently recovered in rates and PSE believes
it is probable that recovery will occur in the future. The Washington Commission staff is
independent from the Washington Commission in such a litigated proceeding and their
positions do not represent an indication of the final outcome of the proceeding. The
hearing was held in late February and the resolution of the final issues of the power cost
only rate case is expected by the end of April 2004 barring any unforeseen circumstances.
 
        On
April 5, 2004, PSE filed general tariff electric and gas rate cases with the Washington
Commission. The rate cases propose increases of 5.7% or $81.6 million annually and 6.3% or
$47.2 million annually for electric and gas customers, respectively. These increases are
intended to recover costs associated with extending and upgrading facilities to serve a
growing number of gas and electric customers as well as strengthen PSE financially to
serve its customers. The resolution of the general rate cases may be up to an 11-month
process from the time the general rate cases were filed.

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

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

Overview

Puget
Energy is an energy services holding company and all of its operations are conducted
through its two subsidiaries. These subsidiaries are PSE, a regulated electric and gas
utility company, and InfrastruX, a utility construction and services company.

Puget Sound Energy
        PSE
generates revenues from the sale of electric and gas services, mainly to residential and
commercial customers within Washington State. A majority of PSEs revenues are
generated in the first and fourth quarters during the winter heating season in Washington
State. 
        
As a regulated utility company, PSE is subject to FERC and Washington Commission regulation
which may impact a large array of business activities, including limitation of future rate
increases; directed accounting requirements that may 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 which can damage distribution and transmission lines; and energy trading and
wholesale market stability over time. 
        PSEs
main operational goal is to provide cost-effective and stable energy prices to its
customers. To help accomplish this goal, PSE is attempting to be more self-sufficient in
energy generation resources. Owning more generation resources rather than purchasing power
through contracts and on the wholesale market is intended to allow customers rates
to remain stable. As such, on April 7, 2004, PSE obtained approval from the Washington
Commission to complete its purchase of a 49.85% interest in a 275 MW (250 MW capacity with
25 MW planned capital improvements) gas-fired generation facility within Western
Washington. This transaction will be completed in the second quarter 2004.
This purchase is the first step of PSEs
long-term electric Least Cost Plan that was filed April 30, 2003 with the Washington
Commission. The plan supports a strategy of diverse resource acquisitions including
resources fueled by natural gas and coal, renewable resources and shared resources.

InfrastruX
        InfrastruX
generates revenues mainly from maintenance services and construction contracts in the
midwest, Texas, south-central and eastern United States regions. A majority of its revenues
are generated during the second and third quarters, which are generally the most
productive quarters for the construction industry due to longer daylight hours and
generally better weather conditions.
        InfrastruX
is subject to risks associated with the construction industry including inability to
adequately estimate costs of projects that are bid upon under fixed-fee contracts;
continued economic downturn that limits the amount of projects available thereby reducing
available profit margins from increased competition; the ability to integrate acquired
companies within its operations without significant cost; and the ability to obtain
adequate financing and bonding coverage to continue expansion and growth. 

        InfrastruXs
main goals have been continued growth and expansion into underdeveloped utility
construction markets and to utilize its acquired entities to capitalize on depth of
expertise, asset base, geographical location and workforce to provide services that local
contractors cannot. InfrastruX has acquired 12 entities since 2000 to fuel growth and
diversify into these underdeveloped markets.

Results of Operations

Puget Energy
        All
of the operations of Puget Energy are conducted through its subsidiaries, PSE and
InfrastruX. Puget Energys net income for the three months ended March 31, 2004 was
$66.4 million on operating revenues of $743.5 million compared with net income of $44.6
million on operating revenues of $640.6 million for the same period in 2003. Income for
common stock was $66.4 million for the first quarter of 2004 compared to $42.7 million for
the first quarter of 2003. Puget Energys basic and diluted earnings per share were
$0.67 for the first quarter of 2004 compared to $0.46 and $0.45, respectively, for the
first quarter of 2003. 
        Puget
Energys income for common stock was positively impacted by an increase in PSEs
income for common stock for the three months ended March 31, 2004 of $20.7 million
compared to the same period in 2003. The improved results were due primarily to higher
energy sales resulting from more normal temperatures in the first quarter of 2004 as
compared to warmer temperatures in the same period in 2003, and an $11.5 million decrease
in underrecovered variable power costs due to reaching the $40 million cap under the Power
Cost Adjustment (PCA) mechanism in the fourth quarter of 2003. The PCA mechanism shares
increases and decreases in power costs on a graduated scale between customers and PSE.
Puget Energys income for common stock was also positively impacted by a $3.0 million
reduction in InfrastruXs loss for common stock (net of minority interest) for the
three months ended March 31, 2004 compared to the same period in 2003 due in part to
improved operating efficiencies and improvement in weather conditions which positively
impacted productivity.

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

|Comparative Three Months Ended
March 31, 2004 vs. March 31, 2003
Increase (Decrease)
(Dollars in Millions)
|----------------------------------------------------------------------------------------------------------
|                                                                                                          
|Operating revenue changes:                                                                                
|Electric:                                                                                                 
|Residential sales                                                                                         
|Commercial sales                                                                                          
|Industrial sales                                                                                          
|Transportation sales                                                                                      
|Sales to other utilities and marketers                                                                    
|Other                                                                                                     
|                                                                                                          
|Total electric operating change                                                                           
|                                                                                                          
|Gas:                                                                                                      
|Residential sales                                                                                         
|Commercial sales                                                                                          
|Industrial sales                                                                                          
|Transportation sales                                                                                      
|                                                                                                          
|Total gas operating change                                                                                
|                                                                                                          
|Total operating revenue change                                                                            
|                                                                                                          
|Operating expense changes:                                                                                
|Energy costs:                                                                                             
|Purchased electricity                                                                                     
|Purchased gas                                                                                             
|Electric generation fuel                                                                                  
|Residential exchange power cost credit increase                                                           
|Unrealized gain decrease on derivative instruments                                                        
|Utility operations and maintenance:                                                                       
|Production operations and maintenance                                                                     
|Low income program pass through expenses                                                                  
|Other utility operations and maintenance                                                                  
|Other operations and maintenance                                                                          
|Depreciation and amortization                                                                             
|Conservation amortization                                                                                 
|Taxes other than income taxes                                                                             
|Income taxes                                                                                              
|                                                                                                          
|Total operating expense change                                                                            
|Other income change (net of tax)                                                                          
|Interest charges change                                                                                   
|Cumulative effect of an accounting change (net of tax)                                                    
|                                                                                                          
|Net income change                                                                                         
|                                                                                                          

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

To
meet customer demand, PSE dispatches resources in its power supply portfolio such as
fossil-fuel generation, owned and contracted hydro capacity and energy, and long-term
contracted power. However, depending principally upon availability of hydroelectric
energy, plant availability, fuel prices and/or changing load as a result of weather, PSE
may sell surplus power or purchase deficit power in the wholesale market. PSE manages its
core energy portfolio through short and intermediate-term off-system physical purchases
and sales, and through other risk management techniques. A PSE Risk Management Committee
oversees energy portfolio exposures. 
        Electric
margin increased $21.4 million for the three months ended March 31, 2004 compared to the
same period in 2003 primarily as a result of higher energy sales from more normal
temperatures in the first quarter of 2004 compared to warmer temperatures in the first
quarter of 2003 and an $11.5 million decrease in underrecovered variable power costs due
to reaching the $40 million cap under the PCA mechanism in the fourth quarter 2003. 
        Electric
margin is electric sales to retail and transportation customers less pass-through tariff
items, 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 for the three months ended March 31, 2004 and 2003 is
detailed further as follows:

|Electric Margin for the Three Months Ended
March 31, 2004 and March 31, 2003
(Dollars in Millions)
|--------------------------------------------------------------------------------------------------
|                                                                                                  
|Electric retail sales revenue                                                                     
|Electric transportation revenue                                                                   
|Other electric revenue-gas supply resale                                                          
|                                                                                                  
|Total electric revenue for margin                                                                 
|Adjustments for amounts included in revenue:                                                      
|Pass-through tariff items                                                                         
|Pass-through revenue-sensitive taxes                                                              
|Residential Exchange Credit                                                                       
|                                                                                                  
|Net electric revenue for margin                                                                   
|Minus power costs:                                                                                
|Fuel                                                                                              
|Purchased electricity, net of sales to other                                                      
|utilities and marketers                                                                           
|                                                                                                  
|Total electric power costs                                                                        
|                                                                                                  
|Electric margin before PCA                                                                        
|Power cost deferred under the PCA                                                                 
|                                                                                                  
|Electric margin                                                                                   
|                                                                                                  

Gas
margin increased $5.5 million for the three months ended March 31, 2004 compared to the
same period in 2003 due primarily to more normal temperatures in the first quarter 2004
compared to above normal temperatures in the first quarter 2003, and increased customers.
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 for the
three months ended March 31, 2004 and 2003 is detailed further as follows:

|Gas Margin for the Three Months Ended
March 31, 2004 and March 31, 2003
(Dollars in Millions)
|---------------------------------------------------------------------------------------------
|                                                                                             
|Gas retail revenue                                                                           
|Gas transportation revenue                                                                   
|                                                                                             
|Total gas revenue for margin                                                                 
|Adjustments for amounts included in revenue:                                                 
|Gas revenue hedge                                                                            
|Pass-through tariff items                                                                    
|Pass-through revenue-sensitive taxes                                                         
|                                                                                             
|Net gas revenue for margin                                                                   
|Minus Purchased Gas Costs                                                                    
|                                                                                             
|Gas Margin                                                                                   
|                                                                                             

Operating Revenues 
Electric
        Electric
operating revenues for the three months ended March 31, 2004 were $392.5 million, an
increase of $10.8 million compared to the same period in 2003, due primarily to increased
sales to residential and commercial customers which increased $13.7 million and $6.1
million, respectively. Residential and commercial sales volumes for the three months ended
March 31, 2004 increased by 188.1 million and 82.3 million kWh, respectively, or 6.1% and
3.9%, compared to the same period in 2003. These changes were mainly attributable to more
normal weather conditions for the three months ended March 31, 2004 as compared to warmer
than normal weather conditions in the same period in 2003. In addition, the customer base
increased by 19,930 customers or 2.1% for the three months ended March 31, 2004 as
compared to the same period in 2003. 
        For
the three months ended March 31, 2004 and 2003, the benefits of the Residential and Farm
Energy Exchange Benefit credited to customers was $56.2 million and $55.1 million,
respectively, with a related offset to power costs. PSE received payments from the
Bonneville Power Administration (BPA) in the amount of $58.6 million and $37.0 million
during the three months ended March 31, 2004 and 2003, respectively. The difference
between the customers credit and the amount received from BPA either increases or
decreases the previously deferred amount owed to customers. The aggregated deferred amount
is recorded on PSEs balance sheet as restricted cash. Absent certain adjustments
tied to the BPA rate adjustment clause, the modified amended settlement agreement provides
for payments from BPA in the amount of $630.6 million for the period January 2003 through
September 2006 and for a pass-through of the same amount to eligible residential and small
farm customers. 
        During
the three months ended March 31, 2004, PSEs other electric operating revenues
increased $3.1 million due in part to the implementation of FIN 46R. FIN 46R required PSE
to consolidate PSEs 1995 conservation trust transaction in the third quarter of
2003. The consolidation increased revenues, while conservation amortization and interest
expense increased by a corresponding amount with no impact on earnings. 
        PSE
operates within the western wholesale market and has made sales into the California energy
market. During the fourth quarter of 2000, PSE made such sales to the California energy
market on which the receivable amount is still outstanding. At March 31, 2004, PSEs
receivable from the California Independent System Operators (CAISO) and other
counter-parties, net of reserves, was $21.3 million. See the discussion of the CAISO
receivable and California proceedings under Proceedings Relating to the Western
Power Market.

Operating Revenues 
Gas
        Gas
operating revenues for the three month period ended March 31, 2004 were $275.7 million, an
increase of $87.9 million compared to the same period in 2003, due primarily to increased
sales to residential and commercial customers of $56.3 million and $27.8 million,
respectively. Approximately $82.4 million of the total increase relates to increases in
the purchased gas adjustment (PGA) rate. Residential and commercial gas sales volumes
increased 16.2 million and 8.0 million therms, respectively, or 8.6% and 8.8% for the
three months ended March 31, 2004 compared to the same period in 2003. 
        PSE
has a PGA mechanism in retail gas rates to recover expected gas costs (gas supply and
transportation costs) by deferring as a receivable or liability, any gas costs that exceed
or fall short of the amount in PGA rates and accrues interest on any deferred balances
under the PGA. Therefore, PSEs gas margin and net income is not affected by changes
in the PGA rates. The PGA liability balances at March 31, 2004 and March 31, 2003 were
$0.9 million and $33.0 million, respectively. The following rate adjustments were approved
by the Washington Commission in relation to the PGA during 2003 that affect changes in gas
revenues for the three months ended March 31, 2004 compared with the same period for 2003:

|Effective Date  | Percentage Increase in
Rates | Annual Increase
in Revenues
(Dollars In Millions)
|--------------- | ---------------------------- | -------------------------------------------------
|October 1, 2003 | 13.3 %                       | $    78.8                                        
|April 10, 2003  | 20.1 %                       | 103.6                                            

Operating Expenses 

        Purchased
electricity expenses decreased $8.8 million for the three months ended March 31, 2004
compared to the same period in 2003. The decrease was primarily due to an $11.5 million
decrease in underrecovered variable power costs. The deferral under the PCA mechanism in
the first quarter of 2004 was $13.9 million compared to no deferral in the first quarter
of 2003. The decrease was partially offset by an increase in load related to more normal
temperatures in the first quarter of 2004 compared to warmer than normal temperatures in
the first quarter of 2003. 
        The
April 19, 2004 Columbia Basin Runoff Forecast published by the National Weather Service
Northwest River Forecast Center indicated that the total forecasted runoff into the Grand
Coulee reservoir for the period January through July 2004 would be 84% of normal. This
compares to 86% of normal for the same period in 2003. Based on this forecast and past
below-normal runoff, PSE will continue to exceed the $40 million cap under the PCA
mechanism, which was reached in the fourth quarter 2003. Under the PCA mechanism, further
increases in variable power costs above the $40 million cap through June 30, 2006 are
apportioned 99% to customers and 1% to PSE.

        Purchased gas
expenses increased $75.5 million for the three months ended March 31, 2004 compared to
the same period in 2003. The increase was primarily due to increased usage as a result of
more normal temperatures in the first quarter of 2004 and higher PGA rates compared to the
same period in 2003. Gas costs are passed through to customers through the PGA mechanism
with no impact on gas margin or net income. 
        Electric
generation fuelexpense decreased $1.1 million for the three months ended March 31, 2004
compared to the same period in 2003 from lower fuel costs associated with PSEs
gas-fired generation facilities not being operated due to lower costs of wholesale power
supply. 
        Residential
exchange credits associated with the Residential Purchase and Sale Agreement with BPA
increased $1.7 million for the three months ended March 31, 2004 when compared to the same
period in 2003 as a result of increased residential electrical load. The residential
exchange credit is a pass-through tariff item with a corresponding credit in electric
operating revenue. It has no impact on electric margin or net income. 
        Unrealized
gain on derivative instrumentsfor the three months ended March 31, 2004 decreased $0.4
million compared with the same period in 2003. SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and SFAS
No. 149, requires that all contracts considered to be derivative instruments be recorded
on the balance sheet at their fair value. The Company enters into both physical and
financial contracts to manage its energy resource portfolio including forward physical and
financial contracts, option contracts and swaps. The majority of these contracts qualify
for the normal purchase and normal sale exception. 
        PSE
has a contract with a counterparty whose debt ratings have been below investment grade
since 2002. The contract, a physical gas supply contract for one of PSEs electric
generating facilities, was marked-to-market beginning in the fourth quarter of 2003.
Although the counterparty continues to fully perform on the physical supply contract, the
counterpartys credit ratings have remained weak. Prior to October 1, 2003, the
contract was designated as a normal purchase under SFAS No. 133. PSE has concluded that it
is appropriate to reserve the marked-to-market gain on this contract due to the credit
quality of the counterparty in accordance with SFAS No. 133 guidance, as management deemed
that delivery is not probable through the term of the contract, which expires in December
2008. 
        Another
physical gas supply contract for one of PSEs electric generating facilities was
marked-to-market in the first quarter of 2004. The counterparty notified PSE in the first
quarter 2004 that it believes it will be unable to deliver physical gas supply beginning
November 2005 through the end of the contract in June 2008. PSE concluded that it is no
longer probable that the counterparty will perform on this contract through the end of
term of the contract. The contract was previously designated as a normal purchase under
SFAS No. 133. PSE has also concluded that it is appropriate to reserve a portion of the
marked-to-market gain on this contract due to the risk of the counterparty not performing,
as delivery is not probable through the end of the contract. As a result, PSE recorded an
unrealized gain, net of a reserve, of $10.1 million in the first quarter of 2004. However,
as a result of the power cost adjustment mechanism, 99% of the net unrealized gain was
deferred due to the Company reaching the $40 million cap under the PCA mechanism. 
        Low-income
Programcosts, which are a pass-through tariff item, decreased $1.7 million for the three
months ended March 31, 2004 compared to the same period in 2003. Low-income program costs
are dependent upon the amount collected from customers through rates. 
        Other
utility operations and maintenancecosts increased $5.9 million for the three months ended
March 31, 2004 compared to the same period in 2003 due primarily to a $4.4 million
increase in storm damage costs associated with a severe ice storm that hit the Puget Sound
region in January 2004, as well as increased administrative and general expenses. 
        Depreciation
and amortizationexpense for PSE increased $1.3 million for the three months ended March
31, 2004 compared to the same period in 2003 due primarily to the effects of new plant
placed into service during 2004 and the latter half of 2003. 
        Taxes
other than income taxes increased $9.3 million for the three months ended March 31, 2004
compared to the same period in 2003 primarily due to higher municipal and state excise
taxes which are revenue based. 
        Income
taxes increased $4.7 million for the three months ended March 31, 2004 compared to the
same period in 2003 as a result of higher pre-tax operating income.

Interest Charges 
        Interest
charges decreased $4.3 million for the three months ended March 31, 2004 compared to the
same period in 2003. This decrease is primarily due to the redemption or maturity of
$187.3 million of Medium-Term Notes with interest rates ranging from 6.07% to 8.59% during
the twelve months ended March 31, 2004, and the refinancing of $161.9 million of Pollution
Control Bonds with interest rates ranging from 5.875% to 7.25% to rates ranging from 5.00%
to 5.10% in March 2003. The decrease in interest expense was partially offset by the
issuance of $150 million of 3.363% Senior Notes in May 2003 and the consolidation of the
conservation trust bonds due to FIN 46R.

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

|Comparative Three Months Ended
March 31, 2004 vs. March 31, 2003
Increase (Decrease)
(Dollars in Millions)
|----------------------------------------------------------------------------------------------------------
|Operating revenue change:                                                                                 
|Non-utility construction services                                                                         
|                                                                                                          
|Operating expense changes:                                                                                
|Other operations and maintenance                                                                          
|Depreciation and amortization                                                                             
|Taxes other than income taxes                                                                             
|Income taxes                                                                                              
|                                                                                                          
|Total operating expense change                                                                            
|                                                                                                          
|Interest charges change                                                                                   
|Minority interest change                                                                                  
|                                                                                                          
|Net income change                                                                                         
|                                                                                                          

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

InfrastruX
revenue increased $4.1 million for the three months ended March 31, 2004 compared to the
same period in 2003 due primarily to the acquisition of one company in the second quarter
of 2003, which contributed $6.5 million to the first quarter of 2004. The increase was
partially offset by lower revenues from existing companies as a result of exiting
unprofitable business lines and the completion of a large project in 2003 that was not
repeated in 2004. InfrastruX operations are seasonal, with its highest revenues typically
in the second and third quarters of the year. 
        InfrastruX
operation and maintenance expenses decreased $3.6 million for the three months ended March
31, 2004 compared to the same period in 2003 due to better overall weather in the first
quarter of 2004 compared to 2003, which positively impacted productivity, and
implementation of an integrated operating plan resulting in increased operating efficiencies. 
        Depreciation
and amortizationexpense increased by $1.1 million for the three months ended March 31,
2004 compared to the same period in 2003 primarily due to an increase in assets through a
company acquisition and additional assets placed in service at existing companies. 
        Income
taxes increased $2.7 million during the three months ended March 31, 2004 compared to the
same period in 2003 due primarily to higher operating income in the first quarter of 2004.

Capital Expenditures,
Capital Resources and Liquidity

Capital Requirements 
Contractual Obligations and Commercial Commitments 

        Puget Energy. The following are Puget Energy's  aggregate  consolidated  (including  PSE)  contractual  obligations and
commercial commitments as of March 31, 2004:

|Payments Due Per Period                      
|---------------------------------------------
|Contractual Obligations
(Dollars in millions)
|Long-term debt                               
|Short-term debt                              
|Junior subordinated debentures payable       
|to a subsidiary trust (1)                    
|Mandatorily redeemable preferred stock       
|Service contract obligations                 
|Capital lease obligations                    
|Non-cancelable operating leases              
|Fredonia combustion turbines lease (2)       
|Energy purchase obligations                  
|Financial hedge obligations                  
|Non-qualified pension funding                
|                                             
|Total contractual cash obligations           
|                                             

|                                                       | Amount of Commitment
Expiration Per Period
|------------------------------------------------------ | ------------------------------------------
|Commercial Commitments
          (Dollars in millions) | Total                                     
|Guarantees (3)                                         |                                           
|Liquidity facilities - available (4)                   |                                           
|Lines of credit - available (5)                        |                                           
|Energy operations letter of credit                     |                                           
|                                                      
|Total commercial commitments                           |                                           
|                                                      

---

|(1) | In
1997 and 2001, PSE formed Puget Sound Energy Capital Trust I and Puget Sound
          Energy Capital Trust II, respectively, for the sole purpose of issuing and
          selling preferred securities (Trust Securities) to investors and issuing common
          securities to PSE. The proceeds from the sale of Trust Securities were used by
          the Trusts to purchase Junior Subordinated Debentures (Debentures) from PSE.
The           Debentures are the sole assets of the Trusts and PSE owns all common
securities           of the Trusts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | See
Fredonia 3 and 4 Operating Lease under Off-Balance Sheet
          Arrangements below.
|--- | ----------------------------------------------------------------------------------------------

|(3) | In
June 2001, InfrastruX signed a three-year credit agreement with several banks
          to provide up to $150 million in financing. Under the credit agreement, Puget
          Energy is the guarantor of the line of credit. Certain InfrastruX subsidiaries
          also have certain borrowing capacities for working capital purposes of which
          Puget Energy is not a guarantor.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | At
March 31, 2004, PSE had available a $250 million unsecured credit agreement           and
a three-year $150 million receivables securization facility. At March 31,           2004,
PSE had $113.0 million of receivables available for sale under its           receivables
securitization facility. See Accounts Receivable           Securitization Program under
Off-Balance Sheet Arrangements          below for further discussion. The
credit agreement and securitization facility           provide credit support for an
outstanding letter of credit totaling $0.5           million, thereby effectively
reducing the available borrowing capacity under           these liquidity facilities to
$362.5 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Puget
Energy has a $15 million line of credit with a bank. At March 31, 2004,           $5.0
million was outstanding, reducing the available borrowing capacity under           this
line of credit to $10.0 million. InfrastruX has $184.7 million in lines of
          credit with various banks to fund capital credit requirements of InfrastruX and
          its subsidiaries. InfrastruX and its subsidiaries had outstanding loans of
          $147.7 million and letters of credit of $4.7 million at March 31, 2004,
          effectively reducing the available borrowing capacity under these lines of
          credit to $32.3 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Puget
Sound Energy. The following are PSE's aggregate  contractual  obligations and commercial
 commitments as of March 31, 2004:

|Payments Due Per Period                      
|---------------------------------------------
|Contractual Obligations
(Dollars in millions)
|Long-term debt                               
|Junior subordinated debentures payable       
|to a subsidiary trust (1)                    
|Mandatorily redeemable preferred stock       
|Service contract obligations                 
|Non-cancelable operating leases              
|Fredonia combustion turbines lease (2)       
|Energy purchase obligations                  
|Financial hedge obligations                  
|Non-qualified pension funding                
|                                             
|Total contractual cash obligations           
|                                             

|                                             | Amount of Commitment
Expiration Per Period
|-------------------------------------------- | ------------------------------------------
|Commercial Commitments
(Dollars in millions) | Total                                     
|Liquidity facilities - available (3)         |                                           
|Energy operations letter of credit           |                                           
|                                            
|Total commercial commitments                 |                                           
|                                            

---

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

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

|(3) | See
note (4) above.
|--- | -------------------

Off-Balance Sheet
ArrangementsAccounts Receivable Securitization
Program. In order to provide a source of liquidity for PSE at attractive cost of capital
rates, PSE entered into a Receivables Sales Agreement with Rainier Receivables, Inc., a
wholly owned subsidiary of PSE in December 2002. Pursuant to the Receivables Sales
Agreement PSE sold all of its utility customers accounts receivable and unbilled
utility revenues to Rainier Receivables. Concurrently with entering into the Receivables
Sales Agreement, Rainier Receivables entered into a Receivables Purchase Agreement with
PSE and a third party. The Receivables Purchase Agreement allows Rainier Receivables to
sell the receivables purchased from PSE to the third party. The amount of receivables sold
by Rainier Receivables is not permitted to exceed $150 million at any time. However,
the maximum amount may be less than $150 million depending on the outstanding amount of
PSEs receivables, which fluctuate with the seasonality of energy sales to customers. 
        The
receivables securitization facility is the functional equivalent of a secured revolving
line of credit. In the event Rainier Receivables elects to sell receivables under the
Receivables Purchase Agreement, Rainier Receivables is required to pay fees to the
purchasers that are comparable to interest rates on a revolving line of credit. As
receivables are collected by PSE as agent for the receivables purchasers, the outstanding
amount of receivables held by the purchasers declines until Rainier Receivables elects to
sell additional receivables to the purchasers. 
        The
receivables securitization facility has a three-year term, but is terminable by PSE and
Rainier Receivables upon notice to the receivables purchasers. At March 31, 2004, Rainier
Receivables had sold $37.0 million of accounts receivable and the maximum receivables
available for sale was $113.0 million. 
        During
the three months ended March 31, 2004, Rainier Receivables sold a cumulative $122.0
million of receivables. No amounts were sold for the same period in 2003.

Fredonia 3 and 4 Operating Lease. PSE
leases two combustion turbines for its Fredonia 3 and 4 electric generation facility
pursuant to a master lease that was amended for this purpose in April 2001. The lease has
a term expiring in 2011, but can be canceled by PSE after August 2004. Payments under the
lease vary with changes in the London Interbank Offered Rate (LIBOR). At March 31, 2004,
PSEs outstanding balance under the lease was $58.4 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.

New Generation Resources. In October
2003, PSE completed negotiations to purchase a 49.85% interest in a 275 MW (250 MW
capacity with 25 MW planned capital improvements) gas-fired electric generating station
located within Western Washington (Fredrickson I). The purchase will add approximately 137
MW of electric generation capacity to serve PSEs retail customers. PSE submitted a
power cost only rate case in October 2003 to the Washington Commission to recover the
approximately $80 million cost of the new generating facility and other power costs. The
acquisition of Frederickson I was approved by the Washington Commission on April 7, 2004. The
acquisition was also approved by FERC under the Federal Power Act on April 23, 2004.  Based on
these approvals, PSE anticipates completing the acquisition in the second quarter of 2004.
In addition, PSE has issued a request for proposals to acquire up to 355 average MW of
electric power resources, including generation energy from wind power for its
electric-resource portfolio and is currently evaluating responses.

Utility Construction Program. Current
utility construction expenditures for generation, transmission and distribution are
designed to meet continuing customer growth and to improve efficiencies of PSEs
energy delivery systems. Construction expenditures, excluding equity Allowance for Funds
Used During Construction (AFUDC), were $65.8 million for the three months ended March 31,
2004. PSE expects construction expenditures will total approximately $408 million in 2004,
which includes $80 million for acquisition of the 49.85% interest in the Fredrickson I
generating facility, $639.7 million in 2005, which includes $280.5 million for new
resource acquisitions, and $327 million in 2006. The Fredrickson I acquisition will be
funded initially with short-term debt. Construction expenditure estimates are subject to
periodic review and adjustment in light of changing economic, regulatory, environmental
and conservation factors.

Other Additions. Other property,
plant and equipment additions were $5.7 million for the three months ended March 31, 2004.
Puget Energy expects InfrastruXs capital additions to be $16.2 million in 2004,
$18.0 million in 2005, and $20.0 million in 2006. Capital addition estimates are subject
to periodic review and adjustment in light of changing economic and regulatory factors.

Capital Resources Cash From Operations.Cash generated
from operations for the three months ended March 31, 2004 was $109.1 million. During the
period, $22.7 million in cash was used for AFUDC and payment of dividends. Consequently,
cash flows available for utility construction expenditures and other capital expenditures
were $86.4 million or 115.4% of the $74.9 million in construction expenditures (net of
AFUDC) and other capital expenditure requirements for the period. For the same period in
2003, cash generated from operations was $153.0 million, $22.7 million of which was used
for AFUDC and payment of dividends. Therefore, cash flows available for utility
construction expenditures and other capital expenditures for the three months ended March
31, 2003 were $130.3 million. The reduction in cash generated from operations in the first
quarter of 2004 compared to the first quarter of 2003 is primarily due to the utilization
of the accounts receivable securization program in December 2003 and March 2004. At
December 31, 2003, Rainier Receivables had sold $111.0 million in account receivables,
which would have been collected during the first quarter of 2004. Rainier Receivables also
sold $37.0 million in accounts receivable at March 31, 2004 compared to no activity for
the first quarter of 2003. 
        Puget
Energy and PSE expect to continue financing the utility construction program and other
capital expenditure requirements with internally generated funds and externally financed
capital.

Financing Program. Financing utility
construction requirements and operational needs 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. The
Company expects to meet capital and operational needs for the balance of 2004 and 2005
with cash generated from operations and borrowings under its liquidity facilities.

Restrictive Covenants.In determining
the type and amount of future financing, PSE may be limited by restrictions contained in
its electric and gas mortgage indentures, articles of incorporation and certain loan
agreements. Under the most restrictive tests, at March 31, 2004, PSE could issue:

| |  | approximately
$946.4 million of first mortgage bonds, as PSE has approximately $1.6 billion of electric
and gas bondable property available for use, subject to the interest coverage ratio
limitation of 2.0 times net earnings available for interest. PSEs interest coverage
ratio at March 31, 2004 was 3.0 times net earnings available for interest which would
allow issuance of approximately $1.3 billion of additional first mortgage bonds, at an
assumed interest rate of approximately 5.6% on a ten-year first mortgage bond;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
$607.9 million of additional preferred stock at an assumed dividend rate of 7.25%; and
|- |  | ----------------------------------------------------------------------------------------------------

| |  | approximately
$265.1 million of unsecured long-term debt.
|- |  | ---------------------------------------------------------

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

The
ratings of Puget Energy and PSE as of April 23, 2004 were:

|                               | Ratings          
|------------------------------ | -----------------
|                               | Standard & Poors
|Puget Sound Energy             |                  
|Corporate credit/issuer rating | BBB-             
|Senior secured debt            | BBB              
|Shelf debt senior secured      | BBB              
|Trust preferred securities     | BB               
|Preferred stock                | BB               
|Commercial paper               | A-3              
|Revolving credit facility      | *                
|Ratings outlook                | Positive         
|Puget Energy                  
|Corporate credit/issuer rating | BBB-             

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

Shelf Registrations. In January 2004,
Puget Energy and PSE filed a shelf registration statement with the Securities and Exchange
Commission for the offering, on a delayed or continuous basis, of up to $500 million
principal amount of:

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

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

Liquidity
Facilities and Commercial Paper. PSEs short-term borrowings and sales of commercial
paper are used to provide working capital and funding of utility construction programs. 
        PSE
has a $250 million unsecured credit agreement with various banks which expires in June
2004 and a $150 million 3-year receivables securitization program which expires in
December 2005. The receivables available for sale under the securitization program may be
less than $150 million depending on the outstanding amount of PSEs receivables,
which fluctuate with the seasonality of energy sales to customers. At March 31, 2004, PSE
had available $250 million in the unsecured credit agreement and $113.0 million available
from the receivable securitization facility (net of $37.0 million sold), which provide
credit support for outstanding commercial paper and outstanding letters of credit. At
March 31, 2004, there were no outstanding amounts under the commercial paper program and
$0.5 million under the letters of credit, effectively reducing the available borrowing
capacity under the liquidity facilities to $362.5 million. PSE is negotiating with various
banks to establish a new unsecured credit facility to replace the facility that will
expire in June 2004 and expects the new credit facility to be effective before the
existing facility expires. 
        In
May 2003, Puget Energy entered into a $15 million, three-year credit agreement with a
bank. Under the terms of the agreement, Puget Energy will pay a floating interest rate on
borrowings based on LIBOR. The interest rate is set for one, two, or three-month periods
at the option of Puget Energy with interest due at the end of each period. Puget Energy
will also pay a commitment fee on any unused portion of the credit facility. Puget Energy
has outstanding $5.0 million under the credit agreement at March 31, 2004.
        In
June 2001, InfrastruX signed a three-year credit agreement with several banks to provide
up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In
addition, InfrastruXs subsidiaries have an additional $34.7 million in lines of
credit with various banks. Borrowings available for InfrastruX are used to fund
acquisitions and working capital requirements of InfrastruX and its subsidiaries. At March
31, 2004, InfrastruX and its subsidiaries had outstanding loans of $147.7 million and
letters of credit of $4.7 million, effectively reducing the available borrowing capacity
under these lines of credit to $32.3 million.

Stock Purchase and Dividend
Reinvestment Plan. Puget Energy has a Stock Purchase and Dividend Reinvestment Plan
pursuant to which shareholders and other interested investors may invest cash and cash
dividends in shares of Puget Energys common stock. Since new shares of common stock
may be purchased directly from Puget Energy, funds received may be used for general
corporate purposes. Puget Energy issued common stock from the Stock Purchase and Dividend
Reinvestment Plan of $3.9 million (175,600 shares) for the three months ended March 31,
2004 compared to $3.8 million (192,800 shares) for the same period in 2003.

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
Licenses Baker River Project. The Baker River
Project is located upstream of the confluence of the Baker and Skagit Rivers in Whatcom
and Skagit Counties and consists of the Lower Baker Development (constructed in 1925) and
the Upper Baker Development (constructed in 1959). The Baker River Projects current
license expires on April 30, 2006, and PSE intends to submit an application for a new
license on or before April 30, 2004.

Snoqualmie Falls Project. The
Snoqualmie Falls Project, built in 1898, was the worlds first electric generating
facility to be built totally underground. It is located 3.5 miles downstream of the
confluence of the north, middle and south forks of the Snoqualmie River. The original
license of the project was issued May 13, 1975, effective March 1, 1956, and terminated on
December 31, 1993. PSE filed its application to relicense the project on November 25,
1991, and has been operating the project pursuant to annual licenses issued by FERC since
the original license expired. The Snoqualmie Tribe appealed the Washington State
Department of Ecologys water quality certification, which the Washington State
Pollution Control Hearings Board (PCHB) upheld on April 7, 2004. The Snoqualmie Tribe may
appeal the PCHBs ruling. PSE anticipates that FERC will issue an order concerning
its license application during the second quarter 2004.

Electric Rate Matters
        On
April 5, 2004, PSE filed a general tariff electric rate case with the Washington
Commission. The electric rate case proposes a 5.7% or $81.6 million annual increase to
electric rates to recover costs associated with extending and upgrading facilities to
serve a growing number of electric customers as well as strengthen PSE financially to
serve its customers. The resolution of the electric general rate case may be up to an
11-month process from the time the electric general rate case was filed.

        On April 23, 2004, the
acquisition of a 49.85% interest in the Fredrickson I generating facility was
approved by FERC.  Prior to that approval, on April 7, 2004, the Washington Commission
issued an order in PSEs power cost only
rate case granting approval for the acquisition of the Frederickson I
generating facility. As a result of these approvals, PSE anticipates completing the acquisition
in the second quarter of 2004.  In its order, the Washington Commission found the acquisition to be
prudent and the cost associated with the generating facility reasonable. The costs
associated with the generating facility, including projected baseline gas costs, are
approved for recovery in rates. The Washington Commission, however, reserved its
determination of certain issues related to the Tenaska and Encogen generating facilities
to a subsequent order. PSE requested clarification on other issues in the power cost only
rate case that were not addressed in the April 7, 2004 order, but was denied clarification
on these issues until resolution of the Tenaska and Encogen fuel cost proceeding. As
described in an exhibit in the rate proceeding, the Washington Commission staff and PSE
agreed on all power cost adjustments except those related to Tenaska and Encogen
generating facilities. Those items agreed to in the proceeding would increase rates by
$54.5 million. 
        PSE
believes that the fuel cost disallowances relating to Encogen and Tenaska proposed by the
Washington Commission staff are legally and factually deficient and PSE filed its rebuttal
case on February 13, 2004. These costs are currently recovered in rates and PSE believes
it is probable that recovery will occur in the future. The Washington Commission staff is
independent from the Washington Commission in such a litigated proceeding and their
positions do not represent an indication of the final outcome of the proceeding. The
hearing was held in late February and the resolution of the final issues of the power cost
only rate case is expected by the end of April 2004 barring any unforeseen circumstances. 
        In
December 2003, PSE notified FERC that it rejected the 1997 license for the White River
Project, because the 1997 license would have made the White River generation project
uneconomical to produce electricity. As a result, generation of electricity ceased at the
White River Project on January 15, 2004. In the same proceeding described above, the
Washington Commission will be ruling on the accounting treatment that will allow for rate
recovery of the unrecovered investment in the White River generating project. The
Washington Commission staffs testimony in PSEs power cost only rate case
supports PSEs accounting treatment for recovery of the investment in the White River
Project. At March 31, 2004, the White River Project net book value totaled $68.2 million,
which included $47.5 million of net utility plant, $17.7 million of capitalized FERC
licensing costs and $3.0 million of costs related to construction work in progress. The
FERC licensing costs and construction work in progress charges have been deferred to a
regulatory asset. The Washington Commissions order on April 7, 2004 did not address
the White River accounting treatment. However, PSE will continue to recover in rates the
cost of the White River Plant over the period equal to the depreciation rate in effect at
the time the plant ceased operations. This accounting treatment is the same as proposed by
the Washington Commission Staff in the power cost only rate proceedings. The accounting
treatment of the unrecovered White River Plant costs will be resolved at the same time the
final order is issued on the Tenaska and Encogen fuel costs issues. 
        In
June 2002, the Washington Commission approved and adopted the settlement stipulation in
the general rate case, putting new rates into effect on July 1, 2002. PSE established an
electric PCA mechanism in the rate case settlement. The PCA mechanism will account for
differences in PSEs modified actual power costs relative to a power cost baseline.
The mechanism will account for a sharing of costs and benefits that are graduated over
four levels of power cost variances, with an overall cap of $40 million (+/-) over the
four year period July 1, 2002 through June 30, 2006 plus 1% of the excess over $40 million
which was met in 2003. Under the PCA mechanism, all variable power cost rate increases
since reaching the $40 million cap are apportioned 99% to customers and 1% to PSE. During
the three months ended March 31, 2004, PSEs excess variable power costs were
apportioned $0.1 million to PSE and $13.9 million to customers. For the same period in
2003, PSE was apportioned all of the excess variable power costs of $11.6 million.

Gas Rate Matters
        On
April 5, 2004, PSE filed a general tariff gas rate case with the Washington Commission.
The gas rate case proposes a 6.3% or $47.2 million annual increase to gas rates to recover
cost associated with extending and upgrading facilities to serve a growing number of gas
customers as well as strengthen PSE financially to serve its customers. The resolution of
the gas general rate case may be up to an 11-month process from the time the gas general
rate case was filed.

Proceedings Relating to
the Western Power MarketCalifornia Independent
System Operator (CAISO) Receivable and California Proceedings 
        Puget
Energys and PSEs Annual Report on Form 10-K for the year ended December 31,
2003 includes a summary of the Western power market proceedings described below. The
following discussion provides a summary of material developments in these proceedings that
occurred during the period covered by this report and of any material new proceedings
instituted during the last quarter. While PSE cannot predict the outcome of any of the
individual ongoing proceedings relating to the Western power markets, in the aggregate,
PSE does not expect the ultimate resolution of the issues and cases discussed below to
have a material adverse impact on the financial condition, results of operations or
liquidity of the Company.

|1. | CAISO
Receivable and California Refund Proceeding. In 2001, PG&E and           Southern
California Edison defaulted on payment obligations owed to various           energy
suppliers, including the CAISO and the California PX. The CAISO in turn
          defaulted on its payment obligations to various energy suppliers, including
          obligations to PSE relating to sales made by PSE into the California energy
          market during the fourth quarter of 2000 through the CAISO. The California PX
          filed bankruptcy in 2001, further constraining PSEs ability to receive
          payments due to controls placed on the California PXs distribution of
          funds by the California PX bankruptcy court and due to the fact that the vast
          majority of funds owed directly to the CAISO are owed by the California PX.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | California
Refund Proceeding. On July 25, 2001, FERC ordered an evidentiary
          hearing (Docket No. EL00-95) to determine the amount of refunds due to
          California energy buyers, including the CAISO, for purchases made in the spot
          markets operated by the CAISO during the period October 2, 2000
          through June 20, 2001.  
        On March 26, 2003, FERC issued an Order on
Proposed Findings on Refund Liability in Docket
No. EL00-95 that substantially adopted the recommendations made by the Administrative Law
Judge on December 12, 2002, except that the Order also substantially adopts the FERC Staff
gas price recommendation from the Staffs August 2002 report. On October 16, 2003,
FERC issued its Order on Rehearing that largely leaves the refund calculations established
by the March 26 Order unchanged, although the Order allows generators to offset their
actual gas costs against their refund liability. The CAISO currently estimates that it
will be unable to complete the initial financial clearing as to who owes what to
whom prior to November 2004.
        Many of the numerous orders that FERC has
issued in Docket No. EL00-95 are now on appeal before
the United States Court of Appeals for the Ninth Circuit. On March 23, 2004, the Ninth
Circuit consolidated most of these appeals. The now consolidated appeals remain in
abeyance pursuant to an August 21, 2002, Ninth Circuit order directing FERC to allow
parties to file additional evidence on market manipulation.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | CAISO
Receivable. PSE has a bad debt reserve and a transaction fee reserve           applied to
the CAISO receivable, such that PSE has a net receivable from the           CAISO at
March 31, 2004 of $21.3 million. PSE estimates the range for the           receivable to
be between $21.3 million and $22.8 million, including interest. In           its October
16, 2003 Order on Rehearing in this docket, FERC expressly adopted           and approved
a stipulation that confirmed that two of PSEs non-spot           market transactions
are not subject to mitigation in the Refund           Proceeding. On October 17, 2003,
PSE formally presented CAISO with a request           that payment be made on these
amounts. The CAISO responded to the letter on           November 13, 2003, expressing an
unwillingness to take the issue up separately           or in advance of its cost re-run
activities. PSE continues to pursue the issue           in filings before the FERC.
        On
February 24, 2004, the CAISO issued a market notice that it would distribute more than $40
million in defaulted receivables to creditors for the November 2000
transactions in accordance with Tariff Amendment 53. The California Parties filed a motion
at FERC seeking to cease distribution of the funds. FERC denied the motion and held that
creditors should not have to face further delays in receiving payment and that the
defaulted receivables should be timely disbursed. The CAISO distributed payments to
creditors on March 25, 2004, including approximately $2.0 million to PSE.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Pacific Northwest Refund Proceeding. On June 25, 2003, FERC issued an order
          terminating the Pacific Northwest refund proceeding, Docket No. EL01-10, largely
          on procedural, jurisdictional and equitable grounds. Various parties filed
          rehearing requests on July 25, 2003. On November 10, 2003, FERC denied the
          rehearing requests. Seven petitions for review are now pending before the United
          States Court of Appeals for the Ninth Circuit. The parties now await an order
          setting a briefing schedule.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Orders to Show Cause. On June 25, 2003, FERC issued two show cause orders
          pertaining to its Western market investigations that commenced individual
          proceedings against many sellers. One show cause order (Docket Nos. EL03-180, et
          seq.) seeks to investigate approximately 26 entities that allegedly had
          potential partnerships with Enron. PSE was not named in that show
          cause order. In an order dismissing many of the already-named respondents in the
          partnerships proceeding on January 22, 2004, FERC states that it
          does not intend to proceed further against other parties. 

        The
second show cause order (Docket No. EL03-169) named PSE along with approximately 54 other
entities (Docket Nos. EL03-137, et seq.) that allegedly had engaged in potential
gaming practices in the CAISO and California PX markets. PSE and FERC Staff
filed a proposed settlement of all issues pending against PSE in those proceedings on
August 28, 2003. The proposed settlement, which admits no wrongdoing on the part of PSE,
would result in a payment of $17,092 to settle all claims. The California Parties filed
for rehearing of that order repeating arguments that have already been addressed by FERC.
On March 17, 2004, PSE filed a motion to dismiss the California Parties rehearing
request. PSE continues to believe that the orders to show cause do not raise new issues or
concerns and will not have a material adverse impact on the financial condition, results
of operation or liquidity of the Company.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Anomalous Bidding Investigation. On June 25, 2003, FERC issued an order
          commencing a new investigatory proceeding (Docket No. IN03-10) to be conducted
          through its Office of Market Oversight and Investigations (OMOI). OMOI is
          investigating sellers bids into the CAISO or California PX markets that
          exceeded $250/MWh during the period of May 1, 2000 to October 1, 2000. The OMOI
          is to determine if each such entitys bids show a pattern or an effort to
          manipulate the market, and if they do, to consider whether the entity should be
          required to disgorge any improper profits earned as a result of such patterns or
          efforts. PSE received a data request from the OMOI in this proceeding about its
          bids and responded on July 24, 2003. PSE has not received any further
          information requests. PSE does not expect any material adverse impacts on the
          financial condition of the Company from this FERC investigation.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Port of Seattle Suit. On May 21, 2003, the Port of Seattle commenced suit in
          federal court in Seattle against 22 energy sellers into the California market,
          alleging that the conduct of those sellers during 2000 and 2001 constituted
          market manipulation, violated antitrust laws, and damaged the Port of Seattle,
          which had a contract to purchase its complete energy supply from PSE at the
          time. The Ports contract with PSE linked the price of the energy sold to
          the Port to an index price for energy sold at wholesale at the Mid-Columbia
          trading hub. The Port alleged that the Mid-Columbia price was intentionally
          affected improperly by the defendants, including PSE. PSE and other defendants
          moved to dismiss this case. The court heard oral argument on PSEs motion
          to dismiss on March 26, 2004. The parties await an order on the motion to
          dismiss.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | California Litigation. California Class Actions. No material developments have
          occurred in the two San Diego class actions since previous reports. The
          plaintiffs allege that all wholesale sellers in the California energy market
          engaged in anti-competitive behavior in violation of California Business
          Practices Act. The motions to dismiss, and the appeals of the remand orders,
          remain pending. Attorney General Case. No material developments have occurred in
          the California Attorney General suit against PSE since previous reports. The
          suit filed against a number of sellers, including PSE, alleges that PSE failed
          to file rates for sales to the CAISO in advance of transactions and thereby
          violated the California Business Practices Act. Oral argument for the dismissal
          appeal has been set to commence on June 14, 2004.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3.       
 Quantitative and
Qualitative Disclosure About Market Risk

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

Portfolio Management. The nature of
serving regulated electric customers with its wholesale portfolio of owned and contracted
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 management
function monitors and manages these risks using analytical models and tools. The Company
manages its energy supply portfolio to achieve three primary objectives:

| |  | Ensure that
physical energy supplies are available to serve retail customer requirements;
|- |  | -----------------------------------------------------------------------------------------

| |  | Manage
portfolio risks to limit undesired impacts on the Companys costs; and
|- |  | -----------------------------------------------------------------------------

| |  | Maximize the
value of the Companys energy supply assets.
|- |  | ---------------------------------------------------------

The
portfolio is subject to major sources of variability (e.g., hydro generation, outage risk,
regional economic factors, temperature-sensitive retail sales, and market prices for gas
and power supplies). At certain times, these sources of variability can mitigate portfolio
imbalances; at other times they can exacerbate portfolio imbalances. 
        The
Companys energy risk management staff develops hedging strategies for the
Companys energy supply portfolio. The first priority is to obtain reliable supply
for delivery to the Companys retail customers. The second priority is to protect
against unwanted risk exposure. The third priority is to optimize excess capacity or
flexibility within the wholesale portfolio. Most hedges can be implemented in ways that
retain the Companys ability to use its energy supply optimization opportunities.
Other hedges are structured similarly to insurance instruments, where PSE pays an
insurance premium to protect against certain extreme conditions. 
        Portfolio
exposure is managed in accordance with Company polices and procedures. The Risk Management
Committee, which is composed of Company officers, provides policy-level and strategic
direction for management of the energy portfolio. The Audit Committee of the
Companys Board of Directors has oversight of the Risk Management Committee. 
        The
prices of energy commodities are subject to fluctuations due to unpredictable factors
including weather, generation outages and other factors, which impact supply and demand.
The volumetric and commodity price risk is a consequence of purchasing energy at fixed and
variable prices and providing deliveries at different tariffs and variable prices. Costs
associated with ownership and operation of production facilities are another component of
this risk. The Company may use forward physical delivery agreements and financial
derivatives for the purpose of hedging commodity price risk. Without jeopardizing the
security of supply within its portfolio, the Company will also engage in optimizing the
portfolio. Optimization may take the form of utilizing excess capacity, shaping flexible
resources to capture their highest value, utilizing transmission capacity or capitalizing
on market price movement. As a result, portions of the Companys energy portfolio are
monetized through the use of forward price instruments. 
        The
regulatory mechanisms of the PGA and the PCA mitigate the impact of commodity price
volatility upon the Company. The PGA mechanism passes through to customers increases and
decreases in the cost of natural gas supply. The PCA mechanism provides for a sharing of
costs and benefits that are graduated over four levels of power cost variances with an
overall cap of $40 million (+/-) plus 1% of the excess over the $40 million cap over the
four-year period ending June 30, 2006. 
        Transactions
that qualify as hedge transactions under SFAS No. 133 are recorded on the balance sheet at
fair value. Changes in fair value of the Companys derivatives are recorded each
period in current earnings or other comprehensive income. Short-term derivative contracts
for the purchase and sale of electricity are valued based upon daily quoted prices from an
independent energy brokerage service. Valuations for short-term and medium-term natural
gas financial derivatives are derived from a combination of quotes from several
independent energy brokers and are updated daily. Long-term gas financial derivatives are
valued based on published pricing from a combination of independent brokerage services and
are updated monthly. Option contracts are valued using market quotes and a Monte Carlo
simulation-based model approach. 
        At
March 31, 2004, the Company had an after-tax net asset of approximately $21.0 million of
energy contracts designated as qualifying cash flow hedges and a corresponding unrealized
gain recorded in other comprehensive income. Of the amount in other comprehensive income,
99% has been reclassified out of other comprehensive income to a deferred account due to
the Company reaching the $40 million cap under the PCA mechanism. The Company also had
energy contracts that were marked-to-market at a gain through current earnings for the
three months ended March 31, 2004 of $0.1 million as a result of 99% being reclassified to
a deferred account due to the Company reaching the $40 million cap under the PCA
mechanism. A hypothetical 10% increase in the market prices of natural gas and electricity
would increase the fair value of qualifying cash flow hedges by approximately $5.8 million
after-tax and would increase current earnings for those contracts marked-to-market in
earnings by an insignificant amount as a result of applying the $40 million PCA mechanism
cap.

Counterparty Credit Risk. The Company
is subject to credit risk from counterparties based on transactions it enters into during
the normal course of business. The Company is exposed to risk to the extent that
counterparties fail to perform on their contractual obligations. These counterparties
include other utilities, energy trading companies, financial institutions and natural gas
production companies. The Company mitigates its exposure by transacting with
counterparties that meet minimum credit thresholds, setting credit limits and obtaining
master agreements. Credit limits are reviewed daily to ensure transactions continually
meet the Companys standards.

Interest Rate Risk. The Company
believes its interest rate risk primarily relates to the use of short-term debt
instruments, variable rate leases and long-term debt financing needed to fund capital
requirements. The Company manages its interest rate risk through the issuance of mostly
fixed-rate debt of various maturities. The Company utilizes bank borrowings, 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 to manage the interest rate risk associated with these
debts. The Company did not have any swap instruments outstanding as March 31, 2004.

Item 4.       
 Controls and
Procedures

Evaluation of disclosure controls and
procedures. Under the supervision and with the participation of Puget Energys and
PSEs management, including the Companies President and Chief Executive Officer
and Senior Vice President and Chief Financial Officer, Puget Energy and PSE have evaluated
the effectiveness of the Companies disclosure controls and procedures (as defined in
Rule 13a-15(e)(c) under the Securities Exchange Act of 1934) as of the end of the fiscal
quarter covered by this report. Based upon that evaluation, the President and Chief
Executive Officer and Senior Vice President and Chief Financial Officer of Puget Energy
and PSE concluded that these disclosure controls and procedures are effective as of the
end of the quarter.

Changes in internal controls over
financial reporting.There have been no significant changes in Puget Energys or
PSEs internal control over financial reporting during the quarter covered by this
report that have materially affected, or are reasonably likely to materially affect, Puget
Energys or 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 Quarterly Report on Form 10-Q. 
        Contingencies
arising out of the normal course of the Companys business exist at March 31, 2004.
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 | 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                                         
|---- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |     |  |                                                                                                                                                                          
|     | (a) |  | See Exhibit Index for list of exhibits.                                                                                                                                  
|     |     |  |                                                                                                                                                                          
|     | (b) |  | Reports on Form 8-K                                                                                                                                                      
|     |     |  |                                                                                                                                                                          
|     |     |  | Filed by Puget Energy & Puget Sound Energy:                                                                                                                              
|     |     |  |                                                                                                                                                                          
|     |     |  | Form 8-K dated February 4, 2004, Item 5 - Other Events, related to Washington Utilities and
Transportation Commission Staff testimony of PSE's Power Cost Only Rate Case.

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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/ Donald E. Gaines                                                                                                                  
|                     | Donald E. Gaines
Vice President Finance and Treasurer                                                                                 
|                     |                                                                                                                                       
|Date: April 27, 2004 | 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 (1998 through 2003
and 12 months ended                      March 31, 2004) for Puget Energy.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.2 |  | Statement
 setting forth  computation  of ratios of earnings to fixed charges (1998 through 2003
and 12 months ended                      March 31, 2004) 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. 31.1
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------