---

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 June 30, 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 June 30, 2004, (i) the number of shares of Puget Energy, Inc. common stock outstanding was 99,486,648 ($.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 4.                   
|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, maintenance and construction of electric
generating facilities, distribution and transmission facilities (gas and electric),
licensing of hydro operations and gas storage facilities, recovery of other capital
investments, recovery of power and gas costs, recovery of regulatory assets, and present
or prospective wholesale and retail competition;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | financial difficulties and energy supply disruptions 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, adoption of, and compliance with laws and regulations including 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, fires 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
                                         (Thousands except per share amounts)
                                                     (Unaudited)

|                                                                        | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------------------------------- | --------------------------- | -------------------------
|                                                                        | 2004                        | 2003                     
|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 (loss) before cumulative effect of accounting change         |                             |                          
|Cumulative effect of implementation of an accounting change, net of tax |                             |                          
|                                                                       
|Net income (loss)                                                       |                             |                          
|Less:  preferred stock dividends accrual                                |                             |                          
|                                                                       
|Income (loss) 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 
(Dollars in Thousands) 
(Unaudited)

|                                                                        | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------------------------------- | --------------------------- | -------------------------
|                                                                        | 2004                        | 2003                     
|Net income (loss)                                                       |                             |                          
|                                                                       
|Other comprehensive income, net of tax:                                 |                             |                          
|Unrealized holding losses arising on marketable securities              |                             |                          
|during the period                                                       |                             |                          
|Reclassification adjustment for realized gains on                       |                             |                          
|marketable securities included in net income                            |                             |                          
|Foreign currency translation adjustment                                 |                             |                          
|Unrealized gains on derivative instruments during the period            |                             |                          
|Reversal of unrealized (gain) loss on derivative                        |                             |                          
|instruments settled during the period                                   |                             |                          
|Deferral related to PCA mechanism                                       |                             |                          
|                                                                       
|Other comprehensive income                                              |                             |                          
|                                                                       
|Comprehensive income (loss)                                             |                             |                          
|                                                                       
|The accompanying notes are an integral part of the financial statements

---

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

ASSETS

|                                                                             | June 30,
2004 | December 31,
2003
|---------------------------------------------------------------------------- | ------------- | -----------------
|Utility Plant: (at original cost, including construction work in progress of |               |                  
|$144,944 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                                                             |               |                  
|Purchased gas receivable                                                     |               |                  
|Materials and supplies, at average cost                                      |               |                  
|Current portion of unrealized gain on derivative instruments                 |               |                  
|Prepayments and other                                                        |               |                  
|                                                                            
|Total current assets                                                         |               |                  
|                                                                            
|Other long-term assets:                                                      |               |                  
|Regulatory asset for deferred income taxes                                   |               |                  
|Regulatory asset for PURPA contract buyout costs                             |               |                  
|Unrealized gain on derivative instruments                                    |               |                  
|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

|                                                                        | June 30,
2004 | December 31,
2003
|----------------------------------------------------------------------- | ------------- | -----------------
|Capitalization:                                                         |               |                  
|Common shareholders' investment:                                        |               |                  
|Common stock $0.01 par value, 250,000,000 shares authorized, 99,486,648 |               |                  
|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            |               |                  
|Tenaska disallowance reserve                                            |               |                  
|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 
(Dollars in Thousands) 
(Unaudited)

|                                                                                  | Six Months Ended
June 30,
|--------------------------------------------------------------------------------- | -------------------------
|                                                                                  | 2004                     
|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 suppliers                                    |                          
|Gain on sale of securities                                                        |                          
|Other                                                                             |                          
|Change in certain current assets and liabilities:                                 |                          
|Accounts receivable and unbilled revenue                                          |                          
|Materials and supplies                                                            |                          
|Prepayments and other                                                             |                          
|Purchased gas receivable/liability                                                |                          
|Accounts payable                                                                  |                          
|Taxes payable                                                                     |                          
|Tenaska disallowance reserve                                                      |                          
|Accrued expenses and other                                                        |                          
|                                                                                 
|Net cash provided by operating activities                                         |                          
|                                                                                 
|Investing activities:                                                             |                          
|Construction and capital expenditures-excluding equity AFUDC                      |                          
|Energy conservation expenditures                                                  |                          
|Acquisitions by InfrastruX, net of cash acquired                                  |                          
|Cash received from sale of securities                                             |                          
|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 
(Dollars in Thousands) 
(Unaudited)

|                                                                        | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------------------------------- | --------------------------- | -------------------------
|                                                                        | 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 (loss) before cumulative effect of accounting change         |                             |                          
|Cumulative effect of implementation of an accounting change, net of tax |                             |                          
|                                                                       
|Net income (loss)                                                       |                             |                          
|Less: preferred stock dividends accrual                                 |                             |                          
|                                                                       
|Income (loss) for common stock                                          |                             |                          
|                                                                       
|The accompanying notes are an integral part of the financial statements

---

PUGET SOUND ENERGY, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(Dollars in Thousands) 
(Unaudited)

|                                                                        | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------------------------------------- | --------------------------- | -------------------------
|                                                                        | 2004                        | 2003                     
|Net income (loss)                                                       |                             |                          
|                                                                       
|Other comprehensive income, net of tax:                                 |                             |                          
|Unrealized holding losses on marketable securities arising              |                             |                          
|during the period                                                       |                             |                          
|Reclassification adjustment for realized gains on                       |                             |                          
|marketable securities included in net income                            |                             |                          
|Unrealized gains on derivative instruments                              |                             |                          
|during the period                                                       |                             |                          
|Reversal of unrealized (gain) loss on derivative                        |                             |                          
|instruments settled during the period                                   |                             |                          
|Deferral related to PCA mechanism                                       |                             |                          
|                                                                       
|Other comprehensive income                                              |                             |                          
|                                                                       
|Comprehensive income (loss)                                             |                             |                          
|                                                                       
|The accompanying notes are an integral part of the financial statements

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

|                                                                        | June 30,
2004 | December 31,
2003
|----------------------------------------------------------------------- | ------------- | -----------------
|Utility plant: (at original cost, including construction work in        |               |                  
|progress of $144,944 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 revenues                                                       |               |                  
|Purchased gas receivable                                                |               |                  
|Materials and supplies, at average cost                                 |               |                  
|Current portion of unrealized gain on derivative instruments            |               |                  
|Prepayments and other                                                   |               |                  
|                                                                       
|Total current assets                                                    |               |                  
|                                                                       
|Other long-term assets:                                                 |               |                  
|Regulatory asset for deferred income taxes                              |               |                  
|Regulatory asset for PURPA contract buyout costs                        |               |                  
|Unrealized gain on derivative instruments                               |               |                  
|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

|                                                                          | June 30,
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              |               |                  
|Tenaska disallowance reserve                                              |               |                  
|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 
(Dollars in Thousands) 
(Unaudited)

|                                                                        | Six Months Ended
June 30,
|----------------------------------------------------------------------- | -------------------------
|                                                                        | 2004                     
|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 suppliers                          |                          
|Gain on sale of securities                                              |                          
|Other                                                                   |                          
|Change in certain current assets and liabilities:                       |                          
|Accounts receivable and unbilled revenue                                |                          
|Materials and supplies                                                  |                          
|Prepayments and other                                                   |                          
|Purchased gas receivable/liability                                      |                          
|Accounts payable                                                        |                          
|Taxes payable                                                           |                          
|Tenaska disallowance reserve                                            |                          
|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                                   |                          
|Investment in variable rate bonds                                       |                          
|Other                                                                   |                          
|                                                                       
|Net cash used by investing activities                                   |                          
|                                                                       
|Financing activities:                                                   |                          
|Change in short-term debt - net                                         |                          
|Dividends paid                                                          |                          
|Issuance of bonds                                                       |                          
|Redemption of preferred stock                                           |                          
|Redemption of trust preferred securities                                |                          
|Redemption of bonds 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 NOTESTO
CONSOLIDATED FINANCIAL STATEMENTS

(1)     Summary of
Consolidation Policy

BASIS OF PRESENTATION
        Puget
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
has a 90.9% ownership interest in 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 99,371,000 and 99,271,000 for the three and six months ended
June 30, 2004, respectively, and 93,928,000 and 93,833,000 for the three and six months
ended June 30, 2003. 

        Puget
Energys diluted earnings per common share have been computed based on weighted
average common shares outstanding of 99,371,000 and 99,786,000 for the three and six
months ended June 30, 2004, respectively, and 94,440,000 and 94,346,000 for the three and
six months ended June 30, 2003, respectively. These shares include the dilutive effect of
securities related to employee and director equity plans. The effects of employee and
director stock compensation plans for the three month period ended June 30, 2004 are
anti-dilutive and are therefore excluded from the calculation of diluted loss per share
for that period. Had the employee and director equity plans not had an anti-dilutive
effect on earnings per share, the diluted common shares for the three months ended June
30, 2004 would have been 99,885,000.

(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 June 30, 2004 | PSE | InfrastruX | Other | Total    
|------------------------------------------------------- | --- | ---------- | ----- | ---------
|Revenues                                                |     |            | $     | 422,570  
|Depreciation and amortization                           |     |            |       | 56,505   
|Income tax                                              |     |            |       | (5,322   
|Operating income                                        |     |            |       | 30,610   
|Interest charges, net of AFUDC                          |     |            |       | 41,814   
|Minority interest in earnings                           |     |            |       | --       
|Net income (loss)                                       |     |            |       | (9,634   
|                                                       
|Goodwill, net at June 30, 2004                          |     |            | $     | --       
|Total assets at June 30, 2004                           |     |            |       | 5,247,686
|                                                       

|Three Months Ended June 30, 2003 | PSE | InfrastruX | Other | Total  
|-------------------------------- | --- | ---------- | ----- | -------
|Revenues                         |     |            | $     | 431,147
|Depreciation and amortization    |     |            |       | 54,661 
|Income tax                       |     |            |       | 2,290  
|Operating income                 |     |            |       | 61,958 
|Interest charges, net of AFUDC   |     |            |       | 44,814 
|Minority interest in earnings    |     |            |       | --     
|Net income                       |     |            |       | 17,562 
|                                

|Six Months Ended June 30, 2004 | PSE | InfrastruX | Other | Total    
|------------------------------ | --- | ---------- | ----- | ---------
|Revenues                       |     |            | $     | 1,090,757
|Depreciation and amortization  |     |            |       | 112,312  
|Income tax                     |     |            |       | 33,899   
|Operating income               |     |            |       | 139,410  
|Interest charges, net of AFUDC |     |            |       | 83,828   
|Minority interest in earnings  |     |            |       | --       
|Net income (loss)              |     |            |       | 57,220   
|                              

|Six Months Ended June 30, 2003 | PSE | InfrastruX | Other | Total    
|------------------------------ | --- | ---------- | ----- | ---------
|Revenues                       |     |            | $     | 1,000,608
|Depreciation and amortization  |     |            |       | 109,194  
|Income tax                     |     |            |       | 36,787   
|Operating income               |     |            |       | 155,773  
|Interest charges, net of AFUDC |     |            |       | 91,170   
|Minority interest in earnings  |     |            |       | --       
|Net income (loss)              |     |            |       | 65,543   
|                              

|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 June 30, 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 $2.8 million compared to an increase in earnings of approximately $44,000
for the three months ended June 30, 2003. In 2004, a portion of the unrealized gain is
deferred in accordance with SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation, due to the Company expecting to reach the $40 million Power Cost
Adjustment (PCA) mechanism in the fourth quarter of 2004. When these transactions are
realized, they will be reflected in the PCA calculation. 

        During the six months ended June 30, 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 $2.9 million compared to an increase in earnings of approximately $0.5
million for the six months ended June 30, 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 December
2008. 
        Another
physical gas supply contract for one of PSEs electric generating facilities was
marked-to-market beginning 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 the 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, beginning November 2005 through the end of the contract as delivery is not
probable during this time period. As a result, PSE recorded an unrealized gain to
earnings, net of a reserve, of $2.3 million in the second quarter of 2004. Approximately $2.2 million of the unrealized
gain will be reversed as transactions settle in 2004.

(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 June 30, 2004
(Dollars in thousands) | Gross
Intangibles | Accumulated
Amortization | Net
Intangibles
|--------------------------------------- | ----------------- | ------------------------ | ---------------
|Covenant not to compete                 |                   |                          | $              
|Developed technology                    |                   |                          |                
|Contractual customer relationships      |                   |                          |                
|Patents                                 |                   |                          |                
|                                       
|Total                                   |                   |                          | $              
|                                        |                  

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

The
identifiable intangible asset amortization expense for the three and six months ended June
30, 2004 was $0.5 million and $1.0 million, respectively, and $0.5 million and $1.0
million, respectively, for the same periods in 2003. 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 |      |      | $    | 1,146 |     

(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 2004:

|(Dollars in thousands)
At June 30, 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 June 30, 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 Ended
June 30, | Six Months Ended
June 30,
|------------------------------------------------------------- | --------------------------- | -------------------------
|(Dollar in thousands, except per share)                       | 2004                        | 2003                     
|Income (loss) 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 No. 123, net of tax                 |                             |                          
|                                                             
|Pro forma income (loss) 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 June 30.

|                                              | Pension Benefits | Other Benefits
|--------------------------------------------- | ---------------- | --------------
|(Dollars in thousands)                        | 2004             | 2003          
|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 following
summarizes the net periodic benefit cost for the six months ended June 30.

|                                              | Pension Benefits | Other Benefits
|--------------------------------------------- | ---------------- | --------------
|(Dollars in thousands)                        | 2004             | 2003          
|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
three and six months ended June 30, 2004, the actual cash contributions to the pension
plans were $0.5 million and $1.0 million, respectively. In addition, some plan
participants chose lump sum pension payments of $9.7 million and deferred them under the
Companys deferred compensation plan in the first quarter of 2004. Based on this
activity, the Company anticipates contributing an additional $0.4 million to the
Companys non-qualified supplemental retirement plan in 2004. 

        During
the three and six months ended June 30, 2004, actual other post-retirement medical benefit
plan contributions were $0.4 million and $0.8 million, respectively, and the Company
expects to make additional contributions of $0.8 million for a total of $1.6 million in
2004.

(9)     Tenaska Disallowance

The
Washington Commission issued an order on May 13, 2004 determining that PSE did not
prudently manage gas costs for the Tenaska electric generating plant and ordered PSE to
adjust its PCA deferral account to reflect a one-time disallowance of $25.6 million for
the PCA 1 period (July 1, 2002 through June 30, 2003), which was recorded as a Purchased
Electricity expense. The order also established guidelines for future recovery of Tenaska
costs. PSE filed a petition for reconsideration and clarification to address certain
issues arising from the May 13, 2004 order. As a result, the Washington Commission issued
an order on June 7, 2004 denying PSEs petition for reconsideration, and denying in
part, and granting in part, PSEs petition for clarification. In its order of June 7,
2004, the Washington Commission clarified the financial impact of the disallowance for
costs relating to the return on PSEs Tenaska regulatory asset in the PCA 1 and 3
periods. The amounts were determined to be a $25.6 million one-time disallowance for the
PCA 1 period; an estimated disallowance of $11.3 million for the PCA 3 period (July 1,
2004 to June 30, 2005), based upon applying the Washington Commissions methodology
of 50% disallowance on the return on the Tenaska regulatory asset due to projected costs
exceeding the benchmark during the period. For the PCA 3 period, approximately $5.6
million would be disallowed in the period July 1, 2004 through December 31, 2004,
primarily as a reduction to Electric Operating Revenue, for a cumulative impact on
earnings of $31.2 million in 2004 for the PCA 1 and 3 periods for PSE. The PCA 3 reduction
in Electric Operating Revenue is the result of the Washington Commissions order that
reflected a reduction in rates of approximately $9.9 million annually. This reduction is
to reflect the Washington Commissions estimate of the Tenaska disallowance for the
PCA 3 period. While the Washington Commission did not expressly address the disallowance
for the PCA 2 period (July 1, 2003 through June 30, 2004), PSE estimates the disallowance
for the PCA 2 period to be approximately $12.2 million if the Washington Commission were
to follow the same methodology as they have ordered for the PCA 3 period. While PSE
reserves the right to address the merits of any disallowance in its PCA 2 compliance
filing which will be filed in the third quarter of 2004, PSE recorded a $12.2 million
disallowance to Purchased Electricity expense in the second quarter of 2004 for the 50%
disallowance of the return on the Tenaska regulatory asset in accordance with the
Washington Commissions methodology discussed in their order of May 13, 2004. As a
result of the disallowance recorded, the PCA customer deferral of $17.6 million at March
31, 2004 was expensed and a reserve was established to offset future PCA customer
deferrals. The reserve balance as of June 30, 2004 was $13.6 million, which is expected to
be utilized over the remaining months in 2004 as the excess power costs are shared through
the PCA mechanism. The cumulative amount attributable to the disallowance recorded in the
second quarter of 2004 was $37.8 million ($24.5 million after-tax) and the total for 2004
is expected to be approximately $43.4 million ($28.1 million after-tax). 

        Prior
to the Tenaska disallowance, PSEs excess power costs under the PCA mechanism were at
the $40 million cap whereas with the Tenaska disallowance the excess power costs at June
30, 2004 are $26.5 million. The excess power costs from June 30, 2004 until the PCA
mechanism cap of $40 million is reached, which is expected in November 2004, will be
offset by the Tenaska disallowance reserve of $13.6 million for the PCA 1 and 2 periods
that was recorded in the second quarter of 2004. Consequently, PSE does not expect
earnings through year-end 2004, based on current market conditions, to be impacted by
excess power costs. 

        Below
is a summary of the Tenaska disallowances by quarter through December 31, 2004:

|Quarter ending 
(Dollars in millions) | 7/02 - 6/03
PCA 1
(ordered/final) | 7/03 - 6/04
PCA 2
(estimated) | 7/04 - 12/04
PCA 3
(estimated) | Total  
|------------------------------------- | --------------------------------- | ----------------------------- | ------------------------------ | -------
|June 30, 2004                         |                                   | $    25                       | .6                             | $    12
|September 30, 2004                    |                                   |                               | --                             |        
|December 31, 2004                     |                                   |                               | --                             |        
|                                      |                                  
|Total                                 |                                   | $    25                       | .6                             | $    12
|                                      |                                  

In
the May 13, 2004 order, the Washington Commission established guidelines and a benchmark
to determine PSEs recovery on the Tenaska regulatory asset starting with the PCA 3
period (July 1, 2004) through the expiration of the Tenaska contract in the year 2011. The
benchmark is defined as the original cost of the Tenaska contract adjusted to reflect the
1.2% disallowance from a 1994 Prudence Order.

|The Washington Commission guidelines for determining future recovery of
the Tenaska costs are as follows:
|---------------------------------------------------------------------------------------------------------

|1. | The
 Washington  Commission  will  determine if PSE's gas  purchasing  plan and gas purchases
for Tenaska are prudent through the PCA compliance filings.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | If
PSEs gas purchasing plan and gas purchases for Tenaska are prudent, and
          if PSEs actual Tenaska costs fall at or below the benchmark, it will
          recover fully its Tenaska costs.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | If
PSEs gas purchasing plan and gas purchases for Tenaska are prudent, but
          its actual Tenaska costs exceed the benchmark, PSE will only recover 50% of the
          lesser of:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | Actual
Tenaska costs that exceed the benchmark or;
|-- |  | --------------------------------------------------

|b) |  | The
return on the Tenaska regulatory asset (return on the asset would be added           last
to all other relevant Tenaska costs).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------

|4. | If
PSEs gas purchasing plan or gas purchases are found to be imprudent in           a
future proceeding, PSE risks disallowance of any and all Tenaska costs (gas,
          return of and return on Tenaska Regulatory Asset).
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Washington Commission confirmed that if the Tenaska costs are deemed prudent, PSE will
recover the full amount of actual costs and the return of the Tenaska regulatory asset
even if the benchmark is exceeded. The projected costs and projected benchmark costs for
Tenaska are as follows:

|(Dollars in millions)               | Remainder
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011
|----------------------------------- | -------------- | ---- | ---- | ---- | ---- | ---- | ---- | ----
|Projected Tenaska costs (*)         |                |      | $    | 96   | .9   | $    | 193  | .7  
|Projected Tenaska benchmark costs   |                |      |      | 85   | .6   |      | 159  | .5  
|                                    |               
|Over (under) benchmark costs        |                |      | $    | 11   | .3   | $    | 34   | .2  
|                                    |               
|Projected 50% disallowance based on |                |     
|Washington Commission methodology   |                |      | $    | 5    | .6   | $    | 10   | .9  
|                                    |               

_________________
* Projection will change based on
market conditions of gas and replacement power costs.

(10)    New Accounting
Pronouncements

In
January 2003, 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 in the first quarter of 2004 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. PSE also determined it does not
have a contractual right to such information. PSE will periodically submit requests for
information in the future to determine if FIN 46R is applicable. 

        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 and six months
ended June 30, 2004 for these three entities was $42.5 million and $110.0 million,
respectively. 

        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 Operating Revenues and Purchased
Electricity for the three and six months ended June 30, 2003 have been reduced by $33.8
million and $69.1 million, respectively, to reflect the netting addressed by EITF No.
03-11 with no effect on net income. 

        On
May 19, 2004, FASB issued FASB Staff Position (FSP) No. FAS 106-2 Accounting and
Disclosure Requirements Related to Medicare Prescription Drug, Improvement and
Modernization Act of 2003 as the result of the new Medicare Prescription Drug and
Modernization Act which was signed into law in December 2003. The law provides a subsidy
for plan sponsors that provide prescription drug benefits to Medicare beneficiaries that
are equivalent to the Medicare Part D plan. Based upon an actuarial assessment, PSE will
not be eligible for such subsidies, thus FSP No. 106-2 will have no impact on PSEs
retiree medical plans. 

        On
June 17, 2004, FASB issued a proposed interpretation titled Accounting for
Conditional Asset Retirement Obligations which is an interpretation of FASB No. 143
Accounting for Asset Retirement Obligations. The proposed interpretation would
address the issue of whether FASB No. 143 requires an entity to recognize a liability for
a legal obligation to perform asset retirement when the asset retirement activities are
conditional on a future event, and if so, the timing and valuation of the recognition.
This proposed interpretation could potentially have an impact on the Company as assets
that were previously outside the scope of FASB No. 143 may be subject to its terms based
on the interpretation. Comments on the proposed interpretation were due August 1, 2004.

(11)    Other

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. 

        On
April 23, 2004, the acquisition of a 49.85% interest in the Fredrickson 1 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 1 generating facility as well. As a result of these
approvals, PSE completed the acquisition in the second quarter of 2004 and added $80.8
million in utility plant. In its order, the Washington Commission found the acquisition to
be prudent and the costs associated with the generating facility reasonable. The costs
associated with the generating facility, including projected baseline gas costs, are
approved for recovery in rates. 

        On
May 13, 2004, the Washington Commission also approved other adjustments to power costs
that resulted in an increase of cost recovery in rates of $44.1 million annually,
beginning May 24, 2004 which includes the ownership, operation and fuel costs of the
Fredrickson 1 generating facility. 

        In
the second quarter of 2004, PSE incurred a $6.9 million charge related to a binding
arbitration settlement between PSE and Western Energy Company (WECO), the supplier of coal
to Colstrip 1 & 2. The binding decision retroactively set a new baseline cost of coal
per ton supplied from July 31, 2001, and is applicable for the remaining term of the coal
supply agreement through December 2009. Of the second quarter charge of $6.9
million, $5.0 million is included in the PCA mechanism. PSE had previously accrued a reserve of $1.6
million in the fourth quarter 2003 related to the arbitration. 

        On
April 29, 2004, the Minerals Management Service of the United States Department of the
Interior issued an order to pay additional royalties to WECO, concerning coal purchased by
PSE for Colstrip Units 3 & 4. The order seeks payment of an additional $1.1 million in
royalties for coal mined from federal lands between 1997 and June 30, 2000. During that
period, PSEs coal price was reduced by a settlement agreement entered into in
February 1997 among PSE, WECO and Montana Power Company that resolved disputes that were
then pending. The order seeks to impute the price charged to PSE based on the other
Colstrip 3 & 4 owners contractual amounts. PSE is supporting WECOs appeal
of the order, but is also evaluating the basis of the claim. PSE accrued a loss reserve in
the amount of $1.1 million in the second quarter of 2004 charging Electric Generation Fuel
expense in connection with this matter. 

        In
addition, the Management Service of the United States Department of the Interior issued
two orders to WECO in 2002 and 2003 to pay additional royalties concerning coal sold to
Colstrip 3 & 4 owners. The orders assert that additional royalties are owed as a
result of WECO not paying royalties in connection with revenue received by WECO from the
Colstrip 3 & 4 owners under a coal transportation agreement during the period October
1, 1991 through December 31, 2001. PSEs share of the alleged additional royalties is
$1.8 million, which is equivalent to PSEs 25% ownership interest in Colstrip 3 &
4. The transportation agreement provides for the construction and operation of a conveyor
system that runs several miles from the mine to the Colstrip 3 & 4 units. WECO has
appealed these orders and PSE is monitoring the process. PSE believes that the Colstrip 3
& 4 owners have reasonable defenses in this matter based upon its review. Neither the
outcome of this matter nor the associated costs can be predicted at this time.

        On
July 15, 2004, PSE issued $200 million in floating rate senior notes under its existing
$500 million shelf registration statement, reducing the available balance for future
issuances under the registration statement to $300 million. The notes float at the
three-month LIBOR rate plus 0.30%, mature on July 14, 2006, and can be redeemed at any
time after January 15, 2005. PSE used the net proceeds from the sale of the floating rate
senior notes to repay outstanding amounts under its commercial paper and accounts
receivable securitization programs, including amounts incurred to repay long-term debt,
and will also be used to redeem $55 million in principal amount of first mortgage bonds at
a premium of 3.68% on August 14, 2004. 

        In
2003, the Washington Commissions Pipeline Safety staff conducted a natural gas
standard inspection for three counties within Washington State in which PSE operates gas
pipeline activities. The inspection included a review of procedures, records, and
operations and maintenance activities. On June 29, 2004, the Washington Commission issued
a complaint to PSE related to those inspections. The Washington Commissions
complaint alleges certain violations of Washington Commission regulations and determined a
maximum aggregated fine for the violations of $4.5 million, although the Washington
Commissions Pipeline Safety staff recommended a fine of $1.3 million. PSE is
investigating this matter and will meet with the Pipeline Safety staff to review both the
allegations and the invitation by the Washington Commission to jointly explore resolution.
PSE believes it has reasonable defenses in this matter based upon a preliminary review.
Neither the outcome of this matter nor the associated costs, including potential fines,
can be predicted at this time.

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 250 MW capacity gas-fired
generation facility within Western Washington. In addition, PSE has signed a two-year
purchase power agreement in the second quarter of 2004 with a utility for 85 MW of energy
with delivery beginning January 1, 2005. These transactions are part of PSEs
long-term electric Least Cost Plan that was filed August 29, 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
goals are 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. 

        Puget
Energy is currently evaluating strategic options related to its investment in InfrastruX.

Results of Operations

Puget Energy

        All
of the operations of Puget Energy are conducted through its subsidiaries, PSE and
InfrastruX. Puget Energys net loss for the three months ended June 30, 2004 was $6.8
million on operating revenues of $515.9 million compared with net income of $22.4 million
on operating revenues of $524.1 million for the same period in 2003. Loss for common stock
was $6.8 million for the three months ended June 30, 2004 compared to income for common
stock of $20.6 million for the same period in 2003. Puget Energys basic and diluted
loss per share was $0.07 for the three months ended June 30, 2004 compared to basic and
diluted earnings per share of $0.22 for the same period of 2003.

        Puget
Energys income for common stock for the three months ended June 30, 2004 was
negatively impacted by a decrease in PSEs income of $27.4 million compared to the
same period in 2003. This negative change was due primarily to a $24.5 million after-tax
disallowance of the return on the regulatory asset for the Tenaska gas supply buyout cost
under the Companys Power Cost Adjustment (PCA) mechanism as a result of a Washington
Commission order in the Companys Power Cost Only Rate Case (PCORC). See further
discussion under PSEs Electric Rate Matters. 

        For
the six months ended June 30, 2004, Puget Energys net income was $59.6 million on
operating revenues of $1.3 billion compared to net income of $67.0 million on operating
revenues of $1.2 billion for the same period in 2003. Income for common stock was $59.6
million for the six months ended June 30, 2004 compared to $63.3 million for the same
period in 2003. Basic and diluted earnings per common share were $0.60 for the six months
ended June 30, 2004 and $0.68 and $0.67 per common share, respectively, for the same
period in 2003. 

        Puget
Energys income for common stock for the six months ended June 30, 2004 was also
negatively impacted by the $24.5 million after-tax disallowance of the return on the
regulatory asset for the Tenaska gas supply buyout cost, partially offset by 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. Puget Energys income for common
stock was also positively impacted by a $3.2 million increase in earnings from InfrastruX
(net of minority interest) for the six months ended June 30, 2004 compared to the same
period in 2003 due in part to improved operating efficiencies and improvement in weather
conditions compared to 2003 which positively impacted productivity.

Puget Sound Energy

        The
changes to items affecting net income for the three and six months ended June 30, 2004, in
comparison to the same periods in 2003, are summarized in the table below.

Comparative Three and
Six Months Ended
June 30, 2004 vs. June 30, 2003
Increase (Decrease)
(Dollars in Millions)

|                                                       | Three Months
Ended | Six Months
Ended
|------------------------------------------------------ | ------------------ | ----------------
|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                                   |                    |                 
|Other                                                  |                    |                 
|                                                      
|Total gas operating change                             |                    |                 
|                                                      
|Total operating revenue change                         |                    |                 
|                                                      
|Operating expense changes:                             |                    |                 
|Energy costs:                                          |                    |                 
|Purchased electricity                                  |                    |                 
|Purchased gas                                          |                    |                 
|Electric generation fuel                               |                    |                 
|Residential exchange power cost credit                 |                    |                 
|Unrealized gain increase on derivative instruments     |                    |                 
|Utility operations and maintenance:                    |                    |                 
|Production operations and maintenance                  |                    |                 
|Low income program pass through expenses               |                    |                 
|Other utility 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. 

        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 decreased $37.6 million and $16.0 million for the three and six months ended June
30, 2004 compared to the same periods in 2003 primarily as a result of the disallowance
ordered by the Washington Commission in the PCORC which resulted in a $37.8 million
pre-tax regulatory disallowance ($1.3 million of which flowed through the PCA mechanism).
Additionally, electric energy sales for the three months ended June 30, 2004 were lower
than the same period in the prior year due to warmer than normal weather conditions in the
second quarter 2004 compared with colder than normal weather conditions in the same period
in the prior year. The lower electric margin for the six months ended June 30, 2004 was
partially offset by near normal weather conditions in the first quarter 2004 in comparison
with warmer than normal weather conditions for the same period in 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 and six months ended June 30, 2004 and
2003 is detailed further as follows:

Electric Margin for the Three and Six Months Ended 
June 30, 2004 and June 30, 2003 
(Dollars in Millions)

|                                                  | Three Months Ended
June 30, | Six Months Ended
June 30,
|------------------------------------------------- | --------------------------- | -------------------------
|                                                  | 2004                        | 2003                     
|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                        |                             |                          
|Tenaska disallowance reserve through May 23, 2004 |                             |                          
|Power cost deferred under the PCA                 |                             |                          
|                                                 
|Electric margin                                   |                             |                          
|                                                  |                            

Gas
margin decreased $4.6 million for the three months ended June 30, 2004 compared to the
same period in 2003 due primarily to warmer than normal weather conditions in comparison
with the same period in 2003. Gas margin for the six months ended June 30, 2004 increased
$0.9 million due primarily to near normal weather conditions in the first quarter 2004 in
comparison with the same period in 2003. 

        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 and six
months ended June 30, 2004 and 2003 is detailed further as follows:

Gas Margin for the Three and Six Months Ended 
June 30, 2004 and June 30, 2003 
(Dollars in Millions)

|                                             | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------------- | --------------------------- | -------------------------
|                                             | 2004                        | 2003                     
|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 June 30, 2004 were $303.1 million, a
decrease of $11.3 million compared to the same period in 2003, due primarily to lower
sales to residential customers and sales to other utilities and marketers which decreased
$4.8 million and $7.9 million, respectively. Residential and sales to other utilities and
marketers volumes for the three months ended June 30, 2004 decreased by 76.4 million kWh
and 347.9 million kWh, respectively, or 3.4% and 55.3%, compared to the same period in
2003. The residential decrease was mainly attributable to warmer than normal weather
conditions for the three months ended June 30, 2004 as compared to colder than normal
weather conditions in the same period in 2003. The reduction in sales volumes to other
utilities and marketers was a result of lower wholesale electric sales. 

        Electric
operating revenues for the six months ended June 30, 2004 were $695.6 million, an increase
of $0.5 million compared to the same period in 2003. This flat revenue change is mainly
attributed to the fact that overall weather conditions for the six months ended June 30,
2004 were slightly warmer than normal. With the first and fourth quarters being PSEs
highest volume months from colder weather, near normal weather in the first quarter offset
warmer than normal weather conditions in the second quarter, despite an overall slightly
warmer than normal period for the six months ending June 30, 2004. Electric operating
revenues for the six months ended June 30, 2004 also were impacted by a $2.1 million
increase related to new electric operating rates that became effective May 24, 2004 for
the Fredrickson 1 generating facility. 

        PSEs
other electric operating revenues for the three and six months ended June 30, 2004
increased $0.4 million and $3.5 million, respectively, 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.

        For
the three and six months ended June 30, 2004, the benefits of the Residential and Farm
Energy Exchange Benefit credited to customers were $37.0 million and $94.0 million,
respectively, with a related offset to power costs. PSE received payments from the
Bonneville Power Administration (BPA) in the amount of $44.0 million and $102.6 million
during the three and six months ended June 30, 2004, 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. See discussion under PSEs Electric Rate Matters for
additional residential exchange information. 

        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 June 30, 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 and six months ended June 30, 2004 were $119.5 million
and $395.2 million, respectively, an increase of $2.7 million and $90.6 million,
respectively, compared to the same periods in 2003. Increases in the purchased gas
adjustment (PGA) rate increased revenues approximately $11.9 million and $81.8 million for
the three and six month periods ended June 30, 2004, respectively. The revenue increase
for the three month period ended June 30, 2004 was partially offset by lower sales volumes
from warmer than normal weather in the second quarter 2004 compared with the same period
in the prior year. Residential and commercial gas sales volumes decreased 17.1 million and
4.1 million therms, respectively, or decreased 20.1% and 7.9% for the three months ended
June 30, 2004 compared to the same period in 2003. Residential and commercial gas sales
volumes decreased 1.0 million and increased 3.9 million therms, respectively, or decreased
0.4% and increased 2.7% for the six months ended June 30, 2004 compared with 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 had an asset balance at June 30, 2004 of $9.7 million and a
liability balance of $14.3 million at June 30, 2003. 

        The
following rate adjustments were approved by the Washington Commission in relation to the
PGA during 2003 that affect changes in gas revenue for the three and six months ended June
30, 2004 compared to the same periods in the prior year:

|Effective Date  | Percentage Increase in
Rates | Annual Increase
in Revenues
(Dollars in millions)
|--------------- | ---------------------------- | -------------------------------------------------
|October 1, 2003 |                              |                                                  
|April 10, 2003  |                              |                                                  

Operating Expenses

        Purchased
electricityexpenses increased $16.0 million and $7.3 million for the three and six months
ended June 30, 2004, respectively, compared to the same periods in 2003. The increase was
primarily due to a $37.8 million disallowance of the return on the Tenaska gas supply
regulatory asset. The increase was partially offset by lower purchases due to increased
generation at PSE generating facilities in the second quarter of 2004 compared to the same
period in 2003, and lower wholesale electricity prices in the first quarter of 2004
compared to the same period in 2003. 

        The
July 8, 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 83% of normal. This
compares to 86% of normal for the same period in 2003. Hydroelectric power is a large
percentage of PSEs power portfolio. 

        Purchased
gas expenses increased $6.3 million and $81.8 million for the three and six months ended
June 30, 2004, respectively, compared to the same periods 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 periods in 2003. Gas costs are
passed through to customers through the PGA mechanism with no impact on gas margin or net
income. 

        Electric
generation fuel expense increased $9.9 million and $8.8 million for the three and six
months ended June 30, 2004, respectively, compared to the same periods in 2003 primarily
from increased generation at PSE generation facilities, including Fredrickson 1 which went
in service in May 2004. In addition, PSE incurred a $6.9 million charge in June 2004
related to a binding arbitration settlement between PSE and Western Energy Company (WECO),
the supplier of coal to Colstrip 1 & 2. The binding decision retroactively set a new
baseline cost of coal per ton supplied from July 31, 2001, and is applicable for the
remaining term of the coal supply agreement through December 2009. Of the second quarter
charge of $6.9 million, $5.0 million is included in the PCA mechanism. PSE had previously
accrued a reserve of $1.6 million in the fourth quarter 2003 related to the arbitration. 

        On
April 29, 2004, the Minerals Management Service of the United States Department of the
Interior issued an order to pay additional royalties to WECO, concerning coal purchased by
PSE for Colstrip Units 3 & 4. The order seeks payment of an additional $1.1 million in
royalties for coal mined from federal lands between 1997 and June 30, 2000. During that
period, PSEs coal price was reduced by a settlement agreement entered into in
February 1997 among PSE, WECO and Montana Power Company that resolved disputes that were
then pending. The order seeks to impute the price charged to PSE based on the other
Colstrip 3 & 4 owners contractual amounts. PSE is supporting WECOs appeal
of the order, but is also evaluating the basis of the claim. PSE accrued a loss reserve in
the amount of $1.1 million in the second quarter of 2004 charging Electric Generation Fuel
expense in connection with this matter. 

        In
addition, the Management Service of the United States Department of the Interior issued
two orders to WECO in 2002 and 2003 to pay additional royalties concerning coal sold to
Colstrip 3 & 4 owners. The orders assert that additional royalties are owed as a
result of WECO not paying royalties in connection with revenue received by WECO from the
Colstrip 3 & 4 owners under a coal transportation agreement during the period October
1, 1991 through December 31, 2001. PSEs share of the alleged additional royalties is
$1.8 million, which is equivalent to PSEs 25% ownership interest in Colstrip 3 &
4. The transportation agreement provides for the construction and operation of a conveyor
system that runs several miles from the mine to the Colstrip 3 & 4 units. WECO has
appealed these orders and PSE is monitoring the process. PSE believes that the Colstrip 3
& 4 owners have reasonable defenses in this matter based upon its review. Neither the
outcome of this matter nor the associated costs can be predicted at this time. 

        Residential
exchange creditsassociated with the Residential Purchase and Sale Agreement with BPA
decreased $1.6 million and increased an insignificant amount for the three and six months
ended June 30, 2004, respectively, when compared to the same periods in 2003. The overall
decrease in the second quarter 2004 was a result of decreased 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 instruments for the three and six months ended June 30, 2004 increased
$2.8 million and $2.4 million, respectively, compared with the same periods 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 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 the
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,
beginning November 2005 through the end of the contract as delivery is not probable during
this time period. As a result, PSE recorded an unrealized gain, net of a
reserve, of $2.3 million in the second quarter 2004. Approximately $2.2 million of the unrealized gain will be reversed as transactions
settle in 2004. 

        Production
operations and maintenanceexpense decreased $0.9 million and $1.3 million for the three
and six months ended June 30, 2004, respectively, compared to the same periods in 2003.
The decrease primarily relates to lower overhaul maintenance performed on Colstrip Units 1
& 2 in the second quarter 2004 compared to the same period in 2003. 

        Low-income
Programcosts, which are a pass-through tariff item, decreased $1.0 million and $2.7
million for the three and six months ended June 30, 2004, respectively, compared to the
same periods in 2003. Low-income program costs are dependent upon the amount collected
from customers through rates. 

        Other
utility operations and maintenancecosts increased $1.2 million and $7.1 million for the
three and six months ended June 30, 2004, respectively, compared to the same periods in
2003. The increase is due primarily to a $1.9 million and $6.4 million increase in storm
damage costs for the three and six months ended June 30, 2004, respectively. The increase
in storm costs for the three months ended June 30, 2004 were associated with a sudden
windstorm in April 2004. The storm costs for the six months ended June 30, 2004, were also
affected by a severe ice storm in January 2004. 

        Depreciation
and amortization expense increased $1.9 million and $3.1 million for the three and six
months ended June 30, 2004, respectively, compared to the same periods 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 decreased $0.3 million and increased $9.0 million
for the three and six months ended June 30, 2004, respectively, compared to the same
periods in 2003. The overall increase for the six months ended June 30, 2004 was primarily
due to higher municipal and state excise taxes which are revenue based. 

        Income
taxes decreased $7.6 million and $3.0 million for the three and six months ended June 30,
2004, respectively, compared to the same periods in 2003 as a result of lower pre-tax
operating income partially offset by the non-recurrence of one-time tax benefits in the
second quarter 2003. 

        Other
incomedecreased $0.7 million and $1.4 million for the three and six months ended June 30,
2004, respectively, compared to the same periods in 2003. The decrease is primarily due to
a gain on the sale of securities in May 2003 of $1.9 million. In addition, PSE incurred a
fine of $0.3 million at its Jackson Prairie facility in June 2004 resulting from a U.S.
Department of Transportation safety inspection conducted in 2001. 

        Interest
charges decreased $3.0 million and $7.3 million for the three and six months ended June
30, 2004, respectively, compared to the same periods in 2003. This decrease is primarily
due to the redemption or maturity of $217.0 million of Medium-Term Notes with interest
rates ranging from 6.07% to 8.59% since December 31, 2002, 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. 

        Also
included in earnings per share are preferred stock dividend accrual expenses. During the
three and six months ended June 30, 2004, preferred stock dividend accrual expense
decreased $1.8 million and $3.7 million, respectively, compared with the same periods in
2003. This decrease is due to the redemption of $41.3 million of $100 par value 7.75%
preferred stock in August 2003 and $60.0 million of $25 par value 7.45% preferred stock in
November 2003.

InfrastruX 
        The
changes to items affecting net income for the three and six months ended June 30, 2004 in
comparison with the same periods in 2003 are summarized in the table below.

Comparative Three and
Six Months Ended 
June 30, 2004 vs. June 30, 2003 
Increase (Decrease) 

(Dollars in Millions)

|                                  | Three Months
Ended | Six Months
Ended
|--------------------------------- | ------------------ | ----------------
|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    |                    |                 
|                                 
|Other income 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 $0.5 million and $4.6 million for the three and six months ended June
30, 2004, respectively, compared to the same periods in 2003 due primarily to the
acquisition of one company late in the second quarter of 2003, which contributed $5.9
million and $12.4 million to the three and six months ended June 30, 2004, respectively.
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
operations and maintenanceexpenses increased $1.0 million for the three months ended June
30, 2004 compared to the same period in 2003 as a result of slightly higher core company
revenues and the timing of expenditures related to core company revenues. Operations and
maintenance expenses decreased $2.6 million for the six months ended June 30, 2004
compared to the same period in 2003 as a result of overall increased operating
efficiencies and implemented cost control measures. 

        Depreciation
and amortizationexpense changed by an insignificant amount and increased $1.0 million for
the three and six months ended June 30, 2004, respectively, compared to the same periods
in 2003 primarily due to an increase in assets through a company acquisition late in the
second quarter of 2003. 

        Income
taxes changed by an insignificant amount and increased $2.7 million during the three and
six months ended June 30, 2004, respectively, compared to the same periods 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 June 30, 2004:

|Puget Energy                                  |       | Payments Due Per Period
|--------------------------------------------- | ----- | -----------------------
|Contractual Obligations
(Dollars in millions) | Total | 2004                   
|Short-term debt                               |       |                        
|Long-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 | 2004                                      
|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 May 2004, InfrastruX signed a three-year credit agreement with a group of
          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 June 30, 2004, PSE had available a three-year $350 million unsecured credit
          agreement and a three-year $150 million receivables securitization facility. At
          June 30, 2004, PSE had $0.4 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
          and commercial paper of $28.1 million, thereby effectively reducing the
          available borrowing capacity under these liquidity facilities to $321.8 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Puget Energy has a $15 million line of credit with a bank. At June 30, 2004,
          $5.0 million was outstanding, reducing the available borrowing capacity under
          this line of credit to $10.0 million. InfrastruX has $186.7 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
          $160.3 million and letters of credit of $4.5 million at June 30, 2004,
          effectively reducing the available borrowing capacity under these lines of
          credit to $21.9 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Puget
Sound Energy.    The following are PSE's aggregate  contractual  obligations and commercial
 commitments as of June 30, 2004:

|Puget Sound Energy                            |       | Payments Due Per Period
|--------------------------------------------- | ----- | -----------------------
|Contractual Obligations
(Dollars in millions) | Total | 2004                   
|Short-term debt                               |       |                        
|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 | 2004                                      
|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
Arrangements 
Accounts 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 June 30, 2004, Rainier
Receivables had sold $145.0 million of accounts receivable and the maximum receivables
available for sale was $0.4 million. 

        During
the three and six months ended June 30, 2004, Rainier Receivables sold a cumulative $145.0
million and $267.0 million of receivables. No amounts were sold for the same periods 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 June 30, 2004,
PSEs outstanding balance under the lease was $57.7 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 April 2003, PSE completed the
purchase of a 49.85% interest in a gas-fired electric generating station located within
Western Washington (Fredrickson 1). The purchase has added $80.8 million in utility plant
at June 30, 2004 and approximately 124 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 cost of the new generating facility and other
power costs. The acquisition of Fredrickson 1 was approved by the Washington Commission on
April 7, 2004 and was also approved by FERC under the Federal Power Act on April 23, 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 $158.8 million and $224.6 million for the three and six months ended June
30, 2004. PSE estimates construction expenditures will total approximately $408 million in
2004, which includes the acquisition of the 49.85% interest in the Fredrickson 1
generating facility. Expenditures in 2005 and 2006 are expected to be $359 million and
$327 million, respectively, excluding amounts for new generating resources currently under
evaluation. 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 $4.9 million and $10.6 million for the three and six months ended June 30,
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 six months ended June 30, 2004 was $291.7 million. During the
period, $45.4 million in cash was used for AFUDC and payment of dividends. Consequently,
cash flows available for utility construction expenditures and other capital expenditures
were $246.3 million or 102.0% of the $241.4 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 $154.5 million, $44.9 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 six months ended June 30,
2003 were $109.6 million, or 73.3% of the $149.5 million in construction expenditures. The
increase in cash generated from operations from 2004 compared to 2003 is primarily due to
the utilization of the accounts receivable securitization program starting in December
2003 and collection of accounts receivable. These items combined provided $76.3 million
additional operating cash flow for the six months ended June 2004 compared with the same
period in 2003. In addition, increases in the PGA mechanism rates in April and October
2003 provided an additional $47.8 million in operating cash flow. 
        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 June 30, 2004, PSE could issue:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | approximately
$982 million of first mortgage bonds, as PSE has approximately $1.8 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 at an assumed interest rate
of approximately 5.6% on a ten-year first mortgage bond. PSEs interest coverage
ratio at June 30, 2004 was 2.8 times net earnings available for interest. PSE currently
has $3.7 billion in electric and gas ratebase to support the interest coverage ratio
limitation test for net earnings available for interest;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | approximately
$280.2 million of additional preferred stock at an assumed dividend rate of 7.25%; and
|- | ----------------------------------------------------------------------------------------------------

| | approximately
$256.9 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 August 4, 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 of:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

On
July 15, 2004, PSE issued $200 million in floating rate senior notes under its existing
$500 million shelf registration statement, reducing the available balance for issuance
under the shelf registration statement to $300 million. The notes float at the three-month
LIBOR rate plus 0.30%, mature on July 14, 2006, and can be redeemed at any time after
January 15, 2005. PSE used the net proceeds from the sale of the floating rate senior
notes to repay outstanding amounts under its commercial paper and accounts receivable
securitization programs, including amounts incurred to repay long-term debt, and will also
be used to redeem $55 million in principal amount of first mortgage bonds at a premium of
3.68% on August 14, 2004.

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. 

        In
May 2004, PSE entered into a three-year, $350 million unsecured credit agreement with a
group of banks which replaced its previous $250 million unsecured credit agreement. PSE
also has 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 June 30, 2004, PSE
had available $350 million in the unsecured credit agreement and $0.4 million available
from the receivable securitization facility (net of $145.0 million sold), which provide
credit support for outstanding commercial paper and outstanding letters of credit. At June
30, 2004, there was $28.1 million outstanding 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 $321.8 million. 

        In
May 2004, InfrastruX entered into a three-year, $150 million credit agreement with a group
of banks, replacing its previous $150 million credit agreement. Puget Energy is the
guarantor of the line of credit. As a result, InfrastruX paid off $134 million of the
previous credit agreement under the new credit facility. In addition, InfrastruXs
subsidiaries have an additional $36.7 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 June 30, 2004, InfrastruX and its
subsidiaries had outstanding loans of $160.3 million and letters of credit of $4.5 million
effectively reducing the available borrowing capacity under these lines of credit to $21.9
million. 

        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 $5.0 million outstanding under the credit agreement at June 30, 2004.

Stock Purchase and Dividend
Reinvestment Plan.Puget Energy has a Stock Purchase and Dividend Reinvestment Plan
pursuant to which shareholders and other interested investors may invest cash and cash
dividends in shares of Puget Energys common stock. Since new shares of common stock
may be purchased directly from Puget Energy, funds received may be used for general
corporate purposes. Puget Energy issued common stock from the Stock Purchase and Dividend
Reinvestment Plan of $3.8 million (178,551 shares) and $7.7 million (354,176 shares) for
the three and six months ended June 30, 2004 compared to $3.9 million (176,806 shares) and
$7.6 million (369,571 shares) for the same periods 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 submitted an application for a new license on
April 30, 2004. In addition, PSE continues to work with numerous interested participants
to achieve a comprehensive settlement agreement to be submitted to FERC during the fall
2004.

Snoqualmie Falls Project. The
Snoqualmie Falls Project, built in 1898, had its original license issued May 13, 1975,
which was made effective retroactively to March 1, 1956, and expired 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. On June 29, 2004, FERC granted PSE a new 40-year operating license for
the Snoqualmie Falls Project. PSE estimates that the capital investment required to
implement the conditions of the new license agreement will cost approximately $44 million.
These conditions include modified operating procedures and various project upgrades that
include better protection of fish, development of riparian habitat to promote fish
propagation, increased minimum flows in the Snoqualmie River during low-water periods and
the development of recreational amenities near the down-river power house.  PSE accepted the FERC license in July 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 1 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 1 generating facility as well. As a result of these
approvals, PSE completed 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. 

        On
May 13, 2004, the Washington Commission also approved other adjustments to power costs
that resulted in an increase of cost recovery in rates of $44.1 million annually,
beginning May 24, 2004 which includes the ownership, operation and fuel costs of the
Fredrickson 1 generating facility. 

        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. PSE owns the facilities and associated water rights
of the project. As a result of rejecting the license, generation of electricity ceased at
the White River Project on January 15, 2004. In the same proceeding described above on
April 7, 2004, the Washington Commission approved PSEs recovery on the unamortized
White River Plant investment. At June 30, 2004, the White River Project net book value
totaled $65.0 million, which included $47.1 million of net utility plant, $14.8 million of
capitalized FERC licensing costs and $3.1 million of costs related to construction work in
progress. PSE is seeking recovery of the relicensing and other construction work in
progress costs totaling $17.9 million in its general rate filing of April 2004, over a
10-year amortization period. The outcome of this matter is expected no later than the
first quarter of 2005. 

        In
June 2003, the Washington State Department of Ecology (WSDE) approved an application for
new municipal water rights related to the White River Project reservoir. This approval was
sought in connection with PSEs ongoing efforts to sell the White River Project to be
used for commercial purposes. An appeal of the water rights determination made by the WSDE
for the project has been pending before the Washington State Department of Ecology
Pollution Control Hearings Board (PCHB). A series of briefs were filed during the second
quarter 2004 regarding whether to remand the water rights determination to the WSDE for
further analysis because the project is not currently generating power. On July 1, 2004,
the PCHB informed the parties by letter that it would issue an order remanding the water
rights determination to WSDE for further consideration and to suspend the hearing schedule
pending remand period. The parties are currently waiting for issuance of that order. 

        In
May 2004, the Puyallup Indian Tribe gave PSE notice of intent to sue for an alleged
violation of water quality laws associated with the release of water from the White River
Project reservoir. No such lawsuit has been filed and PSE is in discussion with the
Puyallup Indian Tribe regarding their concerns. Additionally, PSE has sought, and is
awaiting, further direction from the WSDE as to whether any additional actions are
necessary to maintain compliance with applicable water quality laws. 

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

        In
June 2002, PSE entered into an agreement with BPA, which modified the payment provisions
of the June 2001 amended settlement agreement to provide for conditional deferral of
payment by BPA of certain amounts to be paid under the original agreement for an eight
month period beginning February 2003, for a total deferral of $27.7 million. Absent
certain adjustments tied to a BPA rate adjustment clause, BPA is to begin paying back the
amount deferred with interest over a 60-month period beginning October 1, 2006. In January
2003, PSE filed revised tariff sheets with the Washington Commission to reflect this
modification to the agreement, which was approved by the Washington Commission. 

        In
June 2003, BPA adopted its final Record of Decision in its February 2003 rate case, which
established a formula under the BPA rate adjustment clause to be used in adjusting the
rate that would affect the level of residential exchange benefits for PSEs
customers. The adjustment was approved by FERC on an interim basis and went into effect
October 1, 2003. FERC issued final approval of this formula in May 2004. 

        In
May 2004, PSE and BPA entered into an agreement that modified the payment of Residential
Exchange Program benefits for the period October 1, 2006 through September 30, 2011. The
agreement provides that all benefits in this period will be in the form of cash payments
only and defined a new methodology to be used to calculate the residential benefits. In
addition, PSE agreed to waive payment of approximately one-half of an available
reduction-in-risk discount and deferred payment of the other half of the discount, plus
interest, until October 2007.

Tenaska Disallowance. The Washington
Commission issued an order on May 13, 2004 determining that PSE did not prudently manage
gas costs for the Tenaska electric generating plant and ordered PSE to adjust its PCA
deferral account to reflect a one-time disallowance of $25.6 million for the PCA 1 period
(July 1, 2002 through June 30, 2003), which was recorded as a Purchased Electricity
expense. The order also established guidelines for future recovery of Tenaska costs. PSE
filed a petition for reconsideration and clarification to address certain issues arising
from the May 13, 2004 order. As a result, the Washington Commission issued an order on
June 7, 2004 denying PSEs petition for reconsideration, and denying in part, and
granting in part, PSEs petition for clarification. In its order of June 7, 2004, the
Washington Commission clarified the financial impact of the disallowance for costs
relating to the return on PSEs Tenaska regulatory asset in the PCA 1 and 3 periods.
The amounts were determined to be a $25.6 million one-time disallowance for the PCA 1
period; an estimated disallowance of $11.3 million for the PCA 3 period (July 1, 2004 to
June 30, 2005), based upon applying the Washington Commissions methodology of 50%
disallowance on the return on the Tenaska regulatory asset due to projected costs
exceeding the benchmark during the period. For the PCA 3 period, approximately $5.6
million would be disallowed in the period July 1, 2004 through December 31, 2004,
primarily as a reduction to Electric Operating Revenue, for a cumulative impact on
earnings of $31.2 million in 2004 for the PCA 1 and 3 periods for PSE. The PCA 3 reduction
in Electric Operating Revenue is the result of the Washington Commissions order that
reflected a reduction in rates of approximately $9.9 million annually. This reduction is
to reflect the Washington Commission estimate of the Tenaska disallowance for the PCA 3
period. While the Washington Commission did not expressly address the disallowance for the
PCA 2 period (July 1, 2003 through June 30, 2004), PSE estimates the disallowance for the
PCA 2 period to be approximately $12.2 million if the Washington Commission were to follow
the same methodology as they have ordered for the PCA 3 period. While PSE reserves the
right to address the merits of any disallowance in its PCA 2 compliance filing which will
be filed in the third quarter of 2004, PSE recorded a $12.2 million disallowance to
Purchased Electricity expense in the second quarter of 2004 for the 50% disallowance of
the return on the Tenaska regulatory asset in accordance with the Washington
Commissions methodology discussed in their order of May 13, 2004. As a result of the
disallowance recorded, the PCA customer deferral of $17.6 million at March 31, 2004 was
expensed and a reserve was established to offset future PCA customer deferrals. The
reserve balance as of June 30, 2004 was $13.6 million, which is expected to be utilized
over the remaining months in 2004 as the excess power costs are shared through the PCA
mechanism. The cumulative amount attributable to the disallowance recorded in the second
quarter of 2004 was $37.8 million ($24.5 million after-tax) and the total for 2004 is
expected to be approximately $43.4 million ($28.1 million after-tax). 

        Prior
to the Tenaska disallowance, PSEs excess power costs under the PCA mechanism were at
the $40 million cap whereas with the Tenaska disallowance the excess power costs at June
30, 2004 are $26.5 million. The excess power cost from June 30, 2004 until the PCA
mechanism cap of $40 million is reached, which is expected in November 2004, will be
offset by the Tenaska disallowance reserve of $13.6 million for the PCA 1 and 2 periods
that was recorded in the second quarter of 2004. Consequently, PSE does not expect
earnings through year-end 2004, based on current market conditions, to be impacted by
excess power costs. 

        Below
is a summary of the Tenaska disallowances by quarter through December 31, 2004:

|Quarter ending
(Dollars in millions) | 7/02 - 6/03
PCA 1
(ordered/final) | 7/03 - 6/04
PCA 2
(estimated) | 7/04 - 12/04
PCA 3
(estimated) | Total  
|------------------------------------ | --------------------------------- | ----------------------------- | ------------------------------ | -------
|June 30, 2004                        |                                   | $    25                       | .6                             | $    12
|September 30, 2004                   |                                   |                               | --                             |        
|December 31, 2004                    |                                   |                               | --                             |        
|                                     |                                  
|Total                                |                                   | $    25                       | .6                             | $    12
|                                     |                                  

|In
the May 13, 2004 order, the Washington Commission established guidelines and a benchmark
to determine PSEs recovery on the Tenaska regulatory asset starting with the PCA 3
period (July 1, 2004) through the expiration of the Tenaska contract in the year 2011. The
benchmark is defined as the original cost of the Tenaska contract adjusted to reflect the
1.2% disallowance from a 1994 Prudence Order.


        The Washington Commission guidelines for determining future recovery of
the Tenaska costs are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1. |  | The
 Washington  Commission  will  determine if PSE's gas  purchasing  plan and gas purchases
for Tenaska are prudent through the PCA compliance filings.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | If
PSEs gas purchasing plan and gas purchases for Tenaska are prudent, and
          if PSEs actual Tenaska costs fall at or below the benchmark, it will
          recover fully its Tenaska costs.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | If
PSEs gas purchasing plan and gas purchases for Tenaska are prudent, but
          its actual Tenaska costs exceed the benchmark, PSE will only recover 50% of the
          lesser of:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | Actual
Tenaska costs that exceed the benchmark or;
|-- |  | --------------------------------------------------

|b) |  | The
return on the Tenaska regulatory asset (return on the asset would be added           last
to all other relevant Tenaska costs).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------

|4. |  | If
PSEs gas purchasing plan or gas purchases are found to be imprudent in           a
future proceeding, PSE risks disallowance of any and all Tenaska costs (gas,
          return of and return on Tenaska Regulatory Asset).
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Washington Commission confirmed that if the Tenaska costs are deemed prudent, PSE will
recover the full amount of actual costs and the return of the Tenaska regulatory asset
even if the benchmark is exceeded. The projected costs and projected benchmark costs for
Tenaska are as follows:

|(Dollars in millions)               | Remainder
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011
|----------------------------------- | -------------- | ---- | ---- | ---- | ---- | ---- | ---- | ----
|Projected Tenaska costs (*)         |                |      | $    | 96   | .9   | $    | 193  | .7  
|Projected Tenaska benchmark costs   |                |      |      | 85   | .6   |      | 159  | .5  
|                                    |               
|Over (under) benchmark costs        |                |      | $    | 11   | .3   | $    | 34   | .2  
|                                    |               
|Projected 50% disallowance based on |                |     
|Washington Commission methodology   |                |      | $    | 5    | .6   | $    | 10   | .9  
|                                    |               

_________________
* Projection will change based on
market conditions of gas and replacement power costs.

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
costs 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. 

        In
2003, the Washington Commissions Pipeline Safety staff conducted a natural gas
standard inspection for three counties within Washington State in which PSE operates gas
pipeline activities. The inspection included a review of procedures, records, and
operations and maintenance activities. On June 29, 2004, the Washington Commission issued
a complaint to PSE related to those inspections. The Washington Commissions
complaint alleges certain violations of Washington Commission regulations and determined a
maximum aggregated fine for the violations of $4.5 million, although the Washington
Commissions Pipeline Safety staff recommended a fine of $1.3 million. PSE is
investigating this matter and will meet with the Pipeline Safety staff to review both the
allegations and the invitation by the Washington Commission to jointly explore resolution.
PSE believes it has reasonable defenses in this matter based upon a preliminary review.
Neither the outcome of this matter nor the associated costs, including potential fines,
can be predicted at this time.

Proceedings Relating to
the Western Power Market 
California 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 California Independent System Operator           Corporation
(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 for 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 an Administrative Law
Judge on December 12, 2002, except that the Order also substantially adopts the FERC Staff
gas price recommendation from the FERC 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 December 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.

        On
April 27, 2004, the Williams Companies and the California Parties filed a settlement
agreement at FERC resolving all issues as between Williams and the California Parties, and
Williams and any other market participant willing to opt-in to the settlement. FERC
approved the settlement on July 2, 2004, and PSE elected to opt-in to the settlement
agreement. As a result of opting in, PSE will receive a nominal distribution
(approximately $4,382).


        On
June 28, 2004, Dynegy, Inc. and its subsidiaries and the California Parties
filed a settlement agreement at FERC resolving all issues as between Dynegy and
the California Parties, and Dynegy and any other market particiapnt willing to
opt-in to the settlement. Under the Dynegy settlement, PSE would receive a
distribution of $2,193 if it elects to opt-in.  FERC has not yet issued an order
approving the settlement.

        On
July 13, 2004, Duke Energy, Inc. announced a settlement with the California Parties. PSE
will determine whether to join that settlement when it is filed at FERC.

        FERC
Staff has indicated an interest in facilitating further settlement discussions among the
parties in this proceeding, and held a settlement conference on June 30, 2004. PSE is
currently evaluating the discussion held at the settlement conference.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b. |  | CAISO
Receivable. PSE has a bad debt reserve and a transaction fee reserve           applied to
the CAISO receivable, such that PSE had a net receivable from the           CAISO on June
30, 2004 of $21.3 million. PSE estimates the range for the           receivable to be
between $21.3 million and $23.0 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 FERC.

        On
May 6, 2004, the Los Angeles Department of Water and Power filed a motion at FERC in
Docket No. EL00-95 requesting that FERC issue an order permitting monies to be disbursed
from the California PX Settlement Clearing Account and an escrow account established as
part of PG&Es bankruptcy proceeding. The bulk of the monies owed by the CAISO,
including the monies owed to PSE, are held in those two accounts. PSE filed an answer in
support of the motion on May 21, 2004, and awaits an order from FERC.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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. On July 1, 2004, the Court issued
          an order setting a briefing schedule; initial briefs are due on August 5, 2004.
          Two of the refund proponents in the proceeding, Port of Seattle, Washington, and
          City of Tacoma, Washington, have moved to toll the briefing schedule on the
          grounds that the record filed with the Ninth Circuit by FERC is incomplete. The
          Ninth Circuit rejected a prior motion to toll the briefing schedule, but has not
          yet acted on the most recent filing by Port of Seattle and Tacoma.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 Nos. EL03-137, et seq.) named PSE (Docket No. EL03-169)
and approximately 54 other entities 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. FERC approved the settlement on
January 22, 2004. 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, and awaits FERC action on that
motion. 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). The 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. On May 12, 2004, PSE received a letter
          from the Director of the OMOI stating that the investigation of PSE has been
          terminated without the need for further proceedings. 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 and
          defendants motions to dismiss on March 26, 2004. By an order filed May 12,
          2004, the district court granted the motions and dismissed the lawsuit. The Port
          of Seattle filed an appeal to the United States Court of Appeals for the Ninth
          Circuit. Briefs currently are due in the fall 2004.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Wah Chang Suit.In June 2004, Puget Energy and PSE were served a federal summons
          and complaint by Wah Chang, an Oregon company that makes specialty metals and
          chemicals. Wah Chang claims that during 1998 through 2001 the Company and other
          energy companies (and in a separate complaint, energy marketers) engaged in
          various fraudulent and illegal activities including the transmittal of
          electronic wire communications to transmit false or misleading information to
          manipulate the California energy market. The claims include submitting false
          information such as energy schedules and bids to the California PX, California
          ISO, electronic trading platforms and publishers of energy indexes. The
          complaint is similar to the complaint made by the Port of Seattle against PSE in
          2003. The Wah Chang case is stayed pending an order from the Judicial Panel on
          Multi-District Litigation to determine whether to transfer the case from the
          United States District Court for the District of Oregon to the Multi-District
          Litigation panel.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | California Litigation.Attorney General Case. 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. The Ninth Circuit heard oral argument on the motions to
          dismiss on June 14, 2004 and the parties await the courts ruling. On July
          6, 2004, the United States Court of Appeals for the Ninth Circuit ruled in a
          related case, People of the State of California, ex rel. Bill Lockyer, Attorney
          General v. Dynegy, et al., that action against jurisdictional utilities based on
          the California Business Practices Act for wholesale sales made during 2000 and
          2001 are preempted by the Federal Power Act, which supports arguments PSE raised
          in its dismissal motion. The ruling in Dynegy may support dismissal of this
          litigation. California Class Actions. The plaintiffs allege that all wholesale
          sellers in the California energy market engaged in anti-competitive behavior in
          violation of the California Business Practices Act. On June 14, 2004, the court
          heard oral argument on the defendants motions to dismiss and the appeals
          of the remand orders. The parties await the courts ruling. The holding in
          the Dynegy case is on related issues and may also support dismissal of this
          action.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
June 30, 2004, the Company had an after-tax net asset of approximately $23.7 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% of the mark-to-market gain beginning November 2004 has been reclassified out of other
comprehensive income to a deferred account due to the Company expecting to reach the $40
million cap under the PCA mechanism in accordance with SFAS No. 71 Accounting for
the Effects of Certain Types of Regulation. The Company also had energy contracts
that were marked-to-market at a gain of $1.9 million after-tax through current earnings
for both the three and six months ended June 30, 2004 primarily the result of excluding
certain contracts from the normal purchase normal sale exemption under SFAS No. 133. A
portion of the mark-to-market gain beginning November 2004 has been reclassified to a
deferred account due to the Company expecting to reach the $40 million cap under the PCA
mechanism in accordance with SFAS No. 71. 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 $7.0 million after-tax and would increase current earnings for
those contracts marked-to-market in earnings by $0.4 million after-tax as a result of
applying SFAS No.71 for the portion that exceeds 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 exposures 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 of June 30, 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) 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 June 30, 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 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

Puget
Energys annual meeting of shareholders was held on May 4, 2004. At the annual
meeting, the shareholders elected four directors to hold office until the annual meeting
of shareholders in 2007 or until their successors are elected and qualified. The vote was
as follows:

|                        | Number of Shares
|----------------------- | ----------------
|
|Term Expiring 2007      |                 
|Phyllis J. Campbell     |                 
|Stephen E. Frank        |                 
|Dr. Kenneth P. Mortimer |                 
|Stephen P. Reynolds     |                 

There
were no abstentions and no broker non-votes.

The
terms of the following directors continued after the annual meeting:

| | Charles W. Bingham
| | ------------------
| | Robert L. Dryden  
| | Sally G. Narodick 
| | Douglas P. Beighle
| | Craig W. Cole     
| | Tomio Moriguchi   

|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 and Puget Sound Energy
| |  | --------------------------------------------

| |  | Form 8-K
dated April 6, 2004, Item 5  Other Events related to the filing of an electric and
gas general rate increase proposal.
| |  | --------------------------------------------------------------------------------------------------------------------------------

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/ James W. Eldredge                                                                    
|                     | James W. Eldredge
Corporate Secretary and ChiefAccounting Officer                        
|                     |                                                                                          
|Date: August, 5 2004 | Chief accounting officer duly authorized
to sign this report on behalf of each registrant

EXHIBIT INDEX

The following exhibits are filed
herewith:

| | 10.1 |  | Credit
Agreement dated May 27, 2004 between PSE and various banks named therein, Union Bank of
California as administrative agent.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | 10.2 |  | Credit
Agreement dated May 27, 2004 between InfrastruX Group, Inc. and various banks name
therein, Union                      Bank of California as administrative agent.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.1 |  | Statement
setting forth computation of ratios of earnings to fixed charges (1999 through 2003 and
12 months ended June 30, 2004) for Puget Energy.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.2 |  | Statement
setting forth computation of ratios of earnings to fixed charges (1999 through 2003 and
12 months ended June 30, 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.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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