---

UNITED STATES
                                             SECURITIES AND EXCHANGE COMMISSION
                                                   Washington, D.C. 20549

# FORM 10-Q

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

For the quarterly period ended September 30, 2003

       OR

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

For the transition period from __________ to __________

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

|1-16305 | PUGET ENERGY, INC.                | 91-1969407
|------- | --------------------------------- | ----------
|        | A Washington Corporation.         |           
|        | 10885 N.E. 4th Street, Suite 1200 |           
|        | Bellevue, Washington 98004-5591   |           
|        | (425) 454-6363                    |           

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

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

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

As of September 30, 2003, (i)
the number of shares of Puget Energy, Inc. (Puget Energy) common stock
outstanding was 94,221,064 ($.01 par value) and (ii) all of the outstanding
shares of Puget Sound Energy, Inc. (PSE) common stock were held by Puget Energy.

---

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

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| | 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, such as the attack on
September 11, 2001;
|- | --------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

PART I     FINANCIAL
INFORMATION Item 1.      Financial Statements

PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME 
For the Three Months Ended September 30 
(Thousands except per share amounts) 
(Unaudited)

|                                                        
|--------------------------------------------------------
|Operating Revenues:                                     
|Electric                                                
|Gas                                                     
|Non-utility construction services                       
|Other                                                   
|                                                        
|Total operating revenues                                
|                                                        
|Operating Expenses:                                     
|Energy costs:                                           
|Purchased electricity                                   
|Purchased gas                                           
|Electric generation fuel                                
|Residential Exchange                                    
|Unrealized (gain)/loss on derivative instruments        
|Utility operations and maintenance                      
|Other operations and maintenance                        
|Depreciation and amortization                           
|Conservation amortization                               
|Taxes other than income taxes                           
|Income taxes                                            
|                                                        
|Total operating expenses                                
|                                                        
|Operating Income                                        
|Other income, net of tax                                
|                                                        
|Income Before Interest Charges and Minority Interest    
|                                                        
|Interest Charges:                                       
|Interest charges, net of AFUDC                          
|Mandatorily redeemable securities interest expense      
|                                                        
|Total interest charges                                  
|                                                        
|Minority interest in earnings of consolidated subsidiary
|                                                        
|Net Income                                              
|Less: preferred stock dividends accrual                 
|                                                        
|Income for Common Stock                                 
|                                                        
|Basic common shares outstanding - weighted average      
|Diluted common shares outstanding - weighted average    
|                                                        
|Basic and diluted earnings per share                    
|                                                        

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

PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME 
For the Nine Months Ended September 30 
(Thousands except per share amounts) 
(Unaudited)

|                                                                        
|------------------------------------------------------------------------
|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)/loss on derivative instruments                        
|Utility operations and maintenance                                      
|Other operations and maintenance                                        
|Depreciation and amortization                                           
|Conservation amortization                                               
|Taxes other than income taxes                                           
|Income taxes                                                            
|                                                                        
|Total operating expenses                                                
|                                                                        
|Operating Income                                                        
|Other income, net of tax                                                
|                                                                        
|Income Before Interest Charges and Minority Interest                    
|                                                                        
|Interest charges:                                                       
|Interest charges, net of AFUDC                                          
|Mandatorily redeemable securities interest expense                      
|                                                                        
|Total interest charges                                                  
|                                                                        
|Minority interest in earnings of consolidated subsidiary                
|                                                                        
|Income Before Cumulative Effect of Accounting Change                    
|Cumulative effect of implementation of an accounting change, net of tax 
|                                                                        
|Net Income                                                              
|Less: preferred stock dividends accrual                                 
|                                                                        
|Income for Common Stock                                                 
|                                                                        
|Basic common shares outstanding - weighted average                      
|Diluted common shares outstanding - weighted average                    
|                                                                        
|Basic earnings per share before cumulative effect of accounting change  
|Cumulative effect of accounting change                                  
|                                                                        
|Basic earnings per share                                                
|                                                                        
|Diluted earnings per share before cumulative effect of accounting change
|Cumulative effect of accounting change                                  
|                                                                        
|Diluted earnings per share                                              
|                                                                        

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

PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
For the Nine Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

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

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

|                                                                             | September 30,
2003 | December 31,
2002
|---------------------------------------------------------------------------- | ------------------ | -----------------
|Utility Plant: (at original cost, including construction work in progress of |                    |                  
|$152,123 and $108,658 respectively)                                          |                    |                  
|Electric                                                                     |                    |                  
|Gas                                                                          |                    |                  
|Common                                                                       |                    |                  
|Less: Accumulated depreciation and amortization                              |                    |                  
|                                                                            
|Net utility plant                                                            |                    |                  
|                                                                            
|Other Property and Investments:                                              |                    |                  
|Goodwill, net                                                                |                    |                  
|Intangibles, net                                                             |                    |                  
|Non-utility                                                                  |                    |                  
|Other assets                                                                 |                    |                  
|                                                                            
|Total other property and investments                                         |                    |                  
|                                                                            
|Current Assets:                                                              |                    |                  
|Cash                                                                         |                    |                  
|Restricted cash                                                              |                    |                  
|Accounts receivable, net                                                     |                    |                  
|Unbilled revenue                                                             |                    |                  
|Materials and supplies, at average cost                                      |                    |                  
|Current portion of unrealized gain on derivative instruments                 |                    |                  
|Prepayments and other                                                        |                    |                  
|                                                                            
|Total current assets                                                         |                    |                  
|                                                                            
|Other Long-Term Assets:                                                      |                    |                  
|Regulatory asset for deferred income taxes                                   |                    |                  
|Regulatory asset for PURPA contract buyout costs                             |                    |                  
|Unrealized gain on derivative instruments                                    |                    |                  
|Power cost adjustment 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

|                                                                                  | September 30,
2003 | December 31,
2002
|--------------------------------------------------------------------------------- | ------------------ | -----------------
|Capitalization:                                                                   |                    |                  
|Common shareholders' investment:                                                  |                    |                  
|Common stock $0.01 par value, 250,000,000 shares authorized, 94,221,064           |                    |                  
|and 93,642,659 shares outstanding, respectively                                   |                    |                  
|Additional paid-in capital                                                        |                    |                  
|Earnings reinvested in the business                                               |                    |                  
|Accumulated other comprehensive income                                            |                    |                  
|Preferred stock not subject to mandatory redemption                               |                    |                  
|                                                                                 
|Total shareholders' equity                                                        |                    |                  
|                                                                                 
|Redeemable securities and long term debt:                                         |                    |                  
|Preferred stock subject to mandatory redemption                                   |                    |                  
|Corporation obligated, mandatorily redeemable preferred securities of             |                    |                  
|subsidiary trust holding solely junior subordinated debentures of the corporation |                    |                  
|Long-term debt                                                                    |                    |                  
|                                                                                 
|Total redeemable securities and long term debt                                    |                    |                  
|                                                                                 
|Total capitalization                                                              |                    |                  
|                                                                                 
|Minority interest in equity of a consolidated subsidiary                          |                    |                  
|                                                                                 
|Current Liabilities:                                                              |                    |                  
|Accounts payable                                                                  |                    |                  
|Short-term debt                                                                   |                    |                  
|Current maturities of long-term debt                                              |                    |                  
|Purchased gas liability                                                           |                    |                  
|Accrued expenses:                                                                 |                    |                  
|Taxes                                                                             |                    |                  
|Salaries and wages                                                                |                    |                  
|Interest                                                                          |                    |                  
|Other                                                                             |                    |                  
|                                                                                 
|Total current liabilities                                                         |                    |                  
|                                                                                 
|Long-Term Liabilities:                                                            |                    |                  
|Deferred income taxes                                                             |                    |                  
|Other deferred credits                                                            |                    |                  
|                                                                                 
|Total long-term liabilities                                                       |                    |                  
|                                                                                 
|Total Capitalization and Liabilities                                              |                    |                  
|                                                                                 

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

PUGET ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Nine Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME 
For the Three Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

|                                                  
|--------------------------------------------------
|Operating Revenues:                               
|Electric                                          
|Gas                                               
|Other                                             
|                                                  
|Total operating revenues                          
|                                                  
|Operating Expenses:                               
|Energy costs:                                     
|Purchased electricity                             
|Purchased gas                                     
|Electric generation fuel                          
|Residential Exchange                              
|Unrealized (gain)/loss on derivative instruments  
|Utility operations and maintenance                
|Other operations and maintenance                  
|Depreciation and amortization                     
|Conservation amortization                         
|Taxes other than income taxes                     
|Income taxes                                      
|                                                  
|Total operating expenses                          
|                                                  
|Operating Income                                  
|Other income, net of tax                          
|                                                  
|Income Before Interest Charges                    
|                                                  
|Interest charges:                                 
|Interest charges, net of AFUDC                    
|Mandatorily redeemable securities interest expense
|                                                  
|Total interest charges                            
|                                                  
|Net Income                                        
|Less: preferred stock dividends accrual           
|                                                  
|Income for Common Stock                           
|                                                  

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

PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME 
For the Nine Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

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

PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
For the Three Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
For the Nine Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

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

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

|                                                                            
|----------------------------------------------------------------------------
|Utility Plant: (at original cost, including construction work in progress of
|$152,123 and $108,658 respectively)                                         
|Electric                                                                    
|Gas                                                                         
|Common                                                                      
|Less: Accumulated depreciation and amortization                             
|                                                                            
|Net utility plant                                                           
|                                                                            
|Other Property and Investments                                              
|                                                                            
|Current Assets:                                                             
|Cash                                                                        
|Restricted cash                                                             
|Accounts receivable, net                                                    
|Unbilled revenue                                                            
|Materials and supplies, at average cost                                     
|Current portion of unrealized gain on derivative instruments                
|Prepayments and other                                                       
|                                                                            
|Total current assets                                                        
|                                                                            
|Other Long-Term Assets:                                                     
|Regulatory asset for deferred income taxes                                  
|Regulatory asset for PURPA contract buyout costs                            
|Unrealized gain on derivative instruments                                   
|Power cost adjustment 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

|                                                                                 
|---------------------------------------------------------------------------------
|Capitalization:                                                                  
|Common shareholders' investment:                                                 
|Common stock, $10 stated value, 150,000,000 shares authorized, 85,903,791        
|shares outstanding                                                               
|Additional paid-in capital                                                       
|Earnings reinvested in the business                                              
|Accumulated other comprehensive income                                           
|Preferred stock not subject to mandatory redemption                              
|                                                                                 
|Total shareholders' equity                                                       
|                                                                                 
|Redeemable securities and long term debt:                                        
|Preferred stock subject to mandatory redemption                                  
|Corporation obligated, mandatorily redeemable preferred securities of            
|subsidiary trust holding solely junior subordinated debentures of the corporation
|Long-term debt                                                                   
|                                                                                 
|Total 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                                                                         
|Other                                                                            
|                                                                                 
|Total current liabilities                                                        
|                                                                                 
|Long-Term Liabilities:                                                           
|Deferred income taxes                                                            
|Other deferred credits                                                           
|                                                                                 
|Total long-term liabilities                                                      
|                                                                                 
|Total Capitalization and Liabilities                                             
|                                                                                 

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

PUGET SOUND ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the Nine Months Ended September 30 
(Dollars in Thousands) 
(Unaudited)

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

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

COMBINED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

|(1) | Summary
of Consolidation Policy
|--- | -------------------------------

BASIS OF PRESENTATION

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

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

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

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

Puget
Energys basic earnings per common share have been computed based on weighted average
common shares outstanding of 94,125,000 and 93,930,000 for the three and nine months ended
September 30, 2003, respectively, and 87,618,000 and 87,388,000 for the three and nine
months ended September 30, 2002, respectively. 

        Puget
Energys diluted earnings per common share have been computed based on weighted
average common shares outstanding of 94,635,000 and 94,440,000 for the three and nine
months ended September 30, 2003, respectively, and 87,975,000 and 87,737,000 for the three
and nine months ended September 30, 2002, respectively. These shares include the dilutive
effect of securities related to employee and director equity plans.

|(3) | Segment
Information(Puget Energy Only)
|--- | --------------------------------------

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

        The
Other business segment includes two PSE subsidiaries, a real estate investment and
development company and an owner of a small hydro electric generating facility designated
as an exempt wholesale generator by FERC. The Other business segment also includes the
expenses of Puget Energy, the public utility holding company. Reconciling items between
segments are not material.

Financial
data for business segments are as follows:

|(Dollars in Thousands)
Three Months Ended September 30, 2003 | PSE | InfrastruX | Other | Total    
|------------------------------------------------------------ | --- | ---------- | ----- | ---------
|Revenues                                                     |     |            | $     | 421,641  
|Depreciation and amortization                                |     |            |       | 54,881   
|Income tax                                                   |     |            |       | (1,260   
|Operating income                                             |     |            |       | 51,081   
|Interest charges                                             |     |            |       | 44,178   
|Net income before minority interest                          |     |            |       | 9,396    
|Minority interest                                            |     |            |       | --       
|Net income                                                   |     |            |       | 9,396    
|Goodwill, net                                                |     |            |       | --       
|Total assets                                                 |     |            |       | 5,104,096
|                                                            

|Three Months Ended September 30, 2002 | PSE | InfrastruX | Other | Total  
|------------------------------------- | --- | ---------- | ----- | -------
|Revenues                              |     |            | $     | 365,231
|Depreciation and amortization         |     |            |       | 53,351 
|Income tax                            |     |            |       | (3,862 
|Operating income                      |     |            |       | 51,002 
|Interest charges                      |     |            |       | 46,876 
|Net income before minority interest   |     |            |       | 4,335  
|Minority interest                     |     |            |       | --     
|Net income                            |     |            |       | 4,335  
|                                     

|Nine Months Ended September 30, 2003 | PSE | InfrastruX | Other | Total    
|------------------------------------ | --- | ---------- | ----- | ---------
|Revenues                             |     |            | $     | 1,491,370
|Depreciation and amortization        |     |            |       | 164,074  
|Income tax                           |     |            |       | 35,528   
|Operating income                     |     |            |       | 206,856  
|Interest charges                     |     |            |       | 135,349  
|Net income before minority interest  |     |            |       | 74,939   
|Minority interest                    |     |            |       | --       
|Net income                           |     |            |       | 74,939   
|                                    

|Nine Months Ended September 30, 2002 | PSE | InfrastruX | Other | Total    
|------------------------------------ | --- | ---------- | ----- | ---------
|Revenues                             |     |            | $     | 1,503,477
|Depreciation and amortization        |     |            |       | 161,024  
|Income tax                           |     |            |       | 26,102   
|Operating income                     |     |            |       | 196,021  
|Interest charges                     |     |            |       | 143,558  
|Net income before minority interest  |     |            |       | 56,616   
|Minority interest                    |     |            |       | --       
|Net income                           |     |            |       | 56,616   
|                                    

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

|(4) | Accounting
for Derivative Instruments and Hedging Activities
|--- | ------------------------------------------------------------

The
Company has adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138 and SFAS No. 149. SFAS No. 133 requires that all contracts considered to be
derivative instruments be recorded on the balance sheet at their fair value. The Company
enters into both physical and financial contracts to manage its energy resource portfolio
including forward physical and financial contracts, option contracts and swaps. The
majority of these contracts qualify for the normal purchase and normal sale exception. 

        During
the three months ended September 30, 2003 the Company recorded a decrease in earnings for
the change in the market value of derivative instruments not meeting cash flow hedge
criteria of approximately $0.9 million pre-tax ($0.6 million after-tax) compared to an
increase of $0.3 million pre-tax ($0.2 million after-tax) for the three months ended
September 30, 2002. During the nine months ended September 30, 2003 the Company recorded a
decrease in earnings of approximately $0.4 million pre-tax ($0.2 after-tax) compared to an
increase of $12.1 million pre-tax ($7.8 million after-tax) for the nine months ended
September 30, 2002. The $12.1 million pre-tax gain in 2002 primarily represented the
reversal of unrealized losses on gas hedge contracts that were de-designated in the fourth
quarter of 2001 and the reversal of the mark-to-market unrealized loss on physical
electric contracts at December 31, 2001 that were settled in 2002.

        The
Company has two gas supply contracts outstanding with a counterparty whose senior
unsecured debt ratings are currently below investment grade. The purpose of the contracts
is to manage the fuel supply costs of the Companys electric generating portfolio. The
first contract is a fixed for floating price natural gas swap contract for which the
Company has collected a collateral deposit in the amount of $27.3 million from the
counterparty to guarantee performance. The financial contract will expire in June 2008 and
is accounted for as a cash flow hedge under SFAS No. 133. The second is a physical gas
supply contract expiring in December 2008, which has been designated as a normal purchase
under SFAS No. 133. The counterparty has continuously performed on both contracts since
the contracts were entered into in 2000 and the Company believes it is probable that the
counterparty will continue to perform. The Company will continue to monitor the
performance of the counterparty. 

        In
addition, the Company has adopted SFAS No. 149, Amendment on Statement 133 on
Derivative Instruments and Hedging Activities, which is effective for all contracts
entered into or modified after June 30, 2003 except for certain hedging relationships
designated after June 30, 2003. SFAS No. 149 clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in contracts
and for hedging activities under SFAS No. 133. The Company implemented SFAS 149 in the
third quarter of 2003 with no significant impact on the financial statements.

|(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 five to 20 years.
During the nine months ended September 30, 2003 a total of $0.5 million was added to
intangible assets as a result of an acquisition by InfrastruX during the second quarter of
2003. InfrastruX assigned $0.2 million to contractual customer relationships with an
amortization period of approximately eight years and $0.3 million to covenant not to
compete with an amortization period of five years. The total weighted average amortization
period for the 2003 additions is approximately six years. Identifiable intangible assets
are as follows:

|                                             |                  
|-------------------------------------------- | -----------------
|At September 30, 2003
(Dollars in thousands) | Gross
Intangibles
|Covenant not to compete                      |                  
|Developed technology                         |                  
|Contractual customer relationships           |                  
|Patents                                      |                  
|                                            
|Total                                        |                  
|                                             |                  

|                                            |                  
|------------------------------------------- | -----------------
|At December 31, 2002
(Dollars in thousands) | Gross
Intangibles
|Covenant not to compete                     |                  
|Developed technology                        |                  
|Contractual customer relationships          |                  
|Patents                                     |                  
|                                           
|Total                                       |                  
|                                            |                  

The
identifiable intangible asset amortization expense for the three and nine months ended
September 30, 2003 was $0.4 million and $1.4 million, respectively, compared to $0.5
million and $1.2 million for the same periods of 2002. The identifiable intangible assets
amortization for future periods based on the current acquisitions will be:

|(Dollars in thousands)         | 2003 | 2004 | 2005 | 2006 | 2007 | 2008
|------------------------------ | ---- | ---- | ---- | ---- | ---- | ----
|Future Intangible Amortization |      |      | $    | 547  |      | $   

|(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 2003:

|(Dollars in thousands)
At September 30, 2003      | Amount
|------------------------------------------------- | ------
|Asset retirement obligation at December 31, 2002  |       
|Liability recognized in transition                |       
|Liability settled in the period                   |       
|Accretion expense                                 |       
|                                                  |       
|Asset retirement obligation at September 30, 2003 |       
|                                                  |       

The
pro forma asset retirement obligation liability balances as if SFAS No. 143 had been
adopted on January 1, 1999 (rather than January 1, 2003) are as follows:

|(Dollars in thousands)                                                             
|-----------------------------------------------------------------------------------
|Pro forma amounts of liability for asset retirement obligation at December 31, 1999
|Pro forma amounts of liability for asset retirement obligation at December 31, 2000
|Pro forma amounts of liability for asset retirement obligation at December 31, 2001
|Pro forma amounts of liability for asset retirement obligation at December 31, 2002

The
pro forma income statement effect as if SFAS No. 143 had been adopted on January 1, 1999
(rather than January 1, 2003) is as follows:

|                                               | Three Months Ended
September 30 | Nine Months Ended
September 30
|---------------------------------------------- | ------------------------------- | ------------------------------
|(Dollars in thousands, except per share)       | 2003                            | 2002                          
|Income for common stock, as reported           |                                 |                               
|Add: FAS 143 transition adjustment, net of tax |                                 |                               
|Less: Pro forma accretion expense, net of tax  |                                 |                               
|                                              
|Pro forma income for common stock              |                                 |                               
|                                              
|Earnings per share:                            |                                 |                               
|Basic as reported                              |                                 |                               
|Diluted as reported                            |                                 |                               
|Basic pro forma                                |                                 |                               
|Diluted pro forma                              |                                 |                               

|(7) | Stock
Compensation (Puget Energy only)
|--- | --------------------------------------

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

|                                                          | Three Months Ended
September 30 | Nine Months Ended
September 30
|--------------------------------------------------------- | ------------------------------- | ------------------------------
|(Dollar in thousands, except per share)                   | 2003                            | 2002                          
|Income for common stock, as reported                      |                                 |                               
|Add: Total stock-based employee compensation expense      |                                 |                               
|included in net income, net of tax                        |                                 |                               
|Less: Total stock-based employee compensation expense per |                                 |                               
|the fair value method of SFAS 123, net of tax             |                                 |                               
|                                                         
|Pro forma income for common stock                         |                                 |                               
|                                                         
|Earnings per share:                                       |                                 |                               
|Basic as reported                                         |                                 |                               
|Diluted as reported                                       |                                 |                               
|Basic pro forma                                           |                                 |                               
|Diluted pro forma                                         |                                 |                               

|(8) | New
Accounting Pronouncements
|--- | -----------------------------

In
January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46
 Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies
the application of Accounting Research Bulletin No. 51  Consolidated Financial
Statements to certain entities in which equity investors do not have controlling
interest or sufficient equity at risk for the entity to finance its activities without
additional financial support. This Interpretation requires that if a business entity has a
controlling financial interest in a variable interest entity, the financial statements
must be included in the consolidated financial statements of the business entity. The
adoption of this Interpretation for all interests in variable interest entities created
after January 31, 2003 was effective on that date. For variable interest entities created
before February 1, 2003, it is effective with the first fiscal year or interim period
beginning after December 15, 2003 as amended by the FASB in September 2003. The Company
has evaluated its contractual arrangements and determined PSEs 1995 conservation
trust off-balance sheet financing transaction meets this guidance. This transaction was
consolidated in the third quarter of 2003. As a result, revenues increased $3.9 million
while conservation amortization and interest expense increased by the corresponding amount
with no impact on earnings. At September 30, 2003, the balance sheet assets and
liabilities have been increased by $8.0 million. 

        In
May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150
 Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS 150 establishes the requirements for classifying and
measuring as liabilities certain financial instruments that embody obligations to redeem
the financial instrument by the issuer. The adoption of SFAS 150 is effective with the
first fiscal year or interim period beginning after June 15, 2003, however, on November 5, 2003
FASB deferred for an indefinite period certain mandatorily redeemable noncontrolling
interests associated with finite-lived subsidiaries.  The Comapny does not have any noncontrolling
interests in subsidiaries and is therefore, not affected by the deferral.  Prior periods
will not be restated for the new presentation. 

        SFAS
150 requires the Company to classify its mandatorily redeemable preferred stock and the
corporation obligated, mandatorily redeemable preferred securities of a subsidiary trust
holding solely junior subordinated debentures of the corporation (trust preferred
securities) as liabilities. As a result, the corresponding dividends on the mandatorily
redeemable preferred stock are classified as interest expense on the income statement with
no impact on income for common stock. The Company previously classified the dividends
associated with the trust preferred securities as interest expense.

|(9) | Other
|--- | -----

Effective
April 10, 2003 and October 1, 2003, the Washington Commission approved increases in the
Purchased Gas Adjustment (PGA) gas rates of approximately $103.6 million annually, or
20.1%, and $78.8 million annually, or 13.3%, respectively. The PGA mechanism passes
through to customers increases or decreases in the gas supply portion of the natural gas
service rates based upon changes in gas prices. PSEs gas margin and net income are
not affected by the changes in the PGA rates. 

        PSE
 has minority ownership interests in two venture capital funds established as
limited liability corporations that seek long-term capital appreciation by making capital
investments in energy sector related businesses. The Companys investment in these
two venture capital funds totaled $10.1 million at September 30, 2003, recorded at the
Companys original cost. The managing members of the limited liability corporations
have sole discretion over fund management and investment decisions of both funds. Although
the Company is not aware of any significant matters that would impair the long-term value
of its investments, the Emerging Issues Task Force of the Financial Accounting Standards
Board is currently reviewing the definition of what constitutes an other-than temporary
impairment and its application to certain investments recorded at cost. Under the terms of
the limited liability corporation agreements establishing the funds, one fund will continue
through December 31, 2003 and the other through December 31, 2007. The Companys
original cost in the fund that will terminate on December 31, 2003, was $2.1 million at
September 30, 2003, or approximately the amount the Company believes it will receive in
distributions from the fund in the fourth quarter of 2003. The book value of the
Companys members capital account in the second fund as reported by the fund manager
is below the Companys recorded original cost of the investment. The Companys
original cost in the second fund was $8.0 million at September 30, 2003 and the Company
has a future funding obligation of $0.6 million. The fund manager continues to report that
the Companys original cost is within the projected range of the future anticipated
fund value. 

        PSE
and Western Energy Company, the supplier of coal to PSEs Colstrip power plants, are
engaged in a dispute and binding arbitration process concerning the price of coal that PSE
will pay under the contract for Colstrip Units 1 & 2 through the end of the contract
in 2009. This arbitration is contemplated as a price adjustment mechanism in that
contract. The parties are over $1 per ton apart on their view as to the proper price for
coal under that contract, and the arbitration would resolve that question in the second
quarter of 2004. Any price adjustment could be retroactive to July 30, 2001 and would
apply through the rest of the term. A $1 per ton increase or decrease in the price of coal
would have a corresponding effect on PSEs power costs of approximately $1.4 million
annually and if the price were retroactive to July 30, 2001, the corresponding effect on power
costs would be $3.2 million. Fuel supply costs for electric generation after July 1, 2002 are part of
PSEs power cost adjustment mechanism. 

        In
October 2003, PSE received notice from Western Energy Company that the Montana Department
of Revenue is alleging underpayment of royalties on coal purchased by PSE from Western
Energy Company from 1997 to 2000. PSE used the coal as fuel for its Colstrip Units 3 &
4 generating plants. The dispute is likely to lead to a more formal process or litigation
to review those purchases and to determine whether PSE may owe more royalties, taxes or
penalties. The Montana Department of Revenue seeks a payment of approximately $1.1 million
plus applicable Montana State taxes on such payments. PSE will defend this claim
vigorously. PSE cannot predict the outcome of this issue at this early date.

        On
October 24, 2003, PSE filed a power cost only rate case for an increase in its electric
rates related to higher power costs and the proposed investment in a 275 MW power
generating plant. PSE intends to acquire a 49.85% interest in the power generating plant.
The acquisition and power cost only rate case is subject to regulatory approval from the
Washington Commission. The proposed rate increase of 4.7% or $64.4 million annually, if
approved, would go into effect in April 2004 after a five month regulatory review. 

        In
2003 the Colville Confederated Tribes presented a claim to Douglas County PUD based upon
allegedly due past annual charges for the Wells Hydroelectric Project for the use of
Colville tribal lands. The Tribes claimed that annual charges would also be due for
periods into the future. Since April of 2003, Douglas County PUD and Colville
representatives have discussed settlement of this issue. PSE purchases 31.3% of the power
generated by the Wells Project. A settlement of this claim could affect the amount of
energy PSE receives under the terms of PSEs purchased electricity contract or the
price of the output of the Wells Hydroelectric Project purchased by PSE. 

        The
White River Hydroelectric Generation Project (the Project) was built in 1911 by PSE and
has been in continuous operation ever since. The Project generates electricity to serve
PSEs retail electric customers with an annual average output of approximately 35
megawatts. In 1983, the Company applied for an original FERC License for this Project. In
December of 1997, FERC issued a proposed license that was appealed by the Company and
various natural resource agencies. The Company appealed the license because it contained
terms and conditions that would render ongoing operations of the Project uneconomic
relative to alternative resources. In 1998, 2001 and in 2003 FERC granted a stay of the
license order (and related appeals) to afford interested parties the opportunity for
settlement negotiations. This stay expires in January of 2004. If settlement has not been
reached by the end of the stay, in order to keep the Project in operation the Company
would likely be required to implement the license order pending FERCs disposition of
the Companys appeal. Implementation of the license order would require the Company
to make capital expenditures and incur annual operating costs that would make the Project
uneconomic. The Company has concluded that it is unlikely that a settlement addressing the
deficiencies of the 1997 FERC license will be reached before the stay expires, and
anticipates advising FERC in January that it intends to withdraw its license application
and retire the Project. To this end, the Company is negotiating with a consortium of
municipalities interested in acquiring the Project as a source for a municipal water
supply. The Company is also discussing an interim non-power operations
agreement with the U.S. Army Corps of Engineers. This interim agreement would address the
Corps interest in keeping the Projects diversion dam in operation and thereby
facilitate the Corps ongoing responsibilities to provide fish passage for the
Corps upstream flood control project (Mud Mountain Dam). Keeping the Project in
operation is also a matter of importance to the surrounding community that wants to
preserve the reservoir for financial, recreational and aesthetic purposes. The outcome of
these various negotiations and discussions is uncertain at this time, as is the magnitude
of any financial impact on the Company associated therewith. However, in any event, it is
unlikely that the Project will be in service as a generation resource of the Company after
January of 2004. As a result, PSE will petition the Washington Commission for an
accounting order in the fourth quarter of 2003. This petition will request authorization
for the appropriate accounting and rate making disposition of this Project to be retired.
At September 30, 2003, the White River Project net book value totals $69.0 million, which
includes $47.6 million of net utility plant, $15.0 million of capitalized FERC licensing
costs and $6.4 million of costs related to construction work in progress.

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

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

# Results of Operations

Puget Energy 

        All
of the operations of Puget Energy are conducted through its subsidiaries, PSE and
InfrastruX. Puget Energys net income for the three months ended September 30, 2003
was $11.0 million on operating revenues of $515.6 million, compared with net income of
$8.5 million on operating revenues of $458.5 million for the same period in 2002. Income
for common stock was $9.9 million for the third quarter of 2003 compared to $6.6 million
for the third quarter of 2002. Puget Energys basic and diluted earnings per share
were $0.10 for the third quarter of 2003 compared to $0.07 for the third quarter of 2002. 

        For
the first nine months of 2003, Puget Energys net income was $78.0 million on
operating revenues of $1.7 billion, compared to net income of $66.4 million on operating
revenues of $1.7 billion for the corresponding period in 2002. Income for common stock was
$73.2 million for the first nine months of 2003 and $60.5 million for the same period in
2002. Puget Energys basic and diluted earnings per common share were $0.78 and
$0.77, respectively, for the nine months ended September 30, 2003 and $0.69 for the same
period in 2002. 

        Puget
Energys income for common stock was impacted by PSEs income for common stock
for the three months ended September 30, 2003 of $8.4 million compared to $2.8 million for
the same period in 2002. The improved results were due primarily to customer growth,
improved gas margin, lower costs associated with long term equity incentive plans, gains
from corporate owned life insurance and lower interest expense, partially offset by higher
variable power costs. Puget Energys income for common stock was negatively impacted
by a decrease in InfrastruXs income for common stock (net of minority interest) of
$2.3 million for the three months ended September 30, 2003 compared to the same period in
2002 due in part to fewer summer electric transmission repair and maintenance projects and
a lower margin mix of work performed by InfrastruX companies. 

        Puget
Energys income for common stock was impacted by PSEs income for common stock
for the nine months ended September 30, 2003 of $72.4 million compared to $53.3 million
for the same period in 2002. The improved results were due primarily to improved electric
and gas margins resulting from general tariff rate increases implemented in the third
quarter of 2002 and lower interest expense, partially offset by SFAS 133 unrealized gains
decrease from the prior year. Puget Energys income for common stock was negatively
impacted by a decrease in InfrastruXs income for common stock (net of minority
interest) of $6.5 million for the nine months ended September 30, 2003 compared to the
same period in 2002 due to increased insurance costs, competitive pressures on profit
margins, and unusually severe weather which affected revenues and productivity in the
first half of 2003.

Puget Sound Energy 

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

|Comparative Three and Nine Months Ended
September 30, 2003 vs. September 30, 2002
Increase (Decrease)
(Dollars in Millions)
|---------------------------------------------------------------------------------------------------------------------------
|                                                                                                                           
|Operating revenue changes:                                                                                                 
|Electric interim and general rate increase                                                                                 
|BPA Residential Exchange Credit                                                                                            
|Electric sales to other utilities and marketers                                                                            
|Electric conservation trust credit                                                                                         
|Electric transportation revenue                                                                                            
|Electric load and other                                                                                                    
|                                                                                                                           
|Total electric operating change                                                                                            
|                                                                                                                           
|Gas PGA rate and load change                                                                                               
|Gas general rate increase in base rates                                                                                    
|Gas transportation revenue and other                                                                                       
|                                                                                                                           
|Total gas operating change                                                                                                 
|                                                                                                                           
|Other operating revenue change                                                                                             
|                                                                                                                           
|Total operating revenue change                                                                                             
|                                                                                                                           
|Operating expense changes:                                                                                                 
|Energy costs:                                                                                                              
|Purchased electricity                                                                                                      
|Purchased gas                                                                                                              
|Electric generation fuel                                                                                                   
|Residential exchange power cost credit                                                                                     
|Unrealized gain decrease on derivative instruments                                                                         
|Utility operations and maintenance:                                                                                        
|Production operations and maintenance                                                                                      
|Personal energy management expenses                                                                                        
|Low income program pass through expenses                                                                                   
|Other utility operations and maintenance                                                                                   
|Other operations and maintenance                                                                                           
|Depreciation and amortization                                                                                              
|Conservation amortization                                                                                                  
|Taxes other than income taxes                                                                                              
|Income taxes                                                                                                               
|                                                                                                                           
|Total operating expense change                                                                                             
|Other income change (net of tax)                                                                                           
|Interest charges change                                                                                                    
|Cumulative effect of an accounting change (net of tax)                                                                     
|                                                                                                                           
|Net income change                                                                                                          
|                                                                                                                           

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

        Electric
margin decreased $2.0 million for the three months ended September 30, 2003 compared to
the same period in 2002 primarily as a result of underrecovered variable power costs of
$5.8 million, offset by higher sales of electricity to retail customers. Electric margin
increased $21.1 million for the nine months ended September 30, 2003 compared to the same
period in 2002 due primarily to the non-recurrence of 2002 losses associated with the
resale of excess gas supply for electricity generation. 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 nine months ended September 30, 2003 and September 30, 2002 is
detailed further as follows:

Electric Margin for the Three and Nine Months Ended 
September 30, 2003 and September 30, 2002 
(Dollars in Millions)

|                                             | Three Months Ended
September 30 | Nine Months Ended
September 30
|-------------------------------------------- | ------------------------------- | ------------------------------
|                                             |                                 |                               
|                                             |                                
|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                              |                                 |                               
|                                            

Gas
margin increased $6.5 million for the three months ended September 30, 2003 compared to
the same period in 2002 due primarily to an increase of $2.3 million resulting from the
$35 million annual, 5.8%, general gas tariff rate increase effective September 1, 2002.
Gas margin increased $12.0 million for the nine months ended September 30, 2003 compared
to the same period in 2002 due primarily to an increase of $22.8 million resulting from
the 5.8% general gas tariff rate increase effective September 1, 2002 offset by gas therm
sales declining 7.3% due to warmer weather in the first quarter of 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 nine months ended September 30, 2003 and September 30, 2002 is
detailed further as follows:

Gas Margin for the Three and Nine Months Ended 
September 30, 2003 and September 30, 2002 
(Dollars in Millions)

|                                             | Three Months Ended
September 30 | Nine Months Ended
September 30
|-------------------------------------------- | ------------------------------- | ------------------------------
|                                             |                                 |                               
|                                             |                                
|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 September 30, 2003 were $343.5 million, an
increase of $44.0 million compared to the same period in 2002 due primarily to wholesale
electric sales to other utilities and marketers which increased $32.3 million from greater
surplus volumes due in part to hedging expected hydro shortfall in energy production and
higher prices in the wholesale electricity market. These wholesale sales revenues are a
part of the Companys Power Cost Adjustment (PCA) mechanism. Wholesale sales volumes
increased by 188.6 million kWh or 18.4% to 1.2 billion kWh as a result of warmer
temperatures compared to the same period in 2002 in the Pacific Northwest which provided
excess electric energy supplies for sales to the wholesale market as a result of lower
than expected retail sales and a slight improvement in the forecast of adverse hydro
conditions, providing more hydro production than was originally forecasted. Retail sales
revenue increased $7.2 million due primarily to increased commercial customer sales.
Retail sales volume increased 3.4% to 4.3 billion kWh from 4.2 billion kWh for the same
period in 2002. 

        Electric
operating revenues for the nine months ended September 30, 2003 were $1.1 billion, an
increase of $129.9 million compared to the same period in 2002, due primarily to wholesale
electric sales to other utilities and marketers which increased $110.9 million from
greater surplus volumes due in part to hedging expected hydro shortfall in energy
production, and to higher prices in the wholesale electricity market. Wholesale sales
volumes increased by 1.9 billion kWh or 80.5% to 4.3 billion kWh as a result of
warmer-than-normal temperatures in the Pacific Northwest which provided excess electric
energy supplies for sales to the wholesale market as a result of excess generation from
the combustion turbines and higher than expected hydro production. Temperatures based on
heating-degree-days measured at Seattle-Tacoma airport during the nine month period ended
September 30, 2003 were 7.7% warmer than normal as compared to heating-degree-days being
8.3% cooler than normal during the nine month period ended September 30, 2002. Retail
sales revenue decreased $7.6 million due primarily to $25 million of interim rate relief
ended June 30, 2002 and warmer temperatures in 2003 offset by the effect of a 4.6%
electric general rate increase effective July 1, 2002 that increased electric revenue by
approximately $10.5 million in the first nine months of 2003. Retail sales volume was 14.1
billion kWh, up slightly from the equivalent period in 2002. 

        On
June 20, 2002, the Washington Commission approved and adopted the settlement stipulation
in the general rate case, putting new rates into effect on July 1, 2002. PSE established a
Power Cost Adjustment (PCA) mechanism in the rate case settlement. The PCA mechanism will
account for differences in PSEs modified actual power costs relative to a power cost
baseline. The mechanism will account for a sharing of costs and benefits that are
graduated over four levels of power cost variances, with an overall cap of $40 million
(+/-) over the four year period July 1, 2002 through June 30, 2006 plus 1% of the excess
over $40 million. PSEs share of the costs through September 30, 2003 was $29.9
million, $24.7 million of which was incurred in the first nine months of 2003. PSE expects
to reach the $40 million cap by the end of 2003. Utility customers share of the
costs, which were deferred for later recovery, through September 30, 2003 was $4.1
million, all of which was incurred in the second quarter of 2003. 

        On
June 11, 2001, PSE and 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 payments during the period October 1, 2006 through
September 30, 2011. 

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

        On
June 17, 2002, PSE entered into an agreement with BPA which amended the payment provisions
of the amended settlement agreement to provide for conditional deferral of payment by BPA
of certain amounts to be paid under the original agreement. Under the modified agreement,
BPA deferred paying a portion of the benefits it would have otherwise paid. The amount of
benefits deferred was $3.5 million each month for the eight-month period beginning
February 2003, for a total deferral of $27.7 million. Contemporaneously with entering into
this agreement with PSE, BPA entered into other agreements similar to the agreement with
PSE through which other investor-owned utilities and BPA agreed to BPAs deferral of
payments in their fiscal year 2003. The total cumulative amount deferred under the
agreement with PSE and other such agreements equals $55 million. Absent certain
adjustments tied to a BPA rate adjustment clause, BPA is to begin paying back the amount
deferred with interest over the sixty-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 between PSE and BPA. The Washington Commission accepted the
tariff changes and the BPA credit was changed to $0.01740 per kWh, from $0.01817 per kWh,
for the period February 15, 2003 through September 30, 2006. On June 30, 2003, BPA adopted
its final Record of Decision in the February 2003 rate case, which established a formula
under the BPA rate adjustment clause to be used in adjusting the rate which will affect
the level of residential exchange benefits for PSEs customers. The adjustment under
the formula went into effect on October 1, 2003, resulting in both a reduction of benefits
of $1.2 million a month for a twelve month period and, under the modified agreement
mentioned above, an offsetting acceleration of the payment of the above-described $27.7
million deferral. The net result is no change in the cash being received from BPA for the
twelve month period, but a reduction in the total benefits to be received in the October
1, 2003 through September 30, 2011 period. 

        For
the three and nine months ended September 30, 2003, the benefits of the Residential and
Farm Energy Exchange Benefit credited to customers were $34.3 million and $128.1 million,
respectively, with a related offset to power costs. PSE received payments from BPA in the
amount of $33.5 million and $104.0 million during the three and nine months ended
September 30, 2003, respectively. The difference between the customers credit and
the amount received from BPA reduces the previously deferred amount owed to customers. The
aggregated deferred amount is recorded on PSEs balance sheet as restricted cash.
Absent certain adjustments tied to a BPA rate adjustment clause described above, the
modified amended settlement agreement will provide for payments from BPA in the amount of
$630.6 million for the period January 2003 through September 2006 and for pass-through of
the same amount to eligible residential and small farm customers. 

        On
October 23, 2003, PSE signed conditional settlement agreements including a Stipulation and
Agreement for Settlement, a Waiver and Covenant Not to Sue, and an Amendment No. 1 to the
amended settlement agreement. These conditional settlement agreements, which will be void
unless certain conditions are satisfied, include provisions for the dismissal of certain
lawsuits regarding residential exchange benefits, an elimination of the adjustment
mentioned above for the twelve month period commencing October 1, 2003, the deferral of
the receipt of certain benefits, a change in the methodology used to calculate residential
benefits in the October 1, 2006 through September 30, 2011 period, and elimination of a
risk premium that would otherwise have been payable by BPA under certain conditions under
the amended settlement agreement. The conditions which would render the conditional
settlement agreements void include a condition that approximately 70 public agency
utilities sign a Waiver and Covenant Not to Sue by January 21, 2004, and that no party
withdraws its signature by February 20, 2004. Under the conditional settlement agreements,
the reduction in benefits mentioned above of $1.2 million a month for twelve months will
be eliminated and PSE will defer a total of $37.6 million in the eight month period
beginning February 2004, and $27.6 million a year for the two year period beginning
October 2004, for a total deferral of $92.9 million. This money will be returned with
interest in equal payments over the 60 month period beginning October 2006. If the
conditional settlement agreements signed October 23, 2003 are not voided, the benefits to
be received from BPA will be reduced, absent certain adjustments tied to a BPA rate
adjustment clause, for the January 2003 through September 2006 period from $630.6 million
to $537.7 million with the remaining $92.9 million being paid, plus interest, in the
October 2006 through September 2011 period. 

        There
are several actions in the U.S. Ninth Circuit Court of Appeals against BPA, in which the
petitioners assert that BPA acted contrary to law or without authority in deciding to
enter into, or in entering into or performing, a number of contracts, including the
contract between BPA and PSE. BPA rates used in such contract between BPA and PSE for
determining the amounts of money to be paid to PSE as residential exchange benefits during
the period October 1, 2001 through September 30, 2006 have been confirmed, approved and
allowed to go into effect by FERC. There are also several actions in the U.S. Ninth
Circuit Court of Appeals against BPA, in which petitioners assert that BPA acted contrary
to law in adopting or implementing the rates or rate adjustment clause upon which the
benefits received or to be received from BPA during the October 1, 2001 through September
30, 2006 period are based. It is not clear what impact, if any, review of such rates and
the above-described U.S. Ninth Circuit Court of Appeals actions may have on PSE. PSE
cannot presently predict whether or not the above described conditional settlement
agreements will be rendered void or result in the dismissal of any or all of the above
described U. S. Ninth Circuit Court of Appeals actions. 

        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. 

        During
the six months ended June 30, 2003, PSE collected in its electric general rate tariff and
remitted to a grantor trust $7.7 million as compared to $5.8 million for the same period
in 2002 as a result of PSEs 1995 sale of future electric revenues associated with
its investment in conservation assets. The impact of the sale of revenue was offset by
reductions in conservation amortization and interest expenses. The principal amount owed
by the trust to its bondholders was $11.6 million at June 30, 2003. PSEs 1995
conservation trust transaction was consolidated in the third quarter of 2003 to meet the
guidance of FASB Interpretation No.46 (FIN 46) and, as a result, revenues increased $3.9
million while conservation amortization and interest expense increased by a corresponding
amount with no impact on earnings. At September 30, 2003, the balance sheet assets and
liabilities have increased by $8.0 million. 

        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 September 30, 2003,
PSEs receivable from the California Independent System Operators (CAISO) and other
counter-parties, net of reserves, was $24.1 million. See the discussion of the CAISO
receivable and California proceedings under Proceedings Relating to the Western
Power Market.

Operating Revenues 
Gas 
        Retail
gas revenue for the three and nine month periods ended September 30, 2003 increased by
$11.5 million and decreased by $143.8 million from the same periods in 2002, respectively,
which included the effect of a $35 million annual or 5.8%, gas general rate increase
effective September 1, 2002 that increased gas revenue by approximately $2.3 million and
$22.8 million for the three and nine month periods ended September 30, 2003, respectively.
Retail gas sales volumes increased 10.0% from 78.1 million therms for the three months
ended September 30, 2002 to 85.9 million therms for the three months ended September 30,
2003 and decreased 9.9% from 583.6 million therms for the nine months ended September 30,
2002 to 525.9 million therms for the nine months ended September 30, 2003 due primarily to
warmer temperatures in the Pacific Northwest in the first quarter of 2003. 

        Purchased
Gas Adjustment (PGA) rates charged to customers were lower in the three and nine month
periods ended September 30, 2003 compared to the same periods in 2002 as a result of rate
decreases of 7.3% and 12.5% which took effect September 1, 2002 and November 1, 2002,
respectively, offset by a rate increase of 20.1% which took effect April 10, 2003. On
September 24, 2003 the Washington Commission approved the PGA rate increase of an annual
average of 13.3% across all groups of customers effective October 1, 2003. The PGA
mechanism passes through to customers increases or decreases in the gas supply portion of
the natural gas service rates based upon changes in the price of natural gas purchased
from producers and wholesale marketers or changes in gas pipeline transportation costs. 

        PSEs
gas margin (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) and net income are not
affected by changes under the PGA.

Operating Expenses

        Purchased
electricityexpenses increased $42.1 million and $164.2 million for the three and nine
month periods ended September 30, 2003 compared to the same periods in 2002. PSEs
hydroelectric production and related power costs in 2003 have been negatively impacted by
below normal winter precipitation and snow pack in the Pacific Northwest region associated
with an El Nino weather condition. The October 2, 2003 Columbia Basin Runoff Summary
published by the National Weather Service Northwest River Forecast Center indicated that
the total observed runoff above Grand Coulee reservoir for the period January through
September 2003 was 84% of normal. This compares to 102% of normal for the same period in
2002. The Company anticipates reaching the $40 million cumulative cap under the PCA
mechanism by the end of 2003 primarily due to increased power costs and adverse hydro
conditions. Under the PCA mechanism, further increases in variable power costs through
June 30, 2006 would be apportioned 99% to customers and 1% to PSE. PSEs share of
power costs, in excess of those set in rates, through September 30, 2003 was $29.9
million. 

        Purchased
gasexpenses increased $4.3 million and decreased $144.6 million for the three and nine
month periods ended September 30, 2003 compared to the same periods in 2002. The three
month ended increase was primarily due to an increase in gas market prices from the third
quarter of 2002 to the third quarter of 2003. The nine month ended decrease was due to
lower consumption volumes as a result of warmer than normal temperatures and the impact of
decreased gas costs, which were passed through to customers through the PGA mechanism. The
PGA allows PSE to recover expected gas costs. PSE defers, as a receivable or liability,
any gas costs that exceed or fall short of the amount in PGA rates and accrues interest
under the PGA. The PGA balance was a liability at September 30, 2003 of $6.8 million
compared to a liability balance at September 30, 2002 of $98.6 million. 

        Electric
generationfuel expense increased $4.4 million and decreased $49.3 million for the three
and nine month periods ended September 30, 2003 compared to the same periods in 2002. The
three month increase is due to higher gas supply costs and increased generation from our
combustion turbine units from 2002 to 2003. The nine month decrease is due to lower fuel
costs for PSE controlled gas-fired generation facilities which were not operated due to
lower cost of wholesale power supply. 

        Residential
exchange creditsassociated with the Residential Purchase and Sale Agreement with BPA
increased $6.5 million and $22.4 million for the three and nine month periods ended
September 30, 2003 when compared to the same periods in 2002, due to an increase in the
Residential and Farm Energy Exchange credit rate in January, March, and October of 2002.
For further details, see the amended Residential Purchase and Sale Agreement between PSE
and BPA discussion in Operating Revenues  Electric. 

        Unrealized
gain on derivative instrumentsdecreased $1.2 million and $12.5 million for the three
and nine month periods ended September 30, 2003 compared to the same periods in 2002 due
to changes in the market value of derivative instruments and the reversal of previously
recorded unrealized gains when underlying energy supply contracts were settled. During the
three months ended September 30, 2003 the Company recorded a decrease in earnings for the
change in the market value of derivative instruments not meeting cash flow hedge criteria
of approximately $0.9 million pre-tax ($0.6 million after-tax) compared to an increase of
$0.3 million pre-tax ($0.2 million after-tax), for the same period in 2002. During the
nine months ended September 30, 2003 the Company recorded a decrease in earnings of
approximately $0.4 million pre-tax ($0.2 million after-tax) compared to an increase of
$12.1 million pre-tax ($7.8 million after-tax) for the same period in 2002. An $11.7
million pre-tax gain in 2002 represented the reversal of unrealized losses on gas hedge
contracts that were de-designated in the fourth quarter of 2001 and the reversal of the
mark-to-market unrealized loss on physical electric contracts at December 31, 2001 that
were settled in 2002. 

        The
Company has two contracts outstanding with a counterparty whose senior unsecured debt
ratings are currently below investment grade. The first contract is a fixed for floating
price natural gas swap contract for which the Company has collected a collateral deposit
in the amount of $27.3 million from the counterparty to guarantee performance. The
financial contract will expire in June 2008 and is accounted for as a cash flow hedge
under SFAS No. 133. The second is a physical gas supply contract expiring in December
2008, which has been designated as a normal purchase under SFAS No. 133. The counterparty
has continuously performed on both contracts since the contracts were entered into in 2000
and the Company believes it is probable that the counterparty will continue to perform.
The Company will continue to monitor the performance of the counterparty. 

        Production
operations and maintenancecost decreased $1.0 million and $3.8 million for the three and
nine month periods ended September 30, 2003 compared to the same periods in 2002. The
three month decrease is primarily attributable to $0.8 million in electric generating
facility maintenance inspections of combustion turbines during 2002 that did not recur in
2003. The nine month decrease is due primarily to a $4.0 million pre-tax charge in the
second quarter of 2002 related to an industrial accident at Colstrip Units 1 and 2 (of
which PSE is a 50% owner) which did not recur in 2003. 

        PSEs
Personal Energy ManagementTMenergy-efficiency program costs decreased $1.4 million and
$5.2 million for the three and nine month periods ended September 30, 2003 compared to the
same periods in 2002, reflecting a cancellation of the Companys Time of Use program
in November 2002. 

        A
Low-income Programapproved by the Washington Commission in the general rate case
settlement began in July 2002, which resulted in increased costs of $0.3 million and $4.8
million for the three and nine months ended September 30, 2003 compared to the same
periods in 2002. These costs are fully recovered through a surcharge in retail rates
beginning at the programs inception on July 1, 2002 for electric and September 1,
2002 for gas. 

        Other
utility operations and maintenancecosts increased $0.9 million and $7.3 million for the
three and nine months ended September 30, 2003 compared to the same periods in 2002 due
primarily to an increase in electric overhead and underground line costs, gas distribution
main costs, administrative and general salaries, and meter reading expenses. 

        Depreciation
and amortizationexpense for PSE increased $1.5 million and $3.0 million for the three and
nine months ended September 30, 2003 compared to the same periods in 2002 due primarily to
the effects of new plant placed into service during the past year. 

        Conservation
amortizationexpense increased $5.7 million and $13.9 million for the three and nine
months ended September 30, 2003 compared to the same periods in 2002 due to increased
conservation expenditures and the result of consolidating the off-balance sheet
conservation trust beginning July 1, 2003 in accordance with FIN 46, Consolidation
of Variable Interest Entities. Pass-through conservation costs are recovered through
an electric conservation rider, a gas conservation tracker mechanism and a conservation
trust rate schedule with no impact to earnings. 

        Taxes
other than income taxesincreased $2.6 million and decreased $11.8 million for the three
and nine months ended September 30, 2003 compared to the same periods in 2002 primarily
due to lower municipal and state excise taxes which are revenue based. In addition, PSE
reached a settlement with the Oregon State Department of Revenue related to a property tax
dispute resulting in a $1.4 million reduction in the second quarter of 2003 of amounts
previously accrued as expense. 

        Income
taxesincreased $2.5 million and $7.5 million for the three and nine months ended
September 30, 2003 compared to the same periods in 2002. Included in the three months
ended September 30, 2003 and 2002 were true-ups related to filing the prior years
income tax returns that reduced income tax expense by $3.0 million and $3.5 million
respectively. The nine months ended September 30, 2003 includes a $6.2 million reduction
in tax expense related to a favorable resolution of a federal income tax matter from 1997
to 2002 in the second quarter of 2003.

Other Income 
        Other
income increased $2.4 million and $1.6 million for the three and nine months ended
September 30, 2003 compared to the same periods in 2002 due primarily to lower costs for
long-term equity incentive plans and gains received on corporate owned life insurance.

Interest Charges 

        Interest
charges decreased $2.7 million for the three months ended and $8.2 million for the nine
months ended September 30, 2003 compared to the same periods in 2002. Interest on
long-term debt decreased $3.0 million for the three months ended and $9.2 million for the
nine months ended September 30, 2003, compared to the same periods in 2002. The decrease
in interest expense is primarily due to the maturity of $25 million of 7.625% Medium Term
Notes in the fourth quarter of 2002, maturity of $58 million of Medium Term Notes with
interest rates ranging from 6.23% to 7.02% during 2003, the early redemption of $19.7
million of 8.231% Capital Trust I Preferred Securities, the early redemption of $83
million of Medium Term Notes with interest rates ranging from 7.190% to 8.59% during 2003,
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%. The decrease in
interest expense was partially offset by the issuance of $150 million of 3.363% Senior
Notes in May 2003.

InfrastruX 

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

Comparative Three and
Nine Months Ended 
September 30, 2003 vs. September 30, 2002 
Increase (Decrease) 
(Dollars in Millions)

|                                 | Three Month
Period | Nine Month
Period
|-------------------------------- | ------------------ | -----------------
|Operating revenue change:        |                    |                  
|Other operating revenue          |                    |                  
|                                
|Operating expense changes:       |                    |                  
|Other operations and maintenance |                    |                  
|Depreciation and amortization    |                    |                  
|Taxes other than income taxes    |                    |                  
|Income taxes                     |                    |                  
|                                
|Total operating expense change   |                    |                  
|Other Income (net of tax) change |                    |                  
|Interest charges change          |                    |                  
|Minority interest change         |                    |                  
|                                
|Net income change                |                    |                  
|                                

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

InfrastruX
revenueincreased $0.8 million and $26.9 million for the three and nine month periods
ended September 30, 2003 compared to the same periods in 2002 due primarily to
acquisitions of several companies during 2002 and one in 2003, which contributed an
increase of $10.5 million and $35.3 million, respectively. Revenues from existing
companies decreased overall for the three and nine month periods ended September 30, 2003
by $9.8 million and $8.4 million, respectively, due primarily to a reduction in summer
electric transmission work in the Southwest/South Central region. 

        InfrastruX
operation and maintenanceexpenses increased $5.3 million and $36.7 million for the three
and nine month periods ended September 30, 2003 compared to the same periods in 2002 due
to the additional costs related to acquired companies, weather-related problems in the
first half of 2003 that impacted efficiency and productivity and increases in insurance
costs. 

        Depreciation
and amortizationexpense increased by $0.4 million and $2.8 million for the three and nine
month periods ended September 30, 2003 compared to the same periods in 2002 due to
acquisitions during 2002 and additional assets placed in service to support growth as well
as to replace aging equipment. 

        Income
taxesdecreased $2.1 million during the three month period ended September 30, 2003
compared to the same period in 2002 due primarily to lower operating income contributed
from acquired companies. Income taxes decreased $5.5 million for the nine month period
ended September 30, 2003 compared to the same period in 2002 due to a decrease in revenue.

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 September 30, 2003:

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

|Amount of CommitmentExpiration Per Period   
|--------------------------------------------
|Commercial Commitments
(Dollars in millions)
|Guarantees (4)                              
|Liquidity facilities  available (5)        
|Lines of credit  available (6)             
|Energy operations letter of credit (7)      
|                                            
|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) | On July 7, 2003, the Board of Directors of PSE declared a dividend payable on
October 1, 2003 for preferred stock outstanding on September 1, 2003. The
preferred stock was redeemed at par for $60 million on November 1, 2003, and PSE
paid dividends for the period between October 1, 2003 and November 1, 2003.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (4) | In
June 2001, InfrastruX signed a three-year credit agreement with several banks to provide
up to $150 million in financing. Under the credit agreement, Puget Energy is the
guarantor of the line of credit.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | At September 30, 2003, PSE had available a $250 million unsecured credit
agreement and a three year $150 million receivables securization facility. At
September 30, 2003, PSE had available $88.8 million of receivables for sale
under its receivables securitization facility. See Accounts Receivable
Securitization Program under Off-Balance Sheet Arrangements
below. The credit agreement and securitization facility provide credit support
for outstanding commercial paper totaling $9.3 million and an outstanding letter
of credit totaling $0.5 million, thereby effectively reducing the available
borrowing capacity under these liquidity facilities to $329.0 million.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Puget Energy has a $15 million line of credit with a bank. At September 30,
2003, $5 million was outstanding, reducing the available borrowing capacity
under this line of credit to $10 million. InfrastruX has $31.7 million in lines
of credit with various banks, and a $150 million line of credit guaranteed by
Puget Energy, which fund capital requirements of InfrastruX and its
subsidiaries. InfrastruX and its subsidiaries had outstanding loans of $153.2
million and letters of credit of $4.1 million at September 30, 2003, effectively
reducing the available borrowing capacity under these lines of credit to $24.4
million.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | In May 2002, PSE provided an energy trading counterparty a letter of credit in
the amount of $0.5 million to satisfy the counterpartys credit
requirements following PSEs senior unsecured debt downgrade in October
2001. The letter of credit has been renewed and expires on March 15, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Puget
Sound Energy.The following are PSEs aggregate contractual obligations and
commercial commitments as of September 30, 2003:

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

|Amount of CommitmentExpiration Per Period   
|--------------------------------------------
|Commercial Commitments
(Dollars in millions)
|Liquidity facilities  available (4)        
|Energy operations letter of credit (5)      
|                                            
|Total commercial commitments                

---

(1) See note (1) above. 
     (2) See note (2) above. 
     (3) See note (3) above.
     (4) See note (5) above. 
     (5) See note (7) above.

Off-Balance Sheet
ArrangementsAccounts Receivable Securitization
Program.In order to provide a source of liquidity for PSE at attractive cost of capital
rates, in December 2002, PSE entered into a Receivables Sales Agreement with Rainier
Receivables, Inc., a wholly owned subsidiary of PSE, pursuant to which PSE sold all of its
utility customers accounts receivable and unbilled utility revenues to Rainier
Receivables. Concurrently with entering into the Receivables Sales Agreement, Rainier
Receivables entered into a Receivables Purchase Agreement with PSE and several financial
institutions. The Receivables Purchase Agreement allows Rainier Receivables to sell the
receivables purchased from PSE to the financial institutions. The amount of receivables
sold by Rainier Receivables is not permitted to exceed $150 million at any time.
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 the purchasers of
the receivables fees that are analogous to interest on a revolving line of credit. As
receivables are collected by PSE as agent for the receivables purchasers, the outstanding
amount of receivables purchased by the purchasers declines until Rainier Receivables
elects to sell additional receivables to the purchasers. 

        The
receivables securitization facility has a three year term, but is terminable by PSE and
Rainier Receivables upon notice to the receivables purchasers. At September 30, 2003,
Rainier Receivables had sold $7.0 million of accounts receivable and the maximum
receivables available for sale was $88.8 million.

Fredonia 3 and 4 Operating Lease.PSE
leases two combustion turbines for its Fredonia 3 and 4 electric generation facility
pursuant to a master lease that was amended for this purpose in April 2001. The lease has
a term expiring in 2011, but can be canceled by PSE after three years from the inception
date of August 1, 2001. Payments under the lease vary with changes in the London
inter-bank offered rate (LIBOR). At September 30, 2003, PSEs outstanding balance
under the lease was $59.5 million. The expected residual value under the lease is the
lesser of $37.4 million or 60% of the cost of the equipment. In the event the equipment is
sold to a third party upon termination of the lease and the aggregate sales proceeds are
less than the unamortized value of the equipment, PSE would be required to pay the lessor
contingent rent in an amount equal to the deficiency up to a maximum of 87% of the
unamortized value of the equipment.

Utility Construction Program.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 $203.9 million for the nine months ended September
30, 2003. PSE expects construction expenditures will be approximately $272 million in 2003
and will be larger in 2004. PSE anticipates spending approximately $80 million in 2004 for
new generating resources and a substantially larger amount in 2005, subject to regulatory
approval of the resources and related new revenue requirements. The 2004 resources will be
funded initially with short-term debt. Construction expenditure estimates are subject to
periodic review and adjustment in light of changing economic, regulatory, environmental
and conservation factors.

New Generation Resources.In October
2003, PSE completed negotiations to purchase a 49.85% interest in a 275 MW gas fired
electric generating station located within PSEs service territory. The purchase will
add approximately 137 MW of electric generation capacity to serve PSEs retail
customers. PSE submitted a power cost only rate case in October 2003 to the Washington
Commission to recover the approximately $80 million cost of the new generating facility
and other power costs. The power cost only rate case is expected to last approximately
five months. Accordingly, the acquisition of the plant, subject to favorable approval by
the Washington Commission, could be completed by the end of the first quarter of 2004. 

        In
addition, PSE has issued a draft request for proposals (RFP) to acquire approximately 50
average MWs of energy from wind power for its electric-resource portfolio. PSE plans to
issue an RFP for approximately 300 MWs of thermal generation in early 2004.

Other Additions.Other property,
plant and equipment additions were $10.4 million for the nine months ended September 30,
2003. Puget Energy expects InfrastruXs capital additions to be $13.0 million in
2003. Construction expenditure estimates are subject to periodic review and adjustment in
light of changing economic, regulatory, environmental, and conservation factors.

Capital ResourcesCash From Operations.Cash generated
from operations for the nine month period ended September 30, 2003 was $206.1 million.
During the period, $66.8 million in cash was used for AFUDC and payment of dividends.
Consequently, cash flows available for utility construction expenditures and other capital
expenditures was $139.3 million or 61.7% of the $225.6 million in construction
expenditures (net of AFUDC) and other capital expenditure requirements for the period. PSE
funded these 2003 expenditures primarily by drawing upon its cash reserves which were
$161.5 million at the end of 2002. For the same period in 2002, cash generated from
operations was $566.7 million, $78.1 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 nine month period ended September 30, 2002 was $488.6
million. The reduction in cash generated from operations in 2003 is primarily due to
refunds reducing the PGA balance. In the nine months ended September 30, 2002, PSE
received $135.8 million in excess of actual gas costs from customers through the PGA
mechanism compared to refunds to customers through the PGA mechanism of $77.0 million for
the nine months ended September 30, 2003. Cash from accounts receivables and unbilled
revenues decreased by $45.9 million due primarily to colder than normal temperatures in
the nine months ended September 30, 2002 compared to warmer than normal temperatures in
2003. Cash from materials and supplies decreased $42.2 million due predominantly to higher
gas injections in 2003 as compared to 2002 in order to build up storage levels. Cash from
other operating activities also decreased due to an $11.2 million decrease in accrued
purchases from 2002 to 2003 and a $27.7 million increase in the amount of cash used to
offset customers bills compared to cash received from BPA for the Residential Exchange
Program. 

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

Financing Program.Financing utility
construction requirements and operational needs is dependent upon the cost and
availability of external funds through capital markets and from financial institutions.
Access to funds is dependent upon factors such as general economic conditions, regulatory
authorizations and policies, and Puget Energys and PSEs credit ratings. The
Company expects to meet capital and operational needs for the balance of 2003 and 2004
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 September 30, 2003, PSE could issue:

| |  | approximately
$983.8 million of first mortgage bonds, as PSE has approximately $1.3 billion of electric
and gas bondable property available for use, subject to the interest coverage ratio
limitation of 2.0 times net earnings available for interest. PSEs interest coverage
ratio at September 30, 2003 was 2.7 times net earnings available for interest which would
allow issuance of approximately $783.2 million of additional first mortgage bonds, at an
assumed interest rate of approximately 6% on a ten-year first mortgage bond;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
$415.6 million of additional preferred stock at an assumed dividend rate of 7.75%; and
| | - | ----------------------------------------------------------------------------------------------------

| |  | approximately $262.2 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 spreads over the index and commitment fee increase as PSEs secured
long-term debt ratings decline. A downgrade in commercial paper ratings could preclude
PSEs ability to issue commercial paper under its current programs. The marketability
of PSE commercial paper is currently limited by the A-3/P-2 ratings by Standard &
Poors and Moodys Investors Service. A further downgrade in commercial paper
ratings could preclude entirely PSEs ability to issue commercial paper. In addition,
downgrades in any or a combination of PSEs debt ratings may allow counterparties on
a contract by contract basis in the wholesale electric, wholesale gas and financial
derivative markets to require PSE to post a letter of credit or other collateral, make
cash prepayments, obtain a guarantee agreement or provide other mutually agreeable
security. 
        The
ratings of Puget Energy and PSE as of November 10, 2003 were:

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

| | * | No
ratings provided. S&P and Moodys have placed an indicative rating of BB+ and
Baa3, respectively, on senior unsecured debt were the Company to issue any pursuant to
its shelf registration filed in February 2002. To date, the Company has not issued any
senior unsecured debt.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | No
ratings provided.
| | -- | --------------------

Moodys
Investors Service has stated that its negative outlook is based upon uncertainty about the
outcome of investigations by FERC of the Western power markets. Moodys Investors
Service has stated that it would consider a stable outlook if FERC approves the recent
agreement reached between PSE and the FERC trial staff. See Proceedings Relating to
the Western Power Market  Orders to Show Cause.

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

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

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

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

| |  | trust
preferred securities of Puget Sound Energy Capital Trust III.
| | - | -------------------------------------------------------------------

On
November 5, 2003, Puget Energy completed the sale of 4.55 million shares of common stock
directly to funds managed by Franklin Advisers, Inc. for $100.1 million. The sale of these
shares are expected to be non-dilutive for 2003 and 2004 earnings per share as the common
stock replaces high cost preferred stock. Of the net proceeds of the sale, $93.75 million
will be invested in PSE to fund redemptions of the preferred stock and $6.25 million
balance will be used by PSE for general corporate purposes. Approximately $128.5 million
of securities remain available for issuance under the shelf registration at November 5,
2003.

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

        PSE
has a $250 million unsecured credit agreement with various banks which expires in June
2004 and a $150 million 3-year receivables securitization program which expires in
December 2005. The receivables available for sale under the securitization
program may be less than $150 million depending on the outstanding amount
of PSEs receivables which fluctuate with the seasonality of energy sales to customers.
At September 30, 2003, PSE had available $250 million in the unsecured
credit agreement and $88.8 million available from the receivable securitization facility (net
of $7.0 million sold),
which provide credit support for outstanding commercial paper of $9.3 million and
outstanding letters of credit of $0.5 million, effectively reducing the available
borrowing capacity under the liquidity facilities to $329.0 million. 

        In
June 2001, InfrastruX signed a three-year credit agreement with several banks to provide
up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In
addition, InfrastruXs subsidiaries have an additional $31.7 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
September 30, 2003, InfrastruX and its subsidiaries had outstanding loans of $153.2
million and letters of credit of $4.1 million, effectively reducing the available
borrowing capacity under these lines of credit to $24.4 million. 

        On May 27, 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 the London inter-bank offered rate (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. On May 30, 2003, Puget Energy borrowed $5 million under the credit
agreement. The proceeds of the loan were invested in InfrastruX, which used the proceeds
to acquire a construction services company in New Mexico.

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 $4.0 million (184,870 shares) and $11.6 million (554,441 shares) for
the three and nine months ended September 30, 2003 compared to $3.2 million (149,545
shares) and $13.0 million (619,655 shares) for the same periods in 2002. The decrease in
the shares issued under the Stock Purchase and Dividend Reinvestment Plan from the nine
month period ended September 30, 2003 compared to the nine month period ended September
30, 2002 was largely attributable to the reduction of the common stock dividend on May 15,
2002 to a quarterly dividend of $0.25 per share.

Common Stock Offering Programs.To
provide additional financing options, Puget Energy entered into agreements on July 10,
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. On
October 14, 2003, Puget Energy sold 100,600 shares of common stock under its program with
Cantor Fitzgerald & Company. Puget Energy received approximately $2.3 million in net
proceeds from these sales, after deducting an underwriters commission of $45,000 and
estimated offering expenses payable by Puget Energy.

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

        Puget
Energys and PSEs Annual Report on Form 10-K for the year ended December 31,
2002 and Quarterly Report on Form 10-Q for the quarters ended March 31, 2003 and June 30,
2003 include summaries 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, PSE generally is
pleased that FERC appears to be narrowing the issues under review in the cases pending
before it. The narrowing of issues allows PSE to compare the allegations in the various
proceedings with PSEs relevant records and to better anticipate the likely outcome
of each case. 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. | California
Independent System Operator (CAISO) Receivable.In 2001, PG&E and
Southern California Edison defaulted on payment obligations owed to
various energy suppliers, including the CAISO. The CAISO in turn defaulted
on its payment obligations to 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. After
deducting a bad debt reserve and a transaction fee reserve totaling $41.5
million, PSE has a net receivable from the CAISO at September 30, 2003 of
$24.1 million. On October 16, 2003, FERC issued its Order on Rehearing in
this docket and expressly adopted and approved a stipulation that
confirmed two PSE non-spot market transactions were not
subject to refund. The total gross revenue associated with the
transactions is approximately $26.0 million. On October 17, 2003, PSE sent
a demand letter to the CAISO seeking payment of the amount due.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | 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
EL00-95 that substantially adopted the recommendations made by the Administrative Law
Judge on December 12, 2002, except that the Order also substantially adopts the FERC Staff
gas price recommendation from the Staffs August 2002 report. On October 16, 2003,
FERC issued its Order on Rehearing that largely leaves the refund calculations established
by the March 26 Order unchanged, although the Order postpones resolution of the fuel cost
allowance issues until later. Thus PSEs filing to seek recovery of its actual fuel
costs above the amount set using the Staff methodology remains pending. On
May 21, 2003, the California Parties filed a motion to reject all
fuel cost adjustment filings, including the filing made by PSE. The Order on Rehearing
gives the CAISO a deadline to perform its cost re-runs (which are expected to establish
actual amounts owing and owed) of five months from October 16, 2003. PSE anticipates that
the net results of the re-run and the application of the refund calculation will
extinguish the CAISO receivable apart from the amount associated with the
two non-spot market transactions described in 1 above.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Pacific
Northwest Refund Proceeding.On June 25, 2003, FERC issued an order
terminating the Pacific Northwest refund proceeding, Docket 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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | 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 proceeding seeks to
investigate approximately 26 entities that allegedly had potential partnerships with
Enron. PSE is not named in that show cause order. The second show cause
proceeding seeks to investigate approximately 55 entities that allegedly
had engaged in potential gaming practices in the CAISO and
California PX markets. PSE is one of the entities named in the gaming show
cause order. Consistent with the show cause orders invitation to
attempt settlement, 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 approximately $17,000 to settle all claims. The
California Parties and a few others filed oppositions to PSEs
settlement (and all others) on September 30, 2003. PSE replied to those
arguments on October 20, 2003. PSE continues to believe that the orders to
show cause do not raise new issues or concerns or will have a material
adverse impact on the financial condition, results of operation or
liquidity of the Company. The presiding Administrative Law Judge is
expected to determine whether to recommend the settlements to FERC before
the end of the year.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | 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). That docket is
to review each sellers 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. There is no established timetable for this proceeding,
but FERC expects to work diligently to review the practices of each seller
and to resolve the matter expeditiously. PSE does not expect any material
adverse impacts on the financial condition of the Company from this FERC
investigation.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | 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 has moved to dismiss this case; other
defendants have moved to transfer the matter to a multi-district
litigation panel in California. A conditional transfer order was issued in
July 2003. PSEs motion to dismiss remains on the docket but further
proceedings are on hold pending determination of the multi-district
litigation panel on or after November 20, 2003.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | California
Litigation.San Diego Cases.No material developments have occurred in the
two San Diego class actions since previous reports.  The
plaintiffs allege that all wholesale sellers in the California energy
market engaged in anti-competitive behavior in violation of California
Business Practices Act.  The motions to dismiss, and the appeals of the remand
orders, remain pending. Attorney General Case. No material developments
have occurred in the California Attorney General suit against PSE since
previous reports. The suit filed against a number of sellers, including PSE, alleges that
PSE failed to file rates for sales to the CAISO in advance of transactions
and thereby violated the California Business Practices Act.
The appeal of the order of dismissal remains pending.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other 

        On
April 30, 2003, PSE filed its Least Cost Plan with the Washington Commission. This
document provides a high level, diversified resource strategy to meet the Companys
growing energy needs. The Least Cost Plan was developed in consultation with numerous
external key stakeholders, including staff of the Washington Commission. A Least Cost Plan
Update was filed on August 29, 2003, which incorporated new information on conservation
resource potentials. On October 3, 2003, the Washington Commission sent the Company a
letter formally accepting the Companys Least Cost Plan as meeting the Washington
Commissions requirements. The Companys next Least Cost Plan filing is due by
May 1, 2005. 

        On
September 14, 2003, NorthWestern Corporation (NorthWestern) filed a voluntary petition for
relief under Chapter 11 of the U. S. Bankruptcy Code. PSE has several long-term contracts
with NorthWestern under which PSE jointly owns facilities or purchases power or
transmission services from NorthWestern. NorthWestern has indicated that it plans to
continue to perform under those contracts. 

        PSE
and Western Energy Company, the supplier of coal to PSEs Colstrip power plants, are
engaged in a dispute and binding arbitration process concerning the price of coal that PSE
will pay under the contract for Colstrip Units 1 & 2 through the end of the contract
in 2009. This arbitration is contemplated as a price adjustment mechanism in that
contract. The parties are over $1 per ton apart on their view as to the proper price for
coal under that contract, and the arbitration would resolve that question in the second
quarter of 2004. Any price adjustment could be retroactive to July 30, 2001 and would
apply through the rest of the term. A $1 per ton increase or decrease in the price of coal
would have a corresponding effect on PSEs costs of approximately $1.4 million
annually and if the price were retroactive to July 30, 2001, the corresponding effect on power costs would be $3.2 million.
Fuel supply costs for electric generation after July 1, 2002 are a part of
PSEs power cost adjustment mechanism.

        In
October 2003, PSE received notice from Western Energy Company that the Montana Department
of Revenue is alleging underpayment of royalties on coal purchased by PSE from Western
Energy Company from 1997 to 2000. PSE used the coal as fuel for its Colstrip Units 3 &
4 generating plants. The dispute is likely to lead to a more formal process or litigation
to review those purchases and to determine whether PSE may owe more royalties, taxes or
penalties. The Montana Department of Revenue seeks a payment of approximately $1.1 million
plus applicable Montana State taxes on such payments. PSE will defend this claim
vigorously. PSE cannot predict the outcome of this issue at this early date. 

        In
2003 the Colville Confederated Tribes presented a claim to Douglas County PUD based upon
allegedly due past annual charges for the Wells Hydroelectric Project for the use of
Colville tribal lands. The Tribes claimed that annual charges would also be due for
periods into the future. Since April of 2003, Douglas PUD and Colville representatives
have discussed settlement of this issue. The settlement discussions may lead to a
resolution of the claim. PSE purchases 31.3% of the power generated by the Wells Project.
A settlement of this claim could affect the amount of energy PSE receives under the terms
of PSEs purchased electricity contract or the price of the output of the Wells Hydroelectric
Project purchased by PSE.

White River Hydroelectric Generation
Project, FERC No. 2494 (the Project).The Project was built in 1911 by PSE and has been in
continuous operation ever since. The Project generates electricity to serve PSEs
retail electric customers with an annual average output of approximately 35 megawatts. In
1983, the Company applied for an original FERC License for this Project. In December of
1997, FERC issued a proposed license that was appealed by the Company and various natural
resource agencies. The Company appealed the license because it contained terms and
conditions that would render ongoing operations of the Project uneconomic relative to
alternative resources. In 1998, 2001 and in 2003 FERC granted a stay of the license order
(and related appeals) to afford interested parties the opportunity for settlement
negotiations. This stay expires in January of 2004. If settlement has not been reached by
the end of the stay, in order to keep the Project in operation the Company would likely be
required to implement the license order pending FERCs disposition of the
Companys appeal. Implementation of the license order would require the Company to
make capital expenditures and incur annual operating costs that would make the project
uneconomic. The Company has concluded that it is unlikely that a settlement addressing the
deficiencies of the 1997 FERC license will be reached before the stay expires, and
anticipates advising FERC in January that it intends to withdraw its license application
and retire the Project. To this end, the Company is negotiating with a consortium of
municipalities interested in acquiring the Project as a source for a municipal water
supply. The Company is also discussing an interim non-power operations
agreement with the U.S. Army Corps of Engineers. This interim agreement would address the
Corps interest in keeping the Projects diversion dam in operation and thereby
facilitate the Corps ongoing responsibilities to provide fish passage for the
Corps upstream flood control project (Mud Mountain Dam). Keeping the Project in
operation is also a matter of importance to the surrounding community that wants to
preserve the reservoir for financial, recreational and aesthetic purposes. The outcome of
these various negotiations and discussions is uncertain at this time, as is the magnitude
of any financial impact on the Company associated therewith. However, in any event, it is
unlikely that the Project will be in service as a generation resource of the Company after
January of 2004. As a result, PSE will petition the Washington Commission for an
accounting order in the fourth quarter of 2003. This petition will request authorization
for the appropriate accounting and rate making disposition of this Project to be retired.
At September 30, 2003, the White River Projects net book value totals $69.0 million,
which includes $47.6 million of net utility plant, $15.0 million of capitalized FERC
licensing costs and $6.4 million of costs related to construction work in progress.

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 does expose 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
| | - | -----------------------------------------------------------------------------

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

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

        The
Companys energy risk management staff develops hedging strategies for the
Companys energy supply portfolio. The first priority is to 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 tariff 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 use of forward price instruments. 

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

        Transactions
that qualify as hedge transactions under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, are recorded on the balance sheet at fair value.
Changes in fair value of the Companys derivatives are recorded each period in
current earnings or other comprehensive income. Short-term derivative contracts for the
purchase and sale of electricity are valued based upon daily quoted prices from an
independent energy brokerage service. 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
September 30, 2003, the Company had an after-tax net asset of approximately $13.0 million
of energy contracts designated as qualifying cash flow hedges and a corresponding
unrealized gain amount in other comprehensive income. The Company also had energy
contracts that were marked-to-market through current earnings for the third quarter of
2003 of $0.6 million after-tax. A hypothetical 10% increase in the market prices of
natural gas and electricity would increase the fair value of qualifying cash flow hedges
by approximately $9.9 million after-tax and would increase current earnings for those
contracts marked-to-market in earnings by $0.6 million after-tax.

Interest Rate Risk.The Company
believes its interest rate risk primarily relates to the use of short-term debt
instruments, variable rate leases and long-term debt financing needed to fund capital
requirements. The Company manages its interest rate risk through the issuance of mostly
fixed-rate debt of various maturities. The Company does utilize bank borrowings,
commercial paper and line of credit facilities to meet short-term cash requirements. These
short-term obligations are commonly refinanced with fixed-rate bonds or notes when needed
and when interest rates are considered favorable. The Company may enter into swap
instruments to manage the interest rate risk associated with these debts but did not have
any swap instruments outstanding as of September 30, 2003.

Item 4. Controls and
Procedures

Evaluation of disclosure controls and
procedures.Under the supervision and with the participation of Puget Energys and
PSEs management, including the Companies Chief Executive Officer and Chief
Financial Officer, Puget Energy and PSE have evaluated the effectiveness of the
Companies disclosure controls and procedures (as defined in Rule 13a-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 Chief Executive Officer 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 September 30,
2003. The ultimate resolution of these issues in part or in the aggregate is not expected
to have a material adverse impact on the financial condition, results of operations or
liquidity of the Company.

|Item | 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                       
|---- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|     | (a) |  | See Exhibit Index for list of exhibits.                                                                                                                
|     |     |  |                                                                                                                                                        
|     | (b) |  | Reports on Form 8-K                                                                                                                                    
|     |     |  |                                                                                                                                                        
|     |     |  | Filed by Puget Energy & Puget Sound Energy:                                                                                                            
|     |     |  |                                                                                                                                                        
|     |     |  | Form 8-K dated July 23, 2003,  Item 9 - Regulation FD Disclosure,  related to the release of the
              second quarter earnings.                
|     |     |  |                                                                                                                                                        
|     |     |  | Form 8-K dated September 2, 2003, Item 5 - Other Events, related to settlement agreement
              regarding FERC's June 25, 2003 show cause order.

SIGNATURES

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

|                        | PUGET ENERGY, INC.
PUGET SOUND ENERGY, INC.                                                                                                                        
|----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        | /S/ JAMES W. ELDREDGE                                                                                                                                              
|                        | James W. Eldredge
Corporate Secretary and Chief Accounting Officer                                                                                                 
|                        |                                                                                                                                                                    
|Date: November 12, 2003 | Chief accounting officer and officer duly authorized
                                                              to sign this report on behalf of each registrant

EXHIBIT INDEX

The following exhibits are filed
herewith:

| | 12.1 | Statement
setting forth computation of ratios of earnings to fixed charges (1998 through 2002 and
12 months ended September 30, 2003) for Puget Energy.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.2 | Statement
setting forth computation of ratios of earnings to fixed charges (1998 through 2002 and
12 months ended September 30, 2003) 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.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------