EX-10

EXHIBIT 10.108

1995 LONG-TERMINCENTIVE COMPENSATION PLAN

(As Amended Through February 24, 1999)

SECTION 1. PURPOSE

     The purpose of the Puget Energy, Inc. 1995 Long-Term Incentive Compensation Plan (the “Plan”) is to enhance the long-term profitability and shareholder value of Puget Energy, Inc., a Washington corporation (the “Company”), by offering incentives and rewards to those employees of the Company and its Subsidiaries (as defined in Section 5 of the Plan) who are key to the Company’s growth and success, and to encourage them to remain in the service of the Company and its Subsidiaries and to acquire and maintain stock ownership in the Company.

SECTION 2. ADMINISTRATION

   2.1 Plan Administrator

     The Plan shall be administered by a committee or committees (the “Plan Administrator”) (which term includes subcommittees) appointed by, and consisting of one or more members of, the Company’s Board of Directors (the “Board”). The Board may delegate the responsibility for administering the Plan with respect to designated classes of eligible Participants (as defined in Section 3 of the Plan) to different committees, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board may determine, subject to removal by the Board at any time. The composition of any committee responsible for administering the Plan with respect to officers and directors of the Company who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to securities of the Company shall comply with the requirements of Rule 16b-3 under Section 16(b) of the Exchange Act.

   2.2 Administration and Interpretation by the Plan Administrator

     Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have exclusive authority, in its discretion, to determine all matters relating to Awards (as defined in Section 3 of the Plan) under the Plan, including the selection of individuals to be granted Awards, the type of Awards, the number of shares of the Company’s common stock, par value $.01 per share (the “Common Stock”), subject to an Award, all terms, conditions, restrictions and limitations, if any, of an Award and the terms of any instrument that evidences the Award, and to authorize the Trustee (the “Trustee”) of the 1995 Long-Term Incentive Compensation Plan Trust, a trust established under the laws of the State of Washington (the “Trust”), to grant Awards. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt and change, rules and regulations of general application for the Plan’s administration. The Plan Administrator’s interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrative duties to such of the Company’s officers as it so determines.

SECTION 3. AWARDS

   3.1 Form and Grant of Awards

     The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of awards (an “Award”) to be made under the Plan, which may include, but are not limited to, Stock Awards, Performance Awards, Other Stock-Based Awards (including any Dividend Equivalent Rights granted in connection with such Awards) as those terms are defined in Sections 6, 7, 8 and 9, respectively, of the Plan. Awards may be granted singly, in combination or in tandem so that the settlement or payment of one automatically reduces or cancels the other. Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or compensation plan of the Company. For purposes of the Plan, a “Participant” means an individual who is a Holder of an Award or, as the context may require, any employee of the Company or a Subsidiary who has been designated by the Plan Administrator as eligible to participate in the Plan, and a “Holder” means the Participant to whom an Award is granted, or the personal representative of a Holder who has died.

   3.2 Acquired Company Awards

     Notwithstanding anything in the Plan to the contrary, the Plan Administrator may grant Awards under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other entities (“Acquired Entities”) (or the parent of the Acquired Entity) and the new Award is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (the “Acquisition Transaction”). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding such Awards shall be deemed to be Participants and Holders.

   3.3 1995 Long-Term Incentive Compensation Plan Trust

     Awards may be, but need not be, paid to the Trustee, such payments to be used by the Trustee to purchase shares of the Common Stock. Shares purchased by the Trustee pursuant to the terms of the Trust (“Trustee Shares”) shall be held for the benefit of Participants, and shall be distributed to Participants or their beneficiaries by the Trustee at the direction of the Plan Administrator in accordance with the terms and conditions of the Awards. Awards may also be made in units that are redeemable (in whole or part) in Trustee Shares.

SECTION 4. STOCK SUBJECT TO THE PLAN

   4.1 Authorized Number of Shares

     Subject to adjustment from time to time as provided in Section 11.1 of the Plan, the maximum number of shares of Common Stock that may be purchased by the Trustee as Trustee Shares for purposes of the Plan shall be 500,000. Common Stock shall be purchased by the Trustee on the open market. The Company shall not issue any Common Stock under the Plan to the Trust or to any Participant, nor shall the Company purchase any Trustee Shares from the Trust.

   4.2 Limitations

     Subject to adjustment from time to time as provided in Section 11.1 of the Plan, no Awards denominated in stock that constitute more than 40,000 shares of Common Stock shall be payable to any individual Participant in any one fiscal year of the Company, and no Awards denominated in cash that have an aggregate maximum dollar value in excess of $400,000 shall be payable to any individual Participant in any one fiscal year of the Company, such limitations to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

   4.3 Reuse of Shares

     Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares), including, without limitation, in connection with the cancellation of an Award and the grant of a replacement Award, shall again be available for issuance in connection with future grants of Awards under the Plan. Shares that are subject to tandem Awards shall be counted only once.

SECTION 5. ELIGIBILITY

     Awards may be granted under the Plan to those officers and key employees (including directors who are also employees) of the Company and its Subsidiaries as the Plan Administrator from time to time selects. For purposes of the Plan, “Subsidiary,” except as expressly provided otherwise, means any entity that is directly or indirectly controlled by the Company or in which the Company has a significant ownership interest, as determined by the Plan Administrator, and any entity that may become a direct or indirect parent of the Company.

SECTION 6. STOCK AWARDS

   6.1 Grant of Stock Awards

     The Plan Administrator is authorized to grant Awards of Common Stock (“Stock Awards”) to Participants on such terms and conditions, and subject to such restrictions, if any (whether based on performance standards, periods of service or otherwise), as the Plan Administrator shall determine, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award (shares subject to such restrictions are referred to herein as “Restricted Stock”). The terms, conditions and restrictions that the Plan Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to Stock Awards are held during the periods they are subject to restrictions and the circumstances under which forfeiture of Restricted Stock shall occur by reason of termination of the Holder’s employment.

   6.2 Issuance of Shares

     Upon the satisfaction of any terms, conditions and restrictions prescribed in respect to a Stock Award, or upon the Holder’s release from any terms, conditions and restrictions of a Stock Award, as determined by the Plan Administrator, the Company shall deliver, as soon as practicable, to the Holder or, in the case of the Holder’s death, to the personal representative of the Holder’s estate or as the appropriate court directs, a stock certificate for the appropriate number of shares of Common Stock.

   6.3 Waiver of Restrictions

     Notwithstanding any other provisions of the Plan, the Plan Administrator may, in its sole discretion, waive the forfeiture period and any other terms, conditions and restrictions on any Restricted Stock under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate.

SECTION 7. PERFORMANCE AWARDS

   7.1 Plan Administrator Authority

     Awards made under this Section 7 (“Performance Awards”) may be denominated in cash, shares of Common Stock or any combination thereof. The Plan Administrator is authorized to grant Performance Awards and shall determine the nature, length and starting date of the performance period for each Performance Award and the performance objectives to be used in valuing Performance Awards and determining the extent to which such Performance Awards have been earned. Performance objectives and other terms may vary from Participant to Participant and between groups of Participants. Performance objectives shall be based on profits, profit growth, profit-related return ratios, cash flow or total shareholder return, whether applicable to the Company or any relevant Subsidiary or business unit, comparisons with competitor companies or groups and with stock market indices, or any combination thereof, as the Plan Administrator deems appropriate. Additional performance measures may be used to the extent their use would comply with the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. Performance periods may overlap and Participants may participate simultaneously with respect to Performance Awards that are subject to different performance periods and different performance factors and criteria. The Plan Administrator shall determine for each Performance Award the range of dollar values or number of shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6 of the Plan), or a combination thereof, to be received by the Participant at the end of the performance period if and to the extent that the relevant measures of performance for such Performance Awards are met. The performance measures must include a minimum performance standard below which no payment will be made and a maximum performance level above which no increased payment will be made, such limitation to be applied in a manner consistent with the requirements of, and to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. The earned portion of a Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Plan Administrator. Payment shall be made in the form of cash, whole shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6 of the Plan), or any combination thereof, either in a single payment or in annual installments, all as the Plan Administrator shall determine.

   7.2 Adjustment of Awards

     The Plan Administrator may adjust the performance goals and measurements applicable to Performance Awards to take into account changes in law and accounting and tax rules and to make such adjustments as the Plan Administrator deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances, except that, to the extent required for compliance with the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code, no adjustment shall be made that would result in an increase in the compensation of any Participant whose compensation is subject to such limitation for the applicable year. The Plan Administrator also may adjust the performance goals and measurements applicable to Performance Awards and thereby reduce the amount to be received by any Participant pursuant to such Awards if and to the extent that the Plan Administrator deems it appropriate.

   7.3 Payout Upon Termination

     The Plan Administrator shall establish and set forth in each instrument that evidences a Performance Award whether the Award will be payable, and the terms and conditions of such payment, if a Holder ceases to be employed by the Company or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Performance Award, the Award will be payable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. If during a performance period a Participant’s employment with the Company terminates by reason of the Participant’s Retirement, Early Retirement at the Company’s request, Disability, position elimination or death, such Participant shall be entitled to a payment with respect to each outstanding Performance Award at the end of the applicable performance period (a) based, to the extent relevant under the terms of the Performance Award, on the Participant’s performance for the portion of such performance period ending on the date of termination and (b) prorated for the portion of the performance period during which the Participant was employed by the Company, all as determined by the Plan Administrator. For purposes of the Plan, “Retirement” and “Disability” mean “retirement” and “disability” as those terms are defined in the Company’s Investment Plan for Employees or other similar successor plan applicable to salaried employees, and “Early Retirement” means “early retirement” as that term is defined by the Plan Administrator from time to time for purposes of the Plan. The Plan Administrator may provide for an earlier payment in settlement of such Performance Award discounted at a reasonable interest rate and otherwise in such amount and under such terms and conditions as the Plan Administrator deems appropriate. Except as otherwise provided in Section 11 of the Plan or in the instrument evidencing the Performance Award, if during a performance period a Participant’s employment with the Company terminates other than by reason of the Participant’s Retirement, Early Retirement at the Company’s request, Disability, position elimination or death, then such Participant shall not be entitled to any payment with respect to the Performance Awards relating to such performance period, unless the Plan Administrator shall otherwise determine. In case of termination of the Holder’s employment for Cause, the Performance Award shall automatically terminate upon first notification to the Holder of such termination, unless the Plan Administrator determines otherwise. For purposes of the Plan, “Cause” means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Plan Administrator, whose determination shall be conclusive and binding. If a Holder’s employment with the Company is suspended pending an investigation of whether the Holder shall be terminated for Cause, all of the Holder’s rights under any Performance Award likewise shall be suspended during the period of investigation. A transfer of employment between or among the Company and its Subsidiaries shall not be considered a termination of employment. Unless the Plan Administrator determines otherwise, a leave of absence approved in accordance with Company procedures shall not be considered a termination of employment.

SECTION 8. OTHER STOCK-BASED AWARDS

     The Plan Administrator may grant other Awards under the Plan (“Other Stock-Based Awards”) pursuant to which shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 6 of the Plan) are or may in the future be acquired, or Awards denominated in stock units, including Awards valued using measures other than market value. Such Other Stock-Based Awards may be granted alone or in addition to or in tandem with any Award of any type granted under the Plan and must be consistent with the Plan’s purpose.

SECTION 9. DIVIDEND EQUIVALENT RIGHTS

     Any Awards under the Plan may, in the Plan Administrator’s discretion, earn Dividend Equivalent Rights (“Dividend Equivalent Rights”). In respect of any Award that is outstanding on the dividend record date for Common Stock, the Participant may be credited with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares been issued and outstanding on such dividend record date. The Plan Administrator shall establish such rules and procedures governing the crediting of Dividend Equivalent Rights, including the timing, form of payment and payment contingencies of such Dividend Equivalent Rights, as it deems are appropriate or necessary.

SECTION 10. ASSIGNABILITY

     No Performance Award, Other Stock-Based Award or Dividend Equivalent Right granted under the Plan may be assigned or transferred by the Holder other than by will or by the laws of descent and distribution and, during the Holder’s lifetime, such Awards may be exercised only by the Holder. Notwithstanding the foregoing, and to the extent permitted by Rule 16b-3 under the Exchange Act, the Plan Administrator, in its sole discretion, may permit such assignment, transfer and exercisability and may permit a Holder of such Awards to designate a beneficiary who may exercise the Award or receive compensation under the Award after the Holder’s death.

SECTION 11. ADJUSTMENTS

   11.1 Adjustment of Shares

     In the event that at any time or from time to time a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to shareholders other than a normal cash dividend, or other change in the Company’s corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock, then the Plan Administrator, in its sole discretion, shall make such equitable adjustments as it shall deem appropriate under the circumstances in (i) the maximum number of and class of securities subject to the Plan as set forth in Section 4.1 of the Plan, (ii) the maximum number and class of securities and dollar amount subject to Awards that may be paid to any individual Participant as set forth in Section 4.2 of the Plan, and (iii) the number and class of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding.

   11.2 Change of Control

     Except as otherwise provided in the instrument that evidences an Award, in the event of any Change of Control (as defined below), each outstanding Stock Award shall automatically accelerate so that each such Award shall, immediately prior to the specified effective date for the Change of Control, become 100% vested and all restrictions on shares of restricted stock awarded under the Plan shall lapse, except that such acceleration will not occur in the case of a specific Award if in the opinion of the Company’s accountants such Award was made in contemplation of the Change of Control and, acceleration of such Award would render unavailable “pooling of interest” accounting for a merger that would otherwise qualify for such accounting treatment.

     With respect to all Awards granted pursuant to the Plan that are accelerated, the Company shall issue to the Holder within 30 days after the Effective Date, (or if required by “pooling of interest” accounting, within 20 days after financial results covering at least 30 days of post-merger combined operations have been published):

     (a) cash equal to the higher of (1) the average of the last sale prices of the Company’s Common Stock on the New York Stock Exchange in each of the twenty business days preceding the Effective Date or (2) the highest price per share actually paid for any of the Company Common Stock in connection with the Change in Control, multiplied by the aggregate number of shares of the Company’s Common Stock (or, if the event that triggered the Effective Date is a Business Combination, the equivalent number of shares of the then outstanding common stock of the corporation resulting from or effecting such Business Combination into which such shares of Common Stock have been converted) equal to the greater of (x) the total number of the shares payable at the target Award level upon full vesting of each such Award and (y) such higher number of shares payable upon full vesting of each such Award if the Company achieved for each outstanding Award cycle the performance measures which the Company had achieved for the applicable cycle during the period commencing upon the starting year of such cycle and ending with the fiscal quarter immediately preceding the Effective Date; and

     (b) cash equal to the amount of the Dividend Equivalents associated with the number of shares determined under subparagraph (a) above, in accordance with the Plan.

     For the purpose of this Plan, a “Change of Control” means:

     (a) The acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of (i) 20% or more of the outstanding Company Common Stock; provided, however, that the following acquisitions of beneficial ownership shall not constitute a Change of Control: (x) any acquisition by the Company, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (z) any acquisition by any corporation pursuant to a Business Combination, if, following such Business Combination, the conditions described in clauses (i), (ii) and (iii) of subsection (c) below are satisfied; or

     (b) A “Board Change” which, for purposes of this Agreement, shall have occurred if a majority of the seats (other than vacant seats) on the Board of the Company or its successor are occupied by individuals who were neither (i) nominated by a majority of the Incumbent Directors of the Company nor (i) appointed by directors so nominated; or

     (c) Approval by applicable regulatory agencies of a Business Combination unless immediately following such Business Combination, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from or effecting such Business Combination and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all the individuals and entities who were the beneficial owners of the outstanding Company Common Stock immediately prior to such Business Combination is substantially the same proportion as their ownership, immediately prior to such Business Combination, of the outstanding Company Common Stock, (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or the corporation resulting from or effecting such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from or effecting such Business Combination or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from or effecting such Business Combination were Incumbent Directors of the Company at the time of the execution of the initial agreement or action of the Board providing for such Business Combination.

     “Business Combination” means (a) a merger or consolidation, exchange of securities or reorganization of the Company or (b) the sale or other disposition of substantially all the assets of the Company. “Incumbent Direct” means a member of the Board who has been either (a) nominated by a majority of the directors of the Company then in office or (b) appointed by directors so nominated, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. “Person” means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d) of the Exchange Act).

     Any specific Awards that do not accelerate (because the Company’s independent accountants have determined that such acceleration would render pooling of interest accounting unavailable or because the instrument evidencing the Award specifically provided that acceleration of such Award shall not occur upon a change of control) shall be assumed by the successor company or parent thereof or shall be replaced with a comparable award of equivalent value and with the same vesting schedule. Any such Awards that are assumed or replaced shall be accelerated in the event the Holder’s employment should subsequently terminate within two years following the Change of Control, unless employment is terminated by the Company for Cause or voluntarily by the Holder without Good Reason.

     Also for purposes of the Plan, “Good Reason” means the occurrence of any of the following events or conditions:

     (a) a change in the Holder’s status, title, position or responsibilities (including reporting responsibilities) that, in the Holder’s reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Holder of any duties or responsibilities that, in the Holder’s reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Holder from or failure to reappoint or reelect the Holder to any of such positions, except in connection with the termination of the Holder’s employment for Cause, for Disability or as a result of his or her death, or by the Holder other than for Good Reason;

(b) a reduction in the Holder's annual base salary;

     (c) the Company’s requiring the Holder (without the Holder’s consent) to be based at any place outside a 35-mile radius of his or her place of employment prior to a Change of Control, except for reasonably required travel on the Company’s business that is not materially greater than such travel requirements prior to the Change of Control;

     (d) the Company’s failure to (i) continue in effect any material compensation or benefit plan (or the substantial equivalent thereof) in which the Holder was participating at the time of a Change of Control, including, but not limited to, the Plan, or (ii) provide the Holder with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change of Control (or as in effect following the Change of Control, if greater);

(e) any material breach by the Company of any provision of the Plan; or

     (f) any purported termination of the Holder’s employment for Cause by the Company that does not comply with the terms of the Plan.

   11.3 Further Adjustment of Awards

     Without limiting the preceding Section 11.2 of the Plan, and subject to the limitations set forth in Section 7 of the Plan, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, payment or settlement or lifting restrictions, differing methods for calculating payments or settlements, alternate forms and amounts of payments and settlements and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Plan Administrator may take such actions before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action.

   11.4 Limitations

     The grant of Awards will in no way affect the Company’s right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

SECTION 12. WITHHOLDING OF TAXES

     The Company may require the Holder to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant, exercise, payment or settlement of any Award. In such instances, the Plan Administrator may, in its discretion and subject to the Plan and applicable law, permit the Holder to satisfy withholding obligations, in whole or in part, by paying cash, by electing to have the Company withhold shares of Common Stock or by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. For purposes of the Plan, “Fair Market Value” means the mean of the high and low per share trading prices for the Common Stock as reported in The Wall Street Journal for the New York Stock Exchange --Composite Transactions (or similar successor consolidated transactions reports) for a single trading day.

SECTION 13. AMENDMENT AND TERMINATION OF PLAN

   13.1 Amendment of Plan

     The Plan may be amended by the shareholders of the Company. The Board may also amend the Plan in such respects as it shall deem advisable; however, to the extent required for compliance with Rule 16b-3 under the Exchange Act or any applicable law or regulation, shareholder approval will be required for any amendment that will (a) increase the total number of shares that may be used in payment of Awards under the Plan, (b) materially modify the class of persons eligible to receive Awards, (c) materially increase the benefits accruing to Participants under the Plan, or (d) otherwise require shareholder approval under any applicable law or regulation.

   13.2 Termination of Plan

     The Company’s shareholders or the Board may suspend or terminate the Plan at any time. The Plan will have no fixed expiration date.

   13.3 Consent of Holder

     The amendment or termination of the Plan shall not, without the consent of the Holder of any Award under the Plan, alter or impair any rights or obligations under any Award theretofore granted under the Plan.

SECTION 14. GENERAL

   14.1 Notification

     The Plan Administrator shall promptly notify a Participant of an Award, and a written grant shall promptly be executed and delivered by or on behalf of the Company.

   14.2 Continued Employment; Rights in Awards

     Neither the Plan, participation in the Plan as a Participant nor any action of the Plan Administrator taken under the Plan shall be construed as giving any Participant or employee of the Company any right to be retained in the employ of the Company or limit the Company’s right to terminate the employment of the Participant.

   14.3 Registration; Certificates for Shares

     The Company shall be under no obligation to any Participant to register for offering or resale under the Securities Act of 1933, as amended, or register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws.

   14.4 No Rights as a Shareholder

     No Performance Award, Other Stock-Based Award or Dividend Equivalent Right shall entitle the Holder to any dividend (except to the extent provided in an Award of Dividend Equivalent Rights), voting or other right of a shareholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award, free of all applicable restrictions.

   14.5 Compliance With Laws and Regulations

     It is the Company’s intention that, so long as any of the Company’s equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under the Exchange Act and, if any Plan provision is later found not to be in compliance with Rule 16b-3, the provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants.

   14.6 Unfunded Plan

     The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

   14.7 Governing Law

     The Plan and all interpretations of its provisions shall be governed by the laws of the state of Washington and applicable federal laws.

   14.8 Severability

     If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator’s determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.

SECTION 15. EFFECTIVE DATE

     The Plan’s effective date is the date on which it is adopted by the Board, so long as it is approved by the Company’s shareholders, to the extent required for compliance with Rule 16b-3 under the Exchange Act and Section 162(m) of the Code, at the next annual meeting of the Company’s shareholders after adoption of the Plan by the Board.

EX-10

EXHIBIT 10.110

CREDIT AGREEMENT

Dated as of December 18, 1996

among

PUGET SOUND ENERGY COMPANY

(the new name of the corporation

surviving the merger of

WASHINGTON ENERGY COMPANY

and its wholly owned subsidiary

WASHINGTON NATURAL GAS COMPANY

into

PUGET SOUND POWER & LIGHT COMPANY),

VARIOUS BANKS,

and

BANK OF AMERICA NW, N.A. doing business as SEAFIRST BANK,

as Administrative Agent,

FIRST CHICAGO CAPITAL MARKETS, INC.,

as Syndication Agent, and

NATIONSBANK of TEXAS, N.A.,

as Documentation Agent

                                              TABLE OF CONTENTS


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SECTION 1             CERTAIN DEFINITIONS.........................................1

         "Adjustment Certificate".................................................1

         "Affected Bank"..........................................................1

         "Affiliate"..............................................................1

         "Administrative Agent"...................................................1

         "Agreement"..............................................................1

         "Applicable Law".........................................................1

         "Applicable Lending Office"..............................................2

         "Bank"   2

         "Base Rate"..............................................................2

         "Base Rate Margin".......................................................2

         "Business Day"...........................................................2

         "Commitment(s)"..........................................................2

         "Company"................................................................2

         "Consenting Bank(s)".....................................................2

         "Consolidated Subsidiary"................................................2

         "Domestic Office"........................................................3

         "Effective Date".........................................................3

         "Eligible Institution"...................................................3

         "Environmental Laws".....................................................3

         "ERISA"  3

         "Eurodollar Loan"........................................................3

         "Eurodollar Office"......................................................3

         "Eurodollar Rate"........................................................4

         "Eurodollar Reserve Percentage"..........................................4

         "Federal Funds Effective Rate"...........................................4

         "First Mortgage".........................................................4

         "First Mortgage Bond"....................................................4

         "Floating Rate"..........................................................5

         "Floating Rate Loan".....................................................5

         "Indebtedness"...........................................................5

         "Liability"..............................................................5

         "LIBOR"  5

         "LIBOR Margin"...........................................................6

         "Liens"  6

         "Loan(s)"................................................................6

         "Loan Period"............................................................6

         "Non-Consenting Bank(s)".................................................6

         "Note(s)"................................................................6

         "Parent" 6

         "Percentage".............................................................6

         "Permitted Liens"........................................................6

         "Person" 8

         "Plan"   ................................................................8

         "Public Utility Holding Company Act".....................................8

         "Puget"  8

         "Reference Rate".........................................................8

         "Regulatory Change"......................................................8

         "Replacement Bank(s)"....................................................9

         "Required Banks".........................................................9

         "Retiring Bank(s)".......................................................9

         "Secured Debt Rating"....................................................9

         "Significant Subsidiary".................................................9

         "Subsidiary"............................................................10

         "Substitute Loan(s)"....................................................10

         "Termination Date"......................................................10

         "Unmatured Event of Default"............................................10

         "WECO"   10

         "Wholly-Owned Subsidiary"...............................................10

SECTION 2             COMMITMENTS OF THE BANKS; TYPES OF LOANS;
                      PROCEDURES FOR BORROWING...................................10

         2.1      Commitments....................................................10

         2.2      Various Types of Loans.........................................11

         2.3      Borrowing Procedures...........................................11

         2.4      Extension of Termination Date..................................13

         2.5      Removal of Banks...............................................14

         2.6      Removal of Retiring Banks......................................14

         2.7      Representations and Warranty...................................16

SECTION 3             REPAYMENT OF LOANS; NOTES EVIDENCING LOANS...................
         16

         3.1      Repayment of Loans.............................................16

         3.2      Notes..........................................................16

SECTION 4             INTEREST...................................................17

         4.1      Interest Rates.................................................17

         4.2      Applicable Margin..............................................17

         4.3      Interest Payment Dates.........................................17

         4.4      Setting and Notice of Rates....................................17

         4.5      Computation of Interest........................................18

SECTION 5             COMMITMENT FEE.............................................18

SECTION 6             REDUCTION OF THE COMMITMENTS; PREPAYMENTS..................19

         6.1      Optional Reduction or Termination of the Commitments...........19

         6.2      Prepayments....................................................19

SECTION 7             MAKING AND PRORATION OF PAYMENTS; OFFSET.....................
         19

         7.1      Making of Payments.............................................19

         7.2      Application of Certain Payments................................20

         7.3      Proration of Payments..........................................20

         7.4      Payment on Non-Business Days...................................21

         7.5      Offset.........................................................21

SECTION 8         INCREASED COST PROVISIONS AND SPECIAL
                  PROVISIONS FOR EURODOLLAR LOANS................................21

         8.1      Increased Costs................................................21

         8.2      Basis for Determining Interest Rate Inadequate.................22

         8.3      Changes in Law Rendering Certain Loans Unlawful................23

         8.4      Eurodollar Reserve Requirements................................24

         8.5      Funding Losses.................................................24

         8.6      Right of Banks to Fund through Other Offices...................25

         8.7      Discretion of Banks as to Manner of Funding....................25

         8.8      Alternative Lenders............................................25

         8.9      Floating Rate Loans Substituted for Affected Eurodollar Loans..25

         8.10     Conclusiveness of Determination; Survival of Provisions........26

SECTION 9             REPRESENTATIONS AND WARRANTIES.............................26

         9.1      Organization, Etc..............................................26

         9.2      Authorization; No Conflict.....................................26

         9.3      Governmental Approvals.........................................26

         9.4      Validity and Binding Nature....................................27

         9.5      Financial Statements...........................................27

         9.6      Litigation.....................................................27

         9.7      Employee Benefit Plans.........................................27

         9.8      Regulation.....................................................28

         9.9      Public Utility Holding Company Act.............................28

         9.10     Investment Company Act.........................................28

         9.11     Environmental Matters..........................................28

         9.12     Information....................................................28

SECTION 10            CONDITIONS TO EFFECTIVE DATE; LENDING......................29

         10.1     Conditions Precedent to Effective Date.........................29

                  10.1.1   Approval Terms of Merger by WUTC/Banks................29

                  10.1.2   Merger Effected.......................................29

                  10.1.3   Termination of Other Credit Agreements................29

                  10.1.4   Must Occur Not Later Than March 31, 1997..............29

                  10.1.5   Warranties True.......................................30

         10.2     Initial Loan...................................................30

                  10.2.1   Note..................................................30

                  10.2.2   Resolutions and Incumbency............................30

                  10.2.3   Opinion of Counsel for the Company....................30

                  10.2.4   Regulatory Approval...................................31

                  10.2.5   Other.................................................31

         10.3     All Loans......................................................31

         10.4     New Money Loans................................................31

         10.5     Loans On or After Extension of Termination Date................32

                  10.5.1   Bring-Down Opinion....................................32

                  10.5.2   Confirmations.........................................32

SECTION 11            COMPANY'S COVENANTS........................................32

         11.1     Reports, Certificates and Other Information....................32

                  11.1.1   Annual Report.........................................32

                  11.1.2   Interim Reports.......................................33

                  11.1.3   Certificates..........................................33

                  11.1.4   Reports to SEC and to Shareholders....................33

                  11.1.5   Notice of Default and Litigation......................33

                  11.1.6   Other Information.....................................33

         11.2     Preservation of Corporate Existence, Etc.......................34

         11.3     Compliance with Laws, Etc......................................34

         11.4     Maintenance of Insurance.......................................34

         11.5     Visitation Rights..............................................35

         11.6     Keeping of Books...............................................35

         11.7     Maintenance of Properties......................................35

         11.8     Mergers, Etc...................................................35

         11.9     Sales, Etc. of Assets..........................................35

         11.10    Liens..........................................................36

         11.11    Compliance with ERISA..........................................36

         11.12    Use of Proceeds................................................37

         11.13    Scope of Business..............................................37

         11.14    Financial Covenant.............................................37

SECTION 12            EVENTS OF DEFAULT AND THEIR EFFECT.........................37

         12.1     Events of Default..............................................37

                  12.1.1   Non-Payment of Notes, Etc.............................37

                  12.1.2   Non-Payment of Other Indebtedness.....................37

                  12.1.3   Bankruptcy, Insolvency, Etc...........................38

                  12.1.4   Non-Compliance with This Agreement....................38

                  12.1.5   Warranties............................................38

                  12.1.6   Employee Benefit Plans................................38

         12.2     Effect of Event of Default.....................................38

SECTION 13               THE ADMINISTRATIVE AGENT................................39

         13.1     Appointment and Powers.........................................39

         13.2     Limitation on Administrative Agent's Liability.................39

         13.3     Events of Default and Unmatured Events of Default..............40

         13.4     Documentation and Syndication Agents...........................40

         13.5     Rights as a Bank...............................................40

         13.6     Indemnification................................................41

         13.7     Non-Reliance on Administrative Agent and Other Banks...........41

         13.8     Resignation/Removal of the Administrative Agent................42

         13.9     Appointment of Successor Agent.................................42

SECTION 14               GENERAL.................................................42

         14.1     Waiver; Amendments.............................................42

         14.2     Costs, Expenses and Taxes......................................43

         14.3     Notices........................................................43

         14.4     Governing Law..................................................44

         14.5     Counterparts...................................................44

         14.6     Effective Date.................................................44

         14.7     Assignments and Participations Granted by Banks................44

                  14.7.1   Participations........................................44

                  14.7.2   Assignments...........................................45

                  14.7.3   No Increased Costs....................................46

                  14.7.4   Share Information.....................................46

                  14.7.5   No Withholding Tax....................................46

                  14.7.6   Pledge to Federal Reserve Bank........................47

         14.8     Successors and Assigns.........................................47

         14.9     Indemnification of Banks and Agents............................47

         14.10    Waiver of Jury Trial...........................................47

         14.11    Entire Agreement...............................................47

         14.12    Severability...................................................47

         SCHEDULE I - Pricing Grid

         EXHIBITS

         Exhibit A - Form of Note
                           Schedule Attached to Note
         Exhibit B - Form of Adjustment Certificate
                           Annex I to Adjustment Certificate
         Exhibit C - Form of Assignment and Acceptance Agreement
                           Schedule 1 to Assignment and Acceptance Agreement

CREDIT AGREEMENT

Dated as of December 18, 1996

     THIS AGREEMENT is by and between PUGET SOUND POWER & LIGHT COMPANY, a Washington corporation (“Puget”), and Washington Energy Company, a Washington corporation (“WECO”), both for themselves and for PUGET SOUND ENERGY COMPANY, the new name of the Washington corporation which shall survive the merger of WECO into Puget (the “Company”), the undersigned banks (collectively the “Initial Banks” and individually an “Initial Bank”) and BANK OF AMERICA NW, N.A. doing business as Seafirst Bank, as Administrative Agent, FIRST CHICAGO CAPITAL MARKETS, INC., as Syndication Agent, and NATIONSBANK OF TEXAS, N.A. as Documentation Agent (together the “Agents”):

SECTION 1

CERTAIN DEFINITIONS

     When used herein the following terms shall have the following meanings:

     “Adjustment Certificate” means a certificate substantially in the form of Exhibit B, with appropriate insertions, executed pursuant to Section 2.6 by the applicable parties, together with Annex I thereto, to be completed by the Administrative Agent.

     “Affected Bank” has the meaning defined in Section 8.3.

     “Affiliate” means with respect to a Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person.

     “Administrative Agent” means Bank of America NW, N.A. doing business as Seafirst Bank and any successor to Seafirst Bank as Administrative Agent for the Banks hereunder.

     “Agreement” means this Agreement, including all schedules, annexes and exhibits hereto.

     “Applicable Law” means, anything in Section 14.4 to the contrary notwithstanding, (i) all applicable common law and principles of equity and (ii) all applicable provisions of all (a) constitutions, statutes, rules, regulations, and orders of governmental bodies, (b) Governmental Approvals and (c) orders, decisions, judgments, and decrees of all courts (whether at law or in equity or admiralty) and arbitrators.

     “Applicable Lending Office” means, with respect to any Bank, (i) in the case of its Floating Rate Loans, its Domestic Office and (ii) in the case of its Eurodollar Loans, its Eurodollar Office. “Bank” means each Initial Bank, Replacement Bank, Assignee in accordance with Section 14.7.2 and any successor thereof.

“Base Rate” means as of any day the greater of (a) the Reference Rate in effect on such day or (b) the sum of (i) the Federal Funds Effective Rate in effect on such day, plus (ii) 1/2 of 1% per annum. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, the Base Rate shall be the Reference Rate until the circumstances giving rise to such inability no longer exist. “Base Rate Margin” means the margin applicable to Floating Rate Loans as determined in accordance with Section 4.2.

“Business Day” means any day other than a Saturday or Sunday; (a) in the case of a Business Day which relates to a Eurodollar Loan, any day of the year on which banks are open for business in Seattle and New York and on which dealings are carried on in the interbank eurodollar market, and (b) in the case of a Business Day which relates to a Floating Rate Loan, any day of the year on which banks are open for business in Seattle and New York.

“Commitment(s)” means the commitments of the Banks to make Loans hereunder, and Commitment as to any Bank shall mean the commitment of such Bank to make Loans hereunder. “Company” means Puget Sound Energy Company, the Washington corporation which shall survive the merger of WECO and its subsidiary, Washington Natural Gas Company, into Puget on or before the Effective Date hereof and which shall be renamed from Puget Sound Power & Light Company to Puget Sound Energy Company as of the same date, and to the extent permitted by the terms of this Agreement, its successors and assigns. “Consenting Bank(s)” has the meaning defined in Section 2.6.

“Consolidated Subsidiary” means, with respect to the Company or if otherwise specified, any such specified Person, at any time, any Subsidiary or other Person the accounts of which would be consolidated with those of the Company or such other specified first Person in its consolidated financial statements as of such time. “Domestic Office” means with respect to any Bank the office of such Bank designated as such with its signature hereto or, with respect to any Replacement Bank, the office of such Replacement Bank designated as such with its signature on the Adjustment Certificate executed by it as a Replacement Bank and, thereafter, such office as such Bank may designate as its Domestic Office by notice to the Company and the Administrative Agent.

“Effective Date” means the date specified by the Administrative Agent, in a notice to the Company and the Banks, as the date on which all of the conditions precedent to the Effective Date set forth in Section 10.1 shall have first been met.

“Eligible Institution” means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the “OECD”), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD, or (iii) a Person that is primarily engaged in the business of commercial banking and that is (A) a subsidiary of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or (C) a Person of which a Bank is a subsidiary.

“Environmental Laws” means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals, or toxic or hazardous substances or wastes or the clean-up or other remediation thereof. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. “Eurodollar Loan” means any Loan which bears interest at a rate determined by reference to the Eurodollar Rate.

“Eurodollar Office” means, with respect to any Bank, the office of such Bank designated as such from time to time by notice from such Bank to the Company and the Administrative Agent, which shall be making or maintaining the Eurodollar Loans of such Bank hereunder or such other office or offices through which such Bank determines its LIBOR.

“Eurodollar Rate” means with respect to a Eurodollar Loan that per annum interest rate equal to the sum of the LIBOR determined for the Loan Period of the Loan and the LIBOR Margin in effect from time to time during the Loan Period.

“Eurodollar Reserve Percentage” means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of “Eurocurrency liabilities” (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents).

“Federal Funds Effective Rate” means for any day the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York, on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Effective Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Effective Rate for such day shall be the average of the quotations for such Business Day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

     “First Mortgage” means each of (i) that mortgage, dated as of June 2, 1924, as supplemented, between Puget and First National Bank of Boston, as successor trustee thereunder, (ii) that mortgage, dated as of April 1, 1957, between WECO’s Wholly-Owned Subsidiary, Washington Natural Gas Company, and Harris Trust and Savings Bank, as trustee, as either or each may have been, or may hereafter be, amended, modified or supplemented from time to time, and (iii) that mortgage, if any, dated on or after the Effective Date replacing either or both mortgages described in clauses (i) and (ii).

     “First Mortgage Bond” means that margin applicable to Eurodollar Loans as determined in accordance with Section 4.2.

     “Liens” means any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, or assignment of any right to receive goods or payment.

     “Loan(s)” has the meaning defined in Section 2.1.

     “Loan Period” means, with respect to any Eurodollar Loan, the period commencing on the date such Loan was made and ending one, two, three, or six months thereafter as the Company may specify pursuant to Section 2.3; provided, however, that:

     (a) if a Loan Period would otherwise end on a day which is not a Business Day, such Loan Period shall end on the next succeeding Business Day, unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Loan Period shall end on the next preceding Business Day;

(b) no Loan Period may end later than the Termination Date in effect on the date the Loan was made: and

     (c) if there exists no day numerically corresponding to the day of such Loan in the month in which the last day of such Loan Period would otherwise fall, such Loan Period shall end on the last Business Day of such month.

     “Non-Consenting Bank(s)” has the meaning defined in Section 2.4.

     “Note(s)” has the meaning defined in Section 3.2.

     “Parent” means, with respect to any Bank, any Person controlling such Bank.

     “Percentage” means at any time as to any Bank the percentage that the amount of its Commitment (as set forth opposite such Bank’s name in the column captioned “Amount of Commitment” in Table I referenced in Section 2.1, or, if different, in Annex I to the most recently executed Adjustment Certificate, if any) is of the then aggregate amount of the Commitments.

"Permitted Liens" means: ---------------

(a) Liens for taxes, assessments or governmental charges which are not yet delinquent or the amount or validity of which is being contested in good faith;

(b) deposits or pledges to secure the payment of workmen's compensation, unemployment insurance, old age pensions or other social security benefits or obligations;

(c) mechanics,’ materialmen’s, warehousemen’s, carriers’ or other like Liens arising in the ordinary course of business securing obligations which are not overdue for more than 60 days, or which are being contested in good faith;

(d) Liens incurred or created in the ordinary course of business in connection with or to secure the performance of bids, tenders, contracts (other than for the payment of money), leases, statutory obligations, surety bonds or appeal bonds;

(e) Liens (i) which secure obligations not assumed by the Company or any Subsidiary, (ii) on account of which the Company or any Subsidiary has not and does not expect to pay interest directly or indirectly and (iii) which exist upon real estate or rights in or relating to real estate in respect of which the Company or any Subsidiary has a right-of-way or other easement for purposes of substations, gate stations, regulator stations, or transmission or distribution facilities;

(f) rights reserved to or vested in any federal, state or local governmental body or agency by the terms of any right, power, franchise, grant, license, contract or permit, or by any provision of law, to recapture or to purchase, or designate a purchase of or order the sale of, any property of the Company or to terminate any such right, power, franchise, grant, license, contract or permit before the expiration thereof;

(g) Liens of judgments covered by insurance, or upon appeal and covered by bond, or if not so covered not exceeding at one time $10,000,000 in aggregate amount;

(h) easements or reservations in respect of any property of the Company and its Subsidiaries for the purpose of roads and transmission and distribution facilities and other rights-of-way, including overhead and underground transmission and distribution lines, zoning ordinances, regulations, reservations, restrictions, covenants, party wall agreements, conditions of record and other encumbrances (other than to secure the payment of money), none of which materially impairs the use of such property for the purposes for which it is held by the Company or Subsidiary;

(i) any Liens, moneys sufficient for the discharge of which shall have been deposited in trust with the trustee or mortgagee under the instrument evidencing such Lien, with irrevocable authority of such trustee or mortgagee to apply such moneys to the discharge of such Lien to the extent required for such purpose;

(j) rights reserved to or vested in any federal, state or local governmental body or agency or other public authority to control or regulate any property of the Company or Subsidiary, or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by the Company or Subsidiary;

(k) with respect to any property which the Company or any Subsidiary may hereafter acquire, any exceptions or reservations therefrom existing at the time of such acquisition or any terms, conditions, agreements, covenants, exceptions and reservations expressed or provided in the deeds of other instruments, respectively, under and by virtue of which the Company or such Subsidiary shall hereafter acquire the same, none of which materially impairs the use of such property for the purposes for which it is acquired by the Company or such Subsidiary.

     “Person” means any individual, sole proprietorship, corporation, limited liability company, general partnership, limited partnership, limited liability partnership, trust, unincorporated organization, mutual company, joint stock company, estate, union, employee organization, government or any agency or political subdivision thereof.

     “Plan” means, at any time, the rate of interest publicly announced from time to time by the Administrative Agent as its reference rate, which rate, while sometimes referred to as the prime rate, is not necessarily its lowest rate of interest.

     “Regulatory Change” means any of the following occurring after the date hereof: the adoption of any applicable law, rule, regulation or treaty, or any change therein, or any change in the interpretation, application or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation, application or administration thereof, or compliance by any Bank (or any Applicable Lending office of such Bank) with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency.

     “Replacement Bank(s)” has the meaning defined in Section 2.6.

     “Required Banks” means, at any time, Banks having an aggregate Percentage of 60% or more of the Loans outstanding or, if there are no Loans outstanding, an aggregate Percentage of 60% or more of the aggregate amount of the Commitments.

     “Retiring Bank(s)” has the meaning defined in Section 2.6.

     “Secured Debt Rating” means the Company’s First Mortgage Bond (or equivalent long term secured debt) rating as determined by Standard & Poor’s Corporation and Moody’s Investors Service, Inc., any successor thereof or any other comparable rating service selected by the Company with the prior written consent of the Required Banks. If the Company’s rating is split by the two rating services, the higher of the two ratings shall apply unless the split is by more than one level (i.e. double-split), in which case the median of the two ratings shall apply. In the event that either Moody’s Investors Service, Inc., or Standard & Poor’s Corporation shall cease to exist and shall not thereupon be succeeded by a successor entity performing similar functions, or (b) all such corporations (or any such successor entities) shall at any time cease to maintain a rating for the Company’s First Mortgage Bonds or equivalent long term secured debt, the Company, each Bank, and the Administrative Agent agree to enter into negotiations promptly thereafter in good faith with a view toward amending this Agreement to provide for an alternate mechanism (including, without limitation, providing for a replacement rating agency and range of ratings of the Company’s First Mortgage Bonds for determining the respective margins (as set forth in Section 4.2) applicable to Eurodollar Loans and Floating Rate Loans so as to achieve, as nearly as possible, the same economic basis for determining such margins as exists on the Effective Date of this Agreement.

     “Significant Subsidiary” means, as at the time of determination, a Subsidiary meeting any one of the following conditions: (a) the assets of such Subsidiary, or the sum of (i) the investments in and advances to such Subsidiary by the Company and the Company’s other Subsidiaries, if any, plus (ii)  the contingent obligations of the Company and the Company’s other Subsidiaries, if any, with respect to such Subsidiary, as at the Company’s last fiscal quarter ending on or before the time of determination, exceeded 10% of the assets of the Company and its Consolidated Subsidiaries as at the end of such fiscal quarter, or (b) the sales and operating revenues of such Subsidiary for the fiscal year preceding the time of determination exceeded 10% of the sales and operating revenues of the Company and the Company’s Consolidated Subsidiaries for such fiscal year, or (c) such Subsidiary is the parent of one or more Subsidiaries and, together with such Subsidiaries would, if considered in the aggregate, constitute a Significant Subsidiary.

     “Subsidiary” means a corporation of which the Company and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors.

     “Substitute Loan(s)” has the meaning defined in Section 2.6.

     “Termination Date” means the fifth anniversary of the Effective Date and thereafter each succeeding anniversary to which the Commitments shall have been extended pursuant to Section 2.4.

     “Unmatured Event of Default” means any event which, if it continues uncured or if it is not waived, will, with lapse of time or notice or lapse of time and notice, constitute an Event of Default.

     “WECO” means Washington Energy Company, a Washington corporation.

     “Wholly-Owned Subsidiary” means any Subsidiary, all of the shares of voting capital stock, together with any and all options, warrants or other securities convertible into shares of voting capital stock, and all other ownership interests and rights to acquire ownership interests of which (except directors’ qualifying shares) are, directly or indirectly, owned or controlled by the Company and/or one or more other such Subsidiaries.

SECTION 2

COMMITMENTS OF THE BANKS; TYPES OF LOANS;

PROCEDURES FOR BORROWING

     2.1 Commitments. Subject to the terms and conditions of this Agreement, each of the Banks severally agrees to make loans (collectively the “Loans” and individually a “Loan”) from time to time on or after the Effective Date and prior to the Termination Date in such Bank’s Percentage of such aggregate amounts as the Company may from time to time request from all Banks; provided, however, that (i) the aggregate principal amount which any Initial Bank shall be committed to have outstanding hereunder on loan to the Company shall not at any one time exceed the amount set forth opposite such Bank’s name in the column captioned “Amount of Commitment” in Table I on the following page, or, if different, in the most recently executed Adjustment Certificate, if any (as such amount may be reduced from time to time in accordance with this Agreement) and (ii) the aggregate principal amount which all Banks shall be committed to have outstanding hereunder on loan to the Company shall not at any one time exceed $400,000,000 (as such amount shall be reduced from time to time in accordance with paragraph (a) of Section 2.6 or Section 6.1). The Company may borrow, repay (or prepay as permitted by Section 6.2), and reborrow in accordance with this Section 2.1.

     2.2 Various Types of Loans. Each Loan shall be either a Floating Rate Loan or a Eurodollar Loan (each a “type” of Loan), as the Company shall specify in the related notice of borrowing pursuant to Section 2.3. Floating Rate Loans and Eurodollar Loans may be outstanding at the same time. Each borrowing under this Section 2.2 shall be in a minimum aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess of such amount, or such lesser amount as shall result in the Commitments becoming fully drawn, as the Company shall request in the notice of borrowing.

TABLE I

COMMITMENT OF EACH INITIAL BANK

============================================== =====================
Initial Bank                                   Amount of Commitment
============================================== =====================
Bank of America NW, N.A. dba Seafirst Bank     $ 50,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
The First National Bank of Chicago             $ 50,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
NationsBank of Texas, N.A.                     $ 50,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
The Bank of New York                           $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
The Industrial Bank of Japan, Limited          $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
U.S. Bank of Washington                        $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
ABN AMRO Bank, N.V.                            $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Bank of Montreal                               $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
The Chase Manhattan Bank                       $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Wells Fargo Bank, N.A.                         $ 25,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
CIBC Inc.                                      $ 15,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Key Bank of Washington                         $ 15,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Banca di Roma                                  $ 15,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Comerica Bank                                  $ 15,000,000
- ---------------------------------------------- ---------------------
- ---------------------------------------------- ---------------------
Mellon Bank                                    $ 15,000,000
============================================== =====================
TOTAL                                          $ 400,000,000
============================================== =====================

     2.3 Borrowing Procedures. (a) The Company shall give irrevocable notice to the Administrative Agent of each proposed borrowing by 11:00 A.M., Seattle time, on a day which in the case of a Floating Rate Loan is at least one Business Day prior to the proposed date of such borrowing and in the case of a Eurodollar Loan is at least three Business Days prior to the proposed date of such borrowing. Each such notice shall be effective upon receipt by the Administrative Agent, shall be in writing, and shall specify the date, amount and type of borrowing and, in the case of a Eurodollar Loan borrowing, the Loan Period for such borrowing. Promptly upon receipt of such notice, the Administrative Agent shall advise each Bank thereof. Not later than 11:00 A.M., Seattle time, on the date of a proposed borrowing, each Bank shall provide the Administrative Agent at its principal office at 701 Fifth Avenue, Seattle, Washington 98104 with immediately available funds covering such Bank’s Percentage of the borrowing, and the Administrative Agent shall pay over such funds to the Company on the requested borrowing date. Except as otherwise permitted by Section 2.6 and Section 8.3, all borrowings and repayments shall be effected so that after giving effect thereto all types of Loans shall be pro rata among the Banks according to their respective Percentages.

     (b) If any Bank makes a new Loan hereunder on a day on which the Company is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be (i) made available by such Bank to the Administrative Agent as provided in paragraph (a) if the borrowing exceeds the amount to be repaid or (ii) remitted by the Company to the Administrative Agent as provided in Section 7.1, if the borrowing is less than the amount being repaid.

     (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any borrowing that such Bank will not make available to the Administrative Agent an amount equal to such Bank’s Percentage of such borrowing, the Administrative Agent may assume that such Bank has made an amount equal to such Bank’s Percentage of such borrowing available to the Agent on the date of such borrowing in accordance with paragraphs (a) and (b) of this Section 2.3 and the Administrative Agent may, in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent such Bank shall not have so made available to the Administrative Agent the Loan requested to be made by such Bank on such date and the Administrative Agent shall have so made available to the Company a corresponding amount on behalf of such Bank, such Bank shall, on demand, pay to the Administrative Agent such corresponding amount together with interest thereon, for each day from the date such amount shall have been so made available by the Administrative Agent to the Company until the date such amount shall have been repaid to the Administrative Agent, at the Federal Funds Effective Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank’s Loan included in such borrowing for purposes of this Agreement. If such Bank does not pay such amount promptly upon the Administrative Agent’s demand therefor, the Administrative Agent shall promptly notify the Company and the Company shall immediately repay such corresponding amount to the Administrative Agent together with accrued interest thereon at a rate per annum equal to the higher of the Federal Funds Effective Rate and the interest rate applicable thereto pursuant to Section 4.1.

     2.4 Extension of Termination Date. (a) Provided no Event of Default or Unmatured Event of Default has occurred and is continuing, at least 60 days but not more than 90 days before each anniversary of the Effective Date (excluding however that anniversary of the Effective Date which coincides with the then effective Termination Date), the Company may, by delivering a written request to the Administrative Agent, request that each Bank extend for one year the Termination Date with respect to such Bank’s Commitment. The Administrative Agent shall, upon receipt of such a request, promptly notify each Bank thereof, and request that each Bank advise the Administrative Agent of its approval or rejection of such request within 30 days of its receipt of such notification.

     (b) Upon receipt of such notification from the Agent, each Bank may (but shall not be required to), in its sole and absolute discretion, consent to extend the Termination Date with respect to its Commitment for a period of one year, and, should it agree to do so, shall so notify the Agent in writing of its consent no later than 30 days following the Administrative Agent’s notification of the Company’s request. If any Bank shall not so notify the Administrative Agent within 30 days, such Bank shall be deemed not to have consented to such request (the Banks not so consenting or so failing to notify the Administrative Agent collectively the “Non-Consenting Banks” and individually a “Non-Consenting Bank”). The Termination Date will not be extended unless at least the Required Banks consent to the requested extension pursuant to this paragraph (b). The Administrative Agent shall promptly notify the Company as to the Banks, if any, that have not consented to such request. If the requested extension fails to obtain the consent of the Required Banks, the Administrative Agent shall promptly give written notice to the Company and each Bank stating that the Termination Date then in effect (and specifying such date) has not been extended.

     (c) Provided at least the Required Banks have consented to the Company’s request for an extension, notwithstanding a notice given by the Administrative Agent to the Company that a Bank has become a Non-Consenting Bank pursuant to paragraph (b) above, the Termination Date then in effect shall be extended for the requested additional one-year period on the condition that the Company exercises one or more of the options set forth in paragraph (a) of Section 2.6 and the applicable transactions are consummated within the time period specified in paragraph (b) of Section 2.6.

     (d) If the conditions for extension of a Termination Date pursuant to paragraph (c) above are not met, promptly following the last day on which the Company could have exercised one or more of the options to cause an extension of the Termination Date pursuant to paragraph (c) above (or sooner, if the Company informs the Administrative Agent that it does not intend to do so), the Administrative Agent shall give written notice to the Company and each Bank stating that the Termination Date then in effect (and specifying such date) has not been extended.

     2.5 Removal of Banks. Provided no Event of Default has occurred and is continuing, the Company may give written notice (with a copy to the Administrative Agent) (i) to any one or more Banks without cause in any year, at least 90 days but not more than 120 days before the anniversary of the Effective Date, or (ii) to any Bank failing to make a Loan pursuant to Section 2.3 within the thirty (30) days following such failure, that the Company does not desire that such Bank(s) continue to be a party to this Agreement. Any such Bank(s) may be removed as a party to this Agreement if the Company exercises one or more of the options set forth in paragraph (a) of Section 2.6 and the applicable transactions are consummated within the time period specified in paragraph (b) of Section 2.6.

     2.6 Removal of Retiring Banks. (a) Subject to the requirement that after giving effect to the consummation of the events described in Section 2.6 (a)(i), (ii) and (iii), the entire Commitment of each Non-Consenting Bank or Bank to which the Company has given notice pursuant to Section 2.5 (collectively the “Retiring Banks” and individually a “Retiring Bank”) shall be either terminated in its entirety or assumed, and all amounts owing each Retiring Bank shall be paid on a date mutually acceptable to the Retiring Bank, the Company and any Replacement or Consenting Bank within the time period specified in paragraph (b) of Section 2.6, the Company may exercise one or more of the following options to remove a Retiring Bank as a Bank under this Agreement:

     (i) The Company may permanently terminate the Commitment of each or any Retiring Bank and permanently reduce the aggregate amount of the Commitments by an amount equal to the aggregate amount of Commitments of Retiring Banks so terminated (without affecting the Commitment of any other Bank).

     (ii) The Company may request one or more Banks that are not Retiring Banks to assume all, or any part, of each or any Retiring Bank’s Commitment and, if necessary, make substitute Loans for each and any Retiring Bank’s outstanding Loans as provided in this clause (ii). If one or more of such Banks shall so agree (collectively the “Consenting Banks” and individually a “Consenting Bank”) (A) the Commitment of each such Consenting Bank shall be increased by its respective share designated by the Company (and agreed to by such Consenting Bank) of the Commitment(s) of such Retiring Bank(s) being assumed and (B) if there are any Loans outstanding the Consenting Banks shall, if necessary, make Floating Rate Loans to the Company pro rata according to their respective designated shares, in the aggregate principal amount of the outstanding Floating Rate Loan(s) of such Retiring Bank(s) (each a “Substitute Loan”). If any Eurodollar Loan of a Retiring Bank is paid on any day other than the last day of the Loan Period for that Loan occurring within the time period provided in Paragraph (b) below, the Company shall pay the Retiring Bank’s funding losses as provided in Section 8.5.

     (iii) The Company may designate one or more banks or other financial institutions, which are not Banks but which are reasonably acceptable to the Administrative Agent, to assume all, or any part, of the Commitment of each or any Retiring Bank and, if necessary, to make Substitute Loans to the Company pursuant to this clause (iii) for each or any Retiring Bank’s then outstanding Loan(s), if any. If one or more such designated banks or financial institutions so agree (collectively the “Replacement Banks” and individually a “Replacement Bank”), (A) each such Replacement Bank shall assume its respective share of the Commitment(s) of such Retiring Bank(s) being assumed, and (B) if there are any Loans outstanding, the Replacement Bank(s) shall, if necessary, make Floating Rate Loans to the Company pro rata according to their respective designated shares, in the aggregate principal amount of the portion of the outstanding Floating Rate Loan(s) of such Retiring Bank(s). If any Eurodollar Loan of a Retiring Bank is paid on any day other than the last day of the Loan Period for that Loan occurring within the time period provided in Paragraph (b) below, the Company shall pay the Retiring Bank’s funding losses as provided in Section 8.5. Upon such assumption and prepayment, such Replacement Bank(s) shall be deemed a, “Bank” or “Banks” for all purposes of this Agreement.

     (b) The transactions described in the foregoing paragraph must be consummated not more than 180 days after the Company’s notice to the Administrative Agent of its (i) request for an extension of the Termination Date pursuant to Section 2.4 or (ii) removal of a Bank pursuant to Section 2.5 (the “180 Day Period”). Further, from and after said notice until all Loans of the Retiring Bank are completely repaid, the Retiring Bank’s Commitment to make new Loans shall continue, provided that until the earlier of the repayment of the Retiring Bank or the expiration of the 180 Day Period the Company may not request a Eurodollar Loan with a Loan Period extending beyond the end of the 180 Day Period. Upon consummation of the applicable transactions, the applicable parties shall execute and deliver to the Administrative Agent an Adjustment Certificate. The Administrative Agent shall distribute to the Company and the Banks copies of the executed Adjustment Certificate. If the transactions are not fully consummated within the 180 Day Period, the respective requested extension of the Termination Date or removal of a Bank which triggered the commencement of said Period shall be of no effect and void from and after the expiration of said 180 Day Period.

     (c) Immediately upon the termination or assumption of its Commitment and the payment in, full of all amounts then owing to it under this Agreement pursuant to any of the clauses of the foregoing paragraph, each Retiring Bank shall cease to be a “Bank” for all purposes of this Agreement and shall no longer have any obligations or rights hereunder or in connection herewith, other than the right to be reimbursed pursuant to this Agreement for costs and expenses attributable to events, acts or conditions occurring prior to such termination or assumption and payment. If the Company has previously executed and delivered Notes to the Banks pursuant to Section 3.2, the Company shall provide a replacement Note to each Consenting Bank (to reflect its increased Commitment) and/or Replacement Bank (to reflect the amount of its Commitment).

     2.7 Representations and Warranty. Each notice of borrowing pursuant to Section 2.3 shall automatically constitute a representation and warranty by the Company to the Administrative Agent and each Bank to the effect that on the requested date of such borrowing (a) the representations and warranties of the Company contained in Sections 9.1, 9.2, 9.3, 9.4, 9.7, 9.8, 9.9, 9.10, 9.11 and 9.12, and, in the case of borrowings described in Section 10.4, the warranties of the Company contained in Sections 9.5 and 9.6, shall be true and correct as of such requested date as though made on the date thereof, and (b) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing or will result therefrom.

SECTION 3

REPAYMENT OF LOANS; NOTES EVIDENCING LOANS

     3.1 Repayment of Loans. The Company hereby promises to pay the unpaid principal amount of each Eurodollar Loan on the last day of the Loan Period for such Loan and all Floating Rate Loans not later than the Termination Date.

     3.2 Notes. The Loans of each Bank shall be evidenced by a promissory note substantially in the form set forth in Exhibit A, with appropriate insertions, dated the date of the initial Loans or such earlier date as may be acceptable to the Administrative Agent and payable to the order of such Bank in the principal amount of the Commitment of such Bank (collectively the “Notes” and individually a “Note”). Each Bank shall record in its records, or at its option on the schedule attached to its Note, the date and amount of each Loan made by such Bank, each repayment or prepayment thereof, and, in the case of a Eurodollar loan, the dates on which the Loan Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on such Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Company hereunder or under any Note to repay the principal amount of the Loans together with all interest accruing thereon.

SECTION 4

INTEREST

     4.1 Interest Rates. With respect to each Loan of each Bank, the Company hereby promises to pay interest on the unpaid principal amount thereof for the period commencing on the date of such Loan until such Loan is paid in full as follows:

     (a) if such Loan is a Floating Rate Loan, at a rate per annum equal to the sum of the Base Rate and the applicable Base Rate Margin from time to time in effect, changing as the Base Rate and/or Base Rate Margin changes;

     (b) if such Loan is a Eurodollar Loan, at a rate per annum equal to the Eurodollar Rate for such Loan Period, changing as the applicable LIBOR Margin changes.

     (c) Notwithstanding the provisions of preceding clauses (a) or (b), in the event that any principal of, or interest on, any Loan is not paid when due (whether by acceleration or otherwise), after the due date of such principal or interest until such principal or interest is paid, at a rate per annum equal to the Base Rate from time to time (but not less than the Base Rate in effect as at such due date) plus 2% per annum.

     4.2 Applicable Margin. The applicable LIBOR Margin and Base Rate Margin shall be determined from the pricing grid attached hereto as Schedule 1 (which is incorporated by this reference) in accordance with the Company’s Secured Debt Rating at the time of such determination. The LIBOR Margin or the Base Rate Margin, as the case may be, shall be adjusted automatically on and as of the date of public announcement of any change in the Company’s First Mortgage Bond or equivalent long term secured debt rating resulting in a change in the Secured Debt Rating.

     4.3 Interest Payment Dates. Accrued interest on each Loan shall be payable on (i) the date of payment of any Loan and, in the case of a Eurodollar Loan, prepayment thereof, (ii) in the case of each Floating Rate Loan on the last day of each March, June, September and December which occurs while the Loan is outstanding, and (iii) in the case of each Eurodollar Loan on the last day of the Loan Period for such Loan and on the date which is three months after the date the Loan was made in the case of a six month Loan Period. After maturity, accrued interest on all Loans shall be payable on demand.

     4.4 Setting and Notice of Rates. The applicable Eurodollar Rate for each Loan Period for a Eurodollar Loan shall be determined by the Administrative Agent as provided herein, and notice thereof shall be given by the Administrative Agent promptly to the Company and each Bank. Each determination of the applicable Eurodollar Rate (including any change thereof during a Loan Period by reason of a change in the Eurodollar Margin) by the Administrative Agent shall be conclusive and binding upon the parties hereto, in the absence of manifest error. The Administrative Agent shall, upon request of the Company or any Bank, deliver to the Company or such Bank a statement showing the computations used by the Administrative Agent in determining any applicable Eurodollar Rate hereunder.

     4.5 Computation of Interest. Interest shall be computed for the actual number of days elapsed (including the first day, but excluding the last day) on the basis of a 360-day year in the case of Eurodollar Loans and a 365/366-day year in the case of Floating Rate Loans.

SECTION 5

COMMITMENT FEE

     The Company agrees to pay to the Banks that per annum commitment fee for the period from and including the Effective Date to the Termination Date applied to the daily average of the unused amount of the Commitments as shall be determined from time to time from the pricing grid attached hereto as Schedule 1 in accordance with the Company’s Secured Debt Rating then in effect. The applicable fee rate shall be adjusted automatically on and as of the date of public announcement of any change in the Company’s First Mortgage Bond or equivalent long term secured debt rating which results in a change in the Company’s Secured Debt Rating. Such commitment fee shall be computed for the actual number of days elapsed (including the first day but excluding the last day) on the basis of a 365-day year and payable in arrears on the last day of March, June, September, and December, commencing March 31, 1997 for that preceding period from the Effective Date, and thereafter for each preceding three-month period, and on the earlier of the Termination Date or the date of the termination of the Commitments for any period then ending for which such commitment fee shall not have been theretofore paid.

SECTION 6

REDUCTION OF THE COMMITMENTS; PREPAYMENTS

     6.1 Optional Reduction or Termination of the Commitments. The Company may from time to time on at least five Business Days’ prior written notice received by the Administrative Agent (which shall promptly advise each Bank thereof) permanently reduce the amount of the Commitments (such reduction to be pro rata among the Banks according to their respective Percentages) but only upon repayment in accordance with Section 3.1 or prepayment in accordance with Section 6.2 of the amount, if any, by which the aggregate unpaid principal amount of all Loans exceeds the then reduced amount of the Commitments. Any such reduction shall be in a minimum aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess of such amount. The Company may, at any time, on like notice terminate the Commitments in full upon payment in full of all Loans and other obligations of the Company hereunder.

     6.2 Prepayments. The Company may from time to time prepay the Loans in whole or in part, provided that (a) the Company shall give the Administrative Agent (which shall promptly advise each Bank thereof) not less than three (3) Business Days prior notice in the case of Eurodollar Loans and one (1) Business Day in the case of Floating Rate Loans, specifying the Loans to be prepaid and the date and amount of prepayment, (b) Eurodollar Loans shall only be prepaid subject to Section 8.5, and (c) any prepayment of any Loan shall include accrued interest to the date of such prepayment on the principal amount being prepaid. Each partial prepayment pursuant to this Section 6.2 shall be in a minimum aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess of such amount.

SECTION 7

MAKING AND PRORATION OF PAYMENTS; OFFSET

     7.1 Making of Payments. (a) All payments and prepayments of principal of, or interest on, the Notes evidencing the Loans shall be made by the Company to the Administrative Agent in immediately available funds for the account of the holders of the Notes and all such payments (except those made pursuant to Sections 2.6, 8.3, 8.8 and 8.9) shall be pro rata according to the respective unpaid principal amounts of all the Notes evidencing the Loans. All payments of commitment fees shall be made by the Company to the Administrative Agent in immediately available funds for the account of the Banks pro rata except with respect to payments made pursuant to Section 2.6) according to their respective Percentages. All such payments shall be made to the Administrative Agent at its office ‘in Seattle not later than 12:00 Noon, Seattle time, on the date due. Funds received after that hour shall be deemed to have been received by the Administrative Agent on the next following Business Day. The Administrative Agent shall promptly remit to each Bank or other holder of a Note its share of all such payments received in collected funds by the Administrative Agent for the account of such Bank or holder.

     (b) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Banks hereunder that the Company will not make such payment in full, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank (or such lesser amount as may be due such Bank pursuant to Section 2.3 (b). If and to the extent that the Company shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Effective Rate.

     7.2 Application of Certain Payments. Each payment of principal shall be applied to such Loans as the Company shall direct by notice to be received by tile Administrative Agent on or before the date of such payment, or in the absence of such notice, as the Administrative Agent shall determine in its discretion, provided, however, that, except as otherwise expressly provided herein, the corresponding Loans of all Banks shall be paid pro rata according to their respective Percentages and, for purposes hereof, the Floating Rate Loans made pursuant to Section 8.3 or Section 8.9 shall be deemed of the same type as the corresponding Eurodollar Loans of the other Banks. Concurrently with each remittance to any Bank of its share of any such payment, the Administrative Agent shall advise each Bank as to the application of such payment.

     7.3 Proration of Payments. If any Bank or other holder of a Note shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise) on account of principal of or interest (except payments made pursuant to Section 2.6 and Section 8) on any Note in excess of its pro rata share of payments and other recoveries obtained by all Banks or other holders of Notes on account of principal of and interest on Notes then held by them, such Bank or other holder shall purchase from the other Banks or holders such participation in the Notes held by them as shall be necessary to cause such purchasing Bank or other holder to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Bank or holder, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.

     7.4 Payment on Non-Business Days. If any payment of principal of or interest on a Loan, or of commitment fee, falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day and, with respect to principal, interest shall accrue and be payable for the period of such extension.

     7.5 Offset. The Company agrees that the Administrative Agent and each holder of a Note shall have all rights of set-off and bankers’ lien provided by applicable law and that, in addition, at any time (a) any payment or other amount owing by the Company under this Agreement is due to the Administrative Agent or any such holder, and (b) any Unmatured Event of Default described in Section 12.1.3 or any Event of Default exists, the Administrative Agent and each holder may apply to the payment of such payment or other amount any and all balances, credits, deposits, accounts, or moneys of the Company then or thereafter with the Administrative Agent or such holder.

SECTION 8

INCREASED COST PROVISIONS AND SPECIAL

PROVISIONS FOR EURODOLLAR LOANS

8.1 Increased Costs. (a) If (i) Regulation D of the Board of Governors of the Federal Reserve System, or (ii) any Regulatory Change,

     (A) shall subject any Bank (or any Applicable Lending Office of such Bank) to any tax, duty or other charge with respect to its Eurodollar Loans, its Note or its obligation to make Eurodollar Loans, or shall change the basis of taxation of payments to any Bank or its Applicable Lending Office of the principal of or interest on its Eurodollar Loans or any other amounts due under this Agreement in respect of its Eurodollar Loans or its obligation to make Eurodollar Loans (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank’s principal executive office or its Applicable Lending Office is located); or

     (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Eurodollar Loan any reserve to the extent reimbursed pursuant to Section 8.4), special deposit, special assessment or similar requirement against assets of, deposits with, or for the account of, or credit extended by, any Bank (or any Applicable Lending Office of such Bank); or

     (C) shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Eurodollar Loans, its Note, or its obligation to make Eurodollar Loans, and the result of any of the foregoing is to increase the cost to (or in the case of Regulation D referred to above, to impose a cost on) such Bank (or any Applicable Lending Office of such Bank) of making or maintaining any Eurodollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or any Applicable Lending Office of such Bank) under this Agreement or under its Note with respect thereto, then within 10 days after demand by such Bank (which demand shall be accompanied by a statement setting forth the basis of such demand (with a copy to the Administrative Agent), the Company shall pay directly to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or such reduction.

     (b) If any Bank shall determine that any Regulatory Change has or would have the effect of increasing the amount of capital such Bank must maintain or of reducing the rate of return on the capital of such Bank or its Parent as a consequence of such Bank’s obligations hereunder to a level below that which such Bank or its Parent could have achieved but for such Regulatory Change (taking into consideration such Bank’s policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then following demand by such Bank (which demand shall be accompanied by a statement setting forth the basis of such demand (with a copy to the Administrative Agent)), the Company shall pay directly to such Bank such additional amount or amounts as will compensate such Bank for the cost of such additional capital or of such reduced return which additional amount shall be payable on each date on which accrued commitment fees are payable under this Agreement occurring thereafter until the Company is notified that the circumstances giving rise to said increased cost no longer exist. In determining such amount, such Bank may use any reasonable averaging and attribution methods. The protection of this paragraph (b) shall be available to each Bank regardless of any possible contention of invalidity or inapplicability of the Regulatory Change that shall have occurred.

     (c) Bank will promptly notify the Company and the Administrative Agent forthwith upon learning of the occurrence after the date hereof of any event entitling such Bank to compensation pursuant to this Section 8.1.

     8.2 Basis for Determining Interest Rate Inadequate. If on or before the Business Day preceding the first day of a Loan Period for a requested Eurodollar Loan (a) the Administrative Agent determines (which determination shall be binding and conclusive on all parties) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the Eurodollar Rate applicable to such Loan Period, or (b) Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the Eurodollar Rate will not adequately and fairly reflect the cost to such Banks of funding their Eurodollar Loans for such Loan Period, the Administrative Agent shall forthwith give notice thereof to the Company and the Banks, whereupon until the Administrative Agent notifies the Company that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make Eurodollar Loans shall be suspended. Unless the Company notifies the Administrative Agent on or before the Business Day preceding the first day of the Loan Period for the requested Eurodollar Loan that it elects not to borrow on the date specified in the Company’s notice of the proposed borrowing, the proposed borrowing shall instead be made as a Floating Rate Loan borrowing.

     8.3 Changes in Law Rendering Certain Loans Unlawful. In the event that the adoption of any applicable law, rule, or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or any Applicable Lending Office of such Bank) with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency, should make it unlawful or impossible for a Bank or its Applicable Lending Office (“Affected Bank”) to make, maintain, or fund Eurodollar Loans, then (a) the Affected Bank shall promptly notify the Administrative Agent (which shall promptly advise each Bank thereof), (b) the obligation of the Affected Bank to make Eurodollar Loans shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness (and for such duration any requests by the Company for Eurodollar Loans shall be deemed, with respect to the Affected Bank, to be requests for Floating Rate Loans repayable on the same date as the Eurodollar Loans made by the other non-affected Banks), and (c) if the Affected Bank so requests, the Company shall prepay in full the then outstanding principal amount of the Eurodollar Loans of the Affected Bank made unlawful for the Affected Bank, together with accrued interest thereon and any funding losses pursuant to Section 8.5, prior to the last day of the Loan Period therefor, on such date as may be required by the relevant law, regulation, or interpretation. Concurrently with prepaying each such Eurodollar Loan, the Company shall borrow, and the Affected Bank shall make, a Floating Rate Loan in an equal principal amount (on which interest and principal shall be payable contemporaneously with the related Eurodollar Loans of the other Banks).

     8.4 Eurodollar Reserve Requirements. For so long as any Bank may be required to maintain reserves against “Eurocurrency liabilities” under Regulation D of the Board of Governors of the Federal Reserve System (or, so long as any Bank may be required, by reason of any Regulatory Change, to maintain reserves against any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Bank which includes any Eurodollar Loans hereunder), then any affected Bank shall notify the Administrative Agent and the Company shall pay to the Administrative Agent for the account of each Bank, on each date when interest shall be payable in accordance with Section 4.3, an additional amount with respect to the outstanding principal amount of its Eurodollar Loans for each day during the period with respect to which interest is then paid or payable, to be determined as follows:

                                           (   R                      )             1
    Additional amount = P  X               (  ------        -  R       )    X       ------
                                           (   (1 - r)                )             360
P    =      the principal amount of such Eurodollar Loan outstanding on such day;
R    =      the Eurodollar Rate which is a component of the rate at which interest accrues on such
            Eurodollar Loan for such day (expressed as a decimal); and
r    =      the Eurodollar Reserve Percentage.

     The Administrative Agent shall provide the Company with notice of the amount payable under this Section 8.4 at least two Business Days prior to the required date of payment thereof.

     8.5 Funding Losses. The Company hereby agrees that upon demand by any Bank (which demand shall be accompanied by a statement setting forth the basis for the calculations of the amount being claimed), the Company will indemnify such Bank against any net loss or expense which such Bank may sustain or incur (including without limitation any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund or maintain Eurodollar Loans), as reasonably determined by such Bank, as a result of (a) any prepayment of a Eurodollar Loan of such Bank on a date other than the last day of the Loan Period for such Loan, or (b) any failure by the Company to borrow any Loans on a date specified therefor in a notice of borrowing pursuant to Section 2.3. For this purpose, all notices of borrowings to the Administrative Agent pursuant to this Agreement shall be deemed to be irrevocable.

     8.6 Right of Banks to Fund through Other Offices. Each Bank may, if it so elects, fulfill its commitment as to any Eurodollar Loan by causing a branch or affiliate of such Bank to make such Eurodollar Loan, provided that in such event for the purposes of this Agreement such Eurodollar Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Eurodollar Loan shall nevertheless be to such Bank and shall be deemed held by it, to the extent of such Eurodollar Loan, for the account of such branch or affiliate.

     8.7 Discretion of Banks as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Bank had actually funded and maintained each Eurodollar Loan during each Loan Period for such Eurodollar Loan through the purchase of deposits having a maturity corresponding to such Loan Period and bearing an interest rate equal to the Eurodollar Rate for such Loan Period.

     8.8 Alternative Lenders. In the event that it becomes unlawful or impossible for a Bank to make, maintain, or fund Eurodollar Loans as described in Section 8.3, or an additional amount is required to be paid to any Bank under Section 8.1, then at any time after receipt of notice of such event as required by the respective sections and upon giving written notice to the Administrative Agent (which shall promptly communicate such notice to the Bank concerned), the Company, at its option, may elect to cancel the Commitment of such Bank, but such cancellation shall be effective only upon the identification and substitution of a bank or banks to assume the Commitment of the subject Bank; provided, however, that the Company shall have the foregoing cancellation option only at a time when there is a single Bank which has been so affected under said Section 8.3 or said Section 8.1. The assumption of the Commitment of the subject Bank shall be made in accordance with the provisions of clause(s) (ii) and/or (iii) of paragraph (a) of Section 2.6, as if the subject Bank were a Retiring Bank and an Adjustment Certificate (with appropriate revisions) shall be executed by the applicable parties (and the Administrative Agent shall furnish a copy thereof to the Company and the Banks).

     8.9 Floating Rate Loans Substituted for Affected Eurodollar Loans. If any Bank has demanded compensation under Section 8.1(a), and the Company shall, by at least three Business Days prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section 8.9 shall apply to such Bank, then, unless and until such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer apply:

     (a) all Loans which would otherwise be made by such Bank as Eurodollar Loans shall be made instead as Floating Rate Loans (on which interest and principal shall be payable contemporaneously with the related Eurodollar Loans of the other Banks), and

     (b) after each of its Eurodollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Eurodollar Loans shall be applied to repay its Floating Rate Loans instead.

     8.10 Conclusiveness of Determination; Survival of Provisions. Any determination by a Bank pursuant to Sections 8.1, 8.2, 8.3, 8.4, 8.5 or 8.9 shall be conclusive absent manifest error. The provisions of Sections 8.1, 8.4 and 8.5 shall survive termination of this Agreement.

SECTION 9

REPRESENTATIONS AND WARRANTIES

     To induce the Banks to enter into this Agreement and to make Loans hereunder, the Company represents and warrants to the Administrative Agent and the Banks that as of the Effective Date:

     9.1 Organization, Etc. The Company and each Significant Subsidiary is a corporation duly existing and in good standing under the laws of the State of Washington or such other state under the laws of which such Significant Subsidiary is organized and is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, unless the failure to so qualify would not have a material adverse effect on its properties or business.

     9.2 Authorization; No Conflict. The execution and delivery of this Agreement and the Notes, the borrowings hereunder, and the performance by the Company of its obligations under this Agreement and the Notes are within the Company’s corporate powers, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or of any agreement binding upon the Company.

     9.3 Governmental Approvals. The Washington Utilities and Transportation Commission or other applicable governmental authority or regulatory body has duly issued any order authorizing the Company to enter into this Agreement, to execute and deliver this Agreement and the Notes, to borrow hereunder and to perform its obligations under this Agreement and the Notes, that may be required under the laws of the State of Washington and such order, if any is required, remains in full force and effect. No other authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by the Company of this Agreement and the Notes, the borrowings hereunder, and the performance by the Company of its obligations under this Agreement and the Notes.

     9.4 Validity and Binding Nature. This Agreement is, and the Notes when duly executed and delivered will be, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors’ rights generally or by general equitable principles.

     9.5 Financial Statements. The audited consolidated financial statements as of December 31, 1995 of Puget and as of September 30, 1996 of WECO, and, in the case of Puget, its unaudited consolidated financial statements as of March 31, June 30, and September 30, 1996, copies of which have been furnished to each Bank, have been prepared in conformity with generally accepted accounting principles applied on a basis consistent (except as may be required by any change in generally accepted accounting principles) with the preceding fiscal period, accurately present the financial condition of Puget and WECO and their respective Subsidiaries as of such dates and the results of their operations for the periods then ended, and since December 31, 1995 for Puget and September 30, 1996 for WECO, there has been no material adverse change in the consolidated business, assets, revenues, financial condition, operations or prospects of either Puget or WECO, or, from and after their merger, of the Company and its Consolidated Subsidiaries, which would adversely impact the Company’s ability to perform its obligations under this Agreement.

     9.6 Litigation. There is no action, suit, or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency, or official which in any manner draws into question the validity of this Agreement or the Notes or (except as disclosed in the respective 1995 or 1996 Form 10-K for either of the Company’s predecessors) in which there is a reasonable possibility of an adverse decision which could materially adversely affect the ability of the Company to perform its obligations under this Agreement.

     9.7 Employee Benefit Plans. Each Plan complies in all material respects with all applicable requirements of law and regulation, no Reportable Event (as defined in ERISA with the exception of the merger of WECO into Puget to form the Company and for which the Pension Benefit Guaranty Corporation has waived any reporting requirement) has occurred with respect to any Plan, and no contribution failure has occurred with respect to any Plan sufficient to give rise to a lien under Section 302(f) of ERISA.

     9.8 Regulation. The Company is not engaged directly or indirectly in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System) and less than 25% of the assets of the Company and of the Company and its Subsidiaries consists of margin stock.

     9.9 Public Utility Holding Company Act. Either (a) neither the Company nor any Subsidiary is a “holding company,” or a “subsidiary company” of a “holding company,” or an “affiliate” of a “holding company,” within the meaning of the Public Utility Holding Company Act, or (b)(i) the Company is a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act, but such “holding company” and its “subsidiary companies,” including the Company, are exempt from the provisions thereof, except Section 9(a)(2) thereof, by virtue of having filed with the Securities and Exchange Commission a Statement By Holding Company Claiming Exemption Under Rule U-2 From The Provisions of the Public Utility Holding Company Act of 1935 on Form U3A-2, and (ii) such exemption is in full force and effect and, to the best of the Company’s knowledge, no proceedings to revoke or modify such exemption have been instituted or are pending.

9.10 Investment Company Act. The Company is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended.

     9.11 Environmental Matters. The Company conducts in the ordinary course of its business a review of the effect of Environmental Laws on the business, operations, and properties of the Company and its Subsidiaries, and as a result thereof has reasonably concluded that Environmental Laws are unlikely to have a material adverse effect on their operations, taken as a whole, or on the ability of the Company to perform its obligations under this Agreement.

     9.12 Information. All information furnished in writing to the Administrative Agent or the Banks by or on behalf of the Company prior to the Effective Date in connection with or pursuant to this Agreement and the relationship established hereunder, at the time the same was so furnished, but in the case of information dated as of a prior date, as of such date, (i) in the case of any information prepared in the ordinary course of business, was complete and correct in the light of the purpose prepared, and, in the case of any information the preparation of which was requested by any Bank, was complete and correct in all material respects to the extent necessary to give such Bank true and accurate knowledge of the subject matter thereof, (ii) did not contain any untrue statement of a material fact, and (iii) did not omit to state a material fact necessary in order to make the statements contained therein not misleading in the light of the circumstances under which they were made.

SECTION 10

CONDITIONS TO EFFECTIVE DATE; LENDING

     The effectiveness of this Agreement and of the Commitment of each Bank to make its Loans is subject to the following conditions precedent:

     10.1 Conditions Precedent to Effective Date. The Commitment of each Bank shall not become effective until (i) each of the following conditions has been met and satisfied and (ii) the Administrative Agent shall have received, in form and substance satisfactory to it, and in sufficient copies to provide one to each Bank, evidence of:

     10.1.1 Approval Terms of Merger by WUTC/Banks. The Washington Utilities and Transportation Commission shall have approved the plan of merger between Puget and WECO upon terms which are satisfactory to Puget and WECO and which have been approved by Banks holding aggregate Percentages of at least 66 2/3 % of the total Percentages as evidenced by written notices of approval to the Administrative Agent.

     10.1.2 Merger Effected. The merger of WECO into Puget on the terms approved by the WUTC and the Banks pursuant to Section 10.1.1 above shall have been completed and fully effective and the surviving corporation shall have been renamed Puget Sound Energy Company.

     10.1.3 Termination of Other Credit Agreements. Each of the following credit agreements shall have been terminated pursuant to the terms thereof, and all payments required to be made in connection with such termination shall have been made, or the Administrative Agent has received (a) written notice from the agent for the lenders under each such credit agreement that such credit agreement will so terminate immediately upon said lenders’ receipt of the amount specified in said notice, and (b) the Company’s irrevocable written instructions to so direct payment of the corresponding amount(s) out of the proceeds of the initial Loan:

     (i) that credit agreement dated December 1, 1991, among Puget, various banks and Seafirst Bank f/k/a Seattle-First National Bank, as agent,

     (ii) that credit agreement dated December 1, 1991, among Puget, various banks and The Bank of New York, as agent, and

     (iii) that credit agreement dated March 31, 1995, among WECO, various banks and The First National Bank of Chicago, as agent.

     10.1.4 Must Occur Not Later Than March 31, 1997. All of the conditions precedent on the Effective Date set forth in this Section 10.1 must be satisfied no later than March 31, 1997 or such later date to which Puget and WECO may agree to extend their merger agreement with the written consent of Banks holding 66 2/3% of the total Percentage.

     10.1.5 Warranties True. Each of the Company's representations and warranties set forth in Section 9 shall be true and correct.

     10.2 Initial Loan. The obligation of each Bank to make its initial Loan is, in addition to the conditions precedent specified in Sections 10.3 and 10.4, subject to the condition precedent that the Administrative Agent shall have received all of the following, each duly executed and dated the date of such Loan, in form and substance satisfactory to the Administrative Agent, and each (except for the Notes, of which only the original shall be signed) in sufficient number of signed counterparts to provide one for each Bank:

     10.2.1 Note. The Note of the Company payable to the order of such Bank.

     10.2.2 Resolutions and Incumbency. Certified copies of resolutions of the Board of Directors of the Company authorizing this Agreement, the Notes and other documents provided for in this Agreement and the transactions contemplated hereby, together with a certification of the names of the officer or officers of the Company authorized to sign this Agreement and the Notes and other documents provided for in this Agreement and a sample of the true signature of each such officer (upon which certification each Bank may conclusively rely until it shall have received a further certification of the Secretary or any Assistant Secretary of the Company cancelling or amending such prior certification).

     10.2.3 Opinion of Counsel for the Company. The opinion of Perkins Coie LLP, counsel for the Company, addressed to the Administrative Agent and the Banks, to the effect that: (a) the Company and its Significant Subsidiaries are corporations duly existing and in good standing under the laws of the states of their respective incorporation; (b) the Company has full corporate power to execute, deliver and perform this Agreement, to borrow moneys hereunder, and to execute, deliver, and perform its obligations under the Notes; (c) the execution and delivery of this Agreement and the Notes, the borrowings hereunder, and the performance by the Company of its obligations under this Agreement and the Notes have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or, to the knowledge of such counsel, of any agreement binding upon the Company; (d) the Washington Utilities and Transportation Commission or other applicable governmental authority or regulatory body has duly issued an order authorizing the Company to enter into this Agreement, to execute and deliver this Agreement and the Notes, to borrow hereunder, and to perform its obligations under this Agreement and the Notes, and such order remains in full force and effect (or no such order is required under the laws of the State of Washington) and no other authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by the Company of this Agreement and the Notes, the borrowings hereunder, and the performance by the Company of its obligations under this Agreement and the Notes; (e) this Agreement and the Notes have been duly executed and delivered by the Company and are the legal, valid, and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors’ rights generally or by general equitable principles; and (f) either (i) neither the Company nor any Subsidiary is a “holding company,” or a “subsidiary company” of a “holding company,” or an “affiliate” of a “holding company,” within the meaning of the Public Utility Holding Company Act, or (ii) (A) the Company is a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act, but such “holding company” and its “subsidiary companies,” including the Company, are exempt from the provisions thereof, except Section 9(a)(2) thereof, by virtue of having filed with the Securities and Exchange Commission a Statement By Holding Company Claiming Exemption Under Rule 0-2 From The Provisions of the Public Utility Holding Company Act of 1935 on Form 0-3A-2, and (B) such exemption is in full force and effect and, to the best of such counsel’s knowledge, no proceedings to revoke or modify such exemption have been instituted or are pending.

     10.2.4 Regulatory Approval. A certified copy of any order of the Washington Utilities and Transportation Commission or other applicable governmental authority or regulatory body authorizing the Company to enter into this Agreement and to execute and deliver the Notes that may be required under the laws of the State of Washington.

     10.2.5 Other. Such other documents as the Administrative Agent or any Bank may reasonably request.

     10.3 All Loans. The obligation of each Bank to make the initial Loan and each subsequent Loan is subject to the following further-conditions precedent that (a) no Event of Default or Unmatured Event of Default has occurred and is continuing or will result from the making of such Loan, and (b) the representations and warranties of the Company contained in Sections 9.1, 9.2, 9.3, 9.4, 9.7, 9.8, 9.9, 9.10, 9.11 and 9.12 are true and correct as of the date of such requested Loan, with the same effect as though made on the date of such Loan.

     10.4 New Money Loans. The obligation of each Bank to make any Loan that would increase the aggregate outstanding principal amount of the Loans over the aggregate principal amount of the Loans outstanding immediately prior to the making of such Loan is subject to the further condition precedent that the warranties of the Company contained in Sections 9.5 and 9.6 are true and correct as of the date of such requested Loan with the same effect as though made on the date of such Loan; provided, however, that for purposes of the warranties contained in Section 9.5 and Section 9.6, the date of the referenced audited fiscal year-end financial statements and Form 10-K of the Company shall be that last furnished to the Banks with respect to a requested extension of the Termination Date pursuant to Section 2.4 and which such extension was accepted by the Required Banks.

     10.5 Loans On or After Extension of Termination Date. The obligation of each Bank to make its initial Loan on or after any extension of the Termination Date is subject to the following further condition precedent that the Administrative Agent shall have received all of the following, each duly executed and dated the date of such Loan, in form and substance satisfactory to the Administrative Agent, and each in sufficient number of signed counterparts to provide one for each Bank (unless such Loan is also the initial Loan under this Agreement, in which case the conditions precedent specified Sections 10.2, 10.3 and 10.4 shall be applicable):

     10.5.1 Bring-Down Opinion. The opinion of Messrs. Perkins Coie or other counsel for the Company acceptable to the Administrative Agent, addressed to the Administrative Agent and the Banks, reaffirming their opinion furnished pursuant to Section 10.23 (and applying to this Agreement and borrowings hereunder after giving effect to such extension of the Termination Date).

     10.5.2 Confirmations. Such other confirmations of the continuing effectiveness of any of the documents referred to in Section 10.2 as the Administrative Agent or any Bank may reasonably request.

SECTION 11

COMPANY’S COVENANTS

     After the Effective Date and until the expiration or termination of the Commitments and thereafter until all obligations of the Company hereunder and under the Notes are paid in full, the Company agrees that, unless at any time the Required Banks shall otherwise expressly consent in writing, it will:

     11.1 Reports, Certificates and Other Information. Furnish to Administrative Agent and each Bank:

     11.1.1 Annual Report. Within 100 days after the end of each fiscal year of the Company, a copy of the annual audited consolidated financial statements of the Company and its Subsidiaries prepared in conformity with generally accepted accounting principles applied on a basis consistent (except as may be required by any change in generally accepted accounting principles) with the audited consolidated financial statements of Puget and its Subsidiaries as of December 31, 1995, duly certified by independent certified public accountants of recognized national standing.

     11.1.2 Interim Reports. Within 60 days after each quarter (except the last quarter) of each fiscal year of the Company, a copy of the unaudited consolidated financial statements of the Company and its Subsidiaries prepared in the same manner as the audit report referred to in Section 11.1.1, signed by the Chief Financial Officer, Chief Accounting Officer, or the Treasurer of the Company and consisting of at least a balance sheet as of the close of such quarter, statements of earnings for such quarter and for the period from the beginning of such fiscal year to the close of such quarter, and statements of cash flow for the period from the beginning of such fiscal year to the close of such quarter.

     11.1.3 Certificates. Contemporaneously with the furnishing of a copy of each annual audited statements and of each set of quarterly statements provided for in this Section 11.1, a certificate dated as of the date of such annual or quarterly statement and signed by the President, the Chief Financial Officer, Chief Accounting Officer, or the Treasurer of the Company, certifying (i) the Company’s calculation of the financial covenant ratio pursuant to Section 11.14 and (ii) that no Event of Default or Unmatured Event of Default has occurred and is continuing, or, if there is any such event, describing it and the steps, if any, being taken to cure it.

     11.1.4 Reports to SEC and to Shareholders. Copies of each filing and report made by the Company or any Subsidiary with or to any securities exchange or the Securities and Exchange Commission, and of each communication from the Company or any Subsidiary to shareholders generally, promptly upon the filing or making thereof.

     11.1.5 Notice of Default and Litigation. Forthwith upon learning of the occurrence of either of the following, written notice thereof, describing the same and the steps being taken by the Company or the Subsidiary affected with respect thereto: (a) the occurrence of an Event of Default or an Unmatured Event of Default, or (b) the institution of any litigation, arbitration proceeding, or governmental proceeding in which there is a reasonable possibility of an adverse decision, or any adverse determination therein, which could materially adversely affect the ability of the Company to perform its obligations under this Agreement.

     11.1.6 Other Information. From time to time such other information concerning the Company and its Subsidiaries as any Bank or the Administrative Agent may reasonably request. All information furnished in writing to the Administrative Agent or the Banks by or on behalf of the Company on or after the Effective Date in connection with or pursuant to this Agreement or in connection with or pursuant to any amendment or modification of, or waiver of rights under, this Agreement, shall, at the time the same is so furnished, but in the case of information dated as of a prior date, as of such date, (i) in the case of any information prepared in the ordinary course of business, be complete and correct in the light of the purpose prepared, and, in the case of any information required by the terms of this Agreement or the preparation of which was requested by any Bank, be complete and correct to the extent necessary to give the Banks true and accurate knowledge of the subject matter thereof, (ii) not contain any untrue statement of a material fact, and (iii) not omit to state a material fact necessary in order to make the statements contained therein not misleading in the light of the circumstances under which they were made, and the furnishing of the same to the Administrative Agent or any Bank shall constitute a representation and warranty by the Company made on the date the same are so furnished to the effect specified in clauses (i), (ii), and (iii).

     11.2 Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each Significant Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory), franchises, and licenses in the state of its incorporation and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is reasonably necessary in view of its business and operations or the ownership of its properties, except as permitted under Section 11.3 or Section 11.8; provided, however, that neither the Company nor any Significant Subsidiary shall be required to preserve any right, franchise, or license if the loss thereof is not disadvantageous in any material respect to the Banks.

     11.3 Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all respects with all applicable laws, rules, regulations, and orders of any governmental authority, the non-compliance with which is likely to result in a material adverse change in the consolidated financial condition or results of operations of the Company and its Subsidiaries, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments, and governmental charges imposed upon it or upon its property, except to the extent contested in good faith and by appropriate proceedings.

     11.4 Maintenance of Insurance. Maintain, and cause each of its Significant Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations or through its own program of self-insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general area in which the Company or such Significant Subsidiary operates; provided, however, that the portion of such insurance constituting self-insurance is comparable to that usually maintained by such companies and the reserves established with respect to any such self-insurance programs are deemed adequate by the officer or officers of the Company responsible for insurance matters.

     11.5 Visitation Rights. At any reasonable time and from time to time, permit any Bank or the Administrative Agent or any agents or representatives thereof at their own expense to examine and make copies of and abstracts from the records and books of account of the Company and any of its Subsidiaries, and visit the properties of the Company and any of its Subsidiaries, and to discuss the affairs, finances, and accounts of the Company and any of its Subsidiaries with its officers.

     11.6 Keeping of Books. Keep, and cause each of its Significant Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each of its Significant Subsidiaries in accordance with generally accepted accounting principles consistently applied (except as may be required by any change in generally accepted accounting principles).

     11.7 Maintenance of Properties. Maintain and preserve, and cause each of its Significant Subsidiaries to maintain and preserve, all of its properties which are used or which are useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; provided, however, that nothing herein shall prevent the Company from discontinuing the operation or reducing the capacity of any of its plants or properties if (a) in the reasonable judgment of the Company, any such action is necessary or desirable in the conduct of the business of the Company, provided that such discontinuation or reduction shall not be such as to result in a material adverse change in the financial condition or results of operations of the Company, or (b) the Company is ordered to do so by any regulatory authority having jurisdiction over the Company.

     11.8 Mergers, Etc. Not merge with or into or consolidate with or into, or acquire all or substantially all of the assets of, any Person, or permit any Significant Subsidiary to do so, except that (a) any Subsidiary of the Company may merge or consolidate with or into or transfer assets to the Company or any other Subsidiary thereof, or (b) the Company or any of its Subsidiaries may merge or consolidate with, acquire by purchase of stock or acquire the assets of any other Person the assets of which at the time of such merger or consolidation do not exceed 10% of the assets of the Company and its Consolidated Subsidiaries, provided that in the case of any such merger or consolidation involving the Company, it is the surviving entity. The above determinations in this Section 11.8 shall be based on pro forma consolidated financial statements of the Company and its Subsidiaries as of the date of such acquisition.

     11.9 Sales, Etc. of Assets. Not sell, lease, transfer, or otherwise dispose of, or permit any Significant Subsidiary to sell, lease, transfer, or otherwise dispose of, any material part of its assets (except to the extent permitted by Section 11.10) if such sale, lease, transfer or other disposition adversely impacts the Company’s ability to perform its obligations under this Agreement.

     11.10 Liens. Not create, incur, assume, or suffer to exist any Lien upon or with respect to any of its properties, whether now owned or hereafter acquired, to secure any Indebtedness of any Person, any obligation of such Person to pay the deferred purchase price of property or services (except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms), or any obligation of such Person as lessee under a capital lease, other than:

(a) Permitted Liens;

     (b) the Lien of the First Mortgage and any Lien described in any deeds or other instruments under which property has been conveyed to the Company and to which the Lien of the First Mortgage is expressly made subject;

     (c) "permitted encumbrances" as defined in the First Mortgage;

     (d) purchase money mortgages or other purchase money liens upon any property hereafter acquired, mortgages or liens existing upon property hereafter acquired at the date of acquisition and security interests under conditional sale agreements or other similar title retention agreements entered into with respect to any property hereafter acquired within six months of the date of such acquisition (excluding, however, in each case, property referred to in paragraph (e) below); provided, however, that no such mortgage, lien, or security interest permitted under this paragraph (d) shall extend to or cover any property of the Company or any Subsidiary then owned or thereafter acquired (except the property then being acquired, property being acquired with the proceeds of indebtedness secured by such purchase money mortgages, liens or security interests, replacements thereof, fixed improvements erected thereon, and fixed improvements appertaining thereto erected on adjacent property); or

     (e) Liens on coal or other fuel or fuel products not supplying any plant of the Company in existence on the date hereof as security for any indebtedness incurred by the Company for the purpose of financing the acquisition of such coal or other fuel or fuel products.

     11.11 Compliance with ERISA. Not (a) voluntarily terminate any Plan such that the termination results in any material liability of the Company to the Pension Benefit Guaranty Corporation or any other Person under Title IV of ERISA, (b) enter into any Prohibited Transaction (as defined in Section 4975 of the Internal Revenue Code of 1986, as amended, and in ERISA) involving any Plan which results in any material liability of the Company to the Pension Benefit Guaranty Corporation or any other Person under Title IV of ERISA, (c) cause any occurrence of any Reportable Event which results in any material liability of the Company to the Pension Benefit Guaranty Corporation or any other Person under Title IV of ERISA, or (d) allow or suffer to exist any other event or condition known to the Company which results in any material liability of the Company to the Pension Benefit Guaranty Corporation or any other Person under Title IV of ERISA.

     11.12 Use of Proceeds. Use the proceeds of the Loans for general working capital purposes and not use or permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “buying or carrying margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended from time to time.

     11.13 Scope of Business. Engage only in substantially the same types of businesses as it is engaged in on the date hereof.

     11.14 Financial Covenant. Not permit the aggregate Indebtedness of the Company to exceed 65% of the sum of said Indebtedness plus preferred and common shareholder equity as determined at the end of each fiscal quarter of the Company.

SECTION 12

EVENTS OF DEFAULT AND THEIR EFFECT

     12.1 Events of Default. Each of the following shall constitute an "Event of Default" under this Agreement:

     12.1.1 Non-Payment of Notes, Etc. Default in the payment when due of any principal of any Note, or default and the continuance thereof for five days in the payment when due of any interest on any Note or any fees payable by the Company hereunder.

     12.1.2 Non-Payment of Other Indebtedness. Default in the payment when due, whether by acceleration or otherwise, of any Indebtedness (other than the Loans under this Agreement) of the Company or any Significant Subsidiary, or guaranteed by the Company or any Significant Subsidiary, in an amount which exceeds $10,000,000 individually or default in the performance or observance of any obligation or condition with respect to any such other Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or to permit the holder or holders thereof, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity.

     12.1.3 Bankruptcy, Insolvency, Etc. The Company or any Significant Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or the Company or any Significant Subsidiary applies for, consents to, or acquiesces in the appointment of, a trustee, receiver, or other custodian for the Company or such Significant Subsidiary or for a substantial part of the property of any thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver, or other custodian is appointed for the Company or any Significant Subsidiary or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding (except the voluntary dissolution, not under any bankruptcy or insolvency law, of a Significant Subsidiary), is commenced in respect of the Company or any Significant Subsidiary, and if such case or proceeding is not commenced by the Company or such Significant Subsidiary, it is consented to or acquiesced in by the Company or such Significant Subsidiary or remains for 60 days undismissed or an order for relief is entered involuntarily before the expiration of 60 days; or the Company or any Significant Subsidiary takes any corporate action to authorize, or in furtherance of, any of the foregoing.

     12.1.4 Non-Compliance with This Agreement. Failure by the Company to (a) preserve its corporate existence, (b) comply with the provisions of paragraph (a) of Section 11.1.5, (c) comply with the provisions of Sections 11.8, 11.9, or 11.11, or (d) comply with or to perform any other provision of this Agreement (and not constituting an Event of Default under any of the preceding provisions of this Section 12) and, in the case of paragraph (d) hereof, continuance of such failure for 30 days after notice thereof to the Company from the Administrative Agent, or the Required Banks.

     12.1.5 Warranties. Any representation, warranty, certification, or statement made (or deemed made) by the Company herein or by the Company (or any of its officers) in connection herewith or with the execution and delivery of its Notes or in any certificate, financial statement, or other document delivered pursuant to this Agreement shall prove to have been (i) fraudulent or (ii) misleading in any respect material to the Company’s ability to perform its obligations under this Agreement when made (or deemed made).

     12.1.6 Employee Benefit Plans. With respect to any Plan, a Reportable Event (as defined in ERISA) has occurred and is continuing.

     12.2 Effect of Event of Default. (a)  If any Event of Default described in Section 12.1.1 or Section 12.1.3 shall occur with respect to the Company, the Commitments shall immediately terminate and all Notes (with accrued interest thereon) and all other amounts payable under this Agreement shall become immediately due and payable, all without notice of any kind, (b) in the case of any other Event of Default, the Administrative Agent may (and upon written request of the Required Banks shall) declare the Commitments to be terminated and all Notes, accrued interest thereon, and all other amounts payable under this Agreement to be due and payable, whereupon the Commitments shall immediately terminate and all Notes (with accrued interest thereon) and all such other amounts shall become immediately due and payable, all without notice of any kind, (c) the Administrative Agent shall promptly advise the Company and each Bank of any such declaration, but failure to do so shall not impair the effect of such declaration, and (d) notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 12.1.1 or Section 12.1.3 may be waived by the written concurrence of the holders of 100% of the aggregate unpaid principal amount of the Notes, and the effect as an Event of Default of any other event described in this Section 12 may be waived by the written concurrence of the Required Banks.

SECTION 13

THE ADMINISTRATIVE AGENT

     13.1 Appointment and Powers. Each Bank hereby irrevocably appoints and authorizes Bank of America NW, N.A. doing business as Seafirst Bank, and Seafirst Bank hereby agrees, to act as the agent of such Bank under this Agreement with such powers as are delegated to the Administrative Agent by the terms hereof, together with such other powers as are reasonably incidental thereto. The Administrative Agent’s duties shall be purely ministerial and it shall have no duties or responsibilities except those expressly set forth in this Agreement and shall not be required under any circumstances to take any action that, in its judgment, is contrary to this Agreement or Applicable Law or would expose it to Liability. The Administrative Agent shall not, by reason of its serving as the Administrative Agent, be a trustee or other fiduciary for any Bank

     13.2 Limitation on Administrative Agent’s Liability. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall be liable or responsible to the Banks for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence, willful misconduct or knowing violations of law. The Administrative Agent shall not be responsible to any Bank for (a) any recitals, statements, representations, or warranties contained in this Agreement or in any certificate or other document referred to, provided for in, or received by, any of the Banks under, this Agreement, (b) the validity, effectiveness, or enforceability of this Agreement or the Notes or any such certificate or other document or (c) any failure by the Company to perform any of its obligations under this Agreement or the Notes. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact. The Administrative Agent shall be entitled to rely upon any certification, notice, or other communication (including any thereof by telephone, telex, telecopier, telegram, or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants, and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks.

     13.3 Events of Default and Unmatured Events of Default. The Administrative Agent shall not be deemed to have knowledge of the occurrence of an Event of Default or of an Unmatured Event of Default (other than the non-payment to it of commitment fees or principal of or interest on Loans) unless the Administrative Agent has received notice from a Bank or the Company specifying such Event of Default or Unmatured Event of Default and stating that such notice is a “Notice of Event of Default or Unmatured Event of Default.” The Administrative Agent shall (subject to Section 13.6(b)) (a) in the case of an Event of Default take any or all of the actions referred to in Section 12.2(b) if so directed by the Required Banks, and (b) in the case of any Event of Default or Unmatured Event of Default, take such other action with respect to such Event of Default or Unmatured Event of Default as shall be reasonably directed by the Required Banks; provided, that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable in the best interests of the Banks.

     13.4 Documentation and Syndication Agents. Neither of the Documentation nor Syndication Agents shall have any agency duties or responsibilities as agents for any party under this Agreement.

     13.5 Rights as a Bank. Each Person acting as the Administrative Agent, Documentation Agent or Syndication Agent that is also a Bank shall, in its capacity as a Bank, have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not acting as one of said Agents, and the term “Bank” or “Banks” shall include such Person in its individual capacity. Each Person acting as the Administrative Agent and its Affiliates, or as the Documentation Agent or Syndication Agent and their respective Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, and generally engage in any kind of banking, trust, or other business with the Company and its Affiliates as if it were not acting as such Agent, and such Person and its Affiliates may accept fees and other consideration from the Company and its Affiliates for services in connection with this Agreement or otherwise without having to account for the same to the Banks

     13.6 Indemnification. (a) The Banks agree (which agreement shall survive any termination of this Agreement) to indemnify each of the Administrative Agent, Documentation Agent and Syndication Agent (to the extent not reimbursed by the Company hereunder), ratably on the basis of the respective principal amounts of the Loans outstanding made by the Banks (or, if no Loans are at the time outstanding, ratably on the basis of their respective Commitments), for any and all Liabilities, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind and nature whatsoever that may be imposed on, incurred by, or asserted against any of such Agents (including the costs and expenses that the Company is obligated to pay hereunder) in any way relating to or arising out of this Agreement or any other documents contemplated thereby or referred to therein or the transactions contemplated thereby or the enforcement of any of the terms thereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from gross negligence, willful misconduct or knowing violations of law by such Agent.

     (b) Notwithstanding any other provision of this Agreement, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Banks against any and all Liability and expense that may be incurred by it by reason of taking or continuing to take any such action.

     13.7 Non-Reliance on Administrative Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its own decision to enter into this Agreement, and that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or its Note. Except as provided in Section 13.3, the Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the properties or books of the Company or any Subsidiary. Except for notices, reports, and other documents and information expressly required to be furnished to the Banks by the Administrative Agent under this Agreement, the Administrative Agent shall not have any duty or responsibility to provide any Banks with any credit or other information concerning the affairs, financial condition, or business of the Company or any Subsidiary that may come into the possession of the Administrative Agent or any of its Affiliates.

     13.8 Resignation/Removal of the Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving at least 30 days’ prior notice thereof to the Banks and the Company. So long as no Event of Default or Unmatured Event of Default exists, the Company with the approval of the Required Banks, excluding the Bank being removed as Administrative Agent, may remove the Administrative Agent with or without cause. The Required Banks, excluding the Bank being removed as Administrative Agent, may remove the Administrative Agent any time with or without cause, with the consent of the Company, which consent shall not be unreasonably withheld; provided, however, no approval by the Company shall be required during any period during which there exists an Event of Default or Unmatured Event of Default.

     13.9 Appointment of Successor Agent. Upon receipt of notice of the Administrative Agent’s resignation or upon removal of the Administrative Agent by the Required Banks and/or the Company in accordance with Section 13.8, the Required Banks, excluding the resigning Administrative Agent, may, with the approval of the Company, appoint a successor Administrative Agent; provided, however, no approval by the Company shall be required during any period during which there exists an Event of Default or Unmatured Event of Default. In the case of the Administrative Agent’s resignation, if no successor Administrative Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent’s giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent. Upon the acceptance by any Person of its appointment as a successor Administrative Agent, such Person shall thereupon succeed to and become vested with all the rights, powers, privileges, duties, and obligations of the retiring Administrative Agent and the retiring or removed Administrative Agent shall be discharged from its duties and obligations as Administrative Agent under this Agreement. After any such resignation or removal, the provisions of this Section 13 shall continue in effect for the resigning or removed Administrative Agent’s benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.

SECTION 14

GENERAL

     14.1 Waiver; Amendments. No delay on the part of the Administrative Agent, any Bank, or the holder of any Note in the exercise of any right, power, or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power, or remedy preclude other or further exercise thereof, or the exercise of any other right, power, or remedy. No amendment, modification, or waiver of, or consent with respect to, any provision of this Agreement or the Notes shall in any event be effective unless the same shall be in writing and signed and delivered by the Administrative Agent and signed and delivered by Banks having an aggregate Percentage of not less than the aggregate Percentage expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement or the Notes, by the Required Banks and then any such amendment, modification, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, modification, waiver, or consent (a) shall extend or increase the amount of the Commitments, extend the maturity of the Notes or the date for any payment of principal, interest or commitment fee hereunder, or reduce the commitment fee hereunder, the rate of interest payable with respect to the Notes, amounts payable pursuant to Section 8.1 or the aggregate Percentage required to effect an amendment, modification, waiver, or consent without the consent of all of the Banks or (b) shall reduce the principal amount of, or rate of interest on, any Note without the consent of the holder of such Note. No provisions of Section 13 shall be amended, modified, or waived without the consent of the Administrative Agent or of this Section 14.1 without the consent of all of the Banks.

     14.2 Costs, Expenses and Taxes. The Company agrees to pay on demand all out-of-pocket costs and expenses of the Administrative Agent (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and of local counsel, if any, who may be retained by said counsel) in connection with the preparation, execution, delivery, and administration of this Agreement, the Notes, and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, and all out-of pocket costs and expenses (including reasonable attorneys’ fees and legal expenses) incurred by any Bank or the Administrative Agent in connection with the enforcement of this Agreement, the Notes, and any other such instruments or documents or any collateral security. Each Bank agrees to reimburse the Administrative Agent for such Bank’s pro rata share (based upon its respective Percentage) of any such costs or expenses not paid by the Company. In addition, the Company agrees to pay, and to save the Administrative Agent and the Banks harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or of any other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided for in this Section 14.2 shall survive any termination of this Agreement.

     14.3 Notices. All notices hereunder shall be in writing to the addresses of the parties set forth below their respective names on the signature pages hereof or, in the case of notice to a Replacement Bank, to its address set forth on the Adjustment Certificate executed by it as a Replacement Bank, or, in the case of an Assignee to its address as set forth in the Assignment and Assumption Agreement, and in any case, to such other address as any such party may by notice give to the other parties hereto. Notices given by mail shall be deemed to have been given three days after the date sent if sent by registered or certified mail, postage prepaid. Notices given by telegram, telex, or telecopier shall be deemed to have been given when sent, if properly addressed to the party to whom sent, at its address, as aforesaid; provided, that without affecting the effectiveness of any such electronic transmission, the sender shall be expected to extend the courtesy of telephonic notice to the recipient of such electronic transmission.

     14.4 Governing Law. This Agreement and each Note shall be a contract made under and governed by the laws of the State of Washington.

     14.5 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.

     14.6 Effective Date. This Agreement shall become effective on the Effective Date.

14.7 Assignments and Participations Granted by Banks. -----------------------------------------------

     14.7.1 Participations. Any Bank may, without the consent of the Company, at any time sell to one or more banks or other financial institutions (each a “Participant”) participating interests in any Loan owing to such Bank, any Note held by such Bank, the Commitment of such Bank hereunder, and any other interest of such Bank hereunder. After any such sale, each Bank shall notify the Company thereof. In the event of any such sale by a Bank of a participating interest to a Participant, such Bank’s obligations under this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the holder of its Note, if any, for all purposes under this Agreement, and the Company and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement. Any agreement pursuant to which a Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement which pursuant to Section 14.1 requires the consent of all Banks without the consent of the Participant; provided further that such Participant shall be bound by any waiver, amendment or other decision that all Banks shall be required to abide by pursuant to a vote by Required Banks. Subject to the provisions of Section 14.7.3, the Company agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Sections 8.1, 8.4 and 8.5 with respect to its participating interest. An assignment or other transfer which is not permitted by Sections 14.7.2 and 14.7.5 below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this Section 14.7.1.

     14.7.2 Assignments.

     (a) Any Bank may at any time sell to one or more Eligible Institutions (each an “Assignee”) all or a portion of its rights and obligations under this Agreement and the Notes with the consent of the Company, provided no consent of the Company shall be required following an Event of Default or while an Unmatured Event of Default exists. Each Assignee shall assume all such rights and obligations pursuant to an Assignment and Assumption Agreement executed by such Assignee, such transferor Bank and the Company. In no event shall (i) any Commitment of a transferor Bank (together with the Commitment of any affiliate of such Bank), after giving effect to any sale pursuant to this Section 14.7.2, be less than $10,000,000, or (ii) any Commitment of an Assignee (together with the Commitment of any affiliate of such Assignee), after giving effect to any sale pursuant to this Section 14.7.2, be less than $10,000,000, except in each case as may result upon the transfer by a Bank of its Commitment in its entirety.

     (b) So long as no Event of Default or Unmatured Event of Default has occurred and is continuing, no interest may be sold by a Bank pursuant to this Section 14.7.2 without the prior written consent of the Company and the Administrative Agent, which shall not be unreasonably withheld. The withholding of consent by the Company shall not be deemed unreasonable if based solely upon the Company’s desire to (i) balance relative loan exposures to such Eligible Assignee among all credit facilities of the Company or (ii) avoid payment of any additional amounts payable to such Assignee under Sections 8.1, 8.4, and 8.5 which would arise from such assignment.

     (c) Upon (i) execution of an Assignment and Assumption Agreement, (ii) delivery by the transferor Bank of an executed copy thereof, together with notice that the payment referred to in clause (iii) below shall have been made, to the Company and the Administrative Agent, (iii) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee and (iv) if the Assignee is organized under the laws of any Jurisdiction other than the United States or any state thereof, evidence satisfactory to the Administrative Agent and the Company of compliance with the provisions of Section 14.7.5, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with a Commitment as set forth in such Assignment and Assumption Agreement, and the Transferor Bank shall be released from its obligations hereunder to a correspondent extent, and no further consent or action by the Company, the Banks or the Administrative Agent shall be required to effectuate such transfer. Each Assignee shall be bound by any waiver, amendment or other decision that all Banks shall be required to abide by pursuant to a vote by Required Banks.

     (d) Upon the consummation of any transfer to an Assignee pursuant to this Section 14.7.2, the transferor Bank, the Administrative Agent and the Company shall make appropriate arrangements so that, if requested by the transferor Bank or the Assignee, a new Note or Notes shall be delivered from the Company to the transferor Bank and/or such Assignee. In connection with any such assignment, the Assignee or the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,500.

     14.7.3 No Increased Costs. No Assignee, Participant or other transferee (including any successor Applicable Lending Office) of any Bank’s rights shall be entitled to receive any greater payment under Section 8.1, 8.4, or 8.5 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company’s prior written consent or by reason of the provisions of Sections 8.1 or 8.3 requiring such Bank to designate a different Applicable Lending office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist.

     14.7.4 Share Information. Each Bank may, upon the written consent of the Company, which consent shall not be unreasonably withheld, disclose to any Participant or Assignee (each a “Transferee”) and any prospective Transferee any and all financial information in such Bank’s possession concerning the Company that has been delivered to such Bank by the Company pursuant to this Agreement or that has been delivered to such Bank by the Company in connection with such Bank’s credit evaluation prior to entering into this Agreement, subject in all cases to agreement by such Transferee or prospective Transferee to maintain the confidentiality of such information.

     14.7.5 No Withholding Tax. If pursuant to Section 14.7.2, any interest in this Agreement or any Note is transferred to any Assignee that is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Bank shall cause such Assignee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Bank (for the benefit of the transferor Bank, the Administrative Agent and the Company) that under applicable law and treaties no taxes will be required to be withheld by the Administrative Agent, the Company or the transferor Bank with respect to any payments to be made to such Assignee in respect of the Loans and (ii) to furnish to each of the Transferor Bank, the Administrative Agent and the Company two duly completed copies of the duly executed Assignment and Assumption Agreement substantially in the form of Exhibit C hereto.

     14.7.6 Pledge to Federal Reserve Bank. Notwithstanding any provision of this Section 14.7 to the contrary, any Bank may assign or pledge any of its rights and interests in the Loans to a Federal Reserve Bank without the consent of the Company.

     14.8 Successors and Assigns. This Agreement shall be binding upon the Company, the Banks, and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Banks, and the Administrative Agent and their respective successors and assigns; provided, however, that the Company may not assign any of its rights or obligations hereunder without the consent of all of the Banks.

     14.9 Indemnification of Banks and Agents. The Company agrees to indemnify and hold harmless each Agent, Bank, and their officers, directors, employees, and agents from any liability, loss, or expenses incurred thereby in connection with this Agreement or arising out of the Company’s use of the proceeds of the Loans, provided that the Company shall not be liable for any of the foregoing to the extent they arise from gross negligence, willful misconduct or knowing violations of law by such Agent(s) and/or Bank(s).

     14.10 Waiver of Jury Trial. The Company, Agents and Banks each waives any right to a trial by jury in any action or proceeding to enforce or defend any rights under this Agreement, the Notes, and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, and agrees that any such action or proceeding shall be tried before a court and not before a jury.

     14.11 Entire Agreement. This Agreement represents the entire agreement among the parties with respect to the subject matter hereof and supersedes and cancels all other prior agreements and understandings, whether written or oral, of the parties in connection with such subject matter.

     14.12 Severability. The illegality or unenforceability of any provision of this Agreement or any Note or any agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement, such Note or other agreement required hereunder.

     Delivered at Seattle, Washington, as of the day and year first above written.

COMPANY:

                  PUGET SOUND ENERGY COMPANY, the Washington corporation
                             surviving the merger of WECO and Puget by

WASHINGTON ENERGY         and              PUGET SOUND POWER
COMPANY                                    & LIGHT COMPANY


/s/ James P. Torgerson                       /s/ Donald E. Gaines
- ---------------------------                 ----------------------
By:  James P. Torgerson                     By:  Donald E. Gaines
Title:  Executive Vice President and CFO    Title: Treasurer

Address for Notices:                        Address for Notices:
(prior to Effective Date)                   (pre and post Effective Date)
815 Mercer Street                           411 108th Avenue, N.E.
Seattle, WA 98109                           Bellevue, Washington 98004
Attention:     Wayne Hays                   Attention:  Robert P. Bariletti
Telephone:     (206) 224-2122               Telephone: (206) 462-3751
Telecopier:    (206) 521-5143               Telecopier: (206) 462-3515

ADMINISTRATIVE AGENT:
BANK OF AMERICA NW, N.A. d/b/a
SEAFIRST BANK as Administrative Agent


/s/ Dora A. Brown
- ------------------------------
By:  Dora Brown
Its:  Agency Officer
Address for Notices:
Seafirst Agency Services
701 Fifth Avenue, 16th Floor
Seattle, Washington 98104
Attention:  Dora Brown
Telephone:  (206) 358-0101
Telecopier:  (206) 358-0971

BANKS:
BANK OF AMERICA NW, N.A. d/b/a
SEAFIRST BANK in its individual capacity


/s/ David A. Dehlendorf
- ---------------------------------
By:  David A. Dehlendorf
Title:  Vice President

Address for Notices and Domestic Office:
Northwest National Division
701 Fifth Avenue, 12th Floor
Seattle, Washington 98104

Attention:  David A. Dehlendorf
Telephone:  (206) 358-3034 Eurodollar Office:
Telecopier:  (206) 358-3113         701 Fifth Avenue, 12th Floor
                                            Seattle, Washington 98104

NATIONSBANK OF TEXAS, N.A.


/s/ Curtis L. Anderson
- ------------------------------------
By:  Curtis L. Anderson

Title:  Senior Vice President

Address for Notices and Domestic Office:

901 Main Street, Floor 64
Dallas, TX  75202

Attention:  Curtis L. Anderson
Telephone:  (214) 508-1290
Telecopier:  (214) 508-3943

U.S. BANK OF WASHINGTON, N.A.



/s/ Peter Bentley
- ---------------------------
By:  Peter Bentley
Title:  Vice President

Address for Notices and Domestic Office:
1420 Fifth Avenue, Floor 11
Seattle, WA  98101

Attention:  Wade Black

Telephone:  (206) 587-5234
Telecopier:  (206) 587-5259

THE FIRST NATIONAL BANK OF CHICAGO



/s/ [undecipherable]
- ------------------------------------
By:  [undecipherable]
Title:  [undecipherable]

Address for Notices and Domestic Office:

One First National Plaza, Suite 0363
Chicago, IL 60670

Attention:  Thomas Cheng

Telephone:  (312) 732-7822
Telecopier:  (312) 732-3055

ABN AMBRO BANK N.V., SEATTLE BRANCH
by:  ABN AMRO NORTH AMERICA, INC., as AGENT



/s/ James J. Rice                   /s/ Lee-Lee Miao
- ---------------------------         -----------------------------------
By:  James J. Rice                          By:  Lee-Lee Miao
Title:  Vice President and Director         Title:  Vice President and Director

Address for Notices and Domestic Office:

One Union Square, Suite 2323
600 University Street
Seattle, WA 98101

Telephone:  (206) 587-2360
Telecopier:  (206) 682-5641

WELLS FARGO BANK, N.A.



/s/ Adrienne Stone
- ------------------------------------
By:  Adrienne Stone
Title:  Vice President

Address for Notices and Domestic Office:

999 Third Avenue, Floor 11
Seattle, WA 98104

Telephone:  (206) 292-3397
Telecopier:  (206) 292-3120

THE INDUSTRIAL BANK OF JAPAN, LIMITED,
LOS ANGELES AGENCY



/s/ Shusei Nagai
- ---------------------------
By:  Shusei Nagai
Title:  General Manager

Address for Notices and Domestic Office:

Steve Arce
350 South Grand Avenue, Suite 1500
Los Angeles, CA  90071

Telephone:  (213) 893-6453
Telecopier:  (213) 488-9840

BANK OF MONTREAL



/s/ John K. Harche
- ------------------------------------
By:  John K. Harche
Title:  Director

Address for Notices and Domestic Office:

115 South LaSalle Street, 11th Floor
Chicago, IL  60603

Telephone:  (312) 750-3885
Telecopier:  (312) 750-4304

CANADIAN IMPERIAL BANK OF COMMERCE



/s/ Peter R. Saggau
- ------------------------------------
By:  Peter R. Saggau
Title:  Director

Address for Notices and Domestic Office:

200 West Madison, Suite 2300
Chicago, IL 60606

Telephone:  (312) 855-3252
Telecopier:  (312) 750-0927

BANCO DI ROMA



/s/ Thomas C. Woodruff                      /s/ Richard G. Dietz
- ------------------------------------        --------------------------------
By:  Thomas C. Woodruff                     Richard G. Dietz
         97469                                       97271

Address for Notcies and Domestic Office:

1 Montgomery Street, Suite 2200
San Francisco, CA 94104

Telephone:  (415) 765-8226
Telecopier:  (415) 433-6725

MELLON BANK, N.A.



/s/ A. J. Sabatelle
- ------------------------------------
By:  A. J. Sabatelle
Title:  First Vice President

Address for Notices and Domestic Office:

500 Grant Avenue, Room 151-4425
Pittsburgh, PA 15228

Telephone:  (412) 236-2784
Telecopier:  (412) 234-8888

THE BANK OF NEW YORK



/s/ Daniel T. Gates
- ------------------------------------
By:  Daniel T. Gates
Title:  Vice President

Address for Notices and Domestic Office:

The Energy Industries Division
1 Wall Street, Floor 19
New York, NY 10286

Telephone:  (212) 635-7889
Telecopier:  (212) 635-7923/7924/7552

THE CHASE MANHATTAN BANK



/s/ Michiel V.M. Van Der Voort
- --------------------------------------------
By:  Michiel V.M. Van Der Voort
Title:  Vice President

Address for Notices and Domestic Office:

1 Chase Manhattan Plaza, Floor 3
New York, NY 10081

Telephone:  (212) 552-6973
Telecopier:  (212) 552-6276

KEY BANK OF WASHINGTON



/s/ Barry J. Booher
- ------------------------------------
By:  Barry J. Booher
Title:  Vice President

Address for Notices and Domestic Office:

700 Fifth Avenue, Floor 48
P.O. Box 90
Seattle, WA 98111-0090

Telephone:  (206) 685-6029
Telecopier:  (206) 684-6035

COMERICA BANK\



/s/ Dirk A. Price
- ---------------------------
By:  Dirk A. Price
Title:  Vice President

Address for Notices and Domestic Office:

1920 Main Street, Suite 1150
Irvine, CA 92714

Telephone:  (714) 476-1933
Telecopier:  (714) 476-1222

Schedule 1

PUGET SOUND ENERGY COMPANY

============================================================
                                      Pricing Grid
============================================================
                                In Basis Points Per Annum
============================================================

PRICING LEVEL       LEVEL  LEVEL  LEVEL  LEVEL   LEVEL
                    I      II     III    IV      V
                    ------ ------ ------ ------- --------
- ------------------- ------ ------ ------ ------- --------
LIBOR MARGIN        22.5   25.0   30.0   35.0    47.5
                    ------ ------ ------ ------- --------
- ------------------- ------ ------ ------ ------- --------
BASE RATE MARGIN    0.0    0.0    0.0    0.0     0.0
- ------------------- ------ ------ ------ ------- --------
                    ------ ------ ------ ------- --------
COMMITMENT FEE      7.5    8.0    9.0    12.5    15.0
=================== ====== ====== ====== ======= ========

Level I: A or A2 or higher
Level II:         A- or A3
Level III:        BBB + or Baa1
Level IV:         BBB or Baa2
Level V: BBB- or Baa3 or lower

     Ratings are determined by the Standard & Poor’s Corporation and Moody’s Investor’s Service secured long term debt ratings of the Company. Should the rating services ratings for the Company be single split-rated, the higher of the ratings will apply. Should the ratings for the Company be double-split rated, the median of the ratings will apply.

EXHIBIT A

FORM OF NOTE

$____________________

Seattle, Washington

__________________________, 199__

FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of                                                     at the principal office of                                in                                the principal amount of                                dollars ($          ), or so much as may be outstanding (as shown in the records of the payee, or at the payee’s option on the schedule attached hereto and any continuation thereof) on the Termination Date and with respect to each Eurodollar Loan, the principal amount of each such Loan at the expiration of the Loan Period thereof.

The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at such rate(s) and at such time(s) as provided in the Credit Agreement hereinafter referred to.

Presentment, demand, protest, notice of dishonor, and notice of intent to accelerate are hereby waived by the undersigned.

This Note is one the Notes referenced in, and evidences indebtedness incurred under, and is subject to the terms and provisions of, a credit agreement dated as of                      and, if amended, all amendments thereto among the undersigned, certain banks (including the payee), and Bank of America N.W., N.A doing business as Seafirst Bank, as Administrative Agent (the “Credit Agreement”). Reference is hereby made to the Credit Agreement said for a statement of the terms and provisions, including those under which the Loans evidenced by this Note may be paid prior to their respective due dates or their respective due dates accelerated. Terms used but not otherwise defined herein shall have the meaning defined in the Credit Agreement when used herein.

In addition to and not in limitation of the foregoing and the provisions of the Credit Agreement, the undersigned further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys’ fees and legal expenses, incurred by the holder of this Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise.

This Note is made under and governed by the laws of the State of Washington.

PUGET SOUND ENERGY COMPANY

By: --------------------------------

Title: -----------------------------

Schedule Attached to Note

Schedule Attached to Note dated ___________, ____________ of Puget Sound Energy Company payable to the order of

                            Date and Amount
                            of Repayment or
       Date and              Prepayment of                              Unpaid Principal         Notation Made
    Amount of Loan                  Loan            Loan Period                Balance                   By




                                                1.  FLOATING RATE LOANS





                                                 2.  EURODOLLAR LOANS

EXHIBIT B

FORM OF

ADJUSTMENT CERTIFICATE

     THIS CERTIFICATE is delivered pursuant to Section 2.6 of the Credit Agreement dated as of                      (together with all amendments, if any, thereafter from time to time made thereto, the “Credit Agreement”), among Puget Sound Energy Company, the new name of the Washington corporation which shall survive the merger of Puget Sound Power & Light Company and Washington Energy Company, various Banks, and Bank of America NW, N.A. doing business as Seafirst Bank, as Administrative Agent, their successors and assigns. Unless otherwise defined herein, terms used herein have the same meanings provided in the Credit Agreement.

     Each of the undersigned hereby agrees and certifies that:

     [(1) The Company has permanently [terminated] [reduced] the Commitment(s) of [insert name of each Retiring Bank], with the effect that the remaining aggregate Commitment for all of the Banks is reduced to $                    .¹

     [(2) [Each] [The] Consenting Bank listed below under the caption “Consenting Bank” has indicated its desire to assume all or a portion of the Commitment(s) of one or more Retiring Banks in the amount set forth opposite [such] [the] Consenting Bank’s name in the column captioned “Amount of Commitment(s) Assumed” on the signature page hereof.]²

     [(3) [Each] [The] Replacement Bank listed below under the caption “Replacement Bank(s)” has indicated its desire to assume all or a portion of the Commitment(s) of one or more Retiring Bank(s) in the amount set forth opposite [such] [the] Replacement Bank’s name in the column captioned “Amount of Commitment(s)” Assumed on the signature page hereof.]³

¹ Insert if clause (i) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

² Insert if clause (ii) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

³ Insert if clause (iii) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

BANK OF AMERICA NW, N.A. d/b/a SEAFIRST BANK, as

Administrative Agent

By -------------------------------------------------------

Title ----------------------------------------------------

                                 CONSENTING BANK(S)
Amount of                Amount of
Commitment(s) Assumed    Substitute Loan(s)  NAME OF CONSENTING BANK
- ---------------------    -----------------
                                             By
                                             Title
                                             NAME OF CONSENTING BANK
                                             By
                                             Title



         *        The certificate is to be executed by the Company, the Administrative Agent, and (i) each
Bank that is not a Retiring Bank if clause (i) of paragraph (a) of Section 2.6 of the Credit Agreement is
                                                                   -----------
applicable, (ii) each Consenting Bank if clause (ii) of paragraph (a) of Section 2.6 of the Credit Agreement
                                                                         -----------
is applicable, and (iii) each Replacement Bank if clause (iii) of paragraph (a) of Section 2.6 of the Credit
                                                                                   -----------
Agreement is applicable.
                                              REPLACEMENT BANK(S)
Amount of                Amount of
Commitment(s) Assumed    Substitute Loan(s)   NAME OF REPLACEMENT BANK
                                              By
                                              Title
                                              Address for Notices and Domestic
                                              Office:



                                              Eurodollar Office:





Amount of                Amount of
Commitment(s) Assumed    Substitute Loan(s)   NAME OF REPLACEMENT BANK
                                              By
                                              Title

                                              Address for Notices and Domestic
                                              Office:




                                              Eurodollar Office:

ANNEX I TO ADJUSTMENT CERTIFICATE

[A. The Termination Date has been extended to______________,______. (4)

[B. The Non-Consenting Banks are listed below:]a

[C. The Banks which have been given notice by the Company pursuant to Section 2.5 of the Credit Agreement are listed below: (5)

____. After giving effect to the transactions occurring on the Adjustment Date referred to in the Adjustment Certificate to which this Annex I is attached, each of the Banks will have the Commitment amount set forth below opposite its name in the column captioned “Amount of Commitment:"

                              Amount of

Name of Bank                  Commitment

Total

(4) Insert if the Adjustjment Certificate is being furnished in connection with the removal of Non-Consenting Banks.

(5) Insert if the Adjustment Certificate is being furnished in connection with the removal of Banks pursuant to Section 2.5 of the Credit Agreement.

(6) Insert if the aggregate amount of the Commitments after giving effect of the transactions occurring on the Adjustment Date.

FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT

Dated ____________

     Reference is made to that certain Credit Agreement dated as of ____________ by and among PUGET SOUND ENERGY COMPANY, a Washington corporation (the “Company”), the Banks party thereto, and BANK OF AMERICA NW, N.A. doing business as SEAFIRST BANK, as administrative agent for the Banks (the “Administrative Agent”), their successors and assigns (as it may be amended, supplemented, restated or otherwise modified from time to time, the “Credit Agreement”; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined) pursuant to which                      (the “Assignor”) has committed to make loans (the “Loans”) to the Company.

     The Assignor and                                (the “Assignee”) agree as follows:

     1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to [all/a portion] of the Assignor’s rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified in Section 1 of Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement (the “Assigned Interest”), including, without limitation, the percentage interest specified in Section 1 of Schedule 1 hereto of the Assignor’s Commitments and the Loans owing to the Assignor. After giving effect to such sale and assignment, the Assignee’s Commitments and the amount of the Loans owing to the Assignee will be as set forth in Section 2 of Schedule 1 hereto.

     2. The sale and assignment contemplated hereby shall become effective as of the date upon which (i) this Assignment and Acceptance Agreement has been executed by the Assignor and Assignee, (ii) the Assignee has paid to the Assignor, in same day funds, at such address and account as the Assignor shall advise the Assignee, $_________, and (iii) the applicable conditions contained in Section 14.7.2 of the Credit Agreement have been satisfied which said Effective Date set forth in Section 3 of Schedule 1 hereto. From and after the Effective Date, the Assignor agrees that the Assignee shall be entitled to all rights, powers and privileges of the Assignor under the Credit Agreement to the extent of the Assigned Interest, including, without limitation, (a) the right to receive all payments in respect of the Assigned Interest for the period from and after the Effective Date, whether for the period from and after the Effective Date, increased costs, additional amounts or otherwise; (b) the right to vote and to instruct the Administrative Agent under the Credit Agreement according to its pro rata share based on the Assigned Interest; (c) the right set-off and to appropriate and apply deposits of the Company as set forth in the Credit Agreement; and (d) the right to receive notices, requests, demands and other communications. The Assignor agrees that it will promptly remit to the Assignee any amount received by it in respect of the Assigned Interest (whether from the Company, the Agent or otherwise) in the same funds in which such amount is received by the Assignor.

     3. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) other than as provided herein, makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability. genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. Except as specified in this Section 3, the assignment of the Assigned Interest contemplated hereby shall be without recourse to the Assignor.

     4. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and purchase the Assigned Interest; (ii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) represents and warrants that it is an Eligible Assignee as required by Section 14.7.2 of the Credit Agreement; (iv) appoints and authorizes the Administrative Agent to take such action as the Administrative Agent, on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers which are reasonably incidental thereto; and (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank.

     5. The Assignment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument.

6. THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WASHINGTON WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.

     IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto.

Schedule 1

to

Assignment and Acceptance Agreement

Dated _________, 19___

Section 1.

Percentage Interest all outstanding rights and obligations under the Credit Agreement:

                                                     _________________%

Percentage Interest of Assignor's Commitments and Loans owing to Assignor under the Credit Agreement being assigned to Assignee hereby:

                                                     _________________%

Section 2.

Assignee's Commitment:

                                                      $_______________

Aggregate Outstanding Principal Amount of Loans owing to the Assignee:

                                                      $_______________

Section 3.

Effective Date ___________________, 19___

[NAME OF ASSIGNOR]

By:___________________________________

Title:

[NAME OF ASSIGNEE]

By:___________________________________

Title:

CONSENTED TO AND ACKNOWLEDGED

THIS _________ DAY OF ___________ , 19

BANK OF AMERICA NW, N.A.,

as the Administrative Agent under the Credit Agreement

By:___________________________________

Title:

AMENDMENT NUMBER ONE TO CREDIT AGREEMENT

     THIS AMENDMENT NUMBER ONE TO CREDIT AGREEMENT (the “Amendment”) is made this 22d day of December, 1997, by and among PUGET SOUND ENERGY COMPANY (successor by merger to both Puget Sound Power & Light Company and Washington Energy Company, each a Washington corporation), a Washington corporation (the “Company”), the undersigned banks (collectively, the “Banks”) and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION doing business as Seafirst Bank (successor by merger to Bank of America NW, N.A.), as Administrative Agent, FIRST CHICAGO CAPITAL MARKETS, INC., as Syndication Agent, and NATIONSBANK OF TEXAS, N.A., as Documentation Agent (collectively, the “Agents”).

RECITALS

     A. The Company, the Banks and the Agents are parties to that certain Credit Agreement dated as of December 18, 1996 (as the same may be amended, modified or extended from time to time the “Credit Agreement”) and the related instruments and documents described therein.

     B. The revolving loan facility under the Credit Agreement is currently scheduled to expire on February 13, 2002. The Company has requested, pursuant to Section 2.4(a) of the Credit Agreement, that the Banks extend the Termination Date until February 13, 2003.

C. One of the Banks, ABN AMRO Bank, N.V., has declined to consent to the extension of the Termination Date. The Company, pursuant to Section 2.5 of the Credit Agreement, has notified ABN AMRO Bank, N.V. that it has elected to remove ABN AMRO Bank, N.V. as a party to the Credit Agreement. The Company has, pursuant to Section 2.6(a)(i) of the Credit Agreement, further elected to permanently reduce the aggregate amount of the Commitments by an amount equal to ABN AMRO Bank, N.V.'s Commitment. D. The parties now wish to amend the Credit Agreement to extend the Termination Date, remove ABN AMRO Bank, N.V. as a party to the Credit Agreement and reduce the aggregate amount of the Commitments, subject to the terms and conditions set forth herein.

     NOW, THEREFORE, the parties agree as follows:

AGREEMENT

1. Definitions. Capitalized terms used herein and not otherwise defined shall have the meaning given in the Credit Agreement. 2. Amendment to Credit Agreement. In Section 1 of the Credit Agreement, the definition of "Termination Date" is hereby amended and restated to read as follows:

     Termination Date means February 13, 2003 and thereafter each succeeding anniversary to which the Commitments shall have been extended pursuant to Section 2.4.

3. Adjustment Certificate. This Amendment shall constitute the Adjustment Certificate required by Section 2.6(b) of the Credit Agreement, and in connection therewith, the parties agree as follows: (a) The Company has permanently terminated the Commitment of ABN AMRO Bank, N.V., with the effect of the remaining aggregate Commitment for all Banks is reduced to $375,000,000. (b) The date on which the aggregate Commitments of the Banks was reduced was December 22, 1997. (c) After giving effect to the termination of the Commitment of ABN AMRO Bank, N.V., each of the Banks will have the Commitment amount set forth opposite its name in the column captioned "Amount of Commitment:"

- --------------------------------------------------- ----------------------

                          Bank                       Amount of Commitment
                          ----                       --------------------
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Bank of America National Trust and Savings Assoc.        $ 50,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

The First National Bank of Chicago                       $ 50,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Nations Bank of Texas, N.A.                              $ 50,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

The Bank of New York                                     $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

The Industrial Bank of Japan, Limited                    $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

U.S. Bank National Assoc.                                $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Bank of Montreal                                         $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

The Chase Manhattan Bank                                 $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Wells Fargo Bank, N.A.                                   $ 25,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Canadian Imperial Bank of Commerce                       $ 15,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

KeyBank National Assoc.                                  $ 15,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Banca di Roma                                            $ 15,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Comerica Bank                                            $ 15,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

Mellon Bank                                              $ 15,000,000
- --------------------------------------------------- ----------------------
- --------------------------------------------------- ----------------------

         TOTAL                                           $375,000,000
- --------------------------------------------------- ----------------------

4. Conditions to Effectiveness. Notwithstanding anything contained herein to the contrary, this Amendment shall not become effective until each of the following conditions is fully and simultaneously satisfied: (a) Delivery of Amendment. The Company, the Agents and each Bank shall have executed and delivered counterparts of this Amendment to the Agent.

     (b) Representations True; No Default. The representations of the Company as set forth in Section 9 of the Credit Agreement shall be true on and as of the date of this Amendment with the same force and effect as if made on and as of this date. No Event of Default and no event which, with notice or lapse of time or both, would constitute an Event of Default, shall have occurred and be continuing or will occur as a result of the execution of this Amendment.

(c) Other Documents. The Agents and the Banks shall have received such other documents, instruments, and undertakings as such Agent or such Bank may reasonably request. 5. No Further Amendment. Except as expressly modified by this Amendment, the Credit Agreement and the related instruments and documents described therein shall remain unmodified and in full force and effect and the parties hereby ratify their respective obligations thereunder.

   6. Miscellaneous.

(a) Entire Agreement. This Amendment comprises the entire agreement of the Company, the Agents and the Banks with respect to the subject matter hereof and supersedes all prior oral or written agreements, representations or commitments.

     (b) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same Amendment.

(c) Governing Law. This Amendment and the other agreements provided for herein and the rights and obligations of the parties hereto and thereto shall be construed and interpreted in accordance with the laws of the State of Washington.

(d) Oral Agreements Not Enforceable.

     ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

     EXECUTED AND DELIVERED by the duly authorized officers of the parties as of the date first above written.

COMPANY:               PUGET SOUND ENERGY COMPANY, successor by merger to
                       both Puget Sound Power & Light Company and Washington
                       Energy Company



                       By:      /s/ Tommy G. Leong
                          ------------------------
                       Its:     Assistant Treasurer
                            -----------------------



ADMINISTRATIVE AGENT:  BANK OF AMERICA NATIONAL TRUST AND SAVINGS
                       ASSOCIATION doing business as Seafirst Bank,
                       successor by merger to Bank of America NW, N.A.



                       By:
                       Its:



BANKS:                 BANK OF AMERICA NATIONAL TRUST AND SAVINGS
                       ASSOCIATION doing business as Seafirst Bank,
                       successor by merger to Bank of America NW, N.A.



                       By:
                       Its:

                       NATIONS BANK OF TEXAS, N.A.



                       By:
                       Its:

                       U.S. BANK NATIONAL ASSOCIATION, successor by merger
                       to U.S. Bank of Washington N.A.



                       By:
                       Its:

                       THE FIRST NATIONAL BANK OF CHICAGO



                       By:
                       Its:

                       WELLS FARGO BANK, N.A.



                       By:
                       Its:

                       THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES
                       AGENCY



                       By:
                       Its:

                       BANK OF MONTREAL



                       By:
                       Its:

                       CANADIAN IMPERIAL BANK OF COMMERCE



                       By:
                       Its:

                       BANCA DI ROMA



                       By:
                       Its:



                       By:
                       Its:

                       MELLON BANK, N.A.



                       By:
                       Its:

                       THE BANK OF NEW YORK



                       By:
                       Its:

                       THE CHASE MANHATTAN BANK



                       By:
                       Its:

                       KEYBANK NATIONAL ASSOCIATION, successor by merger to
                       Key Bank of Washington



                       By:
                       Its:

                       COMMERICA BANK



                       By:
                       Its:



SYNDICATION AGENT:     FIRST CHICAGO CAPITAL MARKETS, INC.



                       By:
                       Its:



DOCUMENTATION AGENT:   NATIONSBANK OF TEXAS, N.A.



                       By:
                       Its:

ASSIGNMENT AND ACCEPTANCE AGREEMENT

Dated October 1, 1998

     Reference is made to that certain Credit Agreement dated December 18, 1996, by and among PUGET SOUND ENERGY COMPANY, a Washington corporation (the “Company’), the Banks party thereto, and BANK OF AMERICA NW, N.A. doing business as SEAF1RST BANK, as administrative agent for the Banks (the “Administrative Agent”), their successors and assigns (as it may be amended, supplemented, restated or otherwise modified from time to time, the “Credit Agreement.” Bank of America NW, N.A. has merged into Bank of America National Trust and Savings Association, but continues to do business in the State of Washington as “Seafirst Bank.” References to “Seafirst” or “Bank of America NW, N.A.” in this Assignment shall mean Bank of America National Trust and Savings Association, doing business as Seafirst Bank. Capitalized terms defined therein and not otherwise defined herein being used herein as therein defined pursuant to which Bank of America National Trust & Savings Association (the “Assignor”) has committed to make loans (the “Loans”) to the Company.

The Assignor and U.S. Bank, N.A. (the "Assignee") agree as follows: ---------------

     1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to a portion of the Assignor’s rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified in Section 1 of Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement (the “Assigned Interest”), including, without limitation, the percentage interest specified in Section 1 of Schedule 1 hereto of the Assignor’s Commitments and the Loans owing to the Assignor. After giving effect to such sale and assignment, the Assignee’s Commitments and the amount of the Loans owing to the Assignee will be set forth in Section 2 of Schedule 1 hereto.

     2. The sale and assignment contemplated hereby shall become effective as of the date upon which (i) this Assignment and Acceptance Agreement has been executed by the Assignor and Assignee, (ii) the Assignee has paid to the Assignor, in same day funds, at such address and account as the Assignor shall advise the Assignee, $0.00, and (iii) the applicable conditions contained in Section 14.7.2 of the Credit Agreement have been satisfied which said Effective Date set forth in Section 3 of Schedule 1 hereto. From and after the Effective Date, the Assignor agrees that the Assignee shall be entitled to all rights, powers, and privileges of the Assignor under the Credit Agreement to the extent of the Assigned Interest, including without limitation (a) the right to receive all payments in respect of the Assigned Interest for the period from and after the Effective Date, whether for the period from and after the Effective Date, increased costs, additional amounts or otherwise; (b) the right to vote and to instruct the Administrative Agent under the Credit Agreement according to its pro rata share based on the Assigned Interest; (c) the right to set-off and to appropriate and apply deposits of the Company as set forth in the Credit Agreement; and (d) the right to receive notices, requests, demands and other communications.

     The Assignor agrees that it will promptly remit to the Assignee any amount received by it in respect of the Assigned Interest (whether from the Company, the Agent or otherwise) in the same funds in which such amount is received by the Assignor.

     3. The Assignor (i) represents and warrants that it is the lega1 and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) other than as provided herein, makes no representations or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. Except as specified in this Section 3, the assignment of the Assigned Interest contemplated hereby shall be without recourse to the Assignor.

     4 The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to therein and such other documents and information as it had deemed appropriate to make its own credit analysis and purchase the Assigned Interest; (ii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) represents and warrants that it is an Eligible Assignee as required by Section 14.7.2 of the Credit Agreement; (iv) appoints and authorizes the Administrative Agent to take such action as the Administrative Agent, on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof; together with such powers which are reasonably incidental thereto; and (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank.

     5. The Assignment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument.

6. THE ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WASHINGTON WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

     IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made to Schedule 1 hereto.

Schedule 1

to

Assignment and Acceptance Agreement

Dated October 1, 1998

Section 1.

Percentage Interest all outstanding rights and obligations under the Credit Agreements:

                                                      6,666666667%
                                                      -----------

Percentage Interest of Assignor's Commitments and Loans owing to Assignor under the Credit Agreement being assigned to Assignee hereby:

                                                      6,666666667%
                                                      -----------

Section 2.

Assignee's Commitment:

                                                      $25,000,000.00
                                                      --------------

Aggregate Outstanding Principal Amount of Loans owing to the Assignee:

                                                      $0.00
                                                      -----

Section 3.

Effective Date: October 1, 1998

BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, As Assignor

By: /s/ Gary Tsuyuki

------------------------------------------------

Gary Tsuyuki, MD

U.S. BANK, N.A., As Assignee

By: /s/ Wilfred C. Jack

------------------------------------------------

Wilfred C. Jack, V.P.

CONSENTED TO AND

ACKNOWLEDGED THIS

1 DAY OF October 1998

BANK OF AMERICA NW, N.A.,

as the Administrative Agent under the Credit Agreement

By: /s/ Carl Fye

------------------------------------------------

Carl Fye, V.P.

(1) Insert if clause (i) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

(2) Insert if clause (ii) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

(3) Insert if clause (iii) of paragraph (a) of Section 2.6 of the Credit Agreement is applicable.

(4) Insert if the Adjustment Certificate is being furnished in connection with the removal of Non-Consenting Banks.

(5) Insert if the Adjustment Certificate is being furnished in connection with the removal of Banks pursuant to Section 2.5 of the Credit Agreement.

6 Insert the aggregate amount of the Commitments after giving effect of the transactions occurring on the Adjustment Date.

EX-10

SUPPLEMENTAL AGREEMENT

THIS AGREEMENT made and entered into as of this 14^th day of November, 2000, between PUGET SOUND ENERGY, a Washington Corporation (the “Company”) and WILLIAM S. WEAVER (“Employee”). The term “Parties” refers to the Company and the Employee.

RECITALS

A. The Parties entered in an Agreement ("Employment Agreement") dated October 18, 1996;

B. The Company's Board of Directors has requested Employee not to terminate employment voluntarily prior to December 31, 2001;

C. Employee agrees not to terminate employment voluntarily prior to December 31, 2001; and

D. The Parties wish to supplement the terms and conditions of the Employment Agreement to ensure that Employee is not economically prejudiced by agreeing with the Board's request.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the Parties agree as follows:

1. Employee will not voluntarily terminate his employment with the Company as its Chief Executive Officer any earlier than December 31, 2001. Termination through death or disability or termination for cause as defined in the Employment Agreement shall not be considered voluntary.

2. The various payments due to Employee from the Company under the Employment Agreement shall be calculated based on the actual termination date or an assumed termination date of December 31, 2000, whichever produces the higher payment under each payment provision. For this purpose each payment provision of the Employment Agreement shall be calculated separately rather than in the aggregate.

3. Except as expressly supplemented hereby, the Employment Agreement shall remain in full force and effect in its entirety.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.

PUGET SOUND ENERGY

By________________________

Title_______________________

______________________________

William S. Weaver

EX-12

Exhibit 12a

STATEMENT SETTING FORTH COMPUTATIONS OF RATIOS OF

EARNINGS TO FIXED CHARGES

(Dollars in Thousands)

                                            12 Months
                                               Ending               Year Ended December 31,
                                    December 31, 2000         1999        1998         1997        1996
- ----------------------------------- ------------------ ------------ ----------- ------------ -----------
EARNINGS AVAILABLE FOR
 FIXED CHARGES
  Pre-tax income:
    Income from continuing
      operations per statement
      of income                              $193,831     $185,567    $169,612     $125,698    $167,351
    Federal income taxes                      128,973      109,164     105,814       44,916     106,876
    Federal income taxes charged
      to other income - net                     1,411        2,909       3,986       14,807         (784)
    Capitalized interest                       (1,264)     (3,692)      (1,782)        (360)        (600)
    Undistributed (earnings) or
      losses of less-than-
      fifty-percent-owned
      entities                                     --           --          --        (608)         460
- ----------------------------------- ------------------ ------------ ----------- ------------ -----------
Total                                        $322,951     $293,948    $277,630     $184,453    $273,303
- ----------------------------------- ------------------ ------------ ----------- ------------ -----------

  Fixed charges:
    Interest expense                         $184,405     $160,966    $146,248     $123,543    $122,635
    Other interest                              1,264        3,692       1,782          360         600
    Portion of rentals
      representative of the
      interest factor                           5,002        4,575       2,878        3,143       4,187
- ----------------------------------- ------------------ ------------ ----------- ------------ -----------
Total                                        $190,671     $169,233    $150,908     $127,046    $127,422
- ----------------------------------- ------------------ ------------ ----------- ------------ -----------

  Earnings available for
    combined fixed charges                   $513,622     $463,181    $428,538     $311,499    $400,725
RATIO OF EARNINGS TO
  FIXED CHARGES                                 2.69x        2.74x       2.84x        2.45x       3.14x

Exhibit 12b

STATEMENT SETTING FORTH COMPUTATIONS OF RATIOS OF

EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

(Dollars in Thousands)

                                                  12 Months
                                                     Ending                       Year Ended December 31,
                                           December 31, 2000         1999         1998         1997         1996
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------
EARNINGS AVAILABLE FOR COMBINED
 FIXED CHARGES AND PREFERRED
 DIVIDEND REQUIREMENTS

  Pretax income:
    Income from continuing
      operations per statement
      of income                                     $193,831     $185,567     $169,612     $125,698     $167,351
    Federal income taxes                             128,973      109,164      105,814       44,916      106,876
    Federal income taxes charged
      to other income - net                            1,411        2,909        3,986      14,807           (784)
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------
Subtotal                                             324,215      297,640      279,412      185,421      273,443
  Capitalized interest                               (1,264)      (3,692)       (1,782)        (360)         (600)
  Undistributed (earnings) or
    losses of less-than-fifty-
    percent-owned entities                                --           --          --          (608)         460
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------
Total                                               $322,951     $293,948     $277,630     $184,453     $273,303
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------

  Fixed charges:
    Interest expense                                $184,405     $160,966     $146,248     $123,543     $122,635
    Other interest                                     1,264        3,692        1,782          360          600
    Portion of rentals
      representative of the
      interest factor                                  5,002        4,575        2,878        3,143        4,187
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------
Total                                               $190,671     $169,233     $150,908     $127,046     $127,422
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------

Earnings available for
  combined fixed charges
  and preferred dividend
  Requirements                                      $513,622     $463,181     $428,538     $311,499     $400,725

DIVIDEND REQUIREMENT:
  Fixed charges above                               $190,671     $169,233     $150,908     $127,046     $127,422
  Preferred dividend
    requirements below                                15,044       17,747       21,421       26,266       36,242
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------
Total                                               $205,715     $186,980     $172,329     $153,312     $163,664
- -------------------------------------- ---------------------- ------------ ------------ ------------ ------------

                                          12 Months
                                             Ending
                                  December 31, 2000        1999         1998         1997        1996
- --------------------------------- ------------------ ----------- ------------ ------------ -----------
RATIO OF EARNINGS TO COMBINED
  FIXED CHARGES AND PREFERRED
  DIVIDEND REQUIREMENTS                        2.50        2.48         2.49         2.03        2.45

COMPUTATION OF PREFERRED
  DIVIDEND REQUIREMENTS:
  (a) Pre-tax income                       $324,215    $297,640     $279,412    $185, 421    $273,443
  (b) Income from continuing
        operations                         $193,831    $185,567     $169,612     $125,698    $167,351
  (c) Ratio of (a) to (b)                    1.6727      1.6039       1.6474       1.4751      1.6339
  (d) Preferred dividends                   $ 8,994    $ 11,065     $ 13,003     $ 17,806    $ 22,181
  Preferred dividend
    requirements
      [(d) multiplied by (c)]              $ 15,044    $ 17,747     $ 21,421     $ 26,266    $ 36,242

EX-21

EXHIBIT 21.1

Puget Energy, Inc.

SUBSIDIARIES

1.     Puget Sound Energy, Inc.
       411 108th Avenue N.E., 15th floor
       Bellevue, WASHINGTON  98004-5515

2.     InfrastruX Group, Inc.
       411 108th Avenue N.E., 15th floor
       Bellevue, WASHINGTON  98004-5515

EX-21

EXHIBIT 21.2

Puget Sound Energy, Inc.

SUBSIDIARIES

1.     ConneXt
       1301 Fifth Avenue
       Suite 1900
       Seattle, WASHINGTON  98101

2.     GP Acquisition Corp.
       c/o James W. Eldredge
       411 108th Ave. N.E., 15th Floor
       Bellevue, WASHINGTON 98004-5515

3.     LP Acquisition Corp.
       c/o James W. Eldredge
       411 108th Ave. N.E., 15th Floor
       Bellevue, WASHINGTON 98004-5515

4.     PSE Utility Solutions, Inc.
       19515 North Creek Parkway
       Suite 310
       Bothell, Washington 98011

5.     Puget Western, Inc.
       19515 North Creek Parkway
       Suite 310
       Bothell, Washington 98011

6.     Puget Sound Energy Services, Inc.
       19515 North Creek Parkway
       Suite 310
       Bothell, Washington 98011

7.     Washington Energy Gas Marketing Company
       c/o James W. Eldredge
       411 108th Ave. N.E., 15th Floor
       Bellevue, Washington 98004-5515

8.     WNG CAP I, Inc.
       c/o James W. Eldredge
       411 108th Ave. N.E., 15th Floor
       Bellevue, Washington 98004-5515

EX-23

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 33-26818 and 333-65053) and Form S-8 (File Nos. 33-27396, 333-23393, 333-41113 and 333-41157) of Puget Sound Energy, Inc. of our report dated February 10, 2000 relating to the financial statements and financial statement schedule, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Seattle, Washington

March 15, 2000

EX-99

EXHIBIT 99.1

SCHEDULE 14A INFORMATION

     Proxy Statement Pursuant to Section 14 (a) of

The Securities Exchange Act of 1934 (Amendment No. )

     Filed by the Registrant / /

     Filed by a party other than the Registrant /X/.

Check the appropriate box:

/ / Preliminary Proxy Statement

/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e) (2))

/X/ Definitive Proxy Statement

/ / Definitive Additional Materials

/ / Soliciting Material Pursuant to Section 240.14a-11 (c) or Section 240.14a-12

Puget Energy, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required

/ / Fee computed on table below per Exchange Act Rules 14a-6(i) (1) and 0-11

(1) Title of each class of securities to which transaction apples:

(2) Aggregate number of securities to which transaction apples:

(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a) (2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:

Puget Energy, Inc.

Notice of Annual Meeting

May 15, 2001

Meydenbauer Center

11100 N.E. 6^th Street

Bellevue, Washington

To Puget Energy Shareholders:

     On May 15, 2001, Puget Energy, Inc. will hold its Annual Meeting of Shareholders at the Meydenbauer Center, located at 11100 N.E. 6th Street, Bellevue, Washington. The meeting will begin at 10:00 a.m. At the annual meeting, the shareholders will

1. Elect three directors.

2. Consider other matters properly presented at the meeting.

     You are entitled to vote if you were a shareholder at the close of business on March 15, 2001.

     To make it easier for you to vote your proxy, we have made Internet and telephone voting available. You will find instructions on the enclosed proxy card. If you choose not to use the Internet or telephone voting, please sign and date the proxy card and return it in the envelope provided.

     If your shares are registered in the name of a brokerage firm or trustee and you plan to attend the meeting in person, please bring a letter, account statement or other evidence of your beneficial ownership to the meeting.

March 13, 2001

Bellevue, Washington

By Order of the Board of Directors

_________________

James W. Eldredge

Corporate Secretary

CONTENTS
ANNUAL MEETING INFORMATION................................................
         WHEN DID THE COMPANY BECOME PUGET ENERGY?........................
         WHO IS ENTITLED TO VOTE?.........................................
         WHAT AM I VOTING ON?.............................................
         WHAT IS A QUORUM?................................................
         HOW MANY VOTES DO I HAVE?........................................
         HOW MANY VOTES ARE REQUIRED TO ELECT A DIRECTOR?.................
         CAN BROKERS VOTE ON THE ELECTION OF DIRECTORS?...................
         HOW WILL MY PROXY BE VOTED?......................................
         WHO COUNTS THE VOTES?............................................
ELECTION OF DIRECTORS.....................................................
         HOW MANY DIRECTORS DOES PUGET ENERGY HAVE?.......................
         HOW MANY DIRECTORS ARE ELECTED EACH YEAR?........................
         WHO ARE THE NOMINEES?............................................
         WHO ARE THE OTHER DIRECTORS?.....................................
STRUCTURE AND COMPENSATION OF BOARD OF DIRECTORS..........................
         BOARD OF DIRECTORS MEETINGS......................................
         AUDIT COMMITTEE..................................................
         DIRECTOR AFFAIRS COMMITTEE.......................................
         COMPENSATION AND RETIREMENT COMMITTEE............................
         STRATEGIC OPPORTUNITIES COMMITTEE................................
         DIRECTOR COMPENSATION............................................
AUDIT COMMITTEE REPORT....................................................
INDEPENDENT ACCOUNTANTS' FEES.............................................
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS....................
         BENEFICIAL OWNERSHIP TABLE.......................................
         SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..........
EXECUTIVE COMPENSATION....................................................
         JOINT COMPENSATION AND RETIREMENT COMMITTEE REPORT...............
         STOCK PRICE PERFORMANCE GRAPH....................................
         SUMMARY COMPENSATION TABLE.......................................
         OPTION/SAR EXERCISES AND YEAR-END OPTION/SAR VALUES..............
         LONG-TERM INCENTIVE PLAN AWARDS IN 2000..........................
         RETIREMENT BENEFITS STATEMENT....................................
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
         ARRANGEMENTS.....................................................
         AGREEMENTS.......................................................
         1995 LONG-TERM INCENTIVE COMPENSATION PLAN.......................
         STOCK APPRECIATION RIGHTS........................................
ADDITIONAL INFORMATION ABOUT THE MEETING AND SHAREHOLDER
         PROPOSALS........................................................
         INDEPENDENT PUBLIC ACCOUNTANTS...................................
         SHAREHOLDER PROPOSALS............................................
         SOLICITATION OF PROXIES..........................................
APPENDIX A................................................................

YOUR VOTE IS IMPORTANT

     Puget Energy has approximately 51,000 shareholders of record. Regardless of the number of shares you own, please complete and promptly return the enclosed proxy form, using the envelope we have provided.

PROXY STATEMENT

Annual Meeting Information

     This proxy statement relates to the Annual Meeting of Shareholders of Puget Energy, Inc. (“Puget Energy”) to be held at 10:00 a.m. on May 15, 2001 at the Meydenbauer Center, which is located at 11100 N.E. 6^th Street, Bellevue, Washington. We will mail this proxy statement and our Annual Report for 2000 to shareholders on March 28, 2001.

The mailing address of Puget Energy's principal executive offices is Puget Energy, Inc., P.O. Box 97034, Bellevue, Washington 98009-9734.

   When did the Company become Puget Energy?

     Effective January 1, 2001, Puget Sound Energy, Inc. (“Puget Sound Energy”) reorganized into a public utility holding company structure pursuant to a plan of exchange that was approved by Puget Sound Energy shareholders on June 23, 1999. This reorganization resulted in the creation of a new holding company, Puget Energy. Pursuant to the reorganization, Puget Energy became the owner of all Puget Sound Energy’s outstanding common stock. Holders of Puget Sound Energy’s existing common stock exchanged their stock on a one-for-one basis for Puget Energy common stock. All of Puget Energy’s operations are conducted through its subsidiaries. In addition to its ownership of Puget Sound Energy, Puget Energy also owns InfrastruX Group, Inc. (“InfrastruX”). Unless otherwise specified, all historical information in this proxy statement concerning dates prior to January 1, 2001 refers to Puget Sound Energy rather than Puget Energy.

   Who is entitled to vote?

     Only holders of common stock may vote at the Annual Meeting. We had approximately 86 million shares of common stock outstanding on March 15, 2001, the record date for the Annual Meeting.

   What am I voting on?

     You are being asked to elect three directors. We are not aware of any matter to be presented for action at the Annual Meeting other than the election of directors.

   What is a quorum?

     The holders of a majority of the shares of the common stock, present in person or by proxy at the Annual Meeting, constitute a quorum for the transaction of business. There must be a quorum for the meeting to be held.

   How many votes do I have?

     You are entitled to one vote for each share of common stock you held on the record date. You are not entitled to cumulate votes in the election of directors.

     How many votes are required to elect a director?

     If a quorum is present at the Annual Meeting, the three nominees for election as directors who receive the greatest number of votes cast by the shares present in person or represented by proxy at the Annual Meeting will be elected directors.

     Can brokers vote on the election of directors?

     Because brokers have discretion to vote shares they hold on behalf of beneficial owners in the election of directors, if they do not receive instructions, they may vote the shares as they see fit.

   How will my proxy be voted?

     If we receive a proper proxy, your shares will be voted as you direct. If you do not provide any direction on your proxy card, your shares will be voted for all management proposals. You may revoke a proxy card at any time before it is voted by delivering a written notice to the Corporate Secretary or by signing and delivering another proxy card that is dated later. If you attend the Annual Meeting in person, you may revoke the proxy by giving notice of revocation to an inspector of election at the Annual Meeting or by voting at the Annual Meeting.

   Who counts the votes?

     Mellon Investor Services, LLC will tabulate the votes and will act as inspector of election. No one will disclose the identity and vote of any shareholder unless legally required to do so.

Election of Directors

     How many directors does Puget Energy have?

     The number of directors is determined by the Board of Directors, but may be changed by the shareholders. The Board of Directors has fixed the current number of directors at nine. The members of Puget Energy’s Board of Directors and Board Committees are the same as the members of Puget Sound Energy’s Board of Directors and Board Committees.

     How many directors are elected each year?

     The directors are divided into three classes so that each year approximately one-third of the directors are elected for a three-year term. Directors are elected to hold office until their successors are elected and qualified, or until resignation or removal in the manner provided in our Bylaws. At the Annual Meeting, the shareholders will elect three Class I directors to serve for a term of three years expiring on the date of the 2004 Annual Meeting.

   Who are the nominees?

     Proxies will be voted on the following nominees. If any nominee becomes unavailable to serve as a director, the persons named in the enclosed proxy can vote for or against any other nominee in accordance with their judgment.

Class I Nominees Standing for Election

Terms Expire 2004

   Phyllis J. Campbell

     Ms. Campbell has been President of U.S. Bank, Washington (financial institution) since 1993. She also served as Area President of U.S. Bank, Washington for Seattle-King County from 1992 to 1993, Executive Vice President and Manager from 1989 to 1992, and in various banking capacities since 1973. Ms. Campbell, age 49, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1993. Ms. Campbell also serves as a director of SAFECO Corporation, and is a Regent of Washington State University.

   John D. Durbin

     Mr. Durbin has been President and Chief Executive Officer and a Director of InfrastruX since June 2000. Prior to that, he was Executive Director of Emerge Corporation (investment banking), and was a principal in Olympic Capital Partners, Inc. (investment banking), Seattle, Washington, from 1996 to 1999. He served as President and Chief Executive Officer of Hostar International, Inc. from 1988 until his retirement in June 1995, and he has been a General Partner of John Durbin & Associates since 1969. His prior positions include Chairman and President of CEC Equipment Company from 1982 to 1987 and Chairman of Spokane Truck Sales, Inc. from 1983 to 1987. Mr. Durbin, age 65, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1984. Mr. Durbin also serves as a director of ConneXt, Inc. (a subsidiary of Puget Sound Energy) (“ConneXt”).

   William S. Weaver

     Mr. Weaver has been President and Chief Executive Officer of Puget Energy since 2000 and of Puget Sound Energy since January 1998. He also served as President of Puget Sound Energy from May 1997 to January 1998, Vice Chairman and Chairman of Unregulated Subsidiaries from February 1997 to May 1997 and Executive Vice President and Chief Financial Officer from 1991 to 1997. Before joining Puget Sound Energy, he was a partner in the law firm of Perkins Coie LLP. Mr. Weaver, age 57, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1991.

   Who are the other directors?

     The directors who are not standing for reelection at this time are:

   Douglas P. Beighle

     Mr. Beighle served as Senior Vice President of The Boeing Company (aerospace manufacturing and sales) from 1986 until his retirement on May 1, 1997. Mr. Beighle, age 68, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1981. He also serves as a director of Washington Mutual, Inc., Active Voice Corporation, Simpson Investment Company (privately held) and InfrastruX. Mr. Beighle’s term expires in 2003.

   Charles W. Bingham

     Mr. Bingham served as Executive Vice President of Weyerhaeuser Company (forest products industry) from 1981 until his retirement in July 1995. Mr. Bingham, age 67, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1978. Mr. Bingham’s term expires in 2002.

   Craig W. Cole

Mr. Cole has been President and Chief Executive Officer of Brown & Cole Stores (retail grocery) since 1989. Mr. Cole, age 51, is also a member of the Washington Roundtable and serves on the boards of the Washington Early Learning Foundation, the Washington Food Industry, and the Food Marketing Institute. Mr. Cole has served as a Director of Puget Energy and Puget Sound Energy since December 1999. Mr. Cole's term expires in 2003.

   Robert L. Dryden

Mr. Dryden has been President, Chief Executive Officer and a Director of ConneXt since 1999. He served as Executive Vice President, Airplane Production, Boeing Commercial Airplane Group, Seattle, Washington, from 1990 until May 1998. He has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1991. Mr. Dryden, age 67, also serves as a director of U.S. Bancorp. Mr. Dryden's term expires in 2002.

   Tomio Moriguchi

Mr. Moriguchi has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1988. Mr. Moriguchi, age 64, has served as Chairman and Chief Executive Officer of Uwajimaya, Inc. (food and merchandise distributor), Seattle, Washington, since December 1994. Previously, he served as President of Uwajimaya, Inc. from 1965 through December 1994. He also serves as President and Chairman of the Board of North American Post Publishing Company, Seattle, Washington. Mr. Moriguchi's term expires in 2003.

   Sally G. Narodick

     Ms. Narodick is President of Narodick Consulting, which specializes in strategic planning for the educational technology industry. She retired as Chief Executive Officer and President of Apex Learning, Inc., a venture-backed internet distance learning company, in October 2000. Previously, she served as a Consultant on Strategic Planning for Educational Technology software for IBM Corporation and was Chairman and Chief Executive Officer of Edmark Corporation from October 1989 to September 1996. She also serves as a director of Penford Corporation, Click2Learn.com and Solutia, Inc. Ms. Narodick, age 55, has been a Director of Puget Energy since its incorporation in 1999 and of Puget Sound Energy since 1989. Ms. Narodick’s term expires in 2002.

Structure and Compensation of Board of Directors

     The Puget Energy and Puget Sound Energy Boards of Directors have four identical standing committees, which meet in addition to regular Board of Directors meetings. The names of these committees, their current membership and a brief statement of their principal responsibilities are presented below.

   Board of Directors Meetings

     The Puget Energy Board of Directors met one time during 2000. Each director attended this meeting.

     The Puget Sound Energy Board of Directors met eight times during 2000. Each director has attended at least 85% of these meetings and the meetings of committees on which he or she served. Directors on average attended 96% of all board and committee meetings during 2000.

   Audit Committee

     Douglas P. Beighle (Chairperson), Charles W. Bingham, Donald J. Covey, and Tomio Moriguchi serve on the Puget Energy and Puget Sound Energy Audit Committees. The Audit Committees meet with management, the internal auditors and the independent auditors to review and evaluate the companies’ audited Financial Statements, the internal audit function and external audit matters. The Committees recommend to the full Boards the retention of independent auditors. The Puget Sound Energy Audit Committee, which in 2000 was comprised of the same directors, met four times during 2000.

   Director Affairs Committee

     The Puget Energy and Puget Sound Energy Director Affairs Committees currently include John D. Durbin (Chairperson), Phyllis J. Campbell and Donald J. Covey. The Director Affairs Committees acts and makes recommendations regarding selection of director candidates, director tenure, committee assignments and director compensation. Shareholders may nominate candidates for election to the Puget Energy Board of Directors by notifying the Corporate Secretary prior to each annual meeting. The committees seek director candidates with recognized achievements and skills and experience that will enhance the Boards of Directors. The Puget Energy Director Affairs Committee, which until May 2000 was comprised of Ms. Campbell, Mr. Covey and former director Daniel J. Evans, met once during 2000.

   Compensation and Retirement Committee

The Puget Energy and Puget Sound Energy Compensation and Retirement Committees currently include Phyllis J. Campbell (Chairperson), Douglas P. Beighle, Donald J. Covey and Sally G. Narodick. The Compensation and Retirement Committees act and make recommendations to the Board of Directors with respect to executive compensation, the retirement plan and other benefit plans for employees. The Puget Sound Energy Compensation and Retirement Committee, which until May 2000 was comprised of Ms. Campbell, Mr. Beighle, Ms. Narodick and Messrs. Dryden and Durbin, met seven times during 2000.

   Strategic Opportunities Committee

The Puget Energy and Puget Sound Energy Strategic Opportunities Committees currently include Craig W. Cole (Chairperson), Douglas P. Beighle, Robert L. Dryden, John D. Durbin, John W. Ellis and Sally G. Narodick. The Strategic Opportunities Committees act and make recommendations to the Board of Directors with respect to new business development matters. The Puget Sound Energy Strategic Opportunities Committee, which until May 2000 was comprised of Messrs. Beighle, Dryden, Durbin, Ms. Campbell and Ms. Narodick, met four times during 2000.

   Director Compensation

     Puget Energy and Puget Sound Energy pay all directors other than the Company’s Chief Executive Officer a quarterly retainer of $7,500 plus $1,100 for each board and committee meeting the director attends. At least 40% of retainer payments are made in common stock. No director who serves on both the Puget Energy and Puget Sound Energy Boards and the corresponding committees is paid additional compensation for concurrent service. Directors can elect to receive 100% of their retainer payments in Puget Energy common stock, or to defer receipt of shares under the Puget Energy Directors’ Stock Plan. Chairpersons of the Audit, Director Affairs, Compensation, Retirement and Strategic Opportunities Committees are also paid additional quarterly retainers of $500 each.

Audit Committee Report

     The Audit Committee of the Puget Energy Board of Directors is composed of four directors who are independent directors as defined under the rules of the New York Stock Exchange. The Audit Committee operates under a written charter adopted by the Board of Directors in 2000, a copy of which is included as Appendix A to this proxy statement.

     The Audit Committee recommends to the Puget Energy Board of Directors the appointment of the independent auditors, reviews the scope of audits, reviews significant changes to Puget Energy’s accounting principles and practices, reviews significant issues encountered in the course of audit work related to the adequacy of internal controls and reviews the scope and results of Puget Energy’s procedures for internal auditing.

     The Audit Committee reviewed and discussed the audited financial statements with management of Puget Energy and representatives of PricewaterhouseCoopers LLP. The discussions with PricewaterhouseCoopers LLP included the matters required to be discussed by Statement on Auditing Standards No. 61. In addition, the Audit Committee received the written disclosures and the letter regarding independence from PricewaterhouseCoopers LLP as required by Independence Standards Board Standard No. 1 and discussed with PricewaterhouseCoopers LLP their independence.

     Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for filing with the Securities and Exchange Commission.

The Audit Committee of the Board of Directors of Puget Energy, Inc.

Douglas P. Beighle, Chairman

Charles W. Bingham

Donald J. Covey

Tomio Moriguchi

Independent Accountants’ Fees

     Fees billed by PricewaterhouseCoopers LLP, Puget Energy’s independent accountants, in 2000 were as follows:

     Audit Fees – Audit fees of PricewaterhouseCoopers LLP during 2000 for the audit of Puget Sound Energy’s annual financial statements and the review of those financial statements included in Puget Sound Energy’s quarterly reports on Forms 10-Q are estimated to be $534,000 of which an aggregate amount of $306,000 has been billed to Puget Sound Energy through December 31, 2000.

     Financial Information Systems Design and Implementation Fees – Aggregate fees billed to Puget Sound Energy by PricewaterhouseCoopers LLP during 2000 for financial information systems design and implementation services totaled $15,649,000.

     All Other Fees – Aggregate fees billed to the companies by PricewaterhouseCoopers LLP during 2000 for all other services totaled $1,616,000.

     The fees paid for financial information systems design and implementation relate to Puget Sound Energy’s successful implementation of its ConsumerLinX customer information system in 2000, on which PricewaterhouseCoopers’ management consulting services group provided system integration services to the companies. Other fees relate to:

o consulting services relating to consideration of strategic alternatives for a subsidiary of Puget Energy and for regulatory matters - $590,000;

o due diligence reviews of InfrastruX acquisition targets - $364,000;

o tax planning, consulting and tax return reviews - $248,000; and

o employee benefit plan audits, fees relating to registration statements and other - $414,000.

     The Audit Committee of Puget Energy has considered the compatibility of these non-audit services with maintaining PricewaterhouseCoopers LLP’s independence.

Security Ownership of Directors and Executive Officers

Beneficial Ownership Table

     The following table shows the number of shares of common stock beneficially owned on January 31, 2001 by each director and nominee, by each executive officer named in the Summary Compensation Table and by the directors and executive officers of Puget Energy and Puget Sound Energy as a group. No director or executive officer owns more than 1% of the outstanding shares of common stock. We are not aware of any person who beneficially owns five percent or more of the common stock.

                                  Number of Beneficially     Number of Share
                        Name            Owned Shares         Interests Held
                        ----            -------------        --------------
Douglas P. Beighle.............             4,256                1,403(1)
Charles W. Bingham.............             4,754                  435(1)
Phyllis J. Campbell............             1,000                1,754(1)
Craig W. Cole..................               200                1,239(1)
Donald J. Covey................             6,231                3,687(1)
Robert L. Dryden...............             4,698                2,692(1)
John D. Durbin.................             3,115                3,419(1)(3)
John W. Ellis..................            34,918(2)             1,403(1)
Tomio Moriguchi................               805                5,341(1)(3)
Sally G. Narodick..............               258                3,332(1)
William S. Weaver..............            31,328(2)            22,632(3)
Richard L. Hawley..............            12,198(2)             7,622(3)
Timothy J. Hogan...............             7,733(2)            21,165(3)(4)
Stephen A. McKeon..............            14,747(2)             9,554(3)
Gary B. Swofford...............            10,077(2)            12,233(3)
All Directors and Executive Officers      170,833              110,933
_________

(1) Shares represent stock units under the Puget Energy Directors' Stock Plan.

(2) Includes shares credited under the Puget Sound Energy Investment Plan for Employees through December 31, 2000.

(3) Includes vested and non-vested stock units under the Puget Sound Energy Deferred Compensation Plan.

(4) Includes 14,376 shares subject to unexercised stock options granted by Washington Energy Company prior to the Merger, which were converted into options to purchase common stock at the merger exchange ratio of .86 to 1.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the directors and officers of Puget Energy and Puget Sound Energy to file reports of ownership and changes in ownership with respect to the equity securities of the companies with the Securities and Exchange Commission. To our knowledge, based on our review of the reports furnished to Puget Sound Energy in 2000 and written representations that no other reports were required, all directors and officers of Puget Energy and Puget Sound Energy who are subject to the Section 16 reporting requirements filed the required reports on a timely basis in 2000.

Executive Compensation

Joint Compensation and Retirement Committee Report

     The Boards of Directors of Puget Energy and Puget Sound Energy delegate responsibility for executive compensation to their respective Compensation and Retirement Committees. The Committees' members are Phyllis J. Campbell (Chairperson), Douglas P. Beighle, Donald J. Covey and Sally G. Narodick, none of whom is an employee of Puget Energy or Puget Sound Energy or participates in the compensation programs described here for executives. The Committees establish compensation for the President and Chief Executive Officer and review and approve the President and Chief Executive Officer's recommendations regarding compensation of the other executive officers.

     In determining executive compensation, the Committees consider the pay practices in comparable companies in the electric and combination gas and electric utility industries. The Committees believe that executive compensation packages should do the following:

o attract and retain outstanding executives by providing compensation opportunities consistent with those offered by the electric and combination gas and electric utility industries for similar positions;

o place a significant portion of each executive's total pay at risk to motivate executives to achieve company and individual performance goals;

o be aligned with annual operating goals that support continued emphasis on low cost, reliable service to customers; and

o tie long-term incentive compensation to increasing value to the shareholders.

     In making compensation decisions, the Committees reviews appropriate market compensation indices. The principal source of this data is a selection of comparable companies from a comprehensive, industry-wide annual survey of management pay prepared by a national compensation consulting firm. All are part of the Edison Electric Institute (EEI) Investor-Owned Utilities Index and most are gas and electric combination companies which comprise the EEI Combination Gas & Electric Investor-Owned Utilities Index presented in the Stock Price Performance Graph on page 12.

     The Committees' compensation policies encompass a mix of base salary and annual and long-term incentive compensation programs. The Committees design the total package to provide participants with appropriate incentives to achieve current performance goals as well as the long-term objective of enhancing shareholder value. Long-term incentives are designed to comprise the largest portion of each executive's incentive pay. Total Cash Compensation is targeted at the 50th percentile of total compensation for the comparator group if annual performance goals are achieved. If performance goals are achieved at the highest level, total cash compensation will be leveraged to reach the 60th percentile or higher.

Base Salary

     Generally, base salaries for executives are administered on a subjective, individual basis by the Committees using as a guideline, median salary levels of a select group of electric and combination gas and electric companies from the industry survey described above that are most similar in scope and size to Puget Energy.

Annual Incentive Compensation

     All executive officers participate in the annual Pay at Risk Plan. This plan is designed to provide financial incentives to executives for achieving desired annual operating results while meeting the companies' service quality commitment to customers. For 2000, the targeted opportunity for awards from this plan varied by executive officer: Mr. Weaver's target was 45% of base salary; the target for Messrs. Hawley, McKeon and Swofford was 35%; and the target for Mr. Hogan was 30%.

     The primary measure for the named executive officers was earnings per share. For Messrs. Weaver, Hawley and McKeon, 100% of the award was based on EPS performance. For Mr. Swofford, 50% of the award was based on EPS and 50% was based on the weather-adjusted earnings contribution of the business units in his area of responsibility. For Mr. Hogan, 50% of the award was based on EPS with the remaining 50% divided among five additional goals related to his area of responsibility. EPS results were achieved at the outstanding level. For Mr. Swofford, the weather-adjusted earnings contribution of the business unit was achieved at the minimum funding level. For Mr. Hogan, two of the additional goals that comprise 50% of his award achieved funding status.

Long-Term Incentive Compensation

     The 1995 Long-Term Incentive Compensation Plan, approved by shareholders in 1995, links compensation to the relative total shareholder return. Under this plan, the committee has awarded contingent grants of common stock to executives and key employees that generally pay in stock at the end of a four-year period, based on Puget Energy's cumulative four-year total shareholder return relative to the EEI Combination Gas & Electric Investor-Owned Utilities Index during that period. The number of shares delivered at the end of the four-year cycle will range from zero to 175% of the contingent grant. Dividend equivalents are accrued during the performance period and paid out in cash when and to the extent the related performance shares are paid. The Long-Term Incentive Plan Awards in 2000 table shown on page 16 lists the awards made in 2000 to the named executive officers for the four-year performance cycle ending December 31, 2003. The Summary Compensation Table on page 13 shows the payout of awards for the four-year cycle ended December 31, 2000.

     As part of its Long-Term Incentive Program, the committee has also established stock ownership guidelines to be achieved over a five-year period commencing in 1998 for officers and key managers that range from 50% of base salary to two times base salary for the named executive officers.

Chief Executive Officer Compensation

     In February, 2000, Mr. Weaver's base salary as Chief Executive Officer was determined to be below median for CEOs in comparable companies in the EEI survey, and was increased from $575,000 per year to the market median salary of $600,000.

     During 2000, Mr. Weaver's leadership and focus on company-wide strategic and operating goals resulted in continued, significant improvement in financial results with a net increase in EPS of 4.9% over the prior year. This level of achievement resulted in Mr. Weaver's 2000 target annual incentive payment being paid at twice the target of 45% of base salary. As a result, Mr. Weaver's total cash compensation for 2000, was above the 50th percentile for CEO's of comparable companies in the EEI survey, which is in keeping with the committee's philosophy for total cash compensation at the 60th percentile or higher when results are achieved at this outstanding level.

Additional Information

     Section 162(m) of the Internal Revenue Code of 1986 generally disallows a tax deduction to public companies for compensation over $1 million paid to a company's chief executive officer and four other most highly compensated executive officers, unless that compensation is deferred or is considered performance-based. Our policies are to structure executive officer compensation to achieve maximum deductibility under Section 162(m) with minimal sacrifices in flexibility and corporate objectives.

Puget Energy, Inc. and Puget Sound Energy, Inc.

Phyllis J. Campbell, Chair

Douglas P. Beighle

Donald J. Covey

Sally G. Narodick

Stock Price Performance Graph

     The chart below compares the five-year cumulative total shareholder return (share price appreciation plus reinvested dividends) on our common stock to the cumulative total return of the Standard & Poor's 500 Stock Index and the EEI Combination Gas & Electric Investor-Owned Utilities Index.

Year          Puget Energy     EEI G&E         S&P 500
- ----          ------------     -------         -------
1995          100.0            100.0           100.0
1996          111.4            99.4            123.0
1997          149.9            128.5           164.0
1998          147.3            149.3           210.9
1999          111.6            121.3           255.2
2000          172.3            180.6           232.0

Five-Year Cumulative Total Return

     This comparison assumes $100 was invested on December 31, 1995, in (a) our common stock, (b) the S&P 500 Stock Index, and (c) the EEI Combination Gas & Electric Investor-Owned Utilities Index. The graph then observes, in each case, stock price growth and dividends paid (assuming dividends were reinvested) over five years.

     The Board of Directors and its Compensation and Retirement Committee recognize that many factors influence the market price of stock, one of which is company performance. The returns shown on the graph do not necessarily predict future performance.

Summary Compensation Table

     The following information is furnished for the years ended December 31, 2000, 1999 and 1998 with respect to Puget Energy's and Puget Sound Energy's Chief Executive Officer, and each of the four other most highly compensated executive officers of Puget Energy and Puget Sound Energy during 2000, each of whose salary and bonus exceeded $100,000. Annual compensation includes amounts deferred at the officer's election. Unless otherwise indicated, all positions and offices are at Puget Energy and Puget Sound Energy.

                                                                        Long-Term
                                                                        Compensation
                                                                        ------------    All Other
            Name and Principal                Annual Compensation         LTIP          Compensation
           Position in 2000 (1)     Year     Salary ($)   Bonus ($)     Payouts ($)(5)         ($)
           --------------------    -------------------------------------------------------------------

W. Weaver                           2000     594,841       540,000      211,598 (2)     63,852 (6)
President and                       1999     570,208       517,500       38,933 (3)     44,198
Chief Executive Officer             1998     532,971       0            109,933 (4)     35,456

R. Hawley                           2000     335,079       237,300      123,807 (2)     36,188 (7)
Vice President and                  1999     316,167       224,000       20,964 (3)     53,462
Chief Financial Officer             1998     225,000       0             21,987 (4)     81,985

T. Hogan                            2000     210,460        90,300       77,380 (2)     17,241 (8)
Vice President External             1999     191,888        57,900       14,488 (3)     14,546
Affairs of Puget Sound Energy       1998     184,309       0             26,384 (4)     13,458

S. McKeon                           2000     335,079       237,300      147,443 (2)     34,802 (9)
Vice President and                  1999     316,167       224,000       25,142 (3)     22,588
General Counsel                     1998     283,941        25,800       43,516 (4)     21,038

G. Swofford                         2000     261,905       115,937       77,380 (2)     22,061 (10)
Vice President and Chief            1999     238,960        87,500       19,841 (3)     17,300
Operating Officer-Delivery          1998     189,429       0             54,967 (4)     13,337
of Puget Sound Energy

     (1) Mr. Weaver became President and Chief Executive Officer of Puget Energy in October 2000 and of Puget Sound Energy in January 1998. Mr. Hawley became an executive officer of Puget Energy in October 2000 and of Puget Sound Energy in March 1998. Mr. McKeon became an executive officer of Puget Energy in October 2000.

     (2) The amounts for 2000 represent payment of LTIP awards for the four-year performance cycle ended December 31, 2000, which consist of (a) unrestricted shares valued as of the December 31, 2000 closing price of $27.8125, plus (b) a total dividend amount of $7.36 per share during the four-year performance period multiplied by the total number of unrestricted shares. The number and value of unrestricted shares for each of the named executive officers are as follows:

                                         Unrestricted Shares
                                         -------------------
           Name                        Number      Value
           ----                        ------      -----
           W. Weaver.............      6,016    $167,320
           R. Hawley.............      3,520      97,900 (a)
           T. Hogan..............      2,200      61,188
           S. McKeon.............      4,192     116,590
           G. Swofford...........      2,200      61,188

     (a) Mr. Hawley received $50,000 of his share award in the form of cash and the remainder in the form of 1,530 Puget Energy shares.

     (3) The amounts for 1999 represent payment of LTIP awards for the four-year performance cycle ended December 31, 1999, which consist of (a) unrestricted shares and restricted shares, valued as of the December 31, 1999 closing price of $19.38, plus (b) a total dividend amount of $7.36 per share during the four-year performance period multiplied by the total number of restricted and unrestricted shares. The number and value of restricted and unrestricted shares for each of the named executive officers is as follows:

                     Unrestricted Shares         Restricted Shares
                     -------------------         -----------------
 Name                Number         Value       Number        Value
 ----                ------         -----       ------        -----
 W. Weaver........   728          $14,109       728         $14,109
 R. Hawley........   392            7,597       392           7,597
 T. Hogan.......     271            5,250       271           5,250
 S. McKeon........   470            9,111       470           9,111
 G. Swofford......   371            7,190       371           7,190

     (4) The amounts for 1998 represent payment of LTIP awards for the four-year performance cycle ended December 31, 1998, which consist of (a) unrestricted shares and restricted shares, valued as of the December 31, 1998 closing price of $27.875, plus (b) a total dividend amount of $7.36 per share during the four-year performance period multiplied by the total number of restricted and unrestricted shares. The number and value of restricted and unrestricted shares for each of the named executive officers are as follows:

                     Unrestricted Shares    Restricted Shares
                     -------------------    -----------------
  Name               Number     Value       Number     Value
  ----               ------     -----       ------     -----
  W. Weaver.......    1,560    $43,485       1,560    $43,485
  R. Hawley.......      312      8,697         312      8,697
  T. Hogan........      374     10,425         374     10,425
  S. McKeon.......      617     17,199         617     17,199
  G. Swofford.....      780     21,743         780     21,743

     (5) The aggregate number and value of all outstanding restricted stock held by each of the named executive officers as of December 31, 2000, based on the closing price of Puget Sound Energy stock on that date of $27.8125, are as follows: W. Weaver, 728 shares, $20,248; R. Hawley, 392 shares, $10,903; T. Hogan, 271 shares, $7,534; S. McKeon, 470 shares, $13,075; G. Swofford, 371 shares, $10,318.

     (6) Represents $8,500 match under Investment Plan for Employees; $47,117 match under the Investment Plan make-up; and $8,235 imputed income on life insurance.

     (7) Represents $9,967 match under Investment Plan for Employees; $23,578 match under the Investment Plan make-up; and $2,643 imputed income on life insurance.

     (8) Represents $4,316 match under Investment Plan for Employees; $11,872 match under the Investment Plan make-up; and $1,053 imputed income on life insurance.

     (9) Represents $8,650 match under Investment Plan for Employees; $24,895 match under the Investment Plan make-up; and $1,257 imputed income on life insurance.

     (10) Represents $6,220 match under Investment Plan for Employees; $14,744 match under the Investment Plan make-up; and $1,097 imputed income on life insurance.

Option/SAR Exercises and Year-End Option/SAR Values

     The following table shows the number of stock options or stock appreciation rights ("SARs") exercised in 2000 and the number and value of outstanding unexercised options and SARs held by the participating named executive officers at the end of 2000.

                    Number of Shares                           Number of Shares Underlying      Value of Unexercised
                       Underlying              Value of        Unexercised Options/SARs at   In-the-Money Options/ SARs
                 Options/SARs Exercised      Options/SARs         Fiscal Year-End (#)          at Fiscal Year-End ($)
                        ----------                                    -------------                            ---
      Name               in 2000          Exercised in 2000            Exercisable                 Exercisable (3)
      ----               -------          -----------------            -----------                 ---------------

W. Weaver                11,400                $44,047 (1)                7,300                           -
R. Hawley                   -                     -                        -                              -
T. Hogan                  1,290                   $935 (2)               14,376                       $119,672
S. McKeon                   -                     -                        -                              -
G. Swofford                 -                     -                       5,600                        $16,950

     Before 1995, participants in Puget Energy’s Long-Term Incentive Program for Senior Management could receive stock appreciation rights, which are payable only in cash. No options have been granted since 1996 and no SARs have been granted since 1994.

     (1) Amount represents exercise on November 30, 2000 from two SAR grants when the market value of the common stock was $26.4375 per share: 6,000 SARs from a February 4, 1992 grant with a base price of $24.875 per share, and 5,400 SARs from an April 26, 1994 grant with a base price of $20.750 per share.

     (2) Amount represents options exercises of September 18, 2000 and October 10, 2000 totaling 1,290 options.

     (3) Amounts are the number of options or SARs multiplied by the difference between the closing price of the common stock on December 31, 2000 of $27.8125 per share, minus the base price for that option or SAR. There is no guarantee that these options or SARs will have this value when and if they are exercised.

Long-Term Incentive Plan Awards in 2000

     The following table presents grants made to the named executive officers under our 1995 Long-Term Incentive Compensation Plan during 2000.

                    Number of   Period Until       Estimated Future Share Payouts
                                                   ------------------------------
                      Shares    Maturation or   Threshold     Target       Maximum
            Name      (#)(1)       Payout          (#)          (#)          (#)
            ----      ------       ------          ---          ---          ---

W. Weaver........   48,387       4 years          0         48,387        84,677

R. Hawley........   19,883       4 years          0         19,883        34,795

T. Hogan.........    7,093       4 years          0          7,093        12,413

S. McKeon........   19,883       4 years          0         19,883        34,795

G. Swofford......   12,240       4 years          0         12,240        21,420

(1) Awards are contingent grants of common stock. The number of shares delivered at the end of the four-year cycle will range from zero to 175% of the contingent grant. The actual payout depends on Puget Energy's four-year total shareholder return compared to the returns reported in the Edison Electric Institute's Combination Gas and Electric Investor-Owned Utilities Index. To receive 100% of the grant, Puget Energy must perform at the 55th percentile among Edison Electric Institute's companies. To receive 175% of the grant, Puget Energy must perform at or above the 85th percentile ranking. Dividend equivalents are accrued during the performance period and paid out in cash when and to the extent the performance shares are paid.

Retirement Benefits Statement

     The table below presents estimated retirement benefits for the named executive officers, assuming retirement on January 1, 2001 at age 62 after selected periods of service. The table lists the estimated aggregate values under the Puget Sound Energy, Inc. funded pension plan, Supplemental Executive Retirement Plan, Washington Natural Gas Nonqualified Retirement Plan benefits, the SERP pension-type rollover accounts in the Deferred Compensation Plan and the Cash Balance Restoration Matching Account within the Deferred Compensation Plan. Social Security benefits will not be deducted from the amounts shown in the table.

                       Estimated Annual Benefit Upon Retirement At Age 62

  Final Average                   Years of Credited Service
                      ---------------------------------------------------
  Compensation           5               10                 15+
  ------------           -               --                 ---
  $200,000.......      $ 33,333        $ 66,667         $100,000
   300,000.......        50,000         100,000          150,000
   400,000.......        66,667         133,333          200,000
   500,000.......        83,333         166,667          250,000
   600,000.......       100,000         200,000          300,000
   700,000.......       116,667         233,333          350,000
   800,000.......       133,333         266,667          400,000
   900,000.......       150,000         300,000          450,000

     The named executive officers have the following years of credited service as of December 31, 2000: W. Weaver, 32.5; R. Hawley, 2.75; T. Hogan, 24.33; S. McKeon, 3.58; and G. Swofford, 33.42. Under their employment agreements, if Messrs. Hawley and McKeon complete five years of service they will be treated as if they have completed 15 years of credited service.

     Estimated aggregate benefits are based on the following formula: 3-1/3% times years of credited service times average annual compensation (salary plus bonus) for the highest three calendar years in the last five complete calendar years prior to retirement, except that Mr. Weaver’s benefits are based on the average of his highest 24 consecutive months of compensation and Messrs. Hawley’s and McKeon’s benefits are based on the annual average of their highest 36 consecutive months of salary paid or payable plus the average of their highest three annual bonuses paid or payable. Also, $50,000 of Mr. Hawley’s LTIP-related payouts are treated as salary. See the section called “Employment Contracts, Termination of Employment and Change-in-Control Arrangements” below.

     The three-year averages (24-consecutive-month average for Mr. Weaver; 33 - consecutive-month average for Mr. Hawley as of December 31, 2000) for the named executive officers were: $841,275 for Mr. Weaver; $436,453 for Mr. Hawley; $219,353 for Mr. Hogan; $402,579 for Mr. McKeon; and $263,889 for Mr. Swofford.

Employment Contracts, Termination of Employment and Change-In-Control Arrangements

Agreements

     In October 1996 Puget Sound Energy entered into an agreement with Mr. Weaver under which he will receive the following payments and benefits if his employment terminates for any reason sooner than his normal retirement date, which, in accordance with Puget Sound Energy’s policy, is when Mr. Weaver reaches the age of 62.

a. annual base salary and accrued benefits earned through termination, plus a pro rata share of any incentive compensation accrued through the date of termination, regardless of whether such amounts are vested or payable on that date;

b. an amount equal to three times annual base salary and bonus;

c. continued participation for three years in employee benefit plans or provision for substantially similar benefits;

d. a cash payment at normal retirement date of the actuarial equivalent of the additional retirement compensation he would have earned had employment continued for three more years;

e. a payment equal to the difference between the exercise prices of any outstanding options or rights under similar equity plans (whether or not then fully exercisable) and the higher of (i) the market price of the common stock on the date of termination and (ii) the highest price per share actually paid in connection with any change-in-control;

f. a payment equal to the value of the number of shares payable upon full vesting of all outstanding performance awards, whether or not such awards were then fully vested or payable; and

g. a cash payment equal to any excise taxes payable by him due to excess parachute payments, plus the tax expense to him resulting from this payment.

     In addition, Mr. Weaver’s agreement provides that his benefits under the SERP will be based on his average compensation for his highest consecutive 24 months of service. Pursuant to a November 2000 supplement to his October 1996 agreement, Mr. Weaver has agreed not to voluntarily terminate his employment with Puget Sound Energy as its Chief Executive Officer any earlier than December 31, 2001, and Puget Sound Energy has agreed that the various payments due Mr. Weaver under the October 1996 agreement will be calculated based on the actual termination date or an assumed termination date of December 31, 2000, whichever produces the higher payment under each payment provision.

     Effective March 16, 1998, Puget Sound Energy entered into an employment agreement with Mr. Hawley to secure his services as Vice President and Chief Financial Officer. The agreement has a term of five years. Mr. Hawley will receive a minimum annual base salary of $300,000. He also will participate in Puget Sound Energy’s Pay at Risk Plan, with a target award of at least 35% of base salary, and in Puget Energy’s 1995 Long-Term Incentive Compensation Plan, with a target of at least 40% of base salary and grants of 1,200 performance units for the 1995-1998 cycle, 2,800 performance units for the 1996-1999 cycle, 4,400 performance units for the 1997-2000 cycle and 6,400 performance units for the 1998-2001 cycle, and a cash payment equal to the difference between $50,000 and any lesser settlement value for such awards.

     In addition, Mr. Hawley’s agreement provides that if he completes five years of service to Puget Sound Energy, then his benefits under the SERP will be calculated as if he had completed 15 years of service to Puget Sound Energy. His agreement also provides that his benefits under the SERP will be based on the sum of (a) the annual average of his highest 36 consecutive months of salary paid or payable and (b) the average of his highest three annual bonuses paid or payable. Under his agreement, the $50,000 minimum annual award to which Mr. Hawley is entitled with respect to the 1995 Long-Term Incentive Compensation Plan will be treated as salary for purposes of calculating his SERP benefits.

     If Puget Sound Energy terminates Mr. Hawley's employment without cause prior to the end of the term of the agreement, Mr. Hawley will receive:

a. annual base salary and accrued benefits earned through termination, plus a pro rata share of any incentive compensation accrued through the date of termination, regardless of whether such amounts are vested or payable on that date and;

b. continuation of his base salary for two years, plus $50,000 per year.

     If Mr. Hawley's employment terminates for any reason within three years after a change-in-control, Mr. Hawley will receive, in lieu of the benefits described above, substantially the same type of payments and benefits as described above for Mr. Weaver.

     Mr. Hogan entered into an agreement effective as of August 17, 1995 with the Washington Energy Company that Puget Sound Energy has assumed. Under that agreement, as amended on June 30, 1999, if prior to the earlier of June 30, 2002 or a change-in-control of Puget Sound Energy, Mr. Hogan terminates his employment for good reason or Puget Sound Energy terminates his employment without cause, he will receive the same type of payments and benefits as described above for Mr. Weaver.

     In October 1996, Puget Sound Energy entered into an agreement with Mr. Swofford under which he will be paid a retention incentive benefit based on continued employment following the merger of Puget Sound Energy and the Washington Energy Company in February 1997, equal to three times his annual base salary in 1996, plus the bonus paid in 1996. The incentive benefit vests in three equal installments after one year, three years and five years of continued employment after the merger. The vested portion of the incentive benefit will be paid in equal monthly installments over a three-year period beginning on the date his employment terminates.

     In 1999 Puget Sound Energy entered into change-in-control agreements with Mr. Swofford and Mr. Hogan that provided for the same type of payments and benefits described above for Mr. Weaver in the event that their employment is terminated by Puget Sound Energy without cause or by the employee for good reason within two years following a change-in-control of Puget Sound Energy, except that the payments in sections (c) and (d) are based on two rather than three years.

     Effective June 2, 1997, Puget Sound Energy entered into an employment agreement with Mr. McKeon to secure his services as Vice President and General Counsel. The agreement has an initial term of three years and will be extended for two more one-year periods unless Mr. McKeon or Puget Sound Energy gives written notice of termination not less than six months before the applicable anniversary date. No such notice has been given. Mr. McKeon will receive a minimum annual base salary of $260,000. He also will participate in Puget Sound Energy’s Pay at Risk Plan, with a target award of at least 35% of base salary, and in Puget Energy’s 1995 Long-Term Incentive Compensation Plan, with a target of at least 35% of base salary and grants of 2,375 performance units for the 1995-1998 cycle, 3,358 performance units for the 1996-1999 cycle and 5,240 performance units for the 1997-2000 cycle.

     Mr. McKeon’s agreement provides that if he completes five years of service to Puget Sound Energy, then his benefits under the SERP will be calculated as if he had completed 15 years of service to Puget Sound Energy. His agreement also provides that his benefits under the SERP will be based on the sum of (a) the annual average of his highest 36 consecutive months of salary paid or payable and (b) the average of his highest three annual bonuses paid or payable. If Puget Sound Energy terminates his employment without cause prior to the end of the term of the agreement, Mr. McKeon will receive his annual base salary and accrued benefits earned through termination, plus a pro rata share of any incentive compensation accrued through the date of termination, regardless of whether such amounts are vested or payable on that date, and continuation of his base salary for two years. If Mr. McKeon’s employment terminates for any reason within three years after a change-in-control, he would receive substantially the same type of payments and benefits as described above for Mr. Weaver.

1995 Long-Term Incentive Compensation Plan

     Under the Puget Energy 1995 Long-Term Incentive Compensation Plan, in the event of a change-in-control of Puget Energy, each stock award that is at the time outstanding will automatically accelerate and become 100% vested. The plan administrator may, at any time before a corporate transaction, take further action to ensure fair and equitable treatment of awards.

Stock Appreciation Rights

     Upon a change-in-control of Puget Energy, all SARs will terminate. Each holder may exercise his or her SARs immediately prior to the transaction, whether or not the SARs have vested.

Certain Transactions

     Mr. Dryden, a Director of Puget Energy and Puget Sound Energy, has served as President and Chief Executive Officer of ConneXt since 1999. His aggregate compensation for such service in 2000 was $583,000.

     Mr. Durbin, a Director of Puget Energy and Puget Sound Energy, has served as President and Chief Executive Officer of InfrastruX since 2000. His aggregate compensation for such service in 2000 was $254,545.

ADDITIONAL INFORMATION ABOUT THE MEETING AND SHAREHOLDER PROPOSALS

Independent Public Accountants

     The firm of PricewaterhouseCoopers LLP has audited our financial statements since 1933. Representatives of the firm will attend the Annual Meeting, with the opportunity to make a statement and answer appropriate shareholder questions.

Shareholder Proposals

     Shareholders who intend to have a proposal considered for inclusion in our proxy materials for the 2002 Annual Meeting of Shareholders must submit the proposal at our principal executive office no later than November 30, 2001. In accordance with Puget Energy’s Bylaws, shareholders who intend to present a proposal at the 2002 Annual Meeting without inclusion of the proposal in our proxy materials must provide written notice of such proposal, in the manner required by Puget Energy’s Bylaws, no earlier than January 15, 2002 and no later than February 14, 2002.

Solicitation of Proxies

     The Puget Energy Board of Directors is soliciting the proxies in the form enclosed. William S. Weaver and James W. Eldredge, and each or either of them, are named as proxies. We may solicit your proxy by mail, personal interview, telephone and fax. We will request that banks, brokerage houses and other custodians, nominees or fiduciaries forward soliciting materials to their principals and obtain authorization for the execution of proxies. We will reimburse them for their expenses in forwarding and collecting proxies. Our officers, directors, employees and other agents may solicit proxies without compensation, except for reimbursement of expenses. Puget Energy will pay all costs of solicitation of proxies.

March 13, 2001

Bellevue, Washington

By Order of the Board of Directors

_________________

William S. Weaver

President and Chief Executive Officer

APPENDIX A

Puget Energy, Inc.

Audit Committee Charter

Purpose:

     The primary purpose of the Audit Committee (the “Committee”) shall be to monitor the integrity of the Company’s financial reporting by overseeing the participation of management and the independent auditors in the financial reporting process.

Composition:

     The Committee shall be composed of three or more directors, as determined by the Board, each of whom shall meet the independence requirements of the New York Stock Exchange. The Board shall determine in its business judgment that each Committee member is financially literate and that at least one Committee member has accounting or related financial management expertise. In the absence of a member designated by the Board to serve as chair, the members of the Committee may appoint from among their number a person to preside at their meetings.

Responsibilities:

     The Committee shall have the following responsibilities:

     o Recommend to the Board the selection of the independent auditor, evaluate the independent auditor and, where appropriate, recommend the replacement of the independent auditor, with the understanding that the independent auditor shall be ultimately accountable to the Committee and to the Board.

     o Obtain and evaluate an annual written statement from the independent auditor regarding the auditor’s independence in accordance with Independence Standards Board Standard No. 1, discuss with the auditor any independence issues raised by the matters disclosed in such statement and, if so determined by the Committee, take or recommend that the Board take appropriate action to satisfy itself as to the independence of the auditor.

     o Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards ("SAS") No. 61, Communications with Audit Committee, SAS No. 89, Audit Adjustments, and SAS No. 90, Audit Committee Communications, all as amended from time to time.

     o Meet with management and the independent auditor to review and discuss the annual financial statements and the report of the independent auditor thereon and to discuss any significant issues encountered in the course of the audit work, including restrictions on the scope of activities, access to required information or the adequacy of internal controls.

     o Review the management letter delivered by the independent auditor in connection with the audit and management’s responses to the letter.

     o Following such reviews and discussions, if so determined by the Committee, recommend to the Board that the audited financial statements be included in the Company’s annual report on Form 10-K.

     o Meet quarterly with management and the independent auditor to review and discuss the quarterly financial statements.

     o Meet at least once each year in separate executive sessions with the internal auditor and the independent auditor to discuss matters that the Committee or either of these groups believes could significantly affect the financial statements and should be discussed privately.

     o Review significant changes to the Company’s accounting principles and practices proposed by the internal auditor or management. Discuss these changes with the independent auditor.

     o Review changes in promulgated accounting and auditing standards that may materially affect the Company’s financial reporting practices.

     o Review the responsibilities, functions and performance of the Company’s internal audit department, including internal audit plans, budget, and the scope and results of internal audits.

     o Conduct or authorize such inquiries into matters within the Committee’s scope of responsibility as the Committee deems appropriate.

     o As the Committee deems appropriate, retain independent counsel and other professionals to assist the Committee.

     o Provide minutes of Committee meetings to the Board and report to the Board on any significant matters arising from the Committee’s work.

     o At least annually, review and reassess this charter and, if appropriate, recommend proposed changes to the Board.

     o Prepare the report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.

     It is not the responsibility of the Committee to plan or conduct audits, or to determine whether the Company’s financial statements are complete and accurate or in accordance with generally accepted accounting principles.

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                   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

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


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

Securities registered pursuant to Section 12(b) of the Act:

                                                NAME OF EACH EXCHANGE
  TITLE OF EACH CLASS                           ON WHICH LISTED
- --------------------------------------------- ------------------------
  Puget Energy, Inc.
      Common Stock, $0.01 par value             N. Y. S. E.

      Preferred Share Purchase Rights           N. Y. S. E.

  Puget Sound Energy, Inc.
      7.45% Series II, Preferred Stock
      (Cumulative, $25 Par Value)               N. Y. S. E.

Securities registered pursuant to Section 12(g) of the Act:

  TITLE OF EACH CLASS
- --------------------------------------------------
  Puget Sound Energy, Inc.
      Preferred Stock (Cumulative, $100 Par Value)

      8.231% Capital Securities

     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 such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes/X/ No/ /

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

     The aggregate market value of the voting stock held by non-affiliates of Puget Energy, Inc. at January 31, 2001, was approximately $2,130,400,000. The number of shares of Puget Energy, Inc.‘s common stock outstanding at March 1, 2001, was 86,167,369.

     All of the outstanding shares of voting stock of Puget Sound Energy, Inc. are held by Puget Energy, Inc.

Documents Incorporated by Reference

     Portions of the Puget Energy proxy statement for its 2001 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after December 31, 2000, is incorporated by reference in Part III hereof.

This Annual Report on Form 10-K is a combined report being filed separately by two different registrants: Puget Energy, Inc. ("Puget Energy") and Puget Sound Energy, Inc. ("PSE"). 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.

INDEX

       Definitions
       Forward-Looking Statements
       Part I
           1.     Business
                         General
                         Utility Industry Overview
                         Regulation and Rates
                         Electric Utility Operations
                         Electric Utility Operating Statistics
                         Gas Utility Operations
                         Gas Utility Operating Statistics
                         Environment
                         Executive Officers
           2.     Properties
           3.     Legal Proceedings
           4.     Submission of Matters to a Vote of Security Holders

       Part II
           5.     Market for Registrant's Common Equity and Related Shareholder Matters
           6.     Selected Financial Data
           7.     Management's Discussion and Analysis of Financial Condition and Results of Operations
           7a.    Quantitative and Qualitative Disclosures about Market Risk
           8.     Financial Statements and Supplementary Data
           9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

       Part III
           10.     Directors and Executive Officers of the Registrant
           11.     Executive Compensation
           12.     Security Ownership of Certain Beneficial Owners and Management
           13.     Certain Relationships and Related Transactions

       Part IV
        14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K
                   Signatures
                   Exhibit Index

DEFINITIONS

    AFUDC                     Allowance for Funds Used During Construction
    BPA                       Bonneville Power Administration
    CAAA                      Clean Air Act Amendments
    Cabot                     Cabot Oil & Gas Corporation
    Chelan                    Public Utility District No. 1 of Chelan County, Washington
    Dth                       Dekatherm (one Dth is equal to one MMBtu)
    ESA                       Endangered Species Act
    FERC                      Federal Energy Regulatory Commission
    IOU                       Investor-owned Utility
    KW                        Kilowatts
    KWH                       Kilowatt Hours
    LNG                       Liquefied Natural Gas
    MMBtu                     One Million British Thermal Units
    MW                        Megawatts (one MW equals one thousand KW)
    MWH                       Megawatt Hours
    Montana Power             The Montana Power Company
    NMFS                      National Marine Fisheries Service
    PGA                       Purchased Gas Adjustment
    PG&E                      Pacific Gas & Electric Company
    PUDs                      Washington Public Utility Districts
    PURPA                     Public Utility Regulatory Policies Act
    RTO                       Regional Transmission Organization
    WEGM                      Washington Energy Gas Marketing Company
    Washington Commission     Washington Utilities and Transportation Commission
    WNG                       Washington Natural Gas Company

Forward-Looking Statement

     Puget Energy and PSE are including the following cautionary statement in this Form 10-K 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 or 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:

     - prevailing legislative developments, governmental policies and regulatory actions with respect to allowed rates of return, financings, or industry and rate structures

- weather and hydro-electric conditions

- wholesale energy prices

- effect of competition

- changes in and compliance with environmental and endangered species laws and policies

- population growth rates and demographic patterns

- capital market conditions

- legal and regulatory proceedings

     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

ITEM 1. BUSINESS

GENERAL

     On January 1, 2001, Puget Sound Energy, Inc. ("PSE") reorganized into a holding company structure. This reorganization resulted in the creation of a new holding company, Puget Energy, Inc. ("Puget Energy"). Puget Energy was incorporated in the State of Washington and all of its operations are conducted through its subsidiaries.

     Pursuant to the reorganization, Puget Energy became the owner of all PSE's outstanding common stock. Holders of PSE's existing common stock exchanged their stock on a one-for-one basis for common stock of Puget Energy. Puget Energy is a public utility holding company under the Public Utility Holding Company Act of 1935 but is exempt from regulation under such Act. In addition to its ownership of PSE, Puget Energy also owns InfrastruX Group, Inc. (“InfrastruX”), a Washington corporation.

     PSE is a public utility incorporated in the State of Washington furnishing electric and gas service in a territory covering approximately 6,000 square miles, principally in the Puget Sound region of Washington state.

     At December 31, 2000, PSE had approximately 915,900 electric customers, consisting of 811,400 residential, 98,800 commercial, 4,100 industrial and 1,600 other customers; and approximately 580,900 gas customers, consisting of 532,300 residential, 45,500 commercial, 3,000 industrial and 100 other customers. At December 31, 2000, approximately 294,200 customers purchased both forms of energy from PSE. For the year 2000, PSE added approximately 15,900 electric customers and approximately 24,100 gas customers, representing annualized growth rates of 1.8% and 4.3%, respectively. During 2000, PSE's billed retail revenues from electric utility operations were derived 40% from residential customers, 33% from commercial customers, 20% from industrial customers and 7% from other customers. PSE's retail revenues from gas utility operations were derived 61% from residential customers, 29% from commercial customers, 6% from industrial customers, 2% from transportation customers and 2% from other customers. During this period, the largest customer accounted for 2.1% of PSE's operating revenues.

     Electric revenues in 2000 increased significantly due to increased prices related to electric energy sales to other utilities and marketers and sales to customers whose rates are tied to a market index. Several factors, including unfavorable hydro conditions, unscheduled outages of generating facilities in California, and increased consumer demand have raised wholesale market prices on the West Coast to unprecedented levels beginning in the second half of 2000. PSE, to date, has protected its core customers from the negative impact of the volatile West Coast power markets through its effective management of its energy supply resources and its efficient operation of its distribution system.

     PSE is affected by various seasonal weather patterns throughout the year and, therefore, utility revenues and associated expenses are not generated evenly during the year. Variations in energy usage by consumers occur from season to season and from month to month within a season, primarily as a result of weather conditions. PSE normally experiences its highest retail energy sales in the first and fourth quarters of the year. Sales of electricity to wholesale customers also vary by quarters and years depending principally upon streamflow conditions for the generation of surplus hydro-electric power, customer usage and the market demand by wholesale customers. Earnings from electric operations, therefore, can be significantly influenced by surplus sales and variations in weather, hydro conditions and regional electric energy prices. Earnings from gas operations can be significantly influenced by variations in weather and market demand. PSE has a Purchased Gas Adjustment mechanism (“PGA”) in retail rates to recover variations in gas supply and transportation costs. (See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Rate Matters - Gas”.)

     During the period from January 1, 1996 through December 31, 2000 PSE made gross electric utility plant additions of $903 million and retirements of $176  million. In the five-year period ended December 31, 2000, PSE made gross gas utility plant additions of $498 million and retirements of $57 million. In the same five-year period, PSE made gross common utility plant additions of $291 million and retirements of $24 million. Gross electric utility plant at December 31, 2000 was approximately $4.1 billion which consisted of 48% distribution, 27% generation, 15% transmission and 10% general plant and other. Gross gas utility plant at December 31, 2000 was approximately $1.5 billion, which consisted of 83% distribution, 6% transmission and 11% general plant and other. Gross common utility general plant at December 31, 2000 was $351 million.

     At year-end PSE had 2,724 aggregate full-time equivalent utility employees and 128 non-utility employees.

     On September 15, 2000, InfrastruX completed its acquisition of all the outstanding equity of Utilx Corporation (“Utilx”). Utilx is a provider of infrastructure construction services to utilities and telecommunications providers in the United States and around the world. Its primary business is installing, replacing and restoring underground cables and pipes. On September 28, 2000, InfrastruX completed the acquisition of Lineal Industries (“Lineal”), a privately held pipeline infrastructure construction company. Lineal provides pipeline construction, maintenance and rehabilitation services primarily for the natural gas and petroleum industries and currently operates in seven states. These acquisitions mark Puget Energy's entry into the business of providing design, construction and engineering services to the utility industry.

     At year-end, InfrastruX had 902 aggregate full-time equivalent employees.

UTILITY INDUSTRY OVERVIEW

     The electric and gas utility industries in the United States are undergoing significant changes. The focus of these changes is to promote competition among suppliers of electricity and gas and associated services. In 1996 and 1997, the Federal Energy Regulatory Commission (“FERC”) issued orders that require utilities, including PSE, to file open access transmission tariffs that will make utilities' electric transmission systems available to wholesale sellers and buyers on a non-discriminatory basis. A number of states, including California, have restructured their electric industries to separate or “unbundle” power generation, transmission and distribution in order to permit new competitors to enter the marketplace. In part because electric rates in the Pacific Northwest have been among the lowest in the nation, certain of the legislatures in this region, including Washington, have not yet enacted laws to provide for competition at the retail level.

     Beginning in the second half of 2000, the West Coast energy market began experiencing extraordinary market conditions. Wholesale energy prices have greatly exceeded historical norms, reflecting unfavorable hydro conditions, unscheduled outages of generating facilities in California and increased consumer demand, among other factors. Physical supply constraints have led to rolling blackouts in certain areas of California. The region's turbulence and the financial troubles of the California energy market are drawing attention from various state and federal regulatory and political authorities. Numerous changes to the current operating structure have been proposed to address the region's issues. To date, no changes have been implemented which materially affect PSE's operations; however, the situation may change favorably or adversely in the future.

     On December 20, 1999, FERC issued Order 2000 to advance the formation of Regional Transmission Organizations (“RTOs”). This regulation requires each public utility that owns, operates or controls facilities for the transmission of electric energy in interstate commerce to file with FERC by October 15, 2000 their plans for forming and participating in an RTO. FERC's goal is to promote efficiency in wholesale electricity markets and to ensure that electricity consumers pay the lowest price possible for reliable service. On October 16, 2000, PSE and five other utilities filed with FERC their proposal for an independent transmission company, which would serve six states. The independent transmission company would be a member of the planned regional transmission organization. If a final proposal emerges, it must be approved by FERC and the various state public utility commissions.

     Since 1986, PSE has been offering gas transportation as a separate service to industrial and commercial customers who choose to purchase their gas supply directly from producers and gas marketers. The continued evolution of the natural gas industry, resulting primarily from FERC Orders 436, 500 and 636, has served to increase the ability of large gas end-users to independently obtain gas supply and transportation services. Although PSE has not lost any substantial industrial or commercial load as a result of such activities, in certain years up to 160 customers annually have taken advantage of unbundled transportation service; in 2000, 98 commercial and industrial customers, on average, chose to use such service. The shifting of customers from sales to transportation does not materially impact utility margin, as PSE earns similar margins on transportation service as it does on large volume, interruptible gas sales.

REGULATION AND RATES

     PSE is subject to the regulatory authority of (1) the Washington Utilities and Transportation Commission (“Washington Commission”) as to retail utility rates, accounting, the issuance of securities and certain other matters and (2) the FERC with respect to the transmission of electric energy, the resale of electric energy at wholesale, accounting and certain other matters. (See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Rate Matters”.)

ELECTRIC UTILITY OPERATIONS

     At December 31, 2000, PSE's peak electric power resources were approximately 4,916,807 KW. PSE's historical peak load of approximately 4,847,000 KW occurred on December 21, 1998.

     During 2000, PSE's total electric energy production was supplied 24.7% by its own resources, 17.2% through long-term contracts with several of the Washington Public Utility Districts (“PUDs”) that own hydro-electric projects on the Columbia River, 21.0% from other firm purchases and 37.1% from non-firm purchases.

     The following table shows PSE's electric energy supply resources at December 31, 2000, and energy production during the year:

                                 PEAK POWER RESOURCES
                                 AT DECEMBER 31, 2000       2000 ENERGY PRODUCTION
                               -------------------------- ---------------------------
                                                           KILOWATT-HOURS
                         KILOWATTS        %        (THOUSANDS)         %
- ------------------------------ ---------------- --------- ----------------- ---------
  Purchased resources:
    Columbia River
    PUD Contracts (Hydro)            1,393,000     28.3%         6,624,109     17.2%
    Other Hydro1                       542,882     11.1%         3,875,640     10.0%
    Other  Producers                 1,244,675     25.3%        18,526,154     48.1%
- ------------------------------ ---------------- --------- ----------------- ---------
  Total purchased                    3,180,557     64.7%        29,025,903     75.3%
- ------------------------------ ---------------- --------- ----------------- ---------
  Company-owned resources:
    Hydro                              310,700      6.3%         1,298,405      3.4%
    Coal                               680,000     13.8%         4,932,699     12.8%
    Natural gas/oil                    745,550     15.2%         3,271,282      8.5%
- ------------------------------ ---------------- --------- ----------------- ---------
  Total Company-owned                1,736,250     35.3%         9,502,386     24.7%
- ------------------------------ ---------------- --------- ----------------- ---------
  Total                              4,916,807    100.0%        38,528,289    100.0%
- ------------------------------ ---------------- --------- ----------------- ---------

¹ Power received from other utilities is classified between hydro and other producers based on the character of the utility system used to supply the power or, if the power is supplied from a particular resource, the character of that resource.

COMPANY-OWNED ELECTRIC GENERATION RESOURCES

     PSE and other utilities are joint owners of four mine-mouth, coal-fired, steam-electric generating units at Colstrip, Montana, approximately 100 miles east of Billings, Montana. PSE owns a 50% interest (330,000 KW) in Units 1 and 2 and a 25% interest (350,000 KW) in Units 3 and 4. The owners of the Colstrip Units purchase coal for the Units from Western Energy Company (“Western Energy”), under the terms of long-term coal supply agreements.

     PSE owns a (160,000 KW) natural-gas fired cogeneration facility located near Bellingham, Washington, which was purchased from Encogen Northwest L.P. (“Encogen”) on November 1, 1999. PSE also has the following plants with an aggregate net generating capability of 896,250 KW: Upper Baker River hydro project (103,000 KW) constructed in 1959; Lower Baker River hydro project (71,400 KW) reconstructed in 1960; White River hydro plant (63,400 KW) constructed in 1911; Snoqualmie Falls hydro plant (45,500 KW), half the capability of which was installed during the period 1898 to 1910 and half in 1957; and one smaller hydro plant, Electron (27,400 KW), constructed during the period 1904 to 1929; a standby internal combustion unit (2,750 KW) installed in 1969; four dual-fuel combustion turbine units (89,100 KW each) installed during 1981; and two dual-fuel combustion turbine units (113,200 KW each) installed during 1984. During 2001, PSE will be installing two additional dual-fuel combustion turbines (53,000 KW each). All of these generating facilities, except the Colstrip, Montana plants, are located in PSE's service territory.

     On December 19, 1997, PSE was issued a 50-year license by FERC for its existing and operating White River project which includes authorization to install an additional 14,000 KW generating unit. PSE has filed for a rehearing with FERC on conditions of the license related to measures designed to enhance salmon runs on the White River, because those conditions may make the plant uneconomic to operate. On June 30, 1999, FERC issued a two-year stay in the license proceeding. This additional time allows PSE, state agencies, local governments and public interest groups to resolve common issues relating to the plant's continued operation and economics. The initial license for the existing and operating Snoqualmie Falls project expired in December 1993, and PSE continues to operate this project under a temporary license. PSE is continuing the FERC application process to relicense this project.

COLUMBIA RIVER ELECTRIC ENERGY SUPPLY CONTRACTS

     During 2000, approximately 17.2% of PSE's energy output was obtained at an average cost of approximately 11.4 mills per KWH through long-term contracts with several of the Washington PUDs owning hydro-electric projects on the Columbia River.

     PSE's purchases of power from the Columbia River projects is generally on a “cost of service” basis under which PSE pays a proportionate share of the annual debt service and operating and maintenance costs of each project in proportion to the amount of power annually purchased by PSE from such project. Such payments are not contingent upon the projects being operable. These projects are financed through substantially level debt service payments, and their annual costs may vary over the term of the contracts as additional financing is required to meet the costs of major maintenance, repairs or replacements or license requirements.

     PSE has contracted to purchase from Chelan County PUD (“Chelan”) a share of the output of the original units of the Rock Island Project which equaled 50% as of July 1, 1999 and remains unchanged thereafter for the duration of the contract which expires in 2012. PSE has also contracted to purchase the entire output of the additional Rock Island units for the duration of the contract, except that PSE's share of output of the additional units may be reduced up to 10% per year beginning July 1, 2000, subject to a maximum aggregate reduction of 50%, upon the exercise of rights of withdrawal by Chelan for use in its local service area. Chelan began withdrawing 5% of the additional units on July 1, 2000. As of December 31, 2000, PSE's aggregate annual capacity from all units of the Rock Island Project was 457,000 KW. PSE has contracted to purchase from Chelan 38.9% (505,000 KW as of December 31, 2000) of the annual output of the Rocky Reach Project, which percentage remains unchanged for the remainder of the contract which expires in 2011. PSE has contracted to purchase from Douglas County PUD 31.3% (261,000 KW as of December 31, 2000) of the annual output of the Wells Project, the percentage of which remains unchanged for the remainder of the contract which expires in 2018. PSE has contracted to purchase from Grant County PUD 8.0% (72,000 KW as of December 31, 2000) of the annual output of the Priest Rapids Project and 10.8% (98,000 KW as of December 31, 2000) of the annual output of the Wanapum Project, which percentages remain unchanged for the remainder of the contracts which expire in 2005 and 2009, respectively. (See Note 17 to the Consolidated Financial Statements.)

     The February 15, 2001 seasonal water supply forecast published by the National Weather Service indicated that the total forecasted runoff into the Grand Coulee reservoir for the period January – July 2001 would be only 61% of average. PSE therefore expects that total annual generation from the Mid-Columbia projects, and PSE's owned hydro-electric projects, will be below normal in 2001.

ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH OTHER UTILITIES

     Under a 1985 settlement agreement relating to Washington Public Power Supply System (“WPPSS”) Nuclear Project No. 3, in which PSE had a 5% interest, PSE is entitled to receive from BPA beginning January 1, 1987, electric power during the months of November through April. Under the contract, PSE is guaranteed to receive not less than 191,667 MWH in each contract year until PSE has received total deliveries of 5,833,333 MWH. PSE expects the contract to be in effect until at least June 2008. Also pursuant to the 1985 settlement agreement, BPA has an option to request that PSE deliver up to 67 MW of exchange energy to BPA in all months except May, July and August through the remaining term of the agreement which is no earlier than June 2008. BPA exercised its option and PSE began delivering 59 MW of exchange energy in each month commencing in January 2001.

     On April 4, 1988, PSE executed a 15-year contract, with provisions for early termination by PSE, for the purchase of firm energy supply from Avista Corporation (formerly Washington Water Power Company). This agreement calls for the delivery of 100 MW of capacity and 657,000 MWH of energy from the Avista system annually (75 annual average MW). Minimum and maximum delivery rates are prescribed. Under this agreement, the energy is to be priced at Avista's average generation and transmission cost, subject to certain price ceilings. This contract expires on December 31, 2002.

     On October 27, 1988, PSE executed a 15-year contract for the purchase of firm power and energy from PacifiCorp. Under the terms of the agreement, PSE receives 120 average MW of energy and 200 MW of peak capacity. This contract expires on October 31, 2003.

     On November 23, 1988, PSE executed an agreement to purchase surplus firm power from BPA. Under the agreement, PSE receives 150 average MW of energy and 300 MW of peak capacity from BPA between October 1 and March 31 of each contract year. In 1997, PSE elected to terminate the agreement on June 30, 2001, the date that the purchase was to convert to a summer-winter exchange.

     On October 1, 1989, PSE signed a contract with The Montana Power Company under which Montana Power provides PSE, from its share of Colstrip Unit 4, 71 average MW of energy (94 MW of peak capacity) over a 21-year period. This contract expires December 2010.

     PSE executed an exchange agreement with Pacific Gas & Electric Company (“PG&E”) which became effective on January 1, 1992. Under the agreement, 300 MW of capacity together with 413,000 MWH of energy are exchanged seasonally every year on a unit for unit basis. No payments are made under this agreement. PG&E is a summer peaking utility and will provide power during the months of November through February. PSE is a winter peaking utility and will provide power during the months of June through September. Each party may terminate the contract for various reasons. In January 2001, PG&E did not meet all of its exchange delivery obligations to PSE due to resource shortfalls on the PG&E electrical system.

     In October 1997, a 10-year power exchange agreement between PSE and Powerex (a subsidiary of a British Columbia utility) became effective. Under this agreement Powerex pays PSE for the right to deliver power to PSE at the Canadian border in exchange for PSE delivering power to Powerex at various locations in the United States.

ELECTRIC ENERGY SUPPLY CONTRACTS AND AGREEMENTS WITH NON-UTILITIES

     As required by the federal Public Utility Regulatory Policies Act (“PURPA”), PSE entered into long-term firm purchased power contracts with non-utility generators. The most significant of these are the contracts described below which PSE entered into in 1989, 1990 and 1991 with operators of natural gas-fired cogeneration projects. PSE purchases the net electrical output of these three projects at fixed and annually escalating prices which were intended to approximate PSE's avoided cost of new generation projected at the time these agreements were made. PSE's estimated payments under these three contracts are $264 million for 2001, $244 million for 2002, $221 million for 2003, $229 million for 2004, $217 million for 2005 and in the aggregate, $1.4 billion thereafter through 2012. These payments reflect the Tenaska contract restructuring described below. On June 29, 1989, PSE executed a 20-year contract to purchase 70 average MW of energy and 80 MW of capacity, beginning October 11, 1991, from the March Point Cogeneration Company (“March Point”), which owns and operates a natural gas-fired cogeneration facility known as March Point Phase I, located at the Equilon refinery in Anacortes, Washington. On December 27, 1990, PSE executed a second contract (having a term coextensive with the first contract) to purchase an additional 53 average MW of energy and 60 MW of capacity, beginning in January 1993, from another natural gas-fired cogeneration facility owned and operated by March Point, which facility is known as March Point Phase II and is located at the Equilon refinery in Anacortes, Washington. On February 24, 1989, PSE executed a 20-year contract to purchase 108 average MW of energy and 123 MW of capacity, beginning in April 1993, from Sumas Cogeneration Company, L.P., which owns and operates a natural gas-fired cogeneration project located in Sumas, Washington.

     In December 1999, PSE bought out the remaining 8.5 years of one of the natural gas supply contracts serving Encogen from Cabot Oil & Gas Corporation which provided approximately 60% of the plant's natural gas requirements. PSE will become the replacement gas supplier to the project for 60% of the supply under the terms of the Cabot Agreement. The Washington Commission has issued an order creating a regulatory asset relating to the $12 million payment that requires PSE to accrue carrying costs on the unamortized balance over the first three years.

     On March 20, 1991, PSE executed a 20-year contract to purchase 216 average MW of energy and 245 MW of capacity, beginning in April 1994, from Tenaska Washington Partners, L.P., which owns and operates a natural gas-fired cogeneration project located near Ferndale, Washington. In December 1997 and January 1998, PSE and Tenaska Washington Partners entered into revised agreements in which PSE became the principal natural gas supplier to the project and power purchase prices under the Tenaska contract were revised to reflect market-based prices for the natural gas supply. PSE obtained an order from the Washington Commission creating a regulatory asset related to the $215 million restructuring payment. Under terms of the order, PSE is allowed to accrue as an additional regulatory asset one-half the carrying costs of the deferred balance over the first five years.

ELECTRIC RATES AND REGULATION

     The order approving the merger of Puget Sound Power & Light Company, Washington Energy Company and Washington Natural Gas Company (“Merger”), issued by the Washington Commission on February 5, 1997, contained a rate plan designed to provide a five-year period of rate certainty for customers and to provide PSE with an opportunity to achieve a reasonable return on investment. General electric tariff rates were stipulated to increase annually between 1.0% and 1.5% depending on rate class on January 1 of 1998 through 2000. Electric tariff rates for certain customers will increase by 1.5% in 2001. PSE has had no electric rate adjustment mechanism during the rate stability period to adjust for changes in electric energy supply costs or fuel costs. These variances may now significantly influence earnings. The rate stabilization period will end on December 31, 2001, at which time PSE will be allowed to file for changes in rates, if necessary.

       ELECTRIC UTILITY OPERATING STATISTICS


  YEAR ENDED ON DECEMBER 31                                     2000                   1999                  1998
- ----------------------------------------------------- --------------- ---------------------- ---------------------
  Operating revenues by classes (thousands):
- ----------------------------------------------------- --------------- ---------------------- ---------------------
    Residential                                             $587,780               $586,416              $540,549
    Commercial                                               476,052                457,339               431,752
    Industrial                                               292,975                169,508               180,959
    Other consumers                                           98,894                 37,562                42,952
- ----------------------------------------------------- --------------- ---------------------- ---------------------
    Operating revenues billed to consumers (1)             1,455,701              1,250,825             1,196,212
    Unbilled revenues - net increase (decrease)               66,700                 (9,541)                4,024
- ----------------------------------------------------- --------------- ---------------------- ---------------------
      Total operating revenues
      from consumers                                       1,522,401              1,241,284             1,200,236
    Sales to other utilities and marketers                 1,249,294                316,728               274,972
- ----------------------------------------------------- --------------- ---------------------- ---------------------
      Total operating revenues                            $2,771,695             $1,558,012            $1,475,208
- ----------------------------------------------------- --------------- ---------------------- ---------------------
  Number of customers (average):
    Residential                                              811,443                797,421               782,095
    Commercial                                                98,758                 96,769                94,118
    Industrial                                                 4,111                  4,224                 4,193
    Other                                                      1,548                  1,497                 1,437
- ----------------------------------------------------- --------------- ---------------------- ---------------------
      Total customers (average)                              915,860                899,911               881,843
- ----------------------------------------------------- --------------- ---------------------- ---------------------
  KWH generated, purchased and interchanged (thousands):
    Company generated                                      9,502,386              7,941,632             7,934,730
    Purchased power                                       28,907,317             26,716,328            24,231,978
    Interchanged power (net)                                 118,586                 19,650                91,230
- ----------------------------------------------------- --------------- ---------------------- ---------------------
      Total energy output                                 38,528,289             34,677,610            32,257,938
    Losses and company use                                (1,582,446)            (1,512,571)           (1,413,331)
- ----------------------------------------------------- --------------- ---------------------- ---------------------
      Total energy sales                                  36,945,843             33,165,039            30,844,607
- ----------------------------------------------------- --------------- ---------------------- ---------------------

¹Operating revenues in 2000, 1999 and 1998 were reduced by $35.4 million, $43.8 million and $46.7 million , respectively, as a result of PSE's sale of $237.7 million of its investment in customer-owned conservation measures. (See “Operating Revenues” in Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements.)

(continued)

  YEAR ENDED ON DECEMBER 31                                     2000                     1999             1998
- ---------------------------------------------------- ---------------- ------------------ ----------------
  Electric energy sales, KWH (thousands):
- ---------------------------------------------------- ---------------- ------------------ ----------------
    Residential                                            9,810,393          9,861,791        9,313,652
    Commercial                                             7,677,032          7,482,280        7,191,164
    Industrial                                             4,026,344          3,980,246        4,072,722
    Other consumers                                          219,435            262,238          284,312
- ---------------------------------------------------- ---------------- ------------------ ----------------
       Total energy billed to consumers                   21,733,204         21,586,555       20,861,850
    Unbilled energy sales - net increase (decrease)          118,908          (155,023)           43,027
- ---------------------------------------------------- ---------------- ------------------ ----------------
       Total energy sales to consumers                    21,852,112         21,431,532       20,904,877
    Sales to other utilities and marketers                15,093,731         11,733,507        9,939,730
- ---------------------------------------------------- ---------------- ------------------ ----------------
       Total energy sales                                 36,945,843         33,165,039       30,844,607
- ---------------------------------------------------- ---------------- ------------------ ----------------
  Per residential customer:
    Annual use (KWH)                                          12,090             12,367           11,909
    Annual billed revenue                                    $745.44            $762.78          $721.09
    Billed revenue per KWH                                    $.0617             $.0617           $.0606
  Company-owned generation
    capability - KW:
    Hydro                                                    310,700            310,700          308,200
    Steam                                                    680,000            771,900          771,900
    Natural gas/oil                                          745,550            813,050          673,850
- ---------------------------------------------------- ---------------- ------------------ ----------------
       Total                                               1,736,250          1,895,650        1,753,950
- ---------------------------------------------------- ---------------- ------------------ ----------------
  Heating degree days                                          4,970              4,956            4,498
  Percent of normal of 30-year average                        100.9%             101.0%            91.6%
  Load factor                                                  62.2%              62.6%            52.6%

GAS UTILITY OPERATIONS

Gas Supply

     PSE currently purchases a blended portfolio of long-term firm, short-term firm, and non-firm gas supplies from a diverse group of major and independent producers and gas marketers in the United States and Canada. PSE also enters into short-term physical and financial derivative instruments to hedge the cost of gas to service its customers. All of PSE's gas supply is ultimately transported through Northwest Pipeline Corporation (“NPC”), the sole interstate pipeline delivering directly into the Western Washington area.

  PEAK FIRM GAS SUPPLY AT DECEMBER 31, 2000      DTH PER DAY         %
- ---------------------------------------------- -------------- ---------
  Purchased gas supply:
     British Columbia                                129,800      16.7
     Alberta                                          76,200       9.8
     United States                                    74,300       9.6
- ---------------------------------------------- -------------- ---------
  Total purchased gas supply                         280,300      36.1
- ---------------------------------------------- -------------- ---------
  Purchased storage capacity:
     Clay Basin                                       80,900      10.4
     Jackson Prairie                                  47,800       6.2
     LNG                                              71,100       9.1
- ---------------------------------------------- -------------- ---------
  Total purchased storage capacity                   199,800      25.7
- ---------------------------------------------- -------------- ---------
  Owned storage capacity:
     Jackson Prairie                                 266,400      34.3
     Propane-Air Injection                            30,000       3.9
- ---------------------------------------------- -------------- ---------
  Total owned storage capacity                       296,400      38.2
- ---------------------------------------------- -------------- ---------
  Total peak firm gas supply                         776,500     100.0
- ---------------------------------------------- -------------- ---------
All peak firm gas supplies and storage are connected to PSE's market with firm transportation capacity.
       

For baseload and peak-shaving purposes, PSE supplements its firm gas supply portfolio by purchasing natural gas at generally lower prices in summer, injecting it into underground storage facilities and withdrawing it during the winter heating season. Storage facilities at Jackson Prairie in Western Washington and at Clay Basin in Utah are used for this purpose. Peaking needs are also met by using PSE owned gas held in NPC's liquefied natural gas ("LNG") facility at Plymouth, Washington, and by producing propane-air gas at a plant owned by PSE and located on its distribution system.

In 1998, PSE took assignment from Cascade Natural Gas of a Peaking Gas Supply Service contract whereby PSE can divert up to 48,000 Dekatherms per day (one Dekatherm, or "Dth", is equal to one million British thermal units or "MMBtu" per day) of gas supply away from the Tenaska Cogeneration Facility and toward the core gas load by causing Tenaska to operate its facility on distillate fuel and paying any additional costs of such operation.

PSE expects to meet its firm peak-day requirements for residential, commercial and industrial markets through its firm gas purchase contracts, firm transportation capacity, firm storage capacity and other firm peaking resources. PSE believes it will be able to acquire incremental firm gas supply resources that are reliable and reasonably priced, to meet anticipated growth in the requirements of its firm customers for the foreseeable future.

Gas Supply Portfolio

For the 2000-2001 winter heating season, PSE has contracted for approximately 16.7% of its expected peak-day gas supply requirements from sources originating in British Columbia under a combination of long-term and winter-peaking purchase agreements. Long-term gas supplies from Alberta represent approximately 9.8% of the peak-day requirements. Long-term and winter peaking arrangements with U.S. suppliers and gas stored at Clay Basin make up approximately 20.0% of the peak-day portfolio. The balance of the peak-day requirements is expected to be met with gas stored at Jackson Prairie, LNG held at NPC's Plymouth facility and propane-air resources, which represent approximately 40.5%, 9.1% and 3.9%, respectively, of expected peak-day requirements.

During 2000, approximately 50% of gas supplies purchased by PSE originated from British Columbia while 19% originated in Alberta and 31% originated in the United States.

The current firm, long-term gas supply portfolio consists of arrangements with 16 producers and gas marketers, with no single supplier representing more than 16% of expected peak-day requirements. Contracts have remaining terms ranging from less than one-year to 11 years, with an average term of two-years. All gas supply contracts contain market-sensitive pricing provisions based on several published indices.

PSE's firm gas supply portfolio is structured to capitalize on regional price differentials when they arise. Gas and services are marketed outside PSE's service territory ("off-system sales") whenever on-system customer demand requirements permit. The geographic mix of suppliers and daily, monthly and annual take requirements permit a high degree of flexibility in selecting gas supplies during off-peak periods to minimize costs.

Gas Transportation Capacity

PSE currently holds firm transportation capacity on pipelines owned by NPC and PG&E Gas Transmission-Northwest ("PGT"). Accordingly, PSE pays fixed monthly demand charges for the right, but not the obligation, to transport specified quantities of gas from receipt points to delivery points on such pipelines each day for the term or terms of the applicable agreements.

PSE holds firm capacity on NPC's pipeline totaling 454,533 Dth per day, acquired under several agreements at various times. PSE has exchanged certain segments of its firm capacity with third parties to effectively lower transportation costs. PSE's firm transportation capacity contracts with NPC have remaining terms ranging from four to 15.5 years. However, PSE has either the unilateral right to extend the contracts under their current terms or the right of first refusal to extend such contracts under current FERC orders. PSE's firm transportation capacity on PGT's pipeline, totaling 90,392 Dth per day, has a remaining term of 23 years.

Gas Storage Capacity

PSE holds storage capacity in the Jackson Prairie and Clay Basin underground gas storage facilities adjacent to NPC's pipeline. The Jackson Prairie facility, operated and one-third owned by PSE, is used primarily for intermediate peaking purposes, able to deliver a large volume of gas over a relatively short time period. Combined with capacity contracted from NPC's one-third stake in Jackson Prairie, PSE has peak, firm delivery capacity of over 340,000 Dth per day and total firm storage capacity exceeding 7,500,000 Dth at the facility. The location of the Jackson Prairie facility in PSE's market area provides significant cost savings by reducing the amount of annual pipeline capacity required to meet peak-day gas requirements.

The Clay Basin storage facility is supply area storage and is withdrawn over the entire winter, capturing savings due to injecting lower cost gas supplies during the summer. PSE has maximum firm withdrawal capacity of over 100,000 Dth per day from the facility with total storage capacity exceeding 13,000,000 Dth. The capacity is held under two contracts with remaining terms of 13 and 19 years.

LNG and Propane-Air Resources

LNG and propane-air resources provide gas supply on short notice for short periods of time. Due to their typically high cost, these resources are normally utilized as the supply of last resort in extreme peak-demand periods typically lasting a few hours or days. PSE has long-term contracts for storage of approximately 250,000 Dth of Company-owned gas as LNG at NPC's Plymouth facility, which equates to approximately three and one-half days' supply at maximum daily deliverability of 72,000 Dth. PSE owns storage capacity for approximately 1.4 million gallons of propane. The propane-air injection facilities are capable of delivering the equivalent of 30,000 Dth of gas per day for up to four days directly into PSE's distribution system.

Capacity Release

FERC provided a capacity release mechanism as the means for holders of firm pipeline and storage entitlements to temporarily relinquish unutilized capacity to others in order to recoup all or a portion of the cost of such capacity. Capacity may be released through several methods including open bidding and by pre-arrangement. PSE continues to successfully mitigate a portion of the demand charges related to both storage and NPC and PGT pipeline capacity not utilized during off-peak periods. WNG CAP I, a wholly-owned subsidiary of PSE, was formed to provide additional flexibility and benefits from capacity release. Capacity release benefits are passed on to customers through the PGA.

Gas Rates and Regulation

The order approving the Merger, issued by the Washington Commission on February 5, 1997, contains a rate plan which provided unchanged rates for all classes of natural gas customers until January 1, 1999, when rates decreased by approximately $2.3 million annually.

As a result of sharp increases in gas costs during 2000, PSE filed two PGA and deferral amortization filings with the Washington Commission which were approved. The PGA filings allow PSE to recover expected increases in annual gas costs and deferral amortization filings allow PSE to recover prior period gas cost undercollection. As a result, gas rates to all sales customers increased by an average of 30.2% on August 1, 2000 and 26.4% again on January 12, 2001.

On June 25, 1998, PSE received approval from the Washington Commission to begin a new performance-based mechanism for strengthening its gas-supply purchasing and gas-storage practices. The PGA Incentive Mechanism, which encourages competitive gas purchasing and management of pipeline and storage-capacity, became effective July 1, 1998. Incentive gains and losses from the three-year program are shared between customers and shareholders. After the first $0.5 million, which is allocated to customers, gains and losses are shared 40%/60% between PSE and customers up to $26.5 million, and 33%/67% thereafter. Gains or losses are determined relative to a weighted average index which is reflective of PSE's gas supply and transportation contract costs. PSE's share of incentive gains under the PGA Incentive Mechanism in 2000, 1999 and 1998 was approximately $7.5 million, $7.2 million and $1.1 million, respectively while customers received approximately $11.7 million, $11.3 million and $2.0 million of the benefits, respectively. On December 27, 2000, in accordance with the Order issued regarding the PGA Incentive Mechanism, PSE submitted a letter to the Washington Commission providing notice of its intent to seek a continuance of the mechanism after the three-year period ends on June 30, 2001.

GAS UTILITY OPERATING STATISTICS

  Twelve Months Ended December 31                                    2000        1999         1998
- ----------------------------------------------------- -------------------- ----------- ------------
  Operating revenues by classes (thousands):
  Regulated utility sales:
    Residential sales                                            $372,900    $296,032     $253,169
    Commercial firm sales                                         144,046     113,058       96,116
    Industrial firm sales                                          27,832      21,724       18,557
    Interruptible sales                                            44,485      30,404       22,190
    Transportation services                                        12,137      13,117       14,211
    Other                                                          10,911      11,153       12,308
- ----------------------------------------------------- -------------------- ----------- ------------
      Total gas operating revenues                               $612,311    $485,488     $416,551
- ----------------------------------------------------- -------------------- ----------- ------------
  Customers, average number served:
    Residential                                                   532,333     509,384      486,553
    Commercial firm                                                44,817      43,567       42,273
    Industrial firm                                                 2,863       2,879        2,850
    Interruptible                                                     835         873          940
    Transportation                                                     98         103          123
- ----------------------------------------------------- -------------------- ----------- ------------
      Total customers (average)                                   580,946     556,806      532,739
- ----------------------------------------------------- -------------------- ----------- ------------
  Gas volumes (thousands of therms):
    Residential sales                                             517,561     507,978      444,611
    Commercial firm sales                                         221,170     221,804      193,765
    Industrial firm sales                                          48,348      48,422       42,737
    Interruptible sales                                           103,446      93,791       72,115
    Transportation volumes                                        204,035     236,704      254,368
- ----------------------------------------------------- -------------------- ----------- ------------
      Total gas volumes                                         1,094,560   1,108,699    1,007,596
- ----------------------------------------------------- -------------------- ----------- ------------
  Working-gas volumes in storage at year end  (thousands of therms):
      Jackson Prairie                                              67,827      60,673       37,683
      Clay Basin                                                   28,275      37,281       58,827
  Average use per customer (therms):
    Residential                                                       972         997          914
    Commercial firm                                                 4,935       5,091        4,584
    Industrial firm                                                16,887      16,819       14,995
    Interruptible                                                 123,888     107,435       76,718
    Transportation                                              2,081,989   2,298,097    2,068,033

(continued from prior page)

  TWELVE MONTHS ENDED DECEMBER 31              2000       1999       1998
- ----------------------------------------- ---------- ---------- ----------
  Average revenue per customer:
    Residential                             $   701     $  581     $  520
    Commercial firm                           3,214      2,595      2,274
    Industrial firm                           9,721      7,546      6,511
    Interruptible                            53,275     34,827     23,606
    Transportation                          123,846    127,350    115,537
  Average revenue per therm (cents):
    Residential                                72.0       58.3       56.9
    Commercial firm                            65.1       51.0       49.6
    Industrial firm                            57.6       44.9       43.4
    Interruptible                              43.0       32.4       30.8
      Average sales to gas customers           66.2       52.9       51.8
    Transportation                              5.9        5.5        5.6

  Weather - degree days                       4,970      4,956      4,498
    Percent of normal (30-year average)      100.9%     101.0%      91.6%

ENERGY CONSERVATION

     PSE offers programs designed to help new and existing customers use energy efficiently. The primary emphasis is to provide information and technical services to enable customers to make energy-efficient choices with respect to building design, equipment and building systems, appliance purchases and operating practices.

     Since May 1997, PSE has recovered electric energy conservation expenditures through a tariff rider mechanism. The rider mechanism allows PSE to defer the conservation expenditures and amortize them to expense as PSE concurrently collects the conservation expenditures in rates over a one-year period. As a result of the rider, there is no effect on earnings per share.

     Since 1995, PSE has been authorized by the Washington Commission to defer gas energy conservation expenditures and recover them through a tariff tracker mechanism. The tracker mechanism allows PSE to defer conservation expenditures and recover them in rates over the subsequent year. The tracker mechanism also allows PSE to recover an Allowance for Funds Used to Conserve Energy (AFUCE) on any outstanding balance that is not being recovered in rates.

ENVIRONMENT

     Puget Energy's operations are subject to environmental regulation by federal, state and local authorities. Due to the inherent uncertainties surrounding the development of federal and state environmental and energy laws and regulations, Puget Energy cannot determine the impact such laws may have on its existing and future facilities. (See Note 17 to the Consolidated Financial Statements for further discussion of environmental sites.)

Federal Clean Air Act Amendments of 1990

     PSE has an ownership interest in coal-fired, steam-electric generating plants at Colstrip, Montana, which are subject to the federal Clean Air Act Amendments of 1990 (“CAAA”) and other regulatory requirements.

     The Colstrip Projects met the sulfur dioxide limits of the CAAA in Phase I (1995). All four units at the Colstrip Project, operated by PPL Global, LLC, meet Phase II emission limits. PSE owns combustion turbine units, most of which are capable of being fueled by natural gas or oil. The nature of these units provides operational flexibility in meeting air emission standards.

     There is no assurance that in the future environmental regulations affecting sulfur dioxide or nitrogen oxide emissions may not be further restricted, or that restrictions on emissions of carbon dioxide or other combustion byproducts may not be imposed.

Federal Endangered Species Act

     In November 1991, the National Marine Fisheries Service (“NMFS”) listed the Snake River Sockeye salmon as an endangered species pursuant to the federal Endangered Species Act (“ESA”). Since the Sockeye salmon listing, the Snake River fall and spring/summer Chinook salmon have also been listed as threatened. In response to the listings, a team of experts was formed to develop a plan for the recovery needs of these species. In 1995, the NMFS issued a biological opinion that has significantly changed the operation of the Federal Columbia River Power System.

     The plans developed by NMFS affect the Mid-Columbia projects from which PSE purchases power on a long-term basis, and will further reduce the flexibility of the regional hydro-electric system. Although the full impacts are unknown at this time, the plan developed by NMFS shifts an amount of PSE's generation from the Mid-Columbia projects from winter periods into the spring when it is not needed for system loads, and will increase the potential for spill and loss of generation at the Mid-Columbia projects.

     Since the 1991 listings, one more species of salmon has been listed and two more have been proposed which may further influence operations. Upper Columbia River Steelhead were listed by NMFS in August 1997. Anticipating the Steelhead listing, the Mid-Columbia PUDs initiated consultation with the federal and state agencies, Native American tribes and non-governmental organizations to secure operational protection through a long-term settlement and habitat conservation plan which includes fish protection and enhancement measurement for the next 50 years. The negotiations have concluded among the Chelan and Douglas County PUDs and various fishery agencies, and final agreement is subject to a National Environmental Policy Act review and power purchaser approval. Generally, the agreement obligates the PUDs to achieve certain levels of passage efficiency for downstream migrants at their hydro-electric facilities and to fund certain habitat conservation measures. Grant County PUD has yet to reach agreement on these issues.

     The proposed listings of Puget Sound Chinook salmon and spring Chinook salmon for the upper Columbia River were approved in March 1999. The listing of spring Chinook salmon for the upper Columbia River should not result in markedly differing conditions for operations from previous listings in the area. However, Puget Sound has not experienced ESA listing to date, and listing of Puget Sound Chinook salmon could cause a number of changes to operations of governmental agencies and private entities in the region, including PSE. These changes may adversely affect hydro plant operations and permit issuance for facilities construction, and increase costs for process and facilities. Because PSE relies substantially less on hydro-electric energy from the Puget Sound area than from the Mid-Columbia River and because the impact on PSE operations in the Puget Sound area is not likely to impair significant generating resources, the impact of listing for Puget Sound Chinook salmon should be proportionately less than the Columbia River listings. PSE is actively engaging the federal agencies to address ESA issues for PSE's generating plants. The consultation with the federal agencies is ongoing.

EXECUTIVE OFFICERS AT DECEMBER 31, 2000

     The following table sets forth information about the executive officers of Puget Energy and PSE, as of December 31, 2000. Unless otherwise indicated, all positions and offices listed are at PSE. Officers of both Puget Energy and PSE are elected for one-year terms.

  NAME               AGE    OFFICES
- ------------------ ------ --------------------------------------------------------------------------------
  W. S. Weaver       56     President and Chief Executive Officer of Puget Energy since 2000; President
                            and Chief Executive Officer of PSE since January 1998; President of PSE, May
                            1997-January 1998; Vice Chairman and Chairman of Unregulated Subsidiaries of
                            PSE, February 1997-May 1997; Executive Vice President and Chief Financial
                            Officer of PSE 1991-1997; Director of PSE since 1991.
  J. W. Eldredge     50     Corporate Secretary and Chief Accounting Officer of Puget Energy since 2000;
                            Chief Accounting Officer of PSE since 1994; Corporate Secretary and
                            Controller of PSE since 1993; Controller of PSE since 1988.
  D. E. Gaines       43     Treasurer since 1994; Director Strategic Planning 1992-1994; Manager
                            Financial Planning 1986-1992. Mr. Gaines is the brother of W. A. Gaines,
                            Vice President Energy Supply.
  W. A. Gaines       45     Vice President Energy Supply since February 1997; Manager Power Management
                            1996-1997; Manager Operations Planning 1986-1996. Mr. Gaines is the brother
                            of D. E. Gaines, Treasurer.
  D. A. Graham       60     Vice President Human Resources since April 1998; Director Human Resources
                            1989-1998.
  P. A. Gullekson    54     Vice President Customer Services since March 2000; Director of Customer
                            Service 1998-2000; Manager Customer Service 1997-1998; Director New Customer
                            Construction 1995-1997.
  R. L. Hawley       51     Vice President and Chief Financial Officer of Puget Energy since 2000; Vice
                            President and Chief Financial Officer of PSE since March 1998. For more than
                            five years prior to that time, he was a partner with the accounting firm of
                            PricewaterhouseCoopers LLP.
  T. J. Hogan        49     Vice President External Affairs since January 2000; Vice President Systems
                            Operations 1997-2000; Washington Energy Company positions held: Executive
                            Vice President and Chief Operating Officer 1995-1997; Vice President Supply,
                            Administration and Corporate Secretary 1994-1995; Vice President Legal and
                            Corporate Secretary 1991-1994.
  S. A. McKeon       54     Vice President and General Counsel of Puget Energy since 2000, Vice
                            President and General Counsel of PSE since June 1997. For more than five
                            years prior to that time he was a partner with the law firm of Perkins Coie
                            LLP.
  S. McLain          44     Vice President Operations - Delivery since June 1999; Vice President
                            Corporate Performance 1997-1999; Director Planning and Work Practices 1997;
                            various positions in Human Resources, Operations, Customer Service and
                            Strategic Planning 1988-1997.
  G. B. Swofford     59     Vice President and Chief Operating Officer - Delivery since June 1999; Vice
                            President Customer Operations 1997-1999; Senior Vice President Customer
                            Operations 1994-1997; Vice President Divisions and Customer Services
                            1991-1994; Vice President Rates and Customer Programs 1986-1991.
  P. M. Wiegand      48     Vice President Risk Management and Strategic Planning since September 2000;
                            Director of Budgets and Performance Management 1999-2000; Director of
                            Information Technology 1997-1999; Director of Corporate Projects 1995-1997.

ITEM 2. PROPERTIES

The principal electric generating plants and underground gas storage facilities owned by PSE are described under Item 1 - "Business - Electric Utility Operations and Gas Utility Operations." PSE owns its transmission and distribution facilities and various other properties. Substantially all properties of PSE are subject to the liens of PSE's Mortgage Indentures.

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Puget Energy's common stock, the only class of common equity of Puget Energy, is traded on the New York Stock Exchange under the symbol PSD. As of January 31, 2001, there were 50,950 holders of record of Puget Energy's common stock. The outstanding shares of PSE's common stock, the only class of common equity of PSE, are held by Puget Energy and are not traded.

The following table shows the market price range of, and dividends paid on, PSE's common stock during the periods indicated. PSE has paid dividends on its common stock each year since 1943 when such stock first became publicly held. Puget Energy became the holding company for PSE on January 1, 2001 pursuant to a plan of exchange in which each share of PSE common stock was exchange on a one-for-one basis for Puget Energy common stock.

                             2000                                         1999
- -----------------------------------------------------------------------------------------------


                       PRICE RANGE           DIVIDENDS          PRICE RANGE           DIVIDENDS


  QUARTER ENDED    HIGH         LOW             PAID        HIGH          LOW           PAID
- -----------------------------------------------------------------------------------------------
  March 31         24 1/8       18 15/16        $.46        28-3/8        22-15/16      $.46
  June 30          24 13/16     21  5/16        $.46        26-3/8        23-1/8        $.46
  September 30     26  3/16     21 7/8          $.46        24-1/2        21-3/4        $.46
  December 31      28           23 1/8          $.46        23-1/4        18-3/4        $.46

     Beginning in 2001, dividends on Puget Energy's common stock will depend primarily on the dividends and other distributions that PSE and other subsidiaries will pay to Puget Energy and the capital requirements of Puget Energy and its subsidiaries.

     PSE's payment of common stock dividends to Puget Energy is restricted by provisions of certain covenants applicable to preferred stock and long-term debt contained in PSE's Articles of Incorporation and electric and gas mortgage indentures. Under the most restrictive covenants, earnings reinvested in the business unrestricted as to payment of cash dividends were approximately $228 million at December 31, 2000. (See Note 7 to the Consolidated Financial Statements.)

ITEM 6. SELECTED FINANCIAL DATA

     The following table shows selected financial data for PSE. Puget Energy became the holding company for PSE on January 1, 2001 pursuant to a plan of exchange in which each share of PSE common stock was exchanged on a one-for-one basis for Puget Energy common stock.

(Dollars in thousands except per share data)


  YEAR ENDED DECEMBER 31                        2000         1999         1998         1997         1996
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------
Operating revenue                         $3,441,672   $2,066,630   $1,923,856   $1,681,528   $1,652,265
Operating income                             363,872      310,132      295,098      210,638      282,876
  Income from continuing
    operations                               193,831      185,567      169,612      125,698      167,351
  Income for common stock from
    continuing operations                    184,837      174,502      156,609      108,363      145,170

  Basic and diluted earnings
    per common share from
    continuing operations (Note 1 to the        2.16         2.06         1.85         1.28         1.72
       financial statements)
  Dividends per common share                    1.84         1.84         1.84         1.78         1.67
  Book value per common share                  16.61        16.24        16.00        16.06        16.31
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------
  Total assets at year-end                $5,556,669   $5,145,606   $4,709,687   $4,493,306   $4,230,855
  Long-term obligations                    2,170,797    1,783,139    1,475,106    1,412,153    1,166,601
  Redeemable preferred stock                  58,162       65,662       73,162       78,134       87,839
  Corporation obligated,
    mandatorily redeemable
    preferred securities of
    subsidiary trust holding
    solely junior subordinated
    debentures of the
    corporation                              100,000      100,000      100,000      100,000           --
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion includes some forward-looking statements that involve risks and uncertainties. Words such as “estimates,” “expects,” “anticipates,” “plans,” and similar expressions identify forward-looking statements involving risks and uncertainties. Those risks and uncertainties include, but are not limited to, the ongoing restructuring of the electric and gas industries and the outcome of regulatory proceedings related to that restructuring. The ultimate impacts of both increased competition and the changing regulatory environment on future results are uncertain, but are expected to fundamentally change how Puget Energy and PSE conduct their business. The outcome of these changes and other matters discussed below may cause future results to differ materially from historic results, or from results or outcomes currently expected or sought by Puget Energy and PSE.

     Puget Energy was established as the holding company for PSE on January 1, 2001 pursuant to a plan of exchange in which each share of PSE common stock was exchanged on a one-for-one basis for Puget Energy common stock. The following discussion and analysis relates to the accompanying consolidated financial statements and the notes thereto and should be read in conjunction with the financial statements and notes. The financial statements include the accounts of PSE and all wholly-owned subsidiaries and, therefore, also represents the consolidated financial statements of Puget Energy.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Net income in 2000 was $193.8 million on operating revenues of $3.4 billion, compared to $185.6 million on operating revenues of $2.1 billion in 1999 and $169.6 million on operating revenues of $1.9 billion in 1998. Income for common stock was $184.8 million in 2000, compared to $174.5 million in 1999 and $156.6 million in 1998.

     Basic and diluted earnings per share in 2000 were $2.16 on 85.4 million weighted average common shares outstanding compared to $2.06 on 84.6 million weighted average common shares outstanding in 1999 and $1.85 on 84.6 million weighted average common shares outstanding in 1998.

     Net income in 2000 was positively impacted by an increase in margins related to electric and gas operations. Net income in 1999 was positively impacted by net gains of approximately $7.8 million or $0.09 per share from non-utility operations. The $0.09 per share included gains from the sale of Homeguard Security Services, Inc., a wholly-owned subsidiary, and PSE's common stock investment in Cabot Oil & Gas Corporation. These gains were offset in part by losses related to sales of non-core assets and gas transportation contracts, establishing reserves for two proposed small hydro-electric projects by Hydro Energy Development Corp. and costs of ConneXt exiting certain product lines.

     Total kilowatt-hour sales to ultimate consumers in 2000 were 21.9 billion compared with 21.4 billion in 1999 and 20.9 billion in 1998. Kilowatt-hour sales to wholesale customers were 15.1 billion in 2000, 11.7 billion in 1999 and 9.9 billion in 1998.

     Total gas volumes, including gas sales, service and transportation, were 1,095 million therms in 2000, 1,109 million therms in 1999 and 1,008 million therms in 1998.

  Increase (Decrease) Over Preceding Year
  Years Ended December 31
  (DOLLARS IN MILLIONS)                                    2000      1999
- ----------------------------------------------------- ---------- ---------
  Operating revenues:
    General rate increases                               $ 16.9     $17.3
    BPA Residential Purchase and Sale Agreement           (3.3)     (4.8)
    Electric sales to other utilities and marketers       932.6      41.8
    Electric revenue sold at index rates                  184.9     (12.4)
    Electric revenue sold to conservation trust             8.4       2.9
    Electric load and other changes                        74.2      38.1
    Gas revenue change                                    126.8      68.9
    InfrastruX revenues                                    45.0        --
    Other revenues                                        (11.8)     (7.7)
- ----------------------------------------------------- ---------- ---------
       Total operating revenue changes                  1,373.7     144.1
- ----------------------------------------------------- ---------- ---------
  Operating expenses:
    Energy costs:
      Purchased electricity                               986.5      28.0
      Residential exchange                                 (2.0)     16.6
      Purchased gas                                       112.9      44.2
      Electric generation fuel                            123.6       2.9
    Utility operations and maintenance                      (.6)      9.0
    InfrastruX operations and maintenance                  41.4        --
    Other operations and maintenance                       (8.0)     (2.9)
    Depreciation and amortization                          20.8      10.1
    Conservation amortization                              (1.0)      1.6
    Taxes other than federal income taxes                  23.1      19.7
    Federal income taxes                                   21.0       2.2
- ----------------------------------------------------- ---------- ---------
       Total operating expense changes                  1,317.7     131.4
- ----------------------------------------------------- ---------- ---------
  Other income                                            (23.0)     15.0
  Interest charges                                         24.7      11.7
- ----------------------------------------------------- ---------- ---------
  Net income changes                                      $ 8.3    $ 16.0
- ----------------------------------------------------- ---------- ---------

     The following information pertains to the changes outlined in the table above:

Operating Revenues - Electric

     Electric operating revenues increased $16.9 million and $17.3 million in 2000 and 1999, respectively, when compared to the prior years due to overall average 1.2% general rate increases effective January 1, 2000 and January 1, 1999.

     Electric revenues in 2000 increased significantly due to increased prices related to electric energy sales to other utilities and marketers and sales to customers whose rates are tied to a market index. Several factors, including unfavorable hydro conditions, unscheduled outages of generating facilities in California, and increased consumer demand have raised wholesale market prices on the West Coast to unprecedented levels beginning in the second half of 2000. PSE, to date, has protected its core customers from the negative impact of the volatile West Coast power markets through its effective management of its energy supply resources and its efficient operation of its distribution system.

     On December 12, 2000, certain industrial customers who receive electric service under a market index-based tariff filed a complaint with the Washington Commission seeking emergency relief from this tariff. These and other industrial customers had demanded the market index-based tariff in return for supporting PSE's 1997 merger with Washington Natural Gas Company. On December 13, 2000, PSE filed a petition requesting that PSE be allowed to defer and recover any lost revenue resulting from any relief granted to these customers.

     The Washington Commission held a number of hearings on this subject and on January 22, 2001, while concluding no emergency relief was warranted, ordered continued hearings as to whether and how some relief in the form of a “soft” price cap could be temporarily put in place for these customers. PSE immediately filed testimony with the Washington Commission detailing the significant adverse financial impact of such a proposal at rate cap levels being contemplated ($125 to $150 per megawatt hour). PSE also filed suit in King County Superior Court against certain of the customers seeking damages for their attempt to void their agreements to buy electricity under the market index-based tariffs.

     Subsequent to those actions, the Washington Commission suspended the hearings to allow all parties to work on a settlement. The settlement proposal, which currently is being finalized in writing, would result in a significant portion of the industrial loads in question (in excess of 250 average megawatts) being expected to purchase electricity from other suppliers and in return give up any rights to PSE's embedded cost resources. Customers representing a small portion of the load (approximately 25 average megawatts) have the opportunity to transfer to a tariff with a new “small customer” rate schedule. It is expected that the settlement proposal will be submitted to the Washington Commission in March 2001.

     Electric revenues in 2000 and 1999 were reduced because of the credit that PSE received through the Residential Purchase and Sale Agreement with the Bonneville Power Administration (“BPA”). This agreement enables PSE's residential and small farm customers to receive the benefits of lower-cost federal power. On January 29, 1997, PSE and the BPA signed a Residential Exchange Termination Agreement. The Termination Agreement ends PSE's participation in the Residential Purchase and Sale Agreement with BPA. As part of the Termination Agreement, PSE will receive payments by the BPA of approximately $235 million over an approximately five-year period ending June 2001. These payments are recorded as a reduction of purchased electricity expenses. Under the rate plan approved by the Washington Commission in its merger order, PSE will continue to reflect, in customers' bills, the level of Residential Exchange benefits in place at the time of the merger. Over the remainder of the Residential Exchange Termination Agreement from January 2001 through June 2001, it is projected that PSE will credit customers approximately $34.3 million more than it will receive from BPA.

     The allocation of future benefits of low-cost federal power, for the five-year BPA rate plan period 2001 to 2006, will be decided as part of a current BPA rate case process. In May 2000, the BPA published an initial Record of Decision in its Subscription process. BPA allocated benefits intended to be equivalent to 1900 average MW of cost-based federal power to the residential and small farm customers of the Pacific Northwest investor-owned utilities (“IOUs”). The regional Public Utility Commissions in turn recommended an allocation of the benefits among the IOUs, with PSE's proposed annual share equal to 700 average MW of benefits over the five-year period October 2001 through September 2006. In August 2000, the BPA determined that certain aspects of its initial Record of Decision would be revisited in its power rate case that is expected to continue through May 2001. On October 30, 2000, PSE signed a five-year contract with the BPA (as required by BPA's Subscription timeline) for receipt of the federal power benefits allocated by the Subscription and Commission processes. The contract describes the form (power and cash) of the 700 average MW benefits to be provided, and provides PSE a right to terminate the contract upon completion of BPA's rate case. The results of the case will affect the value of benefits actually received by PSE and other Northwest IOUs from the Subscription benefits allocation process.

     Electric revenues in 2000 and 1999 were reduced by $35.4 million and $43.8 million, respectively, when compared to prior years as a result of PSE's sale of revenues associated with $237.7 million of its investment in conservation assets to grantor trusts. The revenue decrease represents the portion of rate revenues that were sold and forwarded to the trusts. The impact of this revenue decrease, however, was offset by related reductions in other utility operations and maintenance and interest expenses.

     To meet customer demand, PSE's power supply portfolio includes net purchases of power under long-term supply contracts. However, depending principally upon streamflow available for hydro-electric generation and weather effects on customer demand, from time to time, PSE may have surplus power available for sale to wholesale customers. In addition, PSE has increased its wholesale surplus power business in order to manage its core energy portfolio through short and intermediate-term purchases, sales, arbitrage and other risk management techniques. PSE has a Risk Management Committee which oversees energy price risk matters. Sales to other utilities and marketers increased $932.6 million and $41.8 million in 2000 and 1999, respectively, compared to the prior years due primarily to an increase in sales volumes and, for 2000, large increases in wholesale power prices.

     PSE operates within the western wholesale market and has made sales into the California energy market. At December 31, 2000, PSE's current receivables from the California Independent System Operators (CAISO) and other counterparties, net of reserves, is $41.8 million.

Operating Revenues – Gas

     Regulated gas utility revenues in 2000 increased by $126.8 million from the prior year on a 2.1% increase in gas volumes sold. Total gas volumes, including transported gas, decreased 1.3% in 2000 from 1999. The primary reason for the increase in gas sales was the higher natural gas prices which are passed through to customers in the Purchased Gas Adjustment (“PGA”). Increases under the PGA were effective November 1, 1999 and August 1, 2000. As a result of the PGA increases, gas rates to all sales customers increased by an average of 16% on November 1, 1999 and 30.2% on August 1, 2000. A larger percentage of firm gas sales with higher prices and less transportation volumes in 2000 when compared to last year also contributed to increased revenues. Utility gas margin (the difference between gas revenues and gas purchases) increased by $6.1 million, or 2.8%, in 2000 over 1999.

     Regulated gas utility sales revenue in 1999 increased by $68.9 million from the prior year on a 15.8% increase in gas volumes sold. Total gas volumes, including transported gas, increased 10% in 1999 from 1998.

Other Revenues

     InfrastruX provided total operating revenues of $45.0 million in 2000 from the acquisitions they made in the third quarter. PSE's other revenues decreased $11.8 million in 2000 compared to 1999 primarily due to decreased revenues at PSE's real estate investment and development subsidiary, Puget Western, Inc., and the sale of a wholly-owned subsidiary, Homeguard Security Services, Inc. in 1999. Other revenues decreased $7.7 million in 1999 compared to 1998 due primarily to decreased revenues at PSE's customer information and billing software development and marketing subsidiary, ConneXt.

Operating Expenses

     Purchased electricity expenses increased $986.5 million in 2000 when compared to 1999 and $28.0 million in 1999 when compared to 1998. The increase in 2000 was due primarily to greater volumes and much higher prices for non-firm power purchases from other utilities and marketers due to skyrocketing prices in the volatile West Coast power market. The increase in 1999 was due primarily to an increase in secondary power purchases from other utilities and marketers, the increased load due to temperatures that averaged near normal as compared to warmer than normal in 1998, and the increase in electric customers in 1999 compared to 1998.

     The Colstrip Unit 4 generating plant, located in eastern Montana, went out of service on September 3, 2000, because of cracks discovered in the generator shaft. The unit, which PSE owns in part and buys power from in part, provides 225 MW of capacity and energy. It went back into service the weekend of October 21, 2000. Loss of power from this unit increased PSE's cost of power and reduced energy margins. The 2000 increases were partially offset by a reduction in purchased electricity expenses related to the purchase of the 160-megawatt Encogen electric cogeneration plant in November 1999. This reduction in purchased electricity expenses was offset in part by increases in fuel, operations and maintenance, and depreciation and interest expenses related to Encogen. Prior to the purchase, PSE was obligated to purchase the net output of the plant under a 1990 power purchase contract.

     Residential exchange credits associated with the Residential Purchase and Sale Agreement with BPA increased $2.0 million in 2000 when compared to 1999, due to the terms set out in the 1997 Residential Exchange Termination Agreement discussed in “Operating Revenues – Electric”. Residential exchange credits decreased $16.6 million in 1999 when compared to 1998, also as a result of the Termination Agreement. Residential exchange credits received in 2000 were $41.0 million and are estimated to be $27.0 million in 2001. (See discussion of the Residential Purchase and Sale Agreement under “Operating Revenues – Electric”.)

     Purchased gas expenses increased $112.9 million in 2000 compared to 1999 primarily due to the impact of increased gas costs, which are passed through to customers through the PGA mechanism, and a 2.1% increase in sales volumes. Purchased gas expenses increased $44.2 million in 1999 compared to 1998 due to both the increased volumes of purchases as a result of higher heating load and the increase in gas service customers. Purchased gas expenses also increased by $17.3 million in 1999 compared to 1998 due to approval of PSE's PGA filing effective November 1, 1999. The PGA allows PSE to recover expected increases in gas costs. PSE defers, as a receivable, any gas costs that exceed the amount in PGA rates and accrues interest under the PGA. The balance of the PGA receivable was $96.1 million and $33.7 million for December 31, 2000 and 1999, respectively.

     Electric generation fuel expense increased $123.6 million in 2000 compared to 1999 as a result of $37.6 million in Encogen fuel expenses, compared to $6.7 million in 1999, and as a result of PSE generating more electricity with higher-priced gas and oil at PSE-owned combustion turbines. Electric generation fuel expense increased $2.9 million in 1999 compared to 1998 as a result of a $6.7 million Encogen fuel expense in the fourth quarter of 1999 which was partially offset by PSE generating less electricity at other PSE-owned combustion turbines. PSE's acquisition of the 160-megawatt Encogen natural gas-fired cogeneration facility was completed on November 1, 1999.

     Utility operations and maintenance expenses decreased $0.6 million in 2000 compared to 1999 due primarily to high 1999 costs related to Year 2000 remediation expenses in 1999, and electric service restoration following a number of storms which occurred in early 1999. The lower operations and maintenance expenses in 2000 were partially offset by increased Colstrip costs in 2000 due to unplanned outages, increased costs of running the Encogen plant for all of 2000 as compared to two months of 1999, and increased combustion turbine plant costs due to significantly higher usage in 2000. Utility operations and maintenance increased $9.0 million in 1999 compared to 1998 due to the aforementioned increased storm-repair costs and increased expenditures for Year 2000 remediation efforts in 1999.

     InfrastruX's operation and maintenance expenses for 2000 were $41.4 million due to the third quarter acquisitions in 2000 of its two subsidiaries, Utilx and Lineal. PSE's other operations and maintenance expenses decreased $8.0 million in 2000 compared to 1999 primarily due to a decrease in operating expenses at ConneXt and from the sale of Homeguard Security Services, Inc. in 1999. This decrease was offset by PSE's write-off of the planning and design costs associated with two abandoned utility projects in 2000 for a total of $4.4 million. Other operations and maintenance expenses decreased $2.9 million in 1999 compared to 1998 primarily as a result of ConneXt exiting certain product lines in the second quarter of 1999.

     Depreciation and amortization expenses increased $20.8 million in 2000 compared to 1999 due to the effects of new plant placed into service during the past year, including the Encogen plant, purchased in November 1999, and the purchase of ConsumerLinX, a customer information and billing system, which was placed into service in 2000. Depreciation and amortization expense increased $10.1 million in 1999 compared to 1998 due primarily to the effects of new plant placed into service during 1999.

     Taxes other than federal income taxes increased $23.1 million in 2000 compared to 1999 and $19.7 million in 1999 compared to 1998 due primarily to increases in municipal taxes and state excise taxes which are revenue based. Federal income taxes increased by $21.0 million in 2000 compared to 1999, and $2.2 million in 1999 compared to 1998 primarily due to higher pre-tax operating income for the periods.

Other Income

     Other income, net of federal income tax, decreased $23.0 million in 2000 compared to 1999 due primarily to an after-tax gain in 1999 of $12.3 million on the sale of Cabot Oil & Gas Corporation (“Cabot”) common stock in the second quarter of 1999, and an after-tax gain of $3.6 million related to the sale and assignment of certain non-core assets and supply transportation contracts in 1999. The decrease is also related to the establishing in 2000 of an after-tax reserve of $11.8 million for a write-down to the fair values of certain assets held for sale by Hydro Energy Development Corp. to their net realizable values. The decrease in 2000 was partially offset by the after-tax gain of approximately $1.6 million related to the sale of the Centralia generating plant. Other income, net of federal income tax, increased $15.0 million in 1999 compared to 1998 due primarily to net gains of approximately $7.8 million from non-utility operations in 1999 and an increase of $2.8 million in AFUDC income. The $7.8 million of net gains included gains from the sale of Homeguard Security Services, Inc., and PSE's common stock investment in Cabot. These gains were offset in part by losses related to sales of non-core assets and gas transportation contracts, establishing reserves for two proposed small hydro-electric projects and expenses of a subsidiary exiting certain product lines.

Interest Charges

     Interest charges, which consist of interest and amortization on long-term debt and other interest, increased $24.7 million in 2000 compared to 1999 as a result of the issuance of $225 million 7.96% Senior Medium-Term Notes, Series B, in February 2000, the issuance of $25 million 7.61% Senior Medium-Term Notes, Series B, in September 2000, and the issuance of $260 million 7.69% Senior Medium-Term Notes, Series C, in November 2000. These increases were partially offset by the repayment of $132 million in Secured Medium-Term Notes since September 1999 and $105.6 million of Encogen debt in February 2000. Other interest expense increased $9.1 million compared to 1999 as a result of higher weighted average interest rates and higher average daily short-term borrowings.

     Interest charges increased $11.7 million in 1999 compared to 1998 as a result of the issuance of $200 million 6.74% Senior Medium-Term Notes, Series A, in June 1998, and $250 million Senior Medium-Term Notes, Series B, in March 1999. These increases were partially offset by the maturity or redemption of $188 million in Secured Medium-Term Notes since February 1998. Other interest expense decreased $1.7 million compared to 1998 as a result of lower weighted average interest rates.

CAPITAL RESOURCES AND LIQUIDITY

     Current 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 in 1999 and 2000 also include costs of developing a new customer information system. Construction expenditures, excluding equity AFUDC, were $296.5 million in 2000. PSE expects construction expenditures for the period 2001 through 2003 will be approximately $247 million, $230 million and $231 million, respectively. Construction expenditure estimates are subject to periodic review and adjustment.

     PSE expects cash from operations (net of dividends and AFUDC) during the period 2001 through 2003 will, on average, be approximately 113.1% of average estimated construction expenditures (excluding AFUDC) during the same period.

     In September 1998, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of Senior Notes secured by a pledge of First Mortgage Bonds. On March 9, 1999, PSE issued $250 million principal amount of Senior Medium-Term Notes, Series B, which consisted of $150 million principal amount due March 9, 2009 at an interest rate of 6.46% and $100 million principal amount due March 9, 2029 at an interest rate of 7.0%. On February 22, 2000, PSE issued $225 million principal amount of 7.96% Senior Medium-Term Notes, Series B. The Notes are due February 22, 2010 and the proceeds were used to redeem the Encogen project debt and pay down a portion of PSE's short-term debt. On September 9, 2000, PSE issued $25 million principal amount of 7.61% Senior Medium-Term Notes, Series B, due September 8, 2008, which completed the shelf registration.

     In October 2000, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of Senior Notes secured by a pledge of First Mortgage Bonds, Subordinated Debentures or Trust Preferred Securities. On November 9, 2000, PSE issued $260 million principal amount of 7.69% Senior Medium-Term Notes, Series C, due February 1, 2011.

     In 2000 and 1999 PSE issued common stock for PSE's Stock Purchase and Dividend Reinvestment Plan of $23.1 million (981,549 shares) and $6.8 million (361,944 shares), respectively.

     PSE's ability to finance its future construction program is dependent upon market conditions and maintaining a level of earnings sufficient to permit the sale of additional securities. 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 December 31, 2000, PSE could issue either (i) approximately $427 million of additional first mortgage bonds, (ii) approximately $616 million of additional preferred stock at an assumed dividend rate of 7.75%, or (iii) a combination thereof.

     Short-term borrowings from banks and the sale of commercial paper are used to provide working capital for the construction program. At December 31, 2000, PSE had available $375 million in lines of credit with various banks, which provide credit support for outstanding commercial paper of $204 million, effectively reducing the available borrowing capacity under these lines of credit to $171 million. (See Note 9 to the Consolidated Financial Statements.)

     Under the most restrictive covenants in PSE's Articles of Incorporation and electric and gas mortgage indentures, earnings reinvested in the business unrestricted as to payment of cash dividends were approximately $228 million at December 31, 2000.

     PSE currently has receivables net of reserves in the amount of $41.8 million from the CAISO and other counterparties, for power sales made in 2000. A reserve was established against the receivables as collection of the full amount is currently in question due to problems in the California energy market.

RATE MATTERS – ELECTRIC

     The order approving the Merger, issued by the Washington Commission on February 5, 1997, contained a rate plan designed to provide a five-year period of rate certainty for customers and to provide PSE with an opportunity to achieve a reasonable return on investment. General electric tariff rates were stipulated to increase annually between 1.0% and 1.5% depending on rate class on January 1 of 1998 through 2000. Electric tariff rates for certain customers will increase by 1.5% in 2001. PSE has had no electric rate adjustment mechanism during the rate stability period to adjust for changes in electric energy supply costs or fuel costs. These variances may now significantly influence earnings. The rate stabilization period will end on December 31, 2001, at which time PSE will be allowed to file for changes in rates, if necessary.

     On December 12, 2000, certain industrial customers who receive electric service under a market index-based tariff filed a complaint with the Washington Commission seeking emergency relief from this tariff. These and other industrial customers had demanded the market index-based tariff in return for supporting PSE's 1997 merger with Washington Natural Gas Company. On December 13, 2000, PSE filed a petition requesting that PSE be allowed to defer and recover any lost revenue resulting from any relief granted to these customers.

     The Washington Commission held a number of hearings on this subject and on January 22, 2001, while concluding no emergency relief was warranted, ordered continued hearings as to whether and how some relief in the form of a “soft” price cap could be temporarily put in place for these customers. PSE immediately filed testimony with the Washington Commission detailing the significant adverse financial impact of such a proposal at rate cap levels being contemplated ($125 to $150 per megawatt hour). PSE also filed suit in King County Superior Court against certain of the customers seeking damages for their attempt to void their agreement to buy electricity under the market index-based tariffs.

     Subsequent to those actions, the Washington Commission suspended the hearings to allow all parties to work on a settlement. The settlement proposal, which currently is being finalized in writing, would result in a significant portion of the industrial loads in question (in excess of 250 average megawatts) being expected to purchase electricity from other suppliers and in return give up any rights to PSE's embedded cost resources. Customers representing a small portion of the load (approximately 25 average megawatts) have the opportunity to transfer to a tariff with a new “small customer” rate schedule. It is expected that the settlement proposal will be submitted to the Washington Commission in March 2001.

     On March 6, 2000, the Washington Commission authorized PSE to sell its 7% ownership interest in the coal-fired Centralia Electric Generating plant located in southwest Washington state. On May 4, 2000, the plant was sold to TECWA Power, Inc. Of the resulting pre-tax gain, $21 million was allocated to customers and $2.5 million to PSE in accordance with the order. PSE recognized its share of the gain in September 2000. PSE returned the customers' share of the gain, with accrued interest, beginning November 1, 2000 based on customers' power usage in November 2000. Any final true-up of the gain will be collected or refunded through PSE's conservation rider.

     On October 16, 2000, per FERC Order 2000, PSE filed its plans for forming and participating in a Regional Transmission Organization (“RTO”). FERC's goal is to promote efficiency in wholesale electricity markets and to ensure that electricity consumers pay the lowest price possible for reliable service. The impact upon PSE's operations related to the establishment of an RTO cannot be determined with certainty at this time but is not expected to be material.

     On October 25, 2000, the Washington Commission approved PSE's request to sell excess sulfur dioxide emission allowances if and to the extent excess allowances are available to be sold. The proceeds of such sales will be deferred and amortized over a ten-year period. PSE estimates the value of the excess sulfur dioxide emission allowances to be $3.9 million at December 31, 2000.

RATE MATTERS - GAS

     The order approving the Merger, issued by the Washington Commission on February 5, 1997, contains a rate plan which provided unchanged rates for all classes of natural gas customers until January 1, 1999, when rates decreased by approximately $2.3 million annually.

     As a result of sharp increases in gas costs during 2000, PSE filed two PGA and deferral amortization filings with the Washington Commission which were approved. The PGA filings allow PSE to recover expected increases in annual gas costs and deferral amortization filings allow PSE to recover prior period gas cost undercollections. As a result, gas rates to all sales customers increased by an average of 30.2% on August 1, 2000, and 26.4% again on January 12, 2001. (See Note 1 to the Consolidated Financial Statements for a description of the PGA mechanism.)

Other

     In the second quarter of 2000, PSE sold all of its redeemable 6% convertible preferred stock of Cabot Oil & Gas Corporation for $51.4 million. There was no significant gain or loss on the transaction.

     On July 20, 2000, PSE and PPL Global, LLC (formerly PP&L Global, Inc.) terminated an Asset Purchase Agreement dated as of November 1, 1998, under which PPL Global, LLC had proposed purchasing PSE's 735-megawatt interest in the four-unit Colstrip power plants and associated transmission capacity across Montana. As a result, PSE will retain its 50% interest in Colstrip Units 1 and 2 and 25% interest in Colstrip Units 3 and 4.

     On January 1, 2001, Puget Energy adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“Statement No. 133”), as amended by Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133". Statement No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Puget Energy enters into both physical and financial contracts to manage its energy resource portfolio. Certain of these contracts outstanding on December 31, 2000 meet the derivative classification requirements of the statement and will be reported at fair value in the balance sheet. Beginning with the implementation of Statement No. 133, changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as qualifying cash flow hedge under the statement. Puget Energy will recognize the cumulative effect of this change in accounting principle by recording an after-tax decrease to current earnings of approximately $14.7 million for electric derivative transactions. In addition, Puget Energy will record a deferred asset for electric energy contracts designated as qualifying cash flow hedges of approximately $286.9 million at the adoption with a corresponding increase of approximately $286.9 million in other comprehensive income. Puget Energy anticipates approximately $207.9 million of the $286.9 million will reverse during 2001 and will, as a result, report a corresponding decrease to the deferred asset and to other comprehensive income to report this reversal. The decrease in the deferred asset and in other comprehensive income will have no net effect on current earnings. These estimates are based upon the forward market prices for energy at December 31, 2000. Retail gas related derivative transactions are deferred under Puget Energy's Purchased Gas Adjustment Mechanism and recorded in earnings as the transactions are executed under the PGA Incentive Mechanism.

     PSE entered into an agreement with CellNet Data Services Inc. (“CellNet”) under which PSE would lend CellNet up to $72 million so it can finance the Automated Meter Reading (“AMR”) network system in PSE's service territory. The network system is collateral for the loan which has a term of five-years from the first draw on June 30, 1999. The loan agreement provides for interest only payments during the five-year term, with the principal due at the end of the five-year term. As of December 31, 2000 and 1999, the outstanding loan amounts were $51.9 million and $31.1 million, respectively. In the second quarter of 2000, Schlumberger completed the acquisition of CellNet which was approved by the bankruptcy court.

     In December 1997, PSE paid $215 million to buy out Tenaska's existing long-term gas supply contracts, which contained fixed and escalating gas prices that were well above current and projected future market prices for natural gas. PSE became the principal natural gas supplier to the project and power purchase prices under the Tenaska contract were revised to reflect market-based prices for the natural gas supply. PSE obtained an order from the Washington Commission creating a regulatory asset related to the $215 million restructuring payment. Under terms of the order, PSE is allowed to accrue as an additional regulatory asset one-half the carrying costs of the deferred balance over the first five years.

     On November 1, 1999, PSE purchased the 160-MW cogeneration plant from Encogen Northwest, L.P. Pursuant to an October 27, 1999 order from the Washington Commission approving the purchase, PSE will depreciate the original owner's net book value of the plant over the remaining 23-year useful life of the project. The difference between the purchase price and the net book value of the plant will be amortized over nine years.

     In December 1999, PSE bought out the remaining 8.5 years of one of the natural gas supply contracts serving the cogeneration plant from Cabot Oil & Gas Corporation which provided approximately 60% of the plant's natural gas requirements. PSE became the replacement gas supplier to the project for 60% of the supply under terms of the Cabot Agreement. The Washington Commission has issued an order creating a regulatory asset relating to the $12 million payment that requires PSE to accrue carrying costs on the unamortized balance over the first three years.

     The acquisitions by InfrastruX of Utilx and Lineal have been accounted for using the purchase method of accounting and, accordingly, the operating results of Utilx and Lineal have been included in PSE's consolidated financial statements since the date of acquisition. These acquisitions mark Puget Energy's entry into the business of providing design, construction and engineering services to the utility industry. The total purchase price of the two acquisitions was approximately $87.1 million.

ITEM 7a. quantitative and qualitative disclosure about market risk

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

Commodity Price Risk

     PSE's energy related businesses are exposed to risks related to changes in commodity prices. As part of its business, PSE markets power to wholesale customers by entering into contracts to purchase or supply electric energy or natural gas at specified delivery points and at specified future delivery dates. PSE's energy risk management function manages PSE's core electric and gas supply portfolios.

     PSE manages its energy supply portfolio to achieve three primary objectives:

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

(ii) Manage portfolio risks to limit undesired impacts on PSE financial results; and

(iii) Optimize the value of PSE's energy supply assets.

     The portfolio is subject to major sources of variability (e.g., hydro generation, 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.

     Hedging strategies for PSE's energy supply portfolio interact with portfolio optimization activities. Some hedges can be implemented in ways that retain PSE's ability to use its energy supply portfolio to produce additional value; other hedges can only be achieved by forgoing optimization opportunities.

     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. This 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. PSE may use forward delivery agreements, swaps and option contracts for the purpose of hedging commodity price risk. During fiscal year 2000, unrealized changes in the market value of these derivatives are deferred and recognized upon settlement along with the underlying hedged transaction. Effective January 1, 2001, pursuant to Statement No. 133, which requires that all derivative instruments be recorded on the balance sheet at their fair value, changes in the fair value of PSE's derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as qualifying hedge under the statement and, if it is, the type of hedge transaction. PSE does not consider its current operations to meet the definition of trading activities as described by the Emerging Issues Task Force of the Financial Accounting Standards Issue No. 98-10, “Accounting for Contracts involved in Energy Trading and Risk Management Activities”.

     In addition, PSE believes its current rate design, including its Optional Large Power Sales Rate, various special contracts and the PGA mechanism mitigate a portion of this risk.

     Market risk is managed subject to parameters established by the Board of Directors. A Risk Management Committee separate from the units that manage these risks monitors compliance with PSE's policies and procedures. In addition, the Audit Committee of PSE's Board of Directors has oversight of the Risk Management Committee.

Interest Rate Risk

     PSE believes interest rate risk of PSE primarily relates to the use of short-term debt instruments and new long-term debt financing needed to fund capital requirements. PSE manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. PSE 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. PSE may enter into swap instruments to manage the interest rate risk associated with these debts, and three interest rate swaps were outstanding as of December 31, 1999. These swaps terminated in 2000 and PSE did not enter into any other swap instruments as of December 31, 2000. The carrying amounts and fair values of PSE's fixed-rate debt instruments are:

                                               2000       2000        1999        1999
                                           CARRYING       FAIR    CARRYING        FAIR
  (DOLLARS IN MILLIONS)                      AMOUNT      VALUE      AMOUNT       VALUE
- ---------------------------------------- ----------- ---------- ----------- -----------
  Financial Liabilities:
    Short-term debt                          $377.2     $377.2      $604.7      $604.7
    Long-term debt                         $2,189.9   $2,183.0    $1,724.8    $1,618.3
    Project debt                                 --         --      $106.0      $109.4
  Unrecognized Financial Instruments:
    Interest rate swaps                          --         --          --      $ (0.6)
- ---------------------------------------- ----------- ---------- ----------- ------------

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

     The information required by Part III with respect to Puget Energy is incorporated herein by reference to Puget Energy's proxy statement for its 2001 Annual Meeting of Shareholders, (Commission File No. 1-16305). Reference is also made to the information regarding Puget Energy's executive officers set forth in Part I of this report.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

     The information required by this item with respect to Puget Sound Energy is incorporated herein by reference, to the material under “Election of Directors” and “Security Ownership of Directors and Executive Officers--Section 16(a) Beneficial Ownership Reporting Compliance” in Puget Energy's proxy statement for its 2001 Annual Meeting of Shareholders, (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report. Reference is also made to the information regarding Puget Sound Energy's executive officers set forth in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item with respect to Puget Sound Energy is incorporated herein by reference, to the material under “Structure and Compensation of Board of Directors—Director Compensation,” “Executive Compensation” and “Employment Contracts, Termination of Employment and Change-In-Control Arrangements” in Puget Energy's proxy statement for its 2001 Annual Meeting of Shareholders, (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     As of January 31, 2001, all of the issued and outstanding shares of Puget Sound Energy's common stock were held beneficially and of record by Puget Energy.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item with respect to Puget Sound Energy is incorporated herein by reference, to the material under “Certain Transactions” in Puget Energy's proxy statement for its 2001 Annual Meeting of Shareholders, (Commission File No. 1-16305), which is filed as Exhibit 99.1 to this report.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

       (a)        Documents filed as part of this report:

         1)       Financial statement schedule - see index on page 37.

         2)       Exhibits - see index on page 70.

       (b)        Reports on Form 8-K:

         1)       Form 8-K filed by PSE on October 20, 2000 - Item 5 Other Events, related
                  to Puget Sound Energy, Inc. third-quarter results of operation.

         2)       Form 8-K filed by PSE on November 2, 2000 - Item 5 Other Events, related to PSE issuance and
                  sale from time to time of up to $500,000,000 principal amount of Senior Medium-Term Notes.



       SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


PUGET ENERGY, INC.                             PUGET SOUND ENERGY, INC.

William S. Weaver                              William S. Weaver
- ------------------------------------           -----------------------------------
William S. Weaver                              William S. Weaver
President and Chief Executive Officer          President and Chief Executive Officer

Date:  March 2, 2001                           Date:  March 2, 2001

       Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of each registrant and in the capacities and on the dates indicated.



SIGNATURE                     TITLE                                       DATE
- ---------------------------- ------------------------------------------- -------------------
                             (Puget  Energy  and PSE  unless  otherwise noted)
  William S. Weaver            President, Chief Executive                  March 2, 2001
- ----------------------------
  (William S. Weaver)          Officer and Director


  Richard L. Hawley            Vice President
- ----------------------------
  (Richard L. Hawley)          and Chief Financial Officer


                               Corporate Secretary and Chief
  James W. Eldredge            Accounting Officer of Puget Energy;
- ----------------------------
  (James W. Eldredge)          Corporate Secretary and Controller and
                               Chief Accounting Officer of PSE


  Douglas P. Beighle           Director
- ----------------------------
  (Douglas P. Beighle)


  Charles W. Bingham           Director
- ----------------------------
  (Charles W. Bingham)


  Phyllis J. Campbell          Director
- ----------------------------
  (Phyllis J. Campbell)


  Craig W. Cole                Director
- ----------------------------
  (Craig W. Cole)


  Donald J. Covey              Director
- ----------------------------
  (Donald J. Covey)


  Robert L. Dryden             Director
- ----------------------------
  (Robert L. Dryden)


  John D. Durbin               Director
- ----------------------------
  (John D. Durbin)


  John W. Ellis                Director
- ----------------------------
  (John W. Ellis)


                               Director
- ----------------------------
  (Tomio Moriguchi)


  Sally G. Narodick            Director
- ----------------------------
  (Sally G. Narodick)
       

REPORT OF MANAGEMENT

Puget Energy Inc.

and

Puget Sound Energy, Inc.

The accompanying consolidated financial statements of Puget Sound Energy, Inc. which, therefore, also represent the consolidated financial statements of Puget Energy have been prepared under the direction of management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles and include amounts based on judgments and estimates by management where necessary. Management also prepared the other information in the Annual Report on Form 10-K and is responsible for its accuracy and consistency with the financial statements.

Puget Energy and Puget Sound Energy maintain a system of internal control which, in management's opinion, provides reasonable assurance that assets are properly safeguarded and transactions are executed in accordance with management's authorization and properly recorded to produce reliable financial records and reports. The system of internal control provides for appropriate division of responsibility and is documented by written policy and updated as necessary. Puget Sound Energy's internal audit staff assesses the effectiveness and adequacy of the internal controls on a regular basis and recommends improvements when appropriate. Management considers the internal auditor's and independent auditor's recommendations concerning Puget Energy's and Puget Sound Energy's internal controls and takes steps to implement those that they believe are appropriate in the circumstances.

In addition, PricewaterhouseCoopers LLP, the independent accountants, have performed audit procedures deemed appropriate to obtain reasonable assurance about whether the financial statements are free of material misstatement.

The Board of Directors pursues its oversight role for the financial statements through the audit committee, which is composed solely of outside Directors. The audit committee meets regularly with management, the internal auditors and the independent auditors, jointly and separately, to review management's process of implementation and maintenance of internal accounting controls and auditing and financial reporting matters. The internal and independent auditors have unrestricted access to the audit committee.

William S. Weaver                        Richard L. Hawley           James W. Eldredge
- -------------------------------------    -------------------------   --------------------------
William S. Weaver                        Richard L. Hawley           James W. Eldredge
President and Chief Executive Officer    Vice President and Chief    Corporate Secretary and
                                         Financial Officer           Chief Accounting Officer

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Puget Energy, Inc.:

     In our opinion, the consolidated financial statements listed on page 37 of this Annual Report on Form 10-K present fairly, in all material respects, the financial position of Puget Energy, Inc. (formerly Puget Sound Energy, Inc.) and its subsidiaries (the “Company”) at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed on page 37 of this document presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Seattle, Washington

February 13, 2001

Consolidated Financial Statements, Financial Statement Schedule and Exhibits Covered by the Foregoing Report of Independent Accountants

CONSOLIDATED FINANCIAL STATEMENTS:

Schedule:

All other schedules have been omitted because of the absence of the conditions under which they are required, or because the information required is included in the financial statements or the notes thereto.

Financial statements of PSE's subsidiaries are not filed herewith inasmuch as the assets, revenues, earnings and earnings reinvested in the business of the subsidiaries are not material in relation to those of PSE.

Exhibits:

Consolidated Statements of
         INCOME
  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
  FOR YEARS ENDED DECEMBER 31                          2000          1999          1998
- ---------------------------------------------- ------------- ------------- -------------
  Operating revenues:
  Electric                                       $2,771,695    $1,558,012    $1,475,208
  Gas                                               612,311       485,488       416,551
  Other                                              57,666        24,444        32,097
- ---------------------------------------------- ------------- ------------- -------------
       Total operating revenues                   3,441,672     2,067,944     1,923,856
- ---------------------------------------------- ------------- ------------- -------------
  Operating expenses:
  Energy costs:
    Purchased electricity                         1,766,625       780,162       752,148
    Residential exchange                            (41,000)      (39,000)      (55,562)
    Purchased gas                                   332,927       220,009       175,805
    Fuel                                            182,978        59,439        56,557
  Utility operations and maintenance                240,094       240,645       231,636
  Other operations and maintenance                   60,612        27,179        30,102
  Depreciation and amortization                     196,513       175,710       165,587
  Conservation amortization                           6,830         7,841         6,199
  Taxes other than federal income taxes             203,230       180,141       160,472
  Federal income taxes                              128,991       108,002       105,814
- ---------------------------------------------- ------------- ------------- -------------
       Total operating expenses                   3,077,800     1,760,128     1,628,758
- ---------------------------------------------- ------------- ------------- -------------
  Operating income                                  363,872       307,816       295,098
- ---------------------------------------------- ------------- ------------- -------------
  Other income                                        5,061        28,135        13,182
- ---------------------------------------------- ------------- ------------- -------------
  Income before interest charges                    368,933       335,951       308,280
- ---------------------------------------------- ------------- ------------- -------------
  Interest charges:
    AFUDC                                            (9,303)      (10,582)       (7,580)
    Interest expense                                184,405       160,966       146,248
- ---------------------------------------------- ------------- ------------- -------------
       Total interest charges                       175,102       150,384       138,668
- ---------------------------------------------- ------------- ------------- -------------
  Net income                                        193,831       185,567       169,612
  Less preferred stock dividends accrual              8,994        11,065        13,003
- ---------------------------------------------- ------------- ------------- -------------
  Income for common stock                          $184,837      $174,502      $156,609
- ---------------------------------------------- ------------- ------------- -------------
  Common shares outstanding weighted average         85,411        84,613        84,561
- ---------------------------------------------- ------------- ------------- -------------
  Basic and diluted earnings per common share         $2.16         $2.06         $1.85
- ---------------------------------------------- ------------- ------------- -------------

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





Consolidated Balance Sheets
         ASSETS

  (DOLLARS IN THOUSANDS)
  AT DECEMBER 31                                                           2000          1999
- ------------------------------------------------------------------ ------------- -------------
  Utility plant:
    Electric plant                                                   $4,054,551    $3,966,220
    Gas plant                                                         1,459,488     1,371,589
    Common plant                                                        351,051       314,770
    Less: Accumulated depreciation and amortization                  (2,026,681)   (1,901,658)
- ------------------------------------------------------------------ ------------- -------------
        Net utility plant                                             3,838,409     3,750,921
- ------------------------------------------------------------------ ------------- -------------
  Other property and investments:
    Investment in Bonneville Exchange Power Contract                     58,189        61,716
    Other                                                               234,108       202,444
- ------------------------------------------------------------------ ------------- -------------
        Total other property and investments                            292,297       264,160
- ------------------------------------------------------------------ ------------- -------------
  Current assets:
    Cash                                                                 36,383        65,707
    Accounts receivable, net of allowance for doubtful accounts         343,108       213,020
    Unbilled revenues                                                   211,784       121,303
    Purchased gas receivable                                             96,050        33,700
    Materials and supplies, at average cost                              99,001        69,241
    Prepayments and other                                                11,607         9,866
- ------------------------------------------------------------------ ------------- -------------
        Total current assets                                            797,933       512,837
- ------------------------------------------------------------------ ------------- -------------
  Long-term assets:
    Regulatory asset for deferred income taxes                          207,350       228,454
    Regulatory asset for PURPA buyout costs                             243,071       238,734
    Other                                                               177,609       150,500
- ------------------------------------------------------------------ ------------- -------------
  Total long-term assets                                                628,030       617,688
- ------------------------------------------------------------------ ------------- -------------
  Total assets                                                       $5,556,669    $5,145,606
================================================================== ============= =============

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



Consolidated Balance Sheets
         CAPITALIZATION AND LIABILITIES

  (DOLLARS IN THOUSANDS)
  AT DECEMBER 31                                                      2000         1999
- -------------------------------------------------------------- ------------ ------------
  Capitalization:
  (See "Consolidated Statements of Capitalization"):
     Common equity                                              $1,426,640   $1,379,073
     Preferred stock not subject to mandatory redemption            60,000       60,000
     Preferred stock subject to mandatory redemption                58,162       65,662
     Corporation obligated, mandatorily redeemable preferred
       securities of subsidiary trust holding solely junior
       subordinated debentures of the corporation                  100,000      100,000
     Long-term debt                                              2,170,797    1,783,139
- -------------------------------------------------------------- ------------ ------------
       Total capitalization                                      3,815,599    3,387,874
- -------------------------------------------------------------- ------------ ------------
  Current liabilities:
     Accounts payable                                              410,619      178,218
     Short-term debt                                               378,316      604,712
     Current maturities of long-term debt                           19,000       47,620
     Accrued expenses:
       Taxes                                                       103,996       72,688
       Salaries and wages                                           17,445       18,023
       Interest                                                     43,955       43,955
     Other                                                          26,685       24,259
- -------------------------------------------------------------- ------------ ------------
       Total current liabilities                                 1,000,016      989,475
- -------------------------------------------------------------- ------------ ------------
  Deferred income taxes                                            608,185      636,735
- -------------------------------------------------------------- ------------ ------------
  Other deferred credits                                           132,869      131,522
- -------------------------------------------------------------- ------------ ------------
  Commitments and contingencies                                         --           --
- -------------------------------------------------------------- ------------ ------------
  Total capitalization and liabilities                          $5,556,669   $5,145,606
============================================================== ============ ============

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



Consolidated Statements of
         CAPITALIZATION
  (DOLLARS IN THOUSANDS)
  AT DECEMBER 31                                                             2000        1999
- ---------------------------------------------------------------------- ----------- -----------
  Common equity:
    Common stock ($10 stated value) - 150,000,000 shares
      Authorized, 85,903,791, and 84,922,405 shares outstanding          $859,038    $849,224
    Additional paid-in capital                                            470,179     454,982
    Earnings reinvested in the business                                    92,673      66,019
    Accumulated other comprehensive income - net                            4,750       8,848
- ---------------------------------------------------------------------- ----------- -----------
       Total common equity                                              1,426,640   1,379,073
- ---------------------------------------------------------------------- ----------- -----------
  Preferred stock not subject to mandatory
    Redemption - cumulative  - $25 par value:*
    7.45% series II - 2,400,000 shares authorized and outstanding          60,000      60,000
- ---------------------------------------------------------------------- ----------- -----------
       Total preferred stock not subject to mandatory redemption           60,000      60,000
- ---------------------------------------------------------------------- ----------- -----------
  Preferred stock subject to mandatory redemption - cumulative
    $100 par value:*
      4.84% series - 150,000 shares authorized,
         14,808 shares outstanding                                          1,481       1,481
      4.70% series - 150,000 shares authorized,
         4,311 shares outstanding                                             431         431
      7.75% series - 750,000 shares authorized, 562,500 and 637,500
        shares outstanding                                                 56,250      63,750
- ---------------------------------------------------------------------- ----------- -----------
       Total preferred stock subject to mandatory redemption               58,162      65,662
- ---------------------------------------------------------------------- ----------- -----------
  Corporation obligated, mandatorily redeemable preferred
    securities of subsidiary trust holding solely junior
    subordinated debentures of the corporation                            100,000     100,000
- ---------------------------------------------------------------------- ----------- -----------
  Long-term debt:
    First mortgage bonds and senior notes                               2,028,000   1,563,000
  Pollution control revenue bonds:
      Revenue refunding 1991 series, due 2021                              50,900      50,900
      Revenue refunding 1992 series, due 2022                              87,500      87,500
      Revenue refunding 1993 series, due 2020                              23,460      23,460
  Other notes                                                                  --     105,980
  Unamortized discount - net of premium                                       (63)        (81)
  Long-term debt due within one year                                      (19,000)    (47,620)
- ---------------------------------------------------------------------- ----------- -----------
      Total long-term debt excluding current maturities                 2,170,797   1,783,139
- ---------------------------------------------------------------------- ----------- -----------
  Total capitalization                                                 $3,815,599  $3,387,874
- ---------------------------------------------------------------------- ----------- -----------

* 13,000,000 shares authorized for $25 par value preferred stock and 3,000,000 shares authorized for $100 par
value preferred stock.
The accompanying notes are an integral part of the consolidated financial statements.


Consolidated Statements of
         EARNINGS REINVESTED

  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
  FOR YEARS ENDED DECEMBER 31                       2000      1999      1998
- ----------------------------------------------- --------- --------- ---------
  Balance at beginning of year                  $ 66,019  $ 47,548  $ 46,672
  Net income                                     193,831   185,567   169,612
- ----------------------------------------------- --------- --------- ---------
       Total                                     259,850   233,115   216,284
- ----------------------------------------------- --------- --------- ---------
  Deductions:
       Dividends declared:
          Preferred stock:
            Adjustable rate series B                  --        38       272
            $1.86 per share on 7.45% series II     4,470     4,470     4,470
            $2.13 per share on 8.50% series III       --     1,700     2,550
            $4.84 per share on 4.84% series           72        72        72
            $4.70 per share on 4.70% series           20        20        20
            $8.00 per share on 8% series              --        --        25
            $7.75 per share on 7.75% series        4,505     5,086     5,667
         Common stock                            156,929   155,591   155,591
       Preferred stock redemptions                 1,181       119        69
- ----------------------------------------------- --------- --------- ---------
         Total deductions                        167,177   167,096   168,736
- ----------------------------------------------- --------- --------- ---------
  Balance at end of year                        $ 92,673  $ 66,019  $ 47,548
- ----------------------------------------------- --------- --------- ---------
  Dividends declared per common share              $1.84     $1.84     $1.84
- ----------------------------------------------- --------- --------- ---------




Consolidated Statements of
        COMPREHENSIVE INCOME
  (DOLLARS IN THOUSANDS)
  FOR YEARS ENDED DECEMBER 31                                                  2000        1999      1998
- -------------------------------------------------------------------------- ---------- ---------- ---------
  Net income                                                               $193,831    $185,567  $169,612
- -------------------------------------------------------------------------- ---------- ---------- ---------
  Other comprehensive income, net of tax:
      Unrealized holding gains (losses) on available for sale securities        (938)    12,330    (6,152)
  Reclassification adjustment for gains included in net income                (3,160)   (12,284)       --
- -------------------------------------------------------------------------- ---------- ---------- ---------
      Other comprehensive income                                              (4,098)        46    (6,152)
- -------------------------------------------------------------------------- ---------- ---------- ---------
- -------------------------------------------------------------------------- ---------- ---------- ---------
  Comprehensive income                                                     $189,733    $185,613  $163,460
- -------------------------------------------------------------------------- ---------- ---------- ---------


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


Consolidated Statements of
         CASH FLOWS
  (DOLLARS IN THOUSANDS)
  FOR YEARS ENDED DECEMBER 31                                             2000         1999       1998
- --------------------------------------------------------------------- ---------  ----------- ----------
  Operating activities:
     Net income                                                       $193,831     $185,567   $169,612
     Adjustments to reconcile net income
       to net cash provided by operating activities:
          Depreciation and amortization                                196,513      175,710    165,587
          Deferred income taxes and tax credits - net                   (7,446)      21,133     16,560
          Gain from sale of investment in Cabot common stock                 --     (18,899)        --
          Gain from sale of investment in Homeguard Security Services        --     (11,659)        --
          Gain from sale of securities                                  (6,476)          --         --
          PURPA buyout costs                                                 --     (12,000)        --
          Other (including conservation amortization)                   (7,276)      (3,708)   (14,321)
          Change in certain current assets and liabilities             (48,863)     (25,446)   (23,106)
- --------------------------------------------------------------------- ---------  ----------- ----------
            Net cash provided by operating activities                  320,283      310,698    314,332
- --------------------------------------------------------------------- ---------  ----------- ----------
  Investing activities:
     Construction expenditures - excluding equity AFUDC               (296,480)    (330,976)  (335,471)
     Energy conservation expenditures                                   (6,931)      (5,583)    (6,745)
     Proceeds from sale of investment in Cabot common stock                          37,353         --
     Proceeds from sale of investment in Cabot preferred stock          51,463           --         --
     Proceeds from sale of Homeguard Security Services                      --       13,399         --
     Proceeds from sale of Centralia plant                              37,449           --         --
     Proceeds from sale of securities                                    6,757           --         --
     Purchase of Encogen                                                    --      (55,000)        --
     Investment in InfrastruX                                          (85,506)          --         --
     Loans to CellNet Data Services                                    (20,874)     (31,075)        --
     Other                                                             (14,138)       9,001      8,844
- --------------------------------------------------------------------- ---------  ----------- ----------
            Net cash used by investing activities                     (328,260)    (362,881)  (333,372)
- --------------------------------------------------------------------- ---------  ----------- ----------
  Financing activities:
     Increase (decrease) in short-term debt - net                     (226,395)     153,807     78,367
     Dividends paid                                                   (142,886)    (160,067)  (168,667)
     Issuance of common stock                                               --        1,136         --
     Redemption of preferred stock                                      (7,503)     (42,575)    (5,454)
     Issuance of bonds                                                 510,000      250,000    200,000
     Redemption of bonds and notes                                    (150,980)    (110,370)   (81,093)
     Other                                                              (3,583)      (2,257)    13,374
- --------------------------------------------------------------------- ---------  ----------- ----------
            Net cash provided (used) by financing activities           (21,347)      89,674     36,527
- --------------------------------------------------------------------- ---------  ----------- ----------
  Increase (decrease) in cash from net income                          (29,324)      37,491     17,487
  Cash at beginning of year                                             65,707       28,216     10,729
- --------------------------------------------------------------------- ---------  ----------- ----------
  Cash at end of year                                                  $36,383      $65,707    $28,216
- --------------------------------------------------------------------- ---------  ----------- ----------

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

NOTES

To Consolidated Financial Statements

Note 1.

Summary of Significant Accounting Policies

BASIS OF PRESENTATION

On January 1, 2001, Puget Sound Energy, Inc. ("PSE") reorganized into a holding company structure. This reorganization resulted in the creation of a new holding company, Puget Energy, Inc. ("Puget Energy"). Puget Energy was incorporated in the State of Washington and all of its operations are conducted through its subsidiaries.

     Pursuant to the reorganization, Puget Energy became the owner of all PSE's outstanding common stock. Holders of PSE's existing common stock exchanged their stock on a one-for-one basis for common stock of Puget Energy. Puget Energy is a public utility holding company under the Public Utility Holding Company Act of 1935 but is exempt from regulation under such Act. In addition, to its ownership of PSE, Puget Energy also owns InfrastruX Group, Inc. (“InfrastruX”), a Washington corporation.

     The consolidated financial statements include the accounts of PSE and all its significant wholly-owned subsidiaries and, therefore, also represent the consolidated financial statements of Puget Energy and its wholly-owned subsidiaries. Significant intercompany transactions have been eliminated. Certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation with no material effect on consolidated net income, total assets or common equity.

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

UTILITY PLANT

     The costs of additions to utility plant, including renewals and betterments, are capitalized at original cost. Costs include indirect costs such as engineering, supervision, certain taxes and pension and other employee benefits, and an allowance for funds used during construction. Replacements of minor items of property are included in maintenance expense. The original cost of operating property together with removal cost, less salvage, is charged to accumulated depreciation when the property is retired and removed from service.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

     Puget Energy prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 121 (“Statement No. 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Statement No 121 establishes accounting standards for determining if long-lived assets are impaired and how losses, if any, should be recognized. Puget Energy believes that the net cash flows are sufficient to cover the carrying value of the assets.

REGULATORY ASSETS & AGREEMENTS

     Puget Energy prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("Statement No. 71"). Statement No. 71 requires Puget Energy to defer certain costs that would otherwise be charged to expense, if it is probable that future rates will permit recovery of such costs. Accounting under Statement No. 71 is appropriate as long as: rates are established by or subject to approval by independent, third-party regulators; rates are designed to recover the specific enterprise's cost-of-service; and in view of demand for service, it is reasonable to assume that rates set at levels that will recover costs can be charged to and collected from customers. In applying Statement No. 71, Puget Energy must give consideration to changes in the level of demand or competition during the cost recovery period. In accordance with Statement No. 71, Puget Energy capitalizes certain costs in accordance with regulatory authority whereby those costs will be expensed and recovered in future periods.

     Net regulatory assets and liabilities at December 31, 2000 and 1999, included the following:

  (DOLLARS IN MILLIONS)                                    2000       1999
- ------------------------------------------------------ --------- ----------
  Deferred income taxes                                  $207.4     $228.5
  PURPA electric energy supply contract buyout costs      243.1      238.7
  Investment in BEP Exchange Contract                      58.1       61.7
  Unamortized energy conservation charges                   6.3        4.6
  Storm damage costs - electric                            30.1       31.2
  Purchased gas receivable                                 96.1       33.7
  Deferred AFUDC                                           26.8       25.0
  Various other costs                                      56.2       53.4
  Deferred gains on property sales                        (17.9)     (17.1)
  Various other liabilities                               (13.0)     (19.4)
- ------------------------------------------------------ --------- ----------
  Total                                                  $693.2     $640.3
- ------------------------------------------------------ --------- ----------

     If Puget Energy, at some point in the future, determines that all or a portion of the utility operations no longer meet the criteria for continued application of Statement No. 71, Puget Energy would be required to adopt the provisions of Statement of Financial Accounting Standards No. 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71" ("Statement No. 101"). Adoption of Statement No. 101 would require Puget Energy to write off the regulatory assets and liabilities related to those operations not meeting Statement No. 71 requirements. Discontinuation of Statement No. 71 could have a material impact on Puget Energy's financial statements.

     The Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) has issued its Consensus 97-4 which addresses when an entity should discontinue the application of Statement No. 71, and how Statement No. 101 should be applied to a portion of an entity subject to a transition-to-competition plan. The EITF states that Statement No. 71 shall be discontinued at a date no later than when the details of the transition-to-competition plan for all or a portion of the entity subject to such plan are known. Additionally, the EITF reached a consensus that stranded costs which are to be recovered through cash flows derived from another portion of the entity which continues to apply Statement No. 71 should not be written off; rather, they should be considered regulatory assets of the segment which will continue to apply Statement No. 71.

     PSE, in prior years, incurred costs associated with its 5% interest in a now-terminated nuclear generating project (identified herein as “Investment in Bonneville Exchange Power” (“BEP”)). Under terms of a settlement agreement with the Bonneville Power Administration (“BPA”), which settled claims of PSE relating to construction delays associated with that project, PSE is receiving, power from the federal power system resources marketed by BPA. Approximately two-thirds of PSE's investment in BEP is included in rate base and amortized on a straight-line basis over the life of the contract (amortization is included in “Purchased and interchanged power”). The remainder of PSE's investment was recovered in rates over the ten years ended December 31, 1999, without a return during the recovery period (the related amortization is included in “Depreciation and Amortization,” pursuant to a FERC accounting order).

     PSE has regulatory assets of approximately $243 million related to the buyout of purchased power and gas sales contracts of two non-utility generation projects. Washington Commission accounting orders have approved payments pursuant to these contracts for deferral and collection in rates over the remaining life of the energy supply contracts. Under terms of the orders, PSE is allowed to accrue as an additional regulatory asset certain carrying costs of the deferred balances.

     PSE has an agreement under which ConneXt, a wholly-owned subsidiary of PSE, performs certain billing and customer information technology functions. Under an accounting order approved by the Washington Commission, PSE records payments to ConneXt as if such costs were paid to third-party providers and these costs will be reviewed in a future rate filing.

OPERATING REVENUES

     Operating utility revenues are recorded on the basis of service rendered, which includes estimated unbilled revenue. Non-utility subsidiaries recognize revenue when services are performed or upon the sale of assets.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Allowance for doubtful accounts is calculated based upon historical write-offs as compared to operating revenues. Puget Energy has also provided for a reserve on sales transactions related to the California Independent System Operator and counterparties based upon probability of collection. The allowance for doubtful accounts for 2000 and 1999 was $41.0 million and $1.5 million, respectively.

ENERGY CONSERVATION

     PSE offers programs designed to help new and existing customers use energy efficiently. The primary emphasis is to provide information and technical services to enable customers to make energy-efficient choices with respect to building design, equipment and building systems, appliance purchases and operating practices.

     Since May 1997, PSE has recovered electric energy conservation expenditures through a tariff rider mechanism. The rider mechanism allows PSE to defer the conservation expenditures and amortize them to expense as PSE concurrently collects the conservation expenditures in rates over a one-year period. As a result of the rider, there is no effect on earnings per share.

     Since 1995, PSE has been authorized by the Washington Commission to defer gas energy conservation expenditures and recover them through a tariff tracker mechanism. The tracker mechanism allows PSE to defer conservation expenditures and recover them in rates over the subsequent year. The tracker mechanism also allows PSE to recover an Allowance for Funds Used to Conserve Energy (AFUCE) on any outstanding balance that is not being recovered in rates.

SELF-INSURANCE

     PSE currently has no insurance coverage for storm damage and is self-insured for a portion of the risk associated with comprehensive liability, industrial accidents and catastrophic property losses. With approval of the Washington Commission, PSE is able to defer for collection in future rates certain uninsured storm damage costs associated with major storms.

DEPRECIATION AND AMORTIZATION

     For financial statement purposes, Puget Energy provides for depreciation on a straight-line basis. The depreciation of automobiles, trucks, power-operated equipment and tools is allocated to asset and expense accounts based on usage. The annual depreciation provision stated as a percent of average original cost of depreciable electric utility plant was 2.9% in 2000, 3.0% in 1999 and 1998; depreciable gas utility plant was 3.3%% in 2000, 3.4% in 1999 and 1998; and depreciable common utility plant was 1.9% in 2000 and 2.3% in 1999. Depreciation on other property, plant and equipment is calculated primarily on a straight-line basis over the useful lives of the assets.

GOODWILL AND INTANGIBLES

     Goodwill and intangibles are amortized on a straight-line basis over the expected periods to be benefited up to 30 years. The goodwill and intangibles are the result of InfrastruX acquiring companies during 2000. Puget Energy assesses the recoverability by determining whether the amortization of the goodwill and intangibles balance over its remaining life can be recovered through discounted future operating cash flows of the acquired operation.

FEDERAL INCOME TAXES

     Puget Energy normalizes, with the approval of the Washington Commission, certain items. Deferred taxes have been determined under Statement of Financial Accounting Standards No. 109. Investment tax credits are deferred and amortized based on the average useful life of the related property in accordance with regulatory and income tax requirements. (See Note 13).

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION

     The Allowance for Funds Used During Construction (“AFUDC”) represents the cost of both the debt and equity funds used to finance utility plant additions during the construction period. The amount of AFUDC recorded in each accounting period varies depending principally upon the level of construction work in progress and the AFUDC rate used. AFUDC is capitalized as a part of the cost of utility plant and is credited as a non-cash item to other income and interest charges currently. Cash inflow related to AFUDC does not occur until these charges are reflected in rates.

     The AFUDC rate allowed by the Washington Commission for gas utility plant additions was 9.15% in 2000, 1999 and 1998. The allowed AFUDC rate on electric utility plant was 8.94% during the same period. To the extent amounts calculated using this rate exceed the AFUDC calculated rate using the Federal Energy Regulatory Commission (“FERC”) formula, Puget Energy capitalizes the excess as a deferred asset, crediting miscellaneous income. The amounts included in income were $2.8 million for 2000, $4.3 million for 1999 and $3.4 million for 1998. The deferred asset is being amortized over the average useful life of Puget Energy's non-project utility plant.

RATE ADJUSTMENT MECHANISM

     PSE does not have an electric power cost or fuel adjustment mechanism to adjust for changes in energy and fuel costs or variances in hydro and weather conditions.

     The differences between the actual cost of PSE's gas supplies and gas transportation contracts and that currently allowed by the Washington Commission are deferred and recovered or repaid through the purchased gas adjustment (“PGA”) mechanism.

     On June 25, 1998, PSE received approval from the Washington Commission to begin a new performance-based mechanism for strengthening its gas-supply purchasing and gas-storage practices. The PGA Incentive Mechanism, which encourages competitive gas purchasing and management of pipeline and storage capacity, became effective July 1, 1998. Incentive gains and losses from the three-year program are shared between customers and shareholders. After the first $0.5 million, which is allocated to customers, gains and losses are shared 40%/60% between PSE and customers up to $26.5 million and 33%/67% thereafter. Gains or losses are determined relative to a weighted average index which is reflective of PSE's gas supply and transportation contract costs. PSE's share of incentive gains under the PGA Incentive Mechanism in 2000, 1999 and 1998 was approximately $7.5 million, $7.2 million and $1.1 million, respectively, while customers received approximately $11.7 million, $11.3 million and $2.0 million in benefits, respectively.

OFF-SYSTEM SALES AND CAPACITY RELEASE

     PSE sells excess gas supplies, enters into gas supply exchanges with third parties outside of its distribution area and releases to third parties excess interstate gas pipeline capacity and gas storage rights on a short-term basis. PSE contracts for firm gas supplies and holds firm transportation and storage capacity sufficient to meet the expected peak winter demand for gas for space heating by its firm customers. Due to the variability in weather and other factors, however, PSE holds contractual rights to gas supplies and transportation and storage capacity in excess of its immediate requirements to serve firm customers on its distribution system for much of the year which, therefore, are available for third-party gas sales, exchanges and capacity releases. The proceeds, net of transactional costs, from such activities are accounted for as reductions in the cost of purchased gas and passed on to customers through the PGA mechanism, with no direct impact on net income. As a result, PSE does not reflect sales revenue or associated cost of sales for these transactions in its income statement.

ENERGY RISK MANAGEMENT

     PSE's energy related businesses are exposed to risks related to changes in commodity prices. As part of its business, PSE markets power to wholesale customers by entering into contracts to purchase or supply electric energy or natural gas at specified delivery points and at specified future delivery dates. PSE's energy risk management function manages PSE's core electric and gas supply portfolios.

     PSE manages its energy supply portfolio to achieve three primary objectives:

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

     (ii) Manage portfolio risks to limit undesired impacts on PSE financial results; and

     (iii) Optimize the value of PSE's energy supply assets.

     PSE enters into physical and financial instruments for the purpose of hedging commodity price risk. Gains or losses on these derivatives are generally deferred and recognized upon settlement along with the underlying sales or purchase contract. PSE has established policies and procedures to manage these risks. A Risk Management Committee separate from the units that create these risks monitors compliance with PSE's policies and procedures. In addition, the Audit Committee of PSE's Board of Directors has oversight of the Risk Management Committee.

     Currently, PSE accounts for these activities pursuant to EITF Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities. The conclusion reached by the EITF was that such contracts should be recorded at fair value when entered into for trading purposes with the mark-to-market gains or losses recorded in current earnings. PSE does not consider its current operations to meet the definition of trading activities as described by EITF 98-10. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as qualifying cash flow hedge under the statement. Puget Energy will recognize the cumulative effect of this change in accounting principle by recording an after-tax decrease to current earnings of approximately $14.7 million for electric derivative transactions. In addition, Puget Energy will record a deferred asset for electric energy contracts designated as a qualifying cash flow hedges of approximately $286.9 million at the adoption with a corresponding increase of approximately $286.9 million in other comprehensive income.

OTHER

     Debt premium, discount and expenses are amortized over the life of the related debt. The premiums and costs associated with reacquired debt are being amortized over the life of the related new issuances, in accordance with ratemaking treatment.

EARNINGS PER COMMON SHARE

     Basic earnings per common share have been computed based on weighted average common shares outstanding of 85,411,000, 84,613,000 and 84,561,000 for 2000, 1999 and 1998, respectively. Diluted earnings per common share have been computed based on weighted average common shares outstanding of 85,690,000, 84,847,000 and 84,768,000 for 2000, 1999 and 1998, respectively, which include the dilutive effect of securities related to employee stock-based compensation plans.

Note 2.

Utility Plant

     Utility plant at December 31, 2000 and 1999 included the following:

  (DOLLARS IN THOUSANDS)
  DECEMBER 31                                                       2000           1999
- ---------------------------------------------------------- -------------- --------------
  Electric, gas and common utility plant classified by
       prescribed accounts at original cost:
    Distribution plant                                        $3,177,277     $2,970,643
    Production plant                                           1,097,953      1,116,351
    Transmission plant                                           694,053        666,318
    General plant                                                375,457        383,075
    Construction work in progress                                164,221        311,317
    Plant acquisition adjustment                                  76,623         72,495
    Intangible plant (including capitalized software)            243,904        103,276
    Underground storage                                           22,570         14,801
    Plant held for future use                                      8,225          9,755
    Other                                                          4,807          4,548
    Less accumulated provision for depreciation                2,026,681      1,901,658
- ---------------------------------------------------------- -------------- --------------
       Net utility plant                                      $3,838,409     $3,750,921
- ---------------------------------------------------------- -------------- --------------

     In April 2000, PSE placed its new customer information system software in service for a total of $147 million. The cost of the ConsumerLinX software is being amortized over 10 years.

     On March 6, 2000, the Washington Commission authorized PSE to sell its 7% ownership interest in the coal-fired Centralia Electric Generating plant located in southwest Washington State. On May 4, 2000, the plant was sold to TECWA Power, Inc. Of the resulting pre-tax gain, $21 million was allocated to customers and $2.5 million to PSE in accordance with the order.

     On November 1, 1999, PSE purchased a 160-megawatt natural gas-fired cogeneration plant from Encogen Northwest L.P. for $164 million. Pursuant to an October 27, 1999 order from the Washington Commission approving the purchase, PSE will depreciate the original owner's net book value of the plant over the remaining 23 year useful life of the project. The difference between the purchase price and the net book value of the plant (approximately $76.6 million) has been recorded as plant acquisition adjustment and is being amortized over nine years.

Note 3.

Capital Stock

                                                                    PREFERRED STOCK                  COMMON STOCK
                                                    ---------------------------------------------- ---------------------
                                                         NOT SUBJECT TO          SUBJECT TO
                                                      MANDATORY REDEMPTION       MANDATORY
                                                                                 REDEMPTION        WITHOUT PAR VALUE
                                                         $25 PAR VALUE         $100 PAR VALUE      ($10 STATED VALUE)
- --------------------------------------------------- ----------------------- ------------------- ------------------------
  SHARES OUTSTANDING JANUARY 1, 1998                             3,819,506             781,343               84,560,645
- --------------------------------------------------- ----------------------- ------------------- ------------------------
  Issued to shareholders under the Stock Purchase
  and Dividend Reinvestment Plan:
       1999                                                             --                  --                  361,944
       2000                                                             --                  --                  981,549
- --------------------------------------------------- ----------------------- ------------------- ------------------------
  Acquired for sinking fund:
       1998                                                             --             (49,500)                      --
       1999                                                             --             (75,000)                      --
       2000                                                             --             (75,000)                      --
- --------------------------------------------------- ----------------------- -------------------- -----------------------
  Called for redemption or reacquired and
  canceled:
       1998                                                        (16,500)               (224)                      --
       1999                                                     (1,403,006)                  --                      --
- --------------------------------------------------- ----------------------- ------------------- ------------------------
  Fractional share redemptions in connection with
  merger exchange:
       1998                                                             --                  --                      (84)
       1999                                                             --                  --                     (100)
       2000                                                             --                  --                     (163)
- --------------------------------------------------- ----------------------- ------------------- ------------------------
  Shares outstanding December 31, 2000                           2,400,000             581,619               85,903,791
- --------------------------------------------------- ----------------------- ------------------- ------------------------

See “Consolidated Statements of Capitalization” for details on specific series.

     On October 23, 2000, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding common share of Puget Energy. The dividend was paid on December 29, 2000 to shareholders of record on that date. The Rights will become exercisable only if a person or group acquires 10% or more of the Puget Energy's outstanding common stock or announces a tender offer which, if consummated, would result in ownership by a person or group of 10% or more of the outstanding common stock. Each right will entitle the holder to purchase from Puget Energy one one-hundredth of a share of preferred stock with economic terms similar to that of one share of the Puget Energy's common stock at a purchase price of $65, subject to adjustments. The Rights expire on December 21, 2010, unless earlier redeemed or exchanged by Puget Energy.

     The weighted average dividend rate for the Adjustable Rate Cumulative Preferred Stock (“ARPS”), Series B ($25 par value) was 4.23% for 1999 and 4.83% for 1998. PSE reacquired 16,500 shares of ARPS Series B through open-market purchases during 1998 and redeemed the remaining ARPS on February 2, 1999 at $25 par plus accrued dividends through February 2, 1999. The 8.50% Series Preferred was redeemed at par plus accrued dividends on September 1, 1999. The 7.45% Series Preferred may be redeemed at par on or after November 1, 2003.

Note 4.

Preferred Stock Subject to Mandatory Redemption

     PSE is required to deposit funds annually in a sinking fund sufficient to redeem the following number of shares of each series of preferred stock at $100 per share plus accrued dividends: 4.70% Series and 4.84% Series, 3,000 shares each and 7.75% Series, 37,500 shares. All previous sinking fund requirements have been satisfied. At December 31, 2000, there were 46,689 shares of the 4.70% Series and 30,192 shares of the 4.84% Series acquired by PSE and available for future sinking fund requirements. Upon involuntary liquidation, all preferred shares are entitled to their par value plus accrued dividends.

     The preferred stock subject to mandatory redemption may also be redeemed by PSE at the following redemption prices per share plus accrued dividends: 4.70% Series, $101 and 4.84% Series, $102. The 7.75% Series may be redeemed by PSE, subject to certain restrictions, at $103.62 per share plus accrued dividends through February 15, 2001, and at per share amounts which decline annually to a price of $100 after February 15, 2007.

Note 5.

Company-Obligated, Mandatorily Redeemable Preferred Securities

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

     The Debentures have an interest rate of 8.231% and a stated maturity date of June 1, 2027. The Trust Securities are subject to mandatory redemption at par on the stated maturity date of the Debentures. The Trust Securities may be redeemed earlier, under certain conditions, at the option of PSE. Dividends relating to preferred securities are included in interest expense.

Note 6.

Additional Paid-in Capital

     The changes in Additional Paid-in Capital are as follows:

  (DOLLARS IN THOUSANDS)                           2000       1999       1998
- -------------------------------------------- ----------- ---------- ----------
  Balance at beginning of year                 $454,982   $450,724   $450,845
  Excess of proceeds over stated values of
   common stock issued                           13,295      4,198         --
  Retained earnings adjustment for
   preferred redemption                           1,181        150         --
  Issue costs and other expenses                   (309)       (90)      (121)
  Issuance of preferred stock of subsidiary       1,030         --         --
- -------------------------------------------- ----------- ---------- ----------
  Balance at end of year                       $470,179   $454,982   $450,724
- -------------------------------------------- ----------- ---------- ----------

Note 7.

Earnings Reinvested in the Business

     The payment of dividends on common stock is restricted by provisions of certain covenants applicable to preferred stock and long-term debt contained in PSE's Articles of Incorporation and Mortgage Indentures. Under the most restrictive covenants, earnings reinvested in the business unrestricted as to payment of cash dividends were approximately $228 million at December 31, 2000.

Note 8.

Long-Term Debt

   FIRST MORTGAGE BONDS AND SENIOR NOTES

   AT DECEMBER 31 (DOLLARS IN THOUSANDS)

  SERIES               DUE                  2000                 1999
  6.61%               2000                    --             $ 10,000
  9.60%               2000                    --               25,000
  8.51 8.55%          2001                19,000               19,000
  7.53 7.91%          2002                30,000               30,000
  7.85%               2002                30,000               30,000
  7.07%               2002                27,000               27,000
  7.15%               2002                 5,000                5,000
  7.625%              2002                25,000               25,000
  6.23 - 6.31%        2003                28,000               28,000
  7.02%               2003                30,000               30,000
  6.20%               2003                 3,000                3,000
  6.40%               2003                11,000               11,000
  6.07 & 6.10%        2004                18,500               18,500
  7.70%               2004                50,000               50,000
  7.80%               2004                30,000               30,000
  6.92 & 6.93%        2005                31,000               31,000
  6.58%               2006                10,000               10,000
  8.06%               2006                46,000               46,000
  8.14%               2006                25,000               25,000
  7.02 & 7.04%        2007                25,000               25,000
  7.75%               2007               100,000              100,000
  8.40%               2007                10,000               10,000
  6.51 & 6.53%        2008                 4,500                4,500
  7.61%               2008                25,000                   --
  6.61 & 6.62%        2009                 8,000                8,000
  6.46%               2009               150,000              150,000
  7.12%               2010                 7,000                7,000
  7.96%               2010               225,000                   --
  7.69%               2011               260,000                   --
  8.59%               2012                 5,000                5,000
  8.20%               2012                30,000               30,000
  6.83% & 6.90%       2013                13,000               13,000
  7.35 & 7.36%        2015                12,000               12,000
  6.74%               2018               200,000              200,000
  9.57%               2020                25,000               25,000
  8.25 - 8.40%        2022                35,000               35,000
  7.19%               2023                 3,000               13,000
  7.35%               2024                55,000               55,000
  7.15 & 7.20%        2025                17,000               17,000
  7.02%               2027               300,000              300,000
  7.00%               2029               100,000              100,000
- --------------------------- --------------------- --------------------
  Total                               $2,028,000           $1,563,000
- --------------------------- --------------------- --------------------

     In September 1998, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of Senior Notes secured by a pledge of First Mortgage Bonds. On March 9, 1999, PSE issued $250 million principal amount of Senior Medium-Term Notes, Series B, which consisted of $150 million principal amount due March 9, 2009, at an interest rate of 6.46% and $100 million principal amount due March 9, 2029, at an interest rate of 7.0%. On February 22, 2000, PSE issued $225 million principal amount of 7.96% Senior Medium-Term Notes, Series B due February 22, 2010. On September 8, 2000, PSE issued the remaining $25 million principal amount of Senior Notes from the shelf registration. The 7.61% Senior Medium-Term Notes, Series B are due September 8, 2008.

     In October 2000, PSE filed a shelf-registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of Senior Notes secured by a pledge of First Mortgage Bonds, Subordinated Debentures or Trust Preferred Securities. On November 9, 2000, PSE issued $260 million principal amount of 7.69% Senior Medium-Term Notes, Series C. The Notes are due February 1, 2011.

     Substantially all utility properties owned by PSE are subject to the lien of PSE's electric and gas mortgage indentures.

POLLUTION CONTROL BONDS

     PSE has outstanding three series of Pollution Control Bonds. Amounts outstanding were borrowed from the City of Forsyth, Montana (“the City”). The City obtained the funds from the sale of Customized Pollution Control Refunding Bonds issued to finance pollution control facilities at Colstrip Units 3 and 4.

     Each series of bonds is collateralized by a pledge of PSE's First Mortgage Bonds, the terms of which match those of the Pollution Control Bonds. No payment is due with respect to the related series of First Mortgage Bonds so long as payment is made on the Pollution Control Bonds. Interest rates for the 1992 and 1993 series are 6.80% and 5.875%, respectively. The 1991 series consists of $27.5 million principal amount bearing interest at 7.05% and $23.4 million principal amount bearing interest at 7.25%.

PROJECT DEBT

     On November 1, 1999, PSE assumed approximately $109 million of project debt under the agreement to purchase the 160-megawatt natural gas-fired cogeneration plant from Encogen Northwest L.P. Interest rates on the project debt ranged from 8.64% to 13.03%. In February 2000, PSE used a portion of the proceeds from the issuance of $225 million principal amount of Senior Medium-Term notes to pay off the project debt. At December 31, 1999, the project debt was included in Other notes.

LONG-TERM DEBT MATURITIES

     The principal amounts of long-term debt maturities for the next five years are as follows:

  (DOLLARS IN THOUSANDS)      2001        2002        2003       2004      2005
- -------------------------------------------------------------------------------
  Maturities of:
    Long-term debt        $ 19,000    $117,000    $ 72,000   $ 98,500   $31,000

Note 9

Short-Term Debt and Other Financing Arrangements

     At December 31, 2000, PSE had short-term borrowing arrangements which included a $375 million line of credit with thirteen banks which expires on February 13, 2003. The agreement provides PSE with the ability to borrow at different interest rate options and includes variable fee levels. The options are: (1) the higher of the prime rate or the Federal Funds rate plus .50% or (2) the Eurodollar rate plus .25%. The current availability fee is .08% per annum on the unused loan commitment.

     In addition, PSE has agreements with several banks to borrow on an uncommitted, as available basis at money-market rates quoted by the banks. There are no costs, other than interest, for these arrangements. PSE also uses commercial paper to fund its short-term borrowing requirements.

  (DOLLARS IN THOUSANDS)

AT DECEMBER 31                              2000        1999       1998
- --------------------------------------  ----------    --------   --------
  Short-term borrowings outstanding:
    Commercial paper notes                $204,019    $105,712   $142,105
    Bank line of credit borrowing           $2,377          --    $25,000
    Uncommitted bank borrowings           $171,750    $499,000   $283,800
    Notes Payable                             $170          --         --
    Weighted average interest rate           7.33%       6.59%      5.90%
    Revolving Credit Facility1             $12,000          --         --
    Credit availability2                  $375,000    $375,000   $375,000

     PSE has, on occasion, entered into interest rate swap agreements to reduce the impact of changes in interest rates on portions of its floating-rate debt.

Note 10.

Estimated Fair Value of Financial Instruments

     The following table presents the carrying amounts and estimated fair values of PSE's financial instruments at December 31, 2000 and 1999:

                                              2000           2000     1999           1999
                                              CARRYING       FAIR     CARRYING       FAIR
  (DOLLARS IN MILLIONS)                       AMOUNT         VALUE    AMOUNT        VALUE
- -----------------------------------------------------------------------------------------
  Financial assets:
    Cash                                        $ 36.4      $ 36.4     $ 65.7      $ 65.7
    Cabot preferred stock                           --          --     $ 51.6      $ 51.6
    Equity securities3                          $  7.5      $  7.5     $ 13.7      $ 13.7
    Notes receivable                            $ 53.3      $ 53.3     $ 31.1      $ 31.1
  Financial liabilities:
    Short-term debt                             $377.2      $377.2     $604.7      $604.7
    Preferred stock subject to
      Mandatory redemption                       $58.2      $ 58.5     $ 65.7      $ 65.2
    Corporation obligated, mandatorily
       Redeemable preferred securities of
       Subsidiary trust holding solely
       junior subordinated debentures of
       the corporation                          $100.0     $ 102.4     $100.0      $ 91.8
    Long-term debt                            $2,189.9    $2,183.0   $1,724.8    $1,618.3
    Project debt                                    --          --     $106.0      $109.4
  Unrecognized financial instruments:
    Interest rate swaps                             --          --         --      $ (0.6)
- -------------------------------------------------------------------------------------------

¹ The revolving credit facility requires Utilx to maintain certain financial services covenants, including requirements to maintain certain levels of net worth and debt coverage. The agreement also places certain restrictions on expenditures, other indebtedness and executive compensation.

² Provides liquidity support for PSE's outstanding commercial paper and borrowing from credit line banks in the amount of $204.0 million, $105.7 million and $167.1 million for 2000, 1999 and 1998 respectively, effectively reducing the available borrowing capacity under these credit lines to $171.0 million, $269.3 million and $207.9 million, respectively.

³ 2000 carrying amount includes an adjustment of $7.3 million to report the available-for-sale securities at market value. This amount has been included as a component of other comprehensive income net of deferred taxes of $2.6 million.

     The fair value of outstanding bonds including current maturities is estimated based on quoted market prices.

     The preferred stock subject to mandatory redemption and corporation obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the corporation is estimated based on dealer quotes.

     The carrying value of short-term debt is considered to be a reasonable estimate of fair value. The carrying amount of cash, which includes temporary investments with original maturities of three months or less, is also considered to be a reasonable estimate of fair value.

     The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that PSE would receive or pay to terminate each swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of all the parties to each swap.

     Derivative instruments have been used by PSE on a limited basis. PSE has a policy that financial derivatives are to be used only to mitigate business risk and not for speculative purposes.

Note 11.

Supplementary Income Statement Information

  (DOLLARS IN THOUSANDS)                       2000          1999          1998
- ---------------------------------------- ----------- ------------- -------------
  Taxes:
    Real estate and personal property      $ 47,357      $ 48,036      $ 40,422
    State business                           83,485        70,047        62,855
    Municipal, occupational and other        65,155        52,739        48,090
    Other                                    30,905        19,445        20,010
- ---------------------------------------- ----------- ------------- -------------
  Total taxes                              $226,902      $190,267      $171,377
- ---------------------------------------- ----------- ------------- -------------
  Charged to:
    Operating expense                      $203,230      $180,141      $160,472
    Other accounts, including
      construction work in progress          23,672        10,126        10,905
- ---------------------------------------- ----------- ------------- -------------
  Total taxes                              $226,902      $190,267      $171,377
- ---------------------------------------- ----------- ------------- -------------
       See "Consolidated Statements of Income" for maintenance and depreciation expense.

     Advertising, research and development expenses and amortization of intangibles are not significant. PSE pays no royalties.

Note 12.

Leases

     PSE treats all leases as operating leases for ratemaking purposes as required by the Washington Commission. Certain leases contain purchase options, renewal and escalation provisions. Capitalized leases are not material.

     Rental and operating lease expense for the years ended December 31, 2000, 1999 and 1998, were approximately $18.2 million, $16.9 million and $16.5 million, respectively. Payments received, for the sublease of properties were approximately $2.4 million, $2.3 million, and $1.2 million for the years ended December 31, 2000, 1999 and 1998, respectively.

     Future minimum lease payments for noncancelable leases are approximately $21.0 million for 2001, $17.2 million for 2002, $14.9 million for 2003, $8.7 million for 2004, $3.4 million for 2005 and in the aggregate, $6.7million thereafter. Future minimum sublease receipts for noncancelable subleases are $2.0 million for 2001, $2.0 million for 2002, and $2.0 million for 2003.

Note 13.

Federal Income Taxes

     The details of federal income taxes (“FIT”) are as follows:

  (DOLLARS IN THOUSANDS)                              2000          1999         1998
- ---------------------------------------------- ------------ ------------- ------------
  Charged to operating expense:
  Current                                         $128,138       $93,354      $88,606
  Deferred - net                                     1,557        15,373       17,948
  Deferred investment tax credits                      (704)        (725)        (740)
- ---------------------------------------------- ------------ ------------- ------------
  Total FIT charged to operations                  128,991       108,002      105,814
- ---------------------------------------------- ------------ ------------- ------------
  Charged to miscellaneous income:
  Current                                             7,843          (503)      4,634
  Deferred - net                                    (10,150)        4,574        (648)
- ---------------------------------------------- -------------- ----------- ------------
  Total FIT charged to miscellaneous income          (2,307)       4,071        3,986
- ---------------------------------------------- -------------- ----------- ------------
  Total FIT                                       $126,684      $112,073     $109,800
- ---------------------------------------------- ------------ ------------- ------------

     The following is a reconciliation of the difference between the amount of FIT computed by multiplying pre-tax book income by the statutory tax rate, and the amount of FIT in the Consolidated Statements of Income:

  (DOLLARS IN THOUSANDS)                                2000        1999       1998
- -------------------------------------------------- ---------- ----------- ----------
  FIT at the statutory rate                         $112,180    $104,174    $97,794
- -------------------------------------------------- ---------- ----------- ----------
  Increase (decrease):
    Depreciation expense deducted in the
      Financial statements in excess of tax
      Depreciation, net of depreciation
      Treated as a temporary difference               10,807       8,678      7,756
    AFUDC included in income in the financial
      Statements but excluded from taxable income     (3,274)     (4,345)    (3,953)
    Accelerated benefit on early retirement
      of depreciable assets                             (834)       (812)    (1,241)
    Investment tax credit amortization                  (704)       (725)      (740)
    Energy conservation expenditures - net            10,634      13,434     12,754
    Other - net                                       (2,125)     (8,331)    (2,570)
- -------------------------------------------------- ---------- ----------- ----------
  Total FIT                                         $126,684    $112,073   $109,800
- -------------------------------------------------- ---------- ----------- ----------
  Effective tax rate                                   39.5%       37.7%      39.3%
- -------------------------------------------------- ---------- ----------- ----------

     The following are the principal components of FIT as reported:

  (DOLLARS IN THOUSANDS)                                 2000       1999       1998
- --------------------------------------------------- ---------- ---------- ----------
  Current FIT                                        $135,981    $92,851    $93,240
- --------------------------------------------------- ---------- ---------- ----------
  Deferred FIT - other:
    Conservation tax settlement                         1,776      2,927      3,257
    Periodic rate adjustment mechanism (PRAM)              --         --        107
    Cabot preferred stock sale                        (10,635)        --         --
    Deferred taxes related to insurance reserves         (384)    (1,225)    (1,224)
    Reversal of Statement No. 90 present
      value adjustments                                    --         92        255
    Residential Purchase and Sale Agreement - net       2,226         --      3,441
    Normalized tax benefits of the
      accelerated cost recovery system                 10,931     14,452     20,118
    Energy conservation program                        (1,666)      (983)    (2,437)
    Environmental remediation                              721       947     (2,946)
    WNP 3 tax settlement                               (1,126)      (826)      (826)
    Merger costs                                           --        409         42
    Demand charges                                        (79)        14      3,273
    Allowance for doubtful accounts                   (13,821)        --         --
    Other                                               3,464      4,140     (5,760)
- --------------------------------------------------- ---------- ---------- ----------
  Total deferred FIT - other                           (8,593)    19,947     17,300
- --------------------------------------------------- ---------- ---------- ----------
  Deferred investment tax credits -
    net of amortization                                  (704)      (725)      (740)
- --------------------------------------------------- ---------- ---------- ----------
  Total FIT                                          $126,684   $112,073   $109,800
- --------------------------------------------------- ---------- ---------- ----------

     Deferred tax amounts shown above result from temporary differences for tax and financial statement purposes. Deferred tax provisions are not recorded in the income statement for certain temporary differences between tax and financial statement purposes because they are not allowed for ratemaking purposes.

     PSE calculates its deferred tax assets and liabilities under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“Statement No. 109”). Statement No. 109 requires recording deferred tax balances, at the currently enacted tax rate, for all temporary differences between the book and tax bases of assets and liabilities, including temporary differences for which no deferred taxes had been previously provided because of use of flow-through tax accounting for ratemaking purposes. Because of prior and expected future ratemaking treatment for temporary differences for which flow-through tax accounting has been utilized, a regulatory asset for income taxes recoverable through future rates related to those differences has also been established. At December 31, 2000, the balance of this asset is $207.4 million.

     The deferred tax liability at December 31, 2000 and 1999 is comprised of amounts related to the following types of temporary differences:

  (DOLLARS IN THOUSANDS)                          2000          1999
- ---------------------------------------- -------------- -------------
  Utility plant                               $571,772      $574,064
  Investment in Cabot stock                         --        10,635
  Energy conservation charges                   31,212        41,833
  Contributions in aid of construction         (37,275)       (33,927)
  Bonneville Exchange Power                     20,258        22,618
  Cabot Gas Contract Purchase                    4,533         4,200
  Other                                         17,685        17,312
- ---------------------------------------- -------------- -------------
  Total                                       $608,185      $636,735
- ---------------------------------------- -------------- -------------

     The totals of $608.2 million and $636.7 million for 2000 and 1999 consist of deferred tax liabilities of $706.8 million and $719.7 million net of deferred tax assets of $98.6 million and $83.0 million, respectively.

Note 14.

Retirement Benefits

     Puget Energy has a defined benefit pension plan covering substantially all of its employees. Benefits are a function of both age and salary. Additionally, Puget Energy maintains a non-qualified supplemental retirement plan for officers and certain director-level employees.

     In addition to providing pension benefits, Puget Energy provides certain health care and life insurance benefits for retired employees. These benefits are provided principally through an insurance company whose premiums are based on the benefits paid during the year.

                                                           PENSION BENEFITS         OTHER BENEFITS
       (DOLLARS IN THOUSANDS)                              2000         1999        2000         1999
       -----------------------------------------------------------------------------------------------
       Change in benefit obligation:
       Benefit obligation at beginning of year         $349,160     $352,422     $26,003      $29,438
       Service cost                                       9,005        9,259         224          245
       Interest cost                                     25,500       24,181       1,965        1,868
       Amendments                                            77          500          --           --
       Actuarial (gain)/loss                              4,058      (14,548)      1,187      (3,600)
       Benefits paid                                    (21,318)     (22,654)     (1,811)      (1,948)
       -----------------------------------------------------------------------------------------------
       Benefit obligation at end of year               $366,482     $349,160     $27,568      $26,003
       -----------------------------------------------------------------------------------------------
       Change in plan assets:
       Fair value of plan assets at beginning of year  $524,827     $464,195     $14,738      $14,132
       Actual return on plan assets                      (8,151)      82,300         910          740
       Employer contribution                              1,110          986       1,824        1,814
       Benefits paid                                    (21,318)     (22,654)     (1,811)      (1,948)
       -----------------------------------------------------------------------------------------------
       Fair value of plan assets at end of year        $496,468     $524,827     $15,661      $14,738
       -----------------------------------------------------------------------------------------------


(continued)
                                                               PENSION BENEFITS              OTHER BENEFITS
       (DOLLARS IN THOUSANDS)                                  2000         1999             2000          1999
- ----------------------------------------------------------------------------------------------------------------
       Funded status                                       $129,986     $175,667          $(11,907)    $(11,265)
       Unrecognized actuarial gain                         (128,268)    (189,609)           (3,506)      (4,870)
       Unrecognized prior service cost                       19,333       22,218              (395)        (429)
       Unrecognized net initial (asset)/obligation           (5,103)      (6,333)           7,521         8,148
- ---------------------------------------------------------------------------------    ----------------------------
       Net amount recognized                                 $15,948      $1,943           $(8,287)     $(8,416)
- ---------------------------------------------------------------------------------    ----------------------------
       Amounts recognized on statement of
         financial position consist of:
       Prepaid benefit cost                                 $34,326      $17,698           $(8,287)     $(8,416)
       Accrued benefit liability                            (25,861)     (23,670)              --            --
       Intangible asset                                       7,483        7,915               --            --
- ---------------------------------------------------------------------------------    ----------------------------
       Net amount recognized                                $15,948       $1,943           $(8,287)     $(8,416)
- ---------------------------------------------------------------------------------    ----------------------------

     In accounting for pension and other benefits costs under the plans, the following weighted average actuarial assumptions were used:

                                                   PENSION BENEFITS                       OTHER BENEFITS
                                                2000       1999        1998           2000         1999         1998
 --------------------------------------- ------------ ---------- -----------      --------- ------------ ------------
  Discount rate                                 7.5%       7.5%        7.0%           7.5%         7.5%         7.0%
  Return on plan assets                        9.75%      9.75%       9.75%         6-8.5%       6-8.5%       6-8.5%
  Rate of compensation increase                 5.0%       5.0%        5.0%             --           --           --
  Medical trend rate                              --         --          --           7.0%         7.0%         7.5%
- ---------------------------------------- ------------ ---------- -----------      --------- ------------ ------------

                                                   PENSION BENEFITS                       OTHER BENEFITS
  (DOLLARS IN THOUSANDS)                        2000        1999       1998           2000         1999         1998
  -------------------------------------- ------------ ----------- ----------      --------- ------------ ------------
  Components  Net Periodic Benefit Cost:
  Service cost                                $9,005      $9,259     $8,550           $224         $245         $229
  Interest cost                               25,500      24,180     22,862          1,965        1,868        1,985
  Expected return on plan assets             (42,280)    (37,310)   (33,744)          (892)        (857)        (867)
  Amortization of prior service cost           2,884       3,330      3,330            (34)         (34)         (34)
  Recognized net actuarial gain               (6,851)     (3,117)    (3,180)          (195)        (145)         (97)
  Amortization of transition                  (1,230)     (1,230)    (1,230)           627          627          627
  (asset)/obligation
  Special recognition of prior service costs      77         462         --             --           --           --
 ---------------------------------------- ------------- ------------ --------- --- --------- ------------ ------------
  Net pension benefit cost                   (12,895)      (4,426)   (3,412)         1,695        1,704        1,843
  Regulatory adjustment                           --         932      1,263             --           --           --
- ---------------------------------------- ------------- ------------ ---------     --------- ------------ ------------
  Net periodic benefit cost                 $(12,895)     $(3,494)  $(2,149)        $1,695       $1,704       $1,843
- ---------------------------------------- ------------- ------------ ---------     --------- ------------ ------------

     The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $32.2 million, $25.9 million, and $0, respectively, as of December 31, 2000.

     The assumed medical inflation rate is 7.0% in 2000 decreasing to 6.0% in 2003. A 1% change in the assumed medical inflation rate would have the following effects:

                                                           2000                 1999
                                                     1%           1%       1%          1%
  (DOLLARS IN THOUSANDS)                          INCREASE     DECREASE   INCREASE  DECREASE
- -------------------------------------------------------------------------------------------------
  Effect on service and interest cost components     $661      $(583)       $596     $(579)
  Effect on postretirement benefit obligation        $ 49      $ (42)       $ 40     $ (39)

Note 15.

Employee Investment Plan and Employee Stock Purchase Plan

     Puget Energy has qualified Employee Investment Plans under which employee salary deferrals and after-tax contributions are used to purchase several different investment fund options.

     Puget Energy contributions to the Employee Investment Plan were $7.2 million, $7.1 million, and $6.5 million for the years 2000, 1999 and 1998, respectively. The shareholders have authorized the issuance of up to 2,000,000 shares of common stock under the PSE plan, of which 959,142 were issued through December 31, 2000. The Employee Investment Plan eligibility requirements are set forth in the plan documents.

     Puget Energy also has an Employee Stock Purchase Plan which was approved by shareholders on May 19, 1997, and commenced July 1, 1997, under which options are granted to eligible employees who elect to participate in the plan on January 1st and July 1st of each year. Participants are allowed to exercise those options six months later to the extent of payroll deductions or cash payments accumulated during that six-month period. The option price under the plan during 2000 was 85% of either the fair market value of the common stock at the grant date or the fair market value at the exercise date, whichever is less. Puget Energy contributions to the Plan were $301,610, $88,900 and $98,200 for 2000, 1999 and 1998, respectively.

     On February 1, 1998, Puget Energy granted 50 performance shares to 2,800 eligible employees in recognition of their efforts to implement Puget Energy's strategies. On February 1, 2000, those performance shares and dividend equivalents were converted to common stock. Total cost of the performance share grant program was $4.1 million, which was recognized as an accounting expense over the two-year vesting period.

Note 16.

Other Investments

     In May 1994, PSE merged its oil and gas exploration and production subsidiary, Washington Energy Resources Company (“Resources”), with a wholly-owned subsidiary of Cabot Oil and Gas Corporation (“Cabot”) in a tax-free exchange in which PSE received common and preferred stock of Cabot. The investment in Cabot stock was classified as available-for-sale. In May 1999, PSE sold the 2,133,000 shares of Cabot common stock and recorded an after-tax gain of $12.3 million. At the time of the common stock sale, the fair value of the stock was $37.4 million and an unrealized gain of $12.3 million, net of tax, was included as a component of other comprehensive income. The $12.3 million unrealized gain on the sale was reclassified out of accumulated other comprehensive income at the time of the sale. In May 2000, PSE sold all of its 1,134,000 shares of 6% convertible redeemable preferred stock in Cabot for $51.4 million, after expenses. The sale resulted in approximately $40.8 million in after-tax cash proceeds. There was no significant gain or loss on the transaction. As a result of these two transactions, PSE no longer holds any securities of Cabot.

     In March 1998, PSE entered into an agreement with CellNet Data Services Inc. (“CellNet”) under which PSE would lend CellNet up to $35 million in the form of multiple draws so that CellNet can finance an Automated Meter Reading (“AMR”) network system to be deployed in PSE's service territory. In September 1999, PSE announced it was expanding its AMR network system from 800,000 meters to 1,325,000 meters and as a result increased the authorized loan amount to $72 million. On June 30, 1999, PSE made the first loan under the loan agreement and as of December 31, 1999 and 2000, there were loans outstanding of $31.1 million and $51.9 million, respectively. During 2000, Schlumberger completed the acquisition of CellNet which was approved by the bankruptcy court.

Note 17.

Commitments and Contingencies

COMMITMENTS – ELECTRIC

     For the twelve months ended December 31, 2000, approximately 17.2% of PSE's energy output was obtained at an average cost of approximately 11.4 mills per KWH through long-term contracts with several of the Washington public utility districts (“PUDs”) owning hydro-electric projects on the Columbia River.

     The purchase of power from the Columbia River projects is generally on a “cost-of-service” basis under which PSE pays a proportionate share of the annual cost of each project in direct proportion to the amount of power annually purchased by PSE from such project. Such payments are not contingent upon the projects being operable. These projects are financed through substantially level debt service payments, and their annual costs should not vary significantly over the term of the contracts unless additional financing is required to meet the costs of major maintenance, repairs or replacements or license requirements. PSE's share of the costs and the output of the projects is subject to reduction due to various withdrawal rights of the PUDs and others over the lives of the contracts.

     As of December 31, 2000, PSE was entitled to purchase portions of the power output of the PUDs' projects as set forth in the following tabulation:

                                                              BONDS                    COMPANY'S ANNUAL AMOUNT
                                                           OUTSTANDING                PURCHASABLE (APPROXIMATE)
                                                                          -------------------------------------------------
                              CONTRACT       LICENSE1       12/31/002           % OF            MEGAWATT          COSTS3
  PROJECT                    EXP. DATE      EXP. DATE       (MILLIONS)         OUTPUT           CAPACITY       (MILLIONS)
- ------------------------- --------------- ------------- ----------------- ---------------- ----------------- --------------
  Rock Island
     Original units                 2012          2029              82.2             50.0               457           39.0
     Additional units               2012          2029             330.0             97.5                --             --
  Rocky Reach                       2011          2006             258.6             38.9               505           23.0
  Wells                             2018          2012             176.9             31.3               261            9.6
  Priest Rapids                     2005          2005             165.4              8.0                72            2.4
  Wanapum                           2009          2005             179.7             10.8                98            3.7
                                                                                           ----------------- --------------
  Total                                                                                               1,393           77.7

¹PSE is unable to predict whether the licenses under the Federal Power Act will be renewed to the current licensees. The FERC has issued orders for the Rocky Reach, Wells and Priest Rapids/Wanapum projects under Section 22 of the Federal Power Act, which affirm PSE's contractual rights to receive power under existing terms and conditions even if a new licensee is granted a license prior to expiration of the contract term.

²The contracts for purchases initially were generally coextensive with the term of the PUD bonds associated with the project. Under the terms of some financings and refinancings, however, long-term bonds were sold to finance certain assets whose estimated useful lives extend beyond the expiration date of the power sales contracts. Of the total outstanding bonds sold for each project, the percentage of principal amount of bonds which mature beyond the contract expiration date are: 41.0% at Rock Island; 46.9% at Rocky Reach; 83.2% at Priest Rapids; 51.5% at Wanapum; and 5.3% at Wells.

³ The components of 2000 costs associated with the interest portion of debt service are: Rock Island, $22.0 million for all units; Rocky Reach, $6.2 million; Wells, $2.8 million; Priest Rapids, $0.7 million; and Wanapum, $1.0 million.

     PSE's estimated payments for power purchases from the Columbia River projects are $87.4 million for 2001, $87.0 million for 2002, $86.0 million for 2003, $84.0 million for 2004, $84.0 million for 2005 and in the aggregate, $588 million thereafter through 2018.

     PSE also has numerous long-term firm purchased power contracts with other utilities in the region. PSE is generally not obligated to make payments under these contracts unless power is delivered. PSE's estimated payments for firm power purchases from other utilities, excluding the Columbia River projects, are $144 million for 2001, $138 million for 2002, $125 million for 2003, $73 million for 2004, $69 million for 2005 and in the aggregate, $465 million thereafter through 2037. These contracts have varying terms and may include escalation and termination provisions.

     As required by the federal Public Utility Regulatory Policies Act (“PURPA”), PSE entered into long-term firm purchased power contracts with non-utility generators. PSE purchases the net electrical output of four significant projects at fixed and annually escalating prices which were intended to approximate PSE's avoided cost of new generation projected at the time these agreements were made. PSE's estimated payment under these three contracts are $264 million for 2001, $244 million for 2002, $221 million for 2003, $229 million for 2004, $217 million for 2005 and in the aggregate, $1.4 billion thereafter through 2012.

     The following table summarizes PSE's obligations for future power purchases.

                                                               2006 &
                                                               THERE-
(In Millions)               2001   2002   2003   2004   2005    AFTER    TOTAL
- -------------------------- ------ ------ ------ ------ ------ -------- --------
  Columbia River Projects    $87    $87    $86    $84    $84     $588   $1,016
  Other utilities            144    138    125     73     69      465    1,014
  Non-Utility Generators     264    244    221    229    217    1,437    2,612
- -------------------------- ------ ------ ------ ------ ------ -------- --------
      Total                 $495   $469   $432   $386   $370   $2,490   $4,642
- -------------------------- ------ ------ ------ ------ ------ -------- --------

     Total purchased power contracts provided PSE with approximately 15.1 million, 16.1 million and 15.8 million MWH of firm energy at a cost of approximately $506.5 million, $487.4 million and $481.6 million for the years 2000, 1999 and 1998, respectively.

     As part of its electric operations and in connection with the 1997 restructuring of the Tenaska Power Purchase Agreement, PSE is obligated to deliver to Tenaska up to 48,000 MMBtu per day of natural gas for operation of Tenaska's cogeneration facility. This obligation continues for the remaining term of the agreement, provided that no deliveries are required during the month of May. The price paid by Tenaska for this gas is reflective of the daily price of gas at the United States/Canada border near Sumas, Washington.

     The following table indicates PSE's percentage ownership and the extent of PSE's investment in jointly-owned generating plants in service at December 31, 2000:

                                                                                   COMPANY'S SHARE
                                                                  ------------------------------------------------
                            ENERGY               COMPANY'S           PLANT IN SERVICE           ACCUMULATED
       PROJECT           SOURCE (FUEL)      OWNERSHIP SHARE (%)     AT COST (MILLIONS)    DEPRECIATION (MILLIONS)
- --------------------- ------------------ ------------------------ --------------------- --------------------------
  Colstrip 1 and 2           Coal                   50%                       $191.4                   $116.9
  Colstrip 3 and 4           Coal                   25%                        452.6                    204.4

     Financing for a participant's ownership share in the projects is provided for by such participant. PSE's share of related operating and maintenance expenses is included in corresponding accounts in the Consolidated Statements of Income.

     On May 5, 2000, PSE sold its 7% interest in the 1,340-megawatt Centralia coal-fired generating project to TECWA Power, Inc., a subsidiary of TransAlta Corporation of Calgary, Canada. The sales price of approximately $37.4 million resulted in a pre-tax gain of approximately $23.5 million. Under the order issued by the Washington Commission, approximately $2.5 million of this gain ($1.6 million after-tax) goes to Company shareholders and $21.0 million has been deferred for pass through to electric customers in the form of a one-time refund to electric customers, based on electric consumption during the month of November 2000. Any final true-up of the gain will be collected or refunded through PSE's conservation rider.

     On July 20, 2000, PSE and PPL Global, LLC (formerly PP&L Global, Inc.) terminated an Asset Purchase Agreement dated as of November 1, 1998, under which PPL Global, LLC had proposed purchasing PSE's 735-megawatt interest in the four-unit Colstrip power plants and associated transmission capacity across Montana. As a result, PSE will retain its 50% interest in Colstrip Units 1 and 2 and 25% interest in Colstrip Units 3 and 4.

     As part of its electric operations and in connection with the 1999 buy-out of the Cabot gas supply contract, PSE is obligated to deliver to Encogen up to 21,800 MMBtu per day of natural gas for operation of the Encogen cogeneration facility. This obligation continues for the remaining term of the original Cabot agreement. PSE entered into a financial arrangement to hedge future gas supply costs associated with this obligation, 10,000 MMBtu per day for the remaining term of the agreement. Encogen has two gas supply agreements that comprise 40% of the plant's requirements with remaining terms of 7.5 years. The obligations under these contracts are $12.2 million in 2001, $12.8 million in 2002, $13.5 million in 2003, $14.2 million in 2004, $14.9 million in 2005 and $40.6 million in the aggregate thereafter.

GAS

     PSE has also entered into various firm supply, transportation and storage service contracts in order to assure adequate availability of gas supply for its firm customers. Many of these contracts, which have remaining terms from one to 23 years, provide that PSE must pay a fixed demand charge each month, regardless of actual usage. Certain of PSE's firm gas supply agreements also obligate PSE to purchase a minimum annual quantity at market-based contract prices. Generally, if the minimum volumes are not purchased and taken during the year, PSE is obligated to either: 1) pay a monthly or annual gas inventory charge calculated as a percentage of the then-current contract commodity price times the minimum quantity not taken; or 2) pay for gas not taken. Alternatively, under some of the contracts, the supplier may exercise a right to reduce its subsequent obligation to provide firm gas to PSE. PSE incurred demand charges in 2000 for firm gas supply, firm transportation service and firm storage and peaking service of $31.8 million, $52.9 million and $8.9 million, respectively.

     The following tables summarize PSE's obligations for future demand charges through the primary terms of its existing contracts and the minimum annual take requirements under the gas supply agreements. The quantified obligations are based on current contract prices and FERC authorized rates, which are subject to change.

  DEMAND CHARGE OBLIGATIONS
                                                                        2006 &
                                                                        THERE-
(In Millions)                    2001    2002    2003    2004    2005    AFTER    TOTAL
- ------------------------------ ------- ------- ------- ------- ------- -------- --------
  Firm gas supply               $31.7   $30.9   $25.0   $12.6    $0.8     $4.5   $105.5
  Firm transportation service    52.1    52.1    52.1    46.8    15.8    102.3    321.2
  Firm storage service            9.2     9.2     9.2     8.9     7.6     71.2    115.3
- ------------------------------ ------- ------- ------- ------- ------- -------- --------
      Total                     $93.0   $92.2   $86.3   $68.3   $24.2   $178.0   $542.0
- ------------------------------ ------- ------- ------- ------- ------- -------- --------

  MINIMUM ANNUAL TAKE OBLIGATIONS
                                                                                 2006 &
                                                                                 THERE-
(In thousands of therms)      2001       2002      2003      2004      2005      AFTER       TOTAL
- ------------------------- --------- ---------- --------- --------- --------- ---------- -----------
  Firm gas supply          868,107    531,967   430,542   215,661       680         --   2,046,957

     PSE believes that all demand charges will be recoverable in rates charged to its customers. Further, pursuant to implementation of FERC Order No. 636, PSE has the right to resell or release to others any of its unutilized gas supply or transportation and storage capacity.

     PSE does not anticipate any difficulty in achieving the minimum annual take obligations shown, as such volumes represent less than 77% of expected annual sales for 2001 and less than 48% of expected sales in subsequent years.

     PSE's current firm gas supply contracts obligate the suppliers to provide, in the aggregate, annual volumes up to those shown below:

  MAXIMUM SUPPLY AVAILABLE UNDER CURRENT FIRM SUPPLY CONTRACTS
                                                                                    2006 &
                                                                                    THERE-
(In thousands of therms)       2001       2002      2003      2004       2005        AFTER       TOTAL
- -------------------------- --------- ---------- --------- --------- ---------- ------------ -----------
  Firm gas supply           931,740    593,160   462,880   245,420      6,680       36,033   2,275,913

     During 2000, Washington Energy Gas Marketing Company (“WEGM”), a wholly-owned subsidiary, held firm transportation rights to transport natural gas through various pipelines from Alberta, Canada to the northern border of Idaho, as well as certain gas storage rights in Alberta and Washington state. During 2000, WEGM assigned substantially all of the rights and obligations with the transportation and storage services to various third parties. As of December 31, 2000, WEGM has a reserve for future losses associated with the remaining contractual obligations of $1.7 million. In the third quarter of 1999, WEGM recorded a $4.9 million ($3.2 million after-tax) charge based on the sale of its interest in the PGT pipeline capacity and actual mitigation results in 1999. In the fourth quarter of 1999, WEGM recorded a $0.7 million ($0.5 million after-tax) charge to adjust the remaining reserve for expected future losses. During 2000, 1999 and 1998, pre-tax losses totaling $0.8 million, $8.4 million and $1.9 million, respectively, were charged against the reserve. Future obligation for demand charges through the primary term of the gas transportation and storage contracts that may be reassigned are $27,800 from 2001 through 2004, 65,800 for 2005 and $752,700 thereafter.

CONTINGENCIES

     Puget Energy is subject to environmental regulation by federal, state and local authorities. PSE has been named a Potentially Responsible Party by the Environmental Protection Agency (“EPA”) at several contaminated sites and manufactured gas plant sites. PSE has implemented an ongoing program to test, replace and remediate certain underground storage tanks as required by federal and state laws and this process is nearing completion. Remediation and testing of Company vehicle service facilities and storage yards is also continuing.

     During 1992, the Washington Commission issued orders regarding the treatment of costs incurred by PSE for certain sites under its environmental remediation program. The orders authorize PSE to accumulate and defer prudently incurred cleanup costs paid to third parties for recovery in rates established in future rate proceedings. PSE believes a significant portion of its past and future environmental remediation costs are recoverable from either insurance companies, third parties or under the Washington Commission's order.

     On December 12, 2000, certain industrial customers who receive electric service under a market index-based tariff filed a complaint with the Washington Commission seeking emergency relief from this tariff. These and other industrial customers had demanded the market index-based tariff in return for supporting PSE's 1997 merger with Washington Natural Gas Company. On December 13, 2000, PSE filed a petition requesting that PSE be allowed to defer and recover any lost revenue resulting from any relief granted to these customers.

     The Washington Commission held a number of hearings on this subject and on January 22, 2001, while concluding no emergency relief was warranted, ordered continued hearings as to whether and how some relief in the form of a “soft” price cap could be temporarily put in place for these customers. PSE immediately filed testimony with the Washington Commission detailing the significant adverse financial impact of such a proposal at rate cap levels being contemplated ($125 to $150 per megawatt hour). PSE also filed suit in King County Superior Court against certain of the customers seeking damages for their attempt to void their agreement to buy electricity under the market index-based tariffs.

     Subsequent to those actions, the Washington Commission suspended the hearings to allow all parties to work on a settlement. The settlement proposal, which currently is being finalized in writing, would result in the significant portion of the industrial loads in question (in excess of 250 average megawatts) being expected to purchase electricity from other suppliers and in return give up any rights to PSE's embedded cost resources. Customers representing a small portion of the load (approximately 25 average megawatts) have the opportunity to transfer to a tariff with a new “small customer” rate schedule. It is expected that the settlement proposal will be submitted to the Washington Commission in March 2001.

     The information presented here as it relates to estimates of future liability is as of December 31, 2000.

ELECTRIC SITES

     PSE has expended approximately $16.3 million related to the remediation activities covered by the Washington Commission's order and has accrued approximately $2.0 million as a liability for future remediation costs for these and other remediation activities. To date, PSE has recovered approximately $16.5 million from insurance carriers.

GAS SITES

     Several former WNG or predecessor companies manufactured gas plant (“MGP”) sites are currently undergoing investigation, remediation activities or monitoring actions relating to environmental contamination. Legal and remediation activities incurred to date total approximately $53.8 million and approximately $6.8 million has been accrued for future remediation costs for these and other remediation sites. To date, PSE has recovered approximately $57.5 million from insurance carriers and other third parties.

     Based on all known facts and analyses, PSE believes it is not likely that the identified environmental liabilities will result in a material adverse impact on PSE's financial position, operating results or cash flow trends.

LITIGATION

     Other contingencies, arising out of the normal course of Puget Energy's business, exist at December 31, 2000. The ultimate resolution of these issues is not expected to have a material adverse impact on the financial condition, results of operations or liquidity of Puget Energy.

Note 18.

Accounting for Derivative Instruments and Hedging Activities

     On January 1, 2001, Puget Energy adopted Statement No. 133, as amended by Statement No. 138. Statement No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Puget Energy enters into both physical and financial contracts to manage its energy resource portfolio. Certain of these contracts outstanding on December 31, 2000 meet the derivative classification requirements of the statement and will be reported at fair value in the balance sheet. Beginning with the implementation of Statement No. 133, changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a qualifying cash flow hedge under the statement. Puget Energy will recognize the cumulative effect of this change in accounting principle by recording an after-tax decrease to current earnings of approximately $14.7 million for electric derivative transactions. In addition, Puget Energy will record a deferred asset for electric energy contracts designated as qualifying cash flow hedges of approximately $286.9 million at the adoption with a corresponding increase of approximately $286.9 million in other comprehensive income. Puget Energy anticipates approximately $207.9 million of the $286.9 million will reverse during 2001 and will, as a result, report a corresponding decrease to the deferred asset and to other comprehensive income to report this reversal. The decrease in the deferred asset and in other comprehensive income will have no net effect on current earnings. These estimates are based upon the forward market prices for energy at December 31, 2000. Retail gas related derivative transactions are deferred under Puget Energy's Purchased Gas Adjustment Mechanism and recorded in earnings as the transactions are executed under the PGA Incentive Mechanism.

Note 19.

Supplemental Quarterly Financial Data (Unaudited)

     The following unaudited amounts, in the opinion of Puget Energy, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods. Quarterly amounts vary during the year due to the seasonal nature of the utility business.

  (UNAUDITED; DOLLARS IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
- ------------------------------------ ----------------- ------------------ ----------- ------------
  2000 Quarter                                  First             Second       Third       Fourth
- ------------------------------------ ----------------- ------------------ ----------- ------------
  Operating revenues                        $ 647,223          $ 538,801   $ 978,981   $1,276,667
  Operating income                            115,885             63,119      57,598      127,270
  Other income                                  4,390              6,878       5,273      (11,480)
  Net income                                   78,192             27,369      18,995       69,275
  Basic and diluted earnings
    per common share                           $ 0.89             $ 0.29     $  0.20      $  0.78
- ------------------------------------ ----------------- ------------------ ----------- ------------

  (UNAUDITED; DOLLARS IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
- ------------------------------------ ----------------- ------------------ ----------- ------------
  1999 Quarter                                  First             Second       Third       Fourth
- ------------------------------------ ----------------- ------------------ ----------- ------------
  Operating revenues                         $575,385           $436,064    $411,391     $645,104
  Operating income                            101,923             52,620      51,444      101,829
  Other income                                  3,754             15,379       9,805         (803)
  Net income                                   69,755             31,065      24,912       59,835
  Basic and diluted earnings
    per common share                          $  0.79            $  0.33      $ 0.26       $ 0.68
- ------------------------------------ ----------------- ------------------ ----------- ------------

Note 20.

Consolidated Statement of Cash Flows

     For purposes of the Statement of Cash Flows, Puget Energy considers all temporary investments to be cash equivalents. These temporary cash investments are securities held for cash management purposes, having maturities of three months or less. The net change in current assets and current liabilities for purposes of the Statement of Cash Flows excludes short-term debt and current maturities of long-term debt. At December 31, 2000, 1999 and 1998, book overdrafts of $0.3 million, $22.2 million and $15.7 million were included in accounts payable. Non-cash transactions in 2000 and 1999 included the issuance of $23.1 million and $6.8 million of Company common stock for Puget Energy's Dividend Reinvestment Plan and the assumption in 1999 of $109 million in long-term debt as part of the purchase of the Encogen partnership which was paid off in 2000.

     The following provides additional information concerning cash flow activities:

- ------------------------------------------------------------- ----------- ----------- ---------
  YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)                     2000      1999        1998
- ------------------------------------------------------------- ----------- ----------- ---------
  Changes in certain current assets and current liabilities:
      Accounts receivable                                      $(130,088)  $(23,382)   $(29,042)
      Unbilled revenue                                           (90,480)     5,437      (3,909)
      Materials and supplies                                     (29,760)   (10,707)     (4,111)
      Prepayments and other                                       (1,742)    (1,832)     (2,175)
      Purchased gas liability                                    (62,350)   (28,208)     (6,368)
      Accounts payable                                           232,402     15,077      25,650
      Accrued expenses and other                                  33,155     18,169      (3,151)
- ------------------------------------------------------------- ----------- ----------- ---------
  Net change in certain current assets
    and current liabilities                                     $(48,863)  $(25,446)   $(23,106)
- ------------------------------------------------------------- ----------------------- ---------
  Cash payments:
      Interest (net of capitalized interest)                    $176,895   $153,093   $131,567
      Income taxes                                              $114,100    $99,959   $119,664
- ------------------------------------------------------------- ----------- ----------- ---------

Note 21.

Acquisition of Utilx and Lineal Industries

     On August 1, 2000, InfrastruX Group Inc. (“InfrastruX”), a wholly-owned subsidiary of Puget Energy, purchased 88% of the outstanding shares of Utilx Corporation (“Utilx”) pursuant to a cash tender offer. The remaining shares were acquired on September 15, 2000. Utilx is a provider of infrastructure construction services to utilities and telecommunications providers in the United States and around the world. Its primary business is installing, replacing and restoring underground cables and pipes. On September 28, 2000, InfrastruX completed the acquisition of Lineal Industries (“Lineal”), a privately held pipeline infrastructure construction company. Lineal provides pipeline construction, maintenance and rehabilitation services primarily for the natural gas and petroleum industries and currently operates in seven states. These acquisitions mark Puget Energy's entry into the business of providing design, construction and engineering services to the utility industry. The total purchase price of the two acquisitions was approximately $87.1 million.

     The acquisitions of Utilx and Lineal have been accounted for using the purchase method of accounting and, accordingly, the operating results of Utilx and Lineal have been included in Puget Energy's consolidated financial statements since the date of acquisition. Goodwill representing the excess of cost over the net tangible and identifiable intangible assets of the acquired businesses was approximately $40.7 million. Goodwill is being amortized on a straight-line basis up to 30 years. The pro forma combined revenues, net income, and earnings per common share of Puget Energy presented below give effect to the acquisitions as if they had occurred on January 1, 2000 and 1999, respectively. This pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisition been consummated for the period for which it is being given effect.

          (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
          (UNAUDITED)
          FOR THE TWELVE MONTHS ENDING DECEMBER 31,        2000          1999
          -------------------------------------------------------------------
          Operating revenues                         $3,520,817    $2,183,289
          Net income                                    192,558       186,836
          Basic earnings per common share                 $2.15         $2.08
          Diluted earnings per common share               $2.14         $2.07

Note 22.

Segment Information

     PSE primarily operates in one business segment, Regulated Utility Operations. PSE's regulated utility operation generates, purchases and sells electricity and purchases, transports and sells natural gas. The service territory of PSE covers approximately 6,000 square miles in the State of Washington.

     Principal non-utility lines of business include development and marketing of customer information and billing system software, specialized contracting services to utilities and telecommunication companies and real estate investment and development. Reconciling items between segments are not material.

     InfrastruX was formed as a wholly-owned subsidiary of PSE in the second quarter of 2000. Utilx and Lineal were acquired as subsidiaries of InfrastruX in the third quarter of 2000. InfrastruX became a wholly-owned subsidiary of Puget Energy, Inc. on January 1, 2001.

     In the fourth quarter of 2000, Hydro Energy Development Corp., a wholly-owned subsidiary of PSE, recorded a net loss of $12.1 million. $11.8 million of this consists of an impairment loss reserve related to a group of small hydro-electric project investments.

     In the third quarter of 1999, PSE sold the assets, liabilities and trade name of Homeguard Security Services, Inc., its wholly-owned home security services subsidiary, and recorded a net gain of approximately $7.6 million.

     Financial data for business segments are as follows:

  (DOLLARS  IN THOUSANDS)                             REGULATED
                       2000                             UTILITY      OTHER        TOTAL
- ----------------------------------------------------------------------------------------
  Revenues                                           $3,384,006    $57,666   $3,441,672
  Depreciation and amortization                         194,228      2,285      196,513
  Federal income tax                                    130,430     (1,439)     128,991
  Operating income                                      363,559        313      363,872
  Interest charges, net of AFUDC                        174,914        188      175,102
  Net income                                            204,720    (10,889)     193,831
  Total assets                                        5,339,669    217,000    5,556,669
  Construction expenditures - excluding equity AFUDC    296,480         --      296,480
- ----------------------------------------------------------------------------------------

                                                      REGULATED
                       1999                             UTILITY      OTHER        TOTAL
- ----------------------------------------------------------------------------------------
  Revenues                                           $2,043,500    $24,444   $2,067,944
  Depreciation and amortization                         175,610        100      175,710
  Federal income tax                                    110,026     (2,024)     108,002
  Operating income                                      309,006     (1,190)     307,816
  Interest charges, net of AFUDC                        150,384         --      150,384
  Net income                                            174,914     10,653      185,567
  Total assets                                        4,999,020    146,586    5,145,606
  Construction expenditures - excluding equity AFUDC    330,976         --      330,976
- ----------------------------------------------------------------------------------------


                                                      REGULATED
                       1998                             UTILITY      OTHER        TOTAL
- ----------------------------------------------------------------------------------------
  Revenues                                           $1,891,759    $32,097   $1,923,856
  Depreciation and amortization                         165,491         96      165,587
  Federal income tax                                    106,967     (1,153)     105,814
  Operating income                                      292,337      2,761      295,098
  Interest charges, net of AFUDC                        138,561        107      138,668
  Net income                                            170,435       (823)     169,612
  Total assets                                        4,596,893    112,794    4,709,687
  Construction expenditures - excluding equity AFUDC    335,471         --      335,471
- ----------------------------------------------------------------------------------------

Note 23.

Impairment of Long-Lived Assets

     In the fourth quarter of 2000 Hydro Energy Development Corp., a wholly-owned subsidiary of PSE, recorded an after-tax loss of approximately $11.8 million in Other Income of the non-regulated business segment. The loss provision represents the difference between the carrying value of 13 small hydroelectric generating projects Hydro Energy Development Corp. was seeking approval to develop in western Washington state and management's estimate of their net realizable value. Federal and state regulatory agencies that have jurisdiction over the construction and operation of the proposed projects have made it increasingly difficult to complete and operate the projects in an economic manner. Hydro Energy Development Corp. owns and operates a 3.7 mwh hydroelectric project located in western Washington state.

Schedule II.

Valuation and Qualifying Accounts and Reserves

                                                                    ADDITIONS
                                                 BALANCE AT         CHARGED TO                          BALANCE
                                                 BEGINNING          COSTS AND                           AT END
  (DOLLARS IN THOUSANDS)                         OF PERIOD          EXPENSES          DEDUCTIONS        OF PERIOD
                                               ------------------ ----------------- ----------------- ----------------
- ----------------------------------------------
  YEAR ENDED DECEMBER 31, 2000
- ----------------------------------------------
  Accounts deducted from assets
  on balance sheet:
    Allowance for doubtful
      Accounts receivable                                 $1,503           $47,040            $7,517          $41,026
    Gas transportation contracts reserve                  $1,780              $660              $783           $1,657

- ---------------------------------------------- ------------------ ----------------- ----------------- ----------------
  YEAR ENDED DECEMBER 31, 1999
- ----------------------------------------------
  Accounts deducted from assets
  on balance sheet:
    Allowance for doubtful
      Accounts receivable                                 $1,020            $6,885            $6,402           $1,503
    Gas transportation contracts reserve                  $4,611            $5,598            $8,429           $1,780
- ---------------------------------------------- ------------------ ----------------- ----------------- ----------------
  YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------
  Accounts deducted from assets
  on balance sheet:
    Allowance for doubtful
      Accounts receivable                                  $ 971            $5,905            $5,856           $1,020
    Gas transportation contracts reserve                  $6,527                --            $1,916           $4,611

EXHIBIT INDEX

       Certain of the following exhibits are filed herewith. Certain other of the following exhibits have
heretofore been filed with the Commission and are incorporated herein by reference.
       3(i).1 Restated Articles of Incorporation of Puget Energy (Incorporated by reference to Exhibit 99.2,
Puget Energy's Current Report on Form 8-K filed January 2, 2001, Commission File No. 333-77491.
       3(i).2 Restated Articles of Incorporation of PSE (included as Annex F to the Joint Proxy
Statement/Prospectus filed February 1, 1996, Registration No. 333-617).
       3(ii).1Bylaws of Puget Energy (Incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-4 of Puget Energy (No. 333-77491)).
       3(ii).2Restated Bylaws of PSE (Exhibit 3 to PSE's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, Commission File No. 1-4393).
       4.1      Fortieth through Seventy-eighth Supplemental Indentures defining the rights of the holders of PSE's
First Mortgage Bonds (Exhibit 2-d to Registration No. 2-60200; Exhibit 4-c to Registration No. 2-13347; Exhibits
2-e through and including 2-k to Registration No. 2-60200; Exhibit 4-h to Registration No. 2-17465; Exhibits 2-l,
2-m and 2-n to Registration No. 2-60200; Exhibits 2-m to Registration No. 2-37645; Exhibit 2-o through and
including 2-s to Registration No. 2-60200; Exhibit 5-b to Registration No. 2-62883; Exhibit 2-h to Registration
No. 2-65831; Exhibit (4)-j-1 to Registration No. 2-72061; Exhibit (4)-a to Registration No. 2-91516; Exhibit
(4)-b to Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393;
Exhibits (4)(a) and (4)(b) to Company's Current Report on Form 8-K, dated April 22, 1986; Exhibit (4)a to
Company's Current Report on Form 8-K, dated September 5, 1986; Exhibit (4)-b to Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1986, Commission File No. 1-4393; Exhibit (4)-c to Registration No.
33-18506; Exhibit (4)-b to Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission
File No. 1-4393; Exhibit (4)-b to Annual Report on Form 10-K for the fiscal year ended December 31, 1990,
Commission File No. 1-4393; Exhibits (4)-b and (4)-c to Registration No. 33-45916; Exhibit (4)-c to Registration
No. 33-50788; Exhibit (4)-a to Registration No. 33-53056; Exhibit 4.3 to Registration No. 33-63278; Exhibit 4.25
to Registration No. 333-41181; Exhibit 4.27 to Current Report on Form 8-K dated March 5, 1999; and Exhibit 4.2 to
Current Report on Form 8-K dated November 2, 2000).
       4.2    Indenture defining the rights of the holders of PSE's senior notes. (incorporated herein by
reference to Exhibit 4-a to PSE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, Commission
File No. 1-4393)
       4.3    First Supplemental Indenture defining the rights of the holders of PSE's Senior Notes, Series A.
(incorporated herein by reference to Exhibit 4-b to PSE's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, Commission File No. 1-4393).
       4.4    Second Supplemental Indenture defining the rights of the holders of PSE's Senior Notes, Series B.
(incorporated herein be reference to Exhibit 4.6 to PSE's Current Report on Form 8-K, dated March 5, 1999,
Commission File No. 1-4393)
       4.5    Third Supplemental Indenture defining the rights of the holders of PSE's Senior Notes, Series C.
(incorporate herein by reference to Exhibit 4.1 to PSE's Current Report on Form 8-K, dated November 2, 2000,
Commission File No. 1-4393).
       4.6    Rights Agreement dated as of December 21, 2000, between Puget Energy and Mellon Investor Services
LLC, as Rights Agent. (incorporated herein by reference to Exhibit 2.1 to PSE Registration Statement on Form 8-A,
dated January 2, 2001, Commission File No. 1-16305).
       4.7    Indenture between PSE and the First National Bank of Chicago, dated June 6, 1997.  (incorporated
herein by reference to Exhibit 4.1 of PSE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
Commission File No. 1.-4393).
       4.8    Amended and Restated Declaration of Trust between Puget Sound Energy Capital Trust I and the First
National Bank of Chicago, dated June 6, 1997. (incorporated herein by reference to Exhibit 4.2 of PSE's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, Commission File No. 1.-4393).
       4.9    Series A Capital Securities Guarantee Agreement between PSE and the First National Bank of Chicago,
dated June 6, 1997. (incorporated herein by reference to Exhibit 4.3 of PSE's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 1.-4393).
       4.10   Pledge Agreement dated August 1, 1991, between PSE and The First National Bank of Chicago, as
Trustee (Exhibit (4)-j to Registration No. 33-45916).
       4.11   Loan Agreement dated August 1, 1991, between the City of Forsyth, Rosebud County, Montana and PSE
(Exhibit (4)-k to Registration No. 33-45916).
       4.12   Pledge Agreement, dated as of March 1, 1992, by and between PSE and Chemical Bank relating to a
series of first mortgage bonds. (Exhibit 4.15 to Annual Report on Form 10-K for the fiscal year ended December
31, 1993, Commission File No. 1-4393).
       4.13   Pledge Agreement, dated as of April 1, 1993, by and between PSE and The First National Bank of Chicago,
relating to a series of first mortgage bonds. (Exhibit 4.16 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, Commission File No. 1-4393).
       4.14   Indenture of First Mortgage dated as of April 1, 1957 (Exhibit 4-B, Registration No. 2-14307).
       4.15   First Supplemental Indenture dated as of October 1, 1959 (Exhibit 4-D to Registration No. 2-17876).
       4.16   Sixth Supplemental Indenture dated as of August 1, 1966 (Exhibit to Form 8-K for month of August 1966,
File No. 0-951).
       4.17   Sixteenth Supplemental Indenture dated as of June 1, 1977 (Exhibit 6-05 to Registration No. 2-60352).
       4.18   Seventeenth Supplemental Indenture dated as of August 9, 1978 (Exhibit 5-K.18 to Registration No.
2-64428).
       4.19   Twenty-second Supplemental Indenture dated as of July 15, 1986 (Exhibit 4-B.20 to Form 10-K for the year
ended September 30, 1986, File No. 0-951).
       4.20   Twenty-sixth Supplemental Indenture dated as of September 1, 1990 (Exhibit 4-B.19, Form 10-K for the
year ended September 30, 1990, File No. 0-951).
       4.21   Twenty-seventh Supplemental Indenture dated as of September 1, 1990 (Exhibit 4-B.20, Form 10-K for the
year ended September 30, 1988, File No. 0-951).
       4.22   Twenty-eighth Supplemental Indenture dated as of July 31, 1991 (Exhibit 4-A, Form 10-Q for the quarter
ended March 31, 1993, File No. 0-951).
       4.23   Twenty-ninth Supplemental Indenture dated as of June 1, 1993 (Exhibit 4-A to Registration No. 33-49599).
       4.24   Thirtieth Supplemental Indenture dated as of August 15, 1995 (incorporated herein by reference to
Exhibit 4-A of Washington Natural Gas Company's S-3 Registration Statement, Registration No. 33-61859).
       4.25   Statement of Relative Rights and Preferences for the 7 3/4% Series Preferred Stock Cumulative, $100 Par
Value. (Exhibit 1.6 to Registration Statement on Form 8-A filed February 14, 1994, Commission File No. 1-4393)
       10.1   Assignment and Agreement, dated as of August 13, 1964, between Public Utility District No. 1 of Chelan
County, Washington and PSE, relating to the Rock Island Project (Exhibit 13-b to Registration No. 2-24262).
       10.2   First Amendment, dated as of October 4, 1961, to Power Sales Contract between Public Utility
District No. 1 of Chelan County, Washington and PSE, relating to the Rocky Reach Project (Exhibit 13-d to
Registration No. 2-24252).
       10.3   Assignment and Agreement, dated as of August 13, 1964, between Public Utility District No. 1 of
Chelan County, Washington and PSE, relating to the Rocky Reach Project (Exhibit 13-e to Registration No. 2-24252).
       10.4   Assignment and Agreement, dated as of August 13, 1964, between Public Utility District No. 2 of
Grant County, Washington and PSE, relating to the Priest Rapids Development (Exhibit 13-j to Registration No.
2-24252).
       10.5   Assignment and Agreement, dated as of August 13, 1964, between Public Utility District No. 2 of
Grant County, Washington and PSE, relating to the Wanapum Development (Exhibit 13-n to Registration No. 2-24252).
       10.6   First Amendment, dated February 9, 1965, to Power Sales Contract between Public Utility District
No. 1 of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-p to Registration No.
2-24252).
       10.7   First Amendment, executed as of February 9, 1965, to Reserved Share Power Sales Contract between
Public Utility District No. 1 of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit
13-r to Registration No. 2-24252).
       10.8   Assignment and Agreement, dated as of August 13, 1964, between Public Utility District No. 1 of
Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-u to Registration No. 2-24252).
       10.9   Pacific Northwest Coordination Agreement, executed as of September 15, 1964, among the United
States of America, PSE and most of the other major electrical utilities in the Pacific Northwest (Exhibit 13-gg
to Registration No. 2-24252).
       10.10  Contract dated November 14, 1957, between Public Utility District No. 1 of Chelan County,
Washington and PSE, relating to the Rocky Reach Project (Exhibit 4-1-a to Registration No. 2-13979).
       10.11  Power Sales Contract, dated as of November 14, 1957, between Public Utility District No. 1 of
Chelan County, Washington and PSE, relating to the Rocky Reach Project (Exhibit 4-c-1 to Registration No.
2-13979).
       10.12  Power Sales Contract, dated May 21, 1956, between Public Utility District No. 2 of Grant
County, Washington and PSE, relating to the Priest Rapids Project (Exhibit 4-d to Registration No. 2-13347).
       10.13  First Amendment to Power Sales Contract dated as of August 5, 1958, between PSE and Public
Utility District No. 2 of Grant County, Washington, relating to the Priest Rapids Development (Exhibit 13-h to
Registration No. 2-15618).
       10.14  Power Sales Contract dated June 22, 1959, between Public Utility District No. 2 of Grant
County, Washington and PSE, relating to the Wanapum Development (Exhibit 13-j to Registration No. 2-15618).
       10.15  Reserve Share Power Sales Contract dated June 22, 1959, between Public Utility District No. 2
of Grant County, Washington and PSE, relating to the Priest Rapids Project (Exhibit 13-k to Registration No.
2-15618).
       10.16  Agreement to Amend Power Sales Contracts dated July 30, 1963, between Public Utility District
No. 2 of Grant County, Washington and PSE, relating to the Wanapum Development (Exhibit 13-1 to Registration No.
2-21824).
       10.17  Power Sales Contract executed as of September 18, 1963, between Public Utility District No. 1
of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-r to Registration No.
2-21824).
       10.18  Reserved Share Power Sales Contract executed as of September 18, 1963, between Public Utility
District No. 1 of Douglas County, Washington and PSE, relating to the Wells Development (Exhibit 13-s to
Registration No. 2-21824).
       10.19  Construction and Ownership Agreement dated as of July 30, 1971, between The Montana Power Company
and PSE (Exhibit 5-b to Registration No. 2-45702).
       10.20  Operation and Maintenance Agreement dated as of July 30, 1971, between The Montana Power Company
and PSE (Exhibit 5-c to Registration No. 2-45702).
       10.21  Coal Supply Agreement, dated as of July 30, 1971, among The Montana Power Company, PSE and Western
Energy Company (Exhibit 5-d to Registration No. 2-45702).
       10.22  Ownership Agreement among PSE, Washington Public Power Supply System and others dated September 17,
1973 (Exhibit 5-a-29 to Registration No. 2-60200).
       10.23  Contract dated June 19, 1974, between PSE and P.U.D No. 1 of Chelan County (Exhibit D to Form 8-K
dated July 5, 1974).
       10.24  Exchange Agreement executed August 13, 1964, between the United States of America, Columbia Storage
Power Exchange and PSE, relating to Canadian Entitlement (Exhibit 13-ff to Registration No. 2-24252).
       10.25  Loan Agreement dated as of December 1, 1980 and related documents pertaining to Whitehorn turbine
construction trust financing (Exhibit 10.52 to Annual Report on Form 10-K for the fiscal year ended December 31,
1980, Commission File No. 1-4393).
       10.26  Letter Agreement dated March 31, 1980, between PSE and Manufacturers Hanover Leasing Corporation
(Exhibit b-8 to Registration No. 2-68498).
       10.27  Coal Transportation Agreement dated as of July 10, 1981 (Exhibit 20-a to Quarterly Report on Form
10-Q for the quarter ended September 30, 1981, Commission File No. 1-4393).
       10.28  Power sales contract dated August 27, 1982 between PSE and Bonneville Power Administration (Exhibit
10-a to Quarterly Report on Form 10-Q for the quarter ended September 30, 1982, Commission File No. 1-4393).
       10.29  Settlement Agreement and Covenant Not to Sue executed by the United States Department of Energy
acting by and through the Bonneville Power Administration and PSE dated September 17, 1985 (Exhibit (10)-49 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
       10.30  Agreement to Dismiss Claims and Covenant Not to Sue dated September 17, 1985 between Washington
Public Power Supply System ("Energy Northwest") and PSE (Exhibit (10)-50 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1985, Commission File No. 1-4393).
       10.31  Irrevocable Offer of Washington Public Power Supply System ("Energy Northwest") Nuclear Project No.
3 Capability for Acquisition executed by PSE, dated September 17, 1985 (Exhibit A of Exhibit (10)-50 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1985, Commission File No. 1-4393).
       10.32  Settlement Exchange Agreement ("Bonneville Exchange Power Contract") executed by the United States
of America Department of Energy acting by and through the Bonneville Power Administration and PSE, dated
September 17, 1985 (Exhibit B of Exhibit (10)-50 to Annual Report on Form 10-K for the fiscal year ended December
31, 1985, Commission File No. 1-4393).
       10.33  Settlement Agreement and Covenant Not to Sue between PSE and Northern Wasco County People's Utility
District, dated October 16, 1985 (Exhibit (10)-53 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1985, Commission File No. 1-4393).
       10.34  Settlement Agreement and Covenant Not to Sue between PSE and Tillamook People's Utility District,
dated October 16, 1985 (Exhibit (10)-54 to Annual Report on Form 10-K for the fiscal year ended December 31,
1985, Commission File No. 1-4393).
       10.35  Settlement Agreement and Covenant Not to Sue between PSE and Clatskanie People's Utility District,
dated September 30, 1985 (Exhibit (10)-55 to Annual Report on Form 10-K for the fiscal year ended December 31,
1985, Commission File No. 1-4393).
       10.36  Stipulation and Settlement Agreement between PSE and Muckleshoot Tribe of the Muckleshoot Indian
Reservation, dated October 31, 1986 (Exhibit (10)-55 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, Commission File No. 1-4393).
       10.37  Transmission Agreement dated April 17, 1981, between the Bonneville Power Administration and PSE
(Colstrip Project) (Exhibit (10)-55 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987,
Commission File No. 1-4393).
       10.38  Transmission Agreement dated April 17, 1981, between the Bonneville Power Administration and
Montana Intertie Users (Colstrip Project) (Exhibit (10)-56 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1987, Commission File No. 1-4393).
       10.39  Ownership and Operation Agreement dated as of May 6, 1981, between PSE and other Owners of the
Colstrip Project (Colstrip 3 and 4) (Exhibit (10)-57 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, Commission File No. 1-4393).
       10.40  Colstrip Project Transmission Agreement dated as of May 6, 1981, between PSE and Owners of the
Colstrip Project (Exhibit (10)-58 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987,
Commission File No. 1-4393).
       10.41  Common Facilities Agreement dated as of May 6, 1981, between PSE and Owners of Colstrip 1 and 2,
and 3 and 4 (Exhibit (10)-59 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987,
Commission File No. 1-4393).
       10.42  Agreement for the Purchase of Power dated as of October 29, 1984, between South Fork II, Inc. and
PSE (Weeks Falls Hydro-electric Project) (Exhibit (10)-60 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, Commission File No. 1-4393).
       10.43  Agreement for the Purchase of Power dated as of October 29, 1984, between South Fork Resources,
Inc. and PSE (Twin Falls Hydro-electric Project) (Exhibit (10)-61 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, Commission File No. 1-4393).
       10.44  Agreement for Firm Purchase Power dated as of January 4, 1988, between the City of Spokane,
Washington and PSE (Spokane Waste Combustion Project) (Exhibit (10)-62 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, Commission File No. 1-4393).
       10.45  Agreement for Evaluating, Planning and Licensing dated as of February 21, 1985 and Agreement for
Purchase of Power dated as of February 21, 1985 between Pacific Hydropower Associates and PSE (Koma Kulshan
Hydro-electric Project) (Exhibit (10)-63 to Annual Report on Form 10-K for the fiscal year ended December 31,
1987, Commission File No. 1-4393).
       10.46  Power Sales Agreement dated as of August 1, 1986, between Pacific Power & Light Company
("PacifiCorp")and PSE (Exhibit (10)-64 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987,
Commission File No. 1-4393).
       10.47  Agreement for Purchase and Sale of Firm Capacity and Energy dated as of August 1, 1986 between The
Washington Water Power Company ("Avista") and PSE (Exhibit (10)-65 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, Commission File No. 1-4393).
       10.48  Amendment dated as of June 1, 1968, to Power Sales Contract between Public Utility District No. 1
of Chelan County, Washington and PSE (Rocky Reach Project) (Exhibit (10)-66 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, Commission File No. 1-4393).
       10.49  Settlement Agreement dated April 24, 1987 between Public Utility District No. 1 of Chelan County,
the National Marine Fisheries Service, the State of Washington, the State of Oregon, the Confederated Tribes and
Bands of the Yakima Indian Nation, Colville Indian Reservation, Umatilla Indian Reservation, the National
Wildlife Federation and PSE (Rock Island Project) (Exhibit (10)-71 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, Commission File No. 1-4393).
       10.50  Amendatory Agreement No. 1 dated August 27, 1982, and Amendatory Agreement No. 2 dated August 27,
1982 to the Power Sales Contract between PSE and the Bonneville Power Administration dated August 27, 1982
(Exhibit (10)-73 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission File No.
1-4393).
       10.51  Transmission Agreement dated as of December 30, 1987 between the Bonneville Power Administration
and PSE (Rock Island Project) (Exhibit (10)-74 to Annual Report on Form 10-K for the fiscal year ended December
31, 1988, Commission File No. 1-4393).
       10.52  Agreement for Purchase and Sale of Firm Capacity and Energy between The Washington Water Power
Company and PSE dated as of January 1, 1988 (Exhibit (10)-1 to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1988, Commission File No. 1-4393).
       10.53  Amendment dated as of August 10, 1988 to Agreement for Firm Purchase Power dated as of January 4,
1988 between the City of Spokane, Washington and PSE (Spokane Waste Combustion Project)(Exhibit (10)-76 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1988, Commission File No. 1-4393).
       10.54  Agreement for Firm Power Purchase dated October 24, 1988 between Northern Wasco People's Utility
District and PSE (The Dalles Dam North Fishway) (Exhibit (10)-77 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1988, Commission File No. 1-4393).
       10.55  Agreement for the Purchase of Power dated as of October 27, 1988 between Pacific Power & Light
Company (PacifiCorp) and PSE (Exhibit (10)-78 to Annual Report on Form 10-K for the fiscal year ended December
31, 1988, Commission File No. 1-4393).
       10.56  Agreement for Sale and Exchange of Firm Power dated as of November 23, 1988 between the Bonneville
Power Administration and PSE (Exhibit (10)-79 to Annual Report on Form 10-K for the fiscal year ended December
31, 1988, Commission File No. 1-4393).
       10.57  Agreement for Firm Power Purchase, dated as of February 24, 1989 between Sumas Energy, Inc. and PSE
(Exhibit (10)-1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, Commission File No.
1-4393).
       10.58  Settlement Agreement, dated as of April 27, 1989 between Public Utility District No. 1 of Douglas
County, Washington, Portland General Electric Company ("Enron"), PacifiCorp, The Washington Water Power Company
("Avista") and PSE (Exhibit (10)-1 to Quarterly Report on Form 10-Q quarter ended September 30, 1989, Commission
File No. 1-4393).
       10.59  Agreement for Firm Power Purchase (Thermal Project), dated as of June 29, 1989 between San Juan
Energy Company and PSE (Exhibit (10)-2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989,
Commission File No. 1-4393).
       10.60  Agreement for Verification of Transfer, Assignment and Assumption, dated as of September 15, 1989
between San Juan Energy Company, March Point Cogeneration Company and PSE (Exhibit (10)-3 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989, Commission File No. 1-4393).
       10.61  Power Sales Agreement between The Montana Power Company and PSE, dated as of October 1, 1989
(Exhibit (10)-4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, Commission File No.
1-4393).
       10.62  Conservation Power Sales Agreement dated as of December 11, 1989 between Public Utility District
No. 1 of Snohomish County and PSE (Exhibit (10)-87 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, Commission File No. 1-4393).
       10.63  Amendment No. 1 to the Colstrip Project Transmission Agreement dated as of February 14, 1990 among
the Montana Power Company, The Washington Water Power Company ("Avista"), Portland General Electric Company
("Enron"), PacifiCorp and PSE (Exhibit (10)-91 to Annual Report on Form 10-K for the fiscal year ended December
31, 1990, Commission File No. 1-4393).
       10.64  Amendment No. 1 to the Fifteen-Year Power Sales Agreement dated as of April 18, 1990 between
PacifiCorp and PSE (Exhibit (10)-93 to Annual Report on Form 10-K for the fiscal year ended December 31, 1990,
Commission File No. 1-4393).
       10.65  Settlement Agreement dated as of October 1, 1990, among Public Utility District No. 1 of Douglas
County, Washington, PSE, Pacific Power and Light Company ("PacifiCorp"), The Washington Water Power Company
("Avista"), Portland General Electric Company ("Enron"), the Washington Department of Fisheries, the Washington
Department of Wildlife, the Oregon Department of Fish and Wildlife, the National Marine Fisheries Service, the
U.S. Fish and Wildlife Service, the Confederated Tribes and Bands of the Yakima Indian Nation, the Confederated
Tribes of the Umatilla Reservation, and the Confederated Tribes of the Colville Reservation (Exhibit (10)-95 to
Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File No. 1-4393).
       10.66  Agreement for Firm Power Purchase (Thermal Project) dated December 27, 1990 among March Point
Cogeneration Company, a California general partnership comprising San Juan Energy Company, a California
corporation; Texas-Anacortes Cogeneration Company, a Delaware corporation; and PSE (Exhibit (10)-4 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1991, Commission File No. 1-4393).
       10.67  Agreement for Firm Power Purchase dated March 20, 1991 between Tenaska Washington, Inc., a Delaware
corporation, and PSE (Exhibit (10)-1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1991,
Commission File No. 1-4393).
       10.68  Letter Agreement dated April 25, 1991 between Sumas Energy, Inc. and PSE, to amend the Agreement
for Firm Power Purchase dated as of February 24, 1989 (Exhibit (10)-2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, Commission File No. 1-4393).
       10.69  Amendment dated June 7, 1991, to Letter Agreement dated April 25, 1991 between Sumas Energy, Inc.
and PSE (Exhibit (10)-3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, Commission File No.
1-4393).
       10.70  Amendatory Agreement No. 3, dated August 1, 1991 to the Pacific Northwest Coordination Agreement,
executed September 15, 1964 among the United States of America, PSE and most of the other major electrical
utilities in the Pacific Northwest (Exhibit (10)-4 to Quarterly Report on Form 10-Q for the quarter ended June
30, 1991, Commission File No. 1-4393).
       10.71  Agreement between the 40 parties to the Western Systems Power Pool (PSE being one party) dated July
27, 1991 (Exhibit (10)-2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission
File No. 1-4393).
       10.72  Memorandum of Understanding between PSE and the Bonneville Power Administration dated September 18,
1991 (Exhibit (10)-3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File
No. 1-4393).
       10.73  Amendment of Seasonal Exchange Agreement, dated December 4, 1991 between Pacific Gas and Electric
Company and PSE (Exhibit (10)-107 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991,
Commission File No. 1-4393).
       10.74  Capacity and Energy Exchange Agreement, dated as of October 4, 1991 between Pacific Gas and
Electric Company and PSE (Exhibit (10)-108 to Annual Report on Form 10-K for the fiscal year ended December 31,
1991, Commission File No. 1-4393).
       10.75  Intertie and Network Transmission Agreement, dated as of October 4, 1991 between Bonneville Power
Administration and PSE (Exhibit (10)-109 to Annual Report on Form 10-K for the fiscal year ended December 31,
1991, Commission File No. 1-4393).
       10.76  Amendatory Agreement No. 4, executed June 17, 1991 to the Power Sales Agreement dated August 27,
1982 between the Bonneville Power Administration and PSE (Exhibit (10)-110 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, Commission File No. 1-4393).
       10.77  Amendment to Agreement for Firm Power Purchase, dated as of September 30, 1991 between Sumas
Energy, Inc. and PSE (Exhibit (10)-112 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991,
Commission File No. 1-4393).
       10.78  Letter Agreement dated October 12, 1992 between Tenaska Washington Partners, L.P. and PSE regarding
clarification of issues under the Agreement for Firm Power Purchase (Exhibit (10)-121 to Annual Report on Form
10-K for the fiscal year ended December 31, 1992, Commission File No. 1-4393).
       10.79  Consent and Agreement dated October 12, 1992 between PSE and The Chase Manhattan Bank, N.A., as
agent (Exhibit (10)-122 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission
File No. 1-4393).
       10.80  Contract with W. S. Weaver, Executive Vice President & Chief Financial Officer, dated April 24,
1991 (Exhibit 10.114 to Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File
No. 1-4393).
       10.81  General Transmission Agreement dated as of December 1, 1994 between the Bonneville Power
Administration and PSE (BPA Contract No. DE-MS79-94BP93947) (Exhibit 10.115 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, Commission File No. 1-4393).
       10.82  PNW AC Intertie Capacity Ownership Agreement dated as of October 11, 1994 between the Bonneville
Power Administration and PSE (BPA Contract No. DE-MS79-94BP94521) (Exhibit 10.116 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, Commission File No. 1-4393).
       10.83  Power Exchange Agreement dated as of September 27, 1995 between British Columbia Power Exchange
Corporation and PSE (Exhibit 10.117 to Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
Commission File No. 1-4393).
       10.84  Contract with W. S. Weaver, Executive Vice President and Chief Financial Officer, dated October 18,
1996 (Exhibit 10.118 to Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File
No. 1-4393).
       10.85  Contract with G. B. Swofford, Senior Vice President Customer Operations, dated October 18, 1996
(Exhibit 10.120 to Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File No.
1-4393).
       10.86  Service Agreement dated April 14, 1993 between Questar Pipeline Corporation and Washington Natural
Gas Company for FSS-1 firm storage service at Clay Basin (Exhibit 10-B Form 10-K for the year ended September 30,
1994, File No. 11271).
       10.87  Service Agreement dated November 1, 1989 with Northwest Pipeline Corporation covering liquefaction
storage gas service filed under cover of Form SE dated December 27, 1989.
       10.88  Firm Transportation Service Agreement dated October 1, 1990 between Northwest Pipeline Corporation
and Washington Natural Gas Company (Exhibit 10-D Form 10-K for the year ended September 30, 1994, File No. 11271).
       10.89  Gas Transportation Service Contract dated June 29, 1990 between Washington Natural Gas Company and
Northwest Pipeline Corporation (Exhibit 4-A Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
       10.90  Gas Transportation Service Contract dated July 31, 1991 between Washington Natural Gas Company and
Northwest Pipeline Corporation (Exhibit 4-A Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
       10.91  Amendment to Gas Transportation Service Contract dated July 31, 1991 between Washington Natural Gas
Company and Northwest Pipeline Corporation (Exhibit 10-E.2 Form 10-K for the year ended September 30, 1995, File
No. 11271).
       10.92  Gas Transportation Service Contract dated July 15, 1994 between Washington Natural Gas Company and
Northwest Pipeline Corporation (Exhibit 10-E.3 Form 10-K for the year ended September 30, 1995, File No. 11271).
       10.93  Amendment to Gas Transportation Service Contract dated August 15, 1994 between Washington Natural
Gas Company and Northwest Pipeline Corporation (Exhibit 10-E.4 Form 10-K for the year ended September 30, 1995,
File No. 11271).
       10.94  Interest Rate Swap Agreement dated September 27, 1989 between Thermal Resources, Inc. and the First
National Bank of Chicago, filed under cover of Form SE dated December 27, 1989 (Exhibit 10-N, Form 10-K for the
year ended September 30, 1994, File No. 1-11271).
       10.95  Firm Transportation Service Agreement dated March 1, 1992 between Northwest Pipeline Corporation
and Washington Natural Gas Company (Exhibit 10-O, Form 10-K for the year ended September 30, 1994, File No.
1-11271).
       10.96  Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation
and Washington Natural Gas Company for firm transportation service from Jackson Prairie (Exhibit 10-P, Form 10-K
for the year ended September 30, 1994, File No. 1-11271).
       10.97  Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation
and Washington Natural Gas Company for firm transportation service from Jackson Prairie (Exhibit 10-Q, Form 10-K
for the year ended September 30, 1994, File No. 1-11271).
       10.98  Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation
and Washington Natural Gas Company for firm transportation service from Plymouth, LNG (Exhibit 10-R, Form 10-K
for the year ended September 30, 1994, File No. 1-11271).
       10.99  Service Agreement dated July 9, 1991 with Northwest Pipeline Corporation for SGS-2F Storage Service
filed under cover of Form SE dated December 23, 1991 (Exhibit 10-S, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
       10.100 Firm Transportation Agreement dated October 27, 1993 between Pacific Gas Transmission Company and
Washington Natural Gas Company for firm transportation service from Kingsgate (Exhibit 10-T, Form 10-K for the
year ended September 30, 1994, File No. 1-11271).
       10.101 Firm Storage Service Agreement and Amendment dated April 30, 1991 between Questar Pipeline Company
and Washington Natural Gas Company for firm storage service at Clay Basin filed under cover of Form SE dated
December 23, 1991.
       10.102 Change in control agreement with T. J. Hogan, dated August 17, 1995 (Exhibit 10.152 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 1-4393).
       10.103 Asset Purchase Agreement between PP&L Global, Inc. and PSE (Exhibit 2a to Current Report on Form
8-K dated November 13, 1998).
       10.104 Employment agreement with S. A. McKeon, Vice President and General Counsel, dated May 27, 1997
(Exhibit 10.152 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Commission File No.
1-4393).
       10.105 Employment agreement with R. L. Hawley, Vice President and Chief Financial Officer, dated March 16, 1998
(Exhibit 10.153 to Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Commission File No.
1-4393).
       10.106 Puget Energy, Inc. Nonemployee Director Stock Plan. (incorporated herein by reference to
Exhibit 99.1 to Puget Energy's Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated
January 2, 2001, Commission File No.  333-41157-99).
       10.107 Puget Energy, Inc. Employee Stock Purchase Plan. (incorporated herein by reference to Exhibit
99.1 to Puget Energy's Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated January 2, 2001,
Commission File No.  333-41113-99).
       *10.1081995 Long-Term Incentive Compensation Plan.
       10.109 1995 Long-Term Incentive Compensation Plan.  (incorporated herein by reference to Exhibit 99.1 to Puget
Energy's Post Effective Amendment No. 1 to Form S-8 Registration Statement, dated January 2, 2001, Commission
File No.  333-61851-99).
       *10.110Credit Agreement dated December 18, 1996, among PSE and various banks named therein, Bank of
America NW, N.A. as Administrative Agent.
       *10.111Supplemental agreement of the October 1996 employment contract with W.S. Weaver, President and Chief Executive Officer, dated
November 14, 2000.
       *12-a  Statement setting forth computation of ratios of earnings to fixed charges (1996 through 2000).
       *12-b  Statement setting forth computation of ratios of earnings to combined fixed charges and preferred
stock dividends (1996 through 2000).
       *21.1  Subsidiaries of Puget Energy.
       *21.2  Subsidiaries of PSE.
       *23.1  Consent of PricewaterhouseCoopers LLP.
       *99.1  Puget Energy proxy statement for 2001 Annual Meeting of Shareholders, (Commission File No.
1-16305).
         ---------------------------------
         *Filed herewith.