10-Q

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

FORM 10-Q

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

For the quarterly period ended June 30, 2002

OR

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

For the transition period from __________ to __________

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

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

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

As of June 30, 2002, (i) the number of shares of Puget Energy, Inc. (Puget Energy) common stock outstanding was 87,543,312 ($.01 par value) and (ii) all of the outstanding shares of Puget Sound Energy, Inc. (PSE) common stock were held by Puget Energy.

Table of Contents

Part I.	Financial Information
Item I.	Financial Statements

Puget Energy, Inc.

Puget Sound Energy, Inc. (PSE)

Combined Notes to Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Part II	Other Information
Item 1.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K

FILING FORMAT

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

FORWARD-LOOKING STATEMENTS

       Puget Energy and PSE are including the following cautionary statement in this Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of Puget Energy or PSE. This report includes forward-looking statements, which are statements of expectations, beliefs, plans, objectives, assumptions 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:

• the outcome and timing of the gas general rate case filed by PSE with the Washington Utilities and Transportation Commission (Washington Commission) on November 26, 2001;
  
  
• governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission (FERC) and the Washington Commission, with respect to allowed rates of return, financings, industry and rate structures, acquisition and disposal of assets and facilities, operation and construction of hydro, distribution and transmission facilities, recovery of purchased energy and other capital investments, and present or prospective wholesale and retail competition;
  
  
• the recent bankruptcy filing by Enron Corporation, financial difficulties by other energy companies and related events, which may affect the regulatory and legislative process in unpredictable ways;
  
  
• weather, which can have a potentially serious impact on PSE’s ability to procure adequate supplies of gas, fuel or purchased power to serve its customers and on the cost of procuring such supplies;
  
  
• hydroelectric conditions, which can have a potentially serious impact on electric capacity and PSE's ability to generate electricity;
  
  
• the stability and liquidity of wholesale energy markets generally, including the effect of price controls promulgated in June 2001 by FERC on the availability and price of wholesale energy purchases and sales in the western United States;
  
  
• the effect of wholesale and retail competition (including, but not limited to, electric retail wheeling and transmission costs);
  
  
• the amount of collection, if any, of PSE’s receivable from the California ISO;
  
  
• changes in, and compliance with, environmental and endangered species laws and policies;
  
  
• industrial, commercial and residential growth and demographic patterns in the service territories of PSE;
  
  
• the loss of any significant customer, or changes in the business of a major customer that may result in changes in demand for services of PSE;
  
  
• the impact of significant events, such as the attack on September 11, 2001;
  
  
• the ability of Puget Energy and PSE to access the capital markets to support requirements for working capital, construction costs and the repayment of maturing debt;
  
  
• capital market conditions, including changes in the availability of capital or interest rate fluctuations;
  
  
• the impact of the bankruptcy filing by Enron and financial difficulties of other energy industry companies on capital market conditions of the utility industry, including the availability and cost of capital;
  
  
• changes in Puget Energy's or PSE's credit ratings, which may have an adverse impact on the availability and cost of capital;
  
  
• legal and regulatory proceedings; and
  
  
• employee workforce factors, including strikes, work stoppages or the loss of a key executive.

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

Part I. Financial Information
Item 1. Financial Statements

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

2002 2001

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

$ 330,326 
144,384 
80,277 
554,987 
 
 
142,128 
88,520 
14,680 
(30,964)
(252)
73,630 
62,082 
57,307 
3,605 
54,584 
12,834 
478,154 
76,833 
3,441 
80,274 
48,682 
223 
31,369 
1,940  $ 29,429 
87,448 
87,646 
$ 0.34 

$ 719,694 
163,013 
52,712 
935,419 
 
 
535,277 
104,184 
63,134 
(10,304)
(41,527)
65,414 
41,470 
52,935 
1,603 
45,306 
11,856 
869,348 
66,071 
1,568 
67,639 
48,174 
- -- 
19,465 
2,085  $ 17,380 
86,303 
86,576 
$ 0.20 

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

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

2002 2001

 Operating Revenues:
   Electric
   Gas
   Other
      Total operating revenues
Operating Expenses:
Energy costs:
   Purchased electricity
   Purchased gas
   Electric generation fuel
   Residential Exchange
   Unrealized gain on derivative instruments
Utility operations and maintenance
Other operations and maintenance
Depreciation and amortization
Conservation amortization
Taxes other than federal income taxes
Federal income taxes
      Total operating expenses
Operating Income
Other income
Income Before Interest Charges and Minority Interest
Interest charges, net of AFUDC
Minority interest in earnings of consolidated subsidiary
Income Before Cumulative Effect of Accounting Change
Cumulative effect of implementation of FAS-133 derivative instruments and
hedge activities, net of tax
Net Income
Less:  preferred stock dividends accrual
Income for Common Stock
Basic common shares outstanding - weighted average
Diluted common shares outstanding - weighted average
Basic earnings per share before cumulative effect of accounting change
Cumulative effect of accounting change
Basic earnings per share
Diluted earnings per share before cumulative effect of accounting change
Cumulative effect of accounting change
Diluted earnings per share

$ 711,860 
458,875 
141,597 
1,312,332 


342,400 
293,318 
79,860 
(73,711)
(11,748)
139,571 
116,703 
113,256 
5,769 
120,186 
33,324 
1,158,928 
153,404 
3,825 
157,229 
99,080 
302 
57,847 

- -- 
57,847 
3,952 
$ 53,895 
87,309 
87,508 
$ 0.62 
- -- 
$ 0.62 
$ 0.62 
- -- 
$ 0.62 

$ 1,484,701 
467,283 
103,299 
2,055,283 


925,493 
320,793 
165,518 
(27,045)
(15,061)
126,593 
71,610 
106,063 
3,205 
115,386 
66,116 
1,858,671 
196,612 
3,509 
200,121 
93,609 
- -- 
106,512 

14,749 
91,763 
4,243 
$ 87,520 
86,169 
86,443 
$ 1.19 
(0.17)
$1.02 
$ 1.18 
(0.17)
$ 1.01 

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

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

2002 2001

Net Income
Other comprehensive income, net of tax:
   Unrealized holding losses arising on marketable securities
      during the period
   Foreign currency translation adjustment
   Unrealized gains on derivative instruments during the period
   Reversal of unrealized (gains) on derivative instruments
     settled during the period
    Other comprehensive income (loss)
Comprehensive Income (Loss)
$ 31,369 
 
(377)
 
96 
(3,513)
1,347 
  (2,447)
$ 28,922 
$ 19,465 
 
(612)
 
- -- 
(278,117)
(37,267)
  (315,996)
$ (296,531)

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

2002 2001

Net Income
Other comprehensive income, net of tax:
   Unrealized holding losses arising on marketable securities
      during the period
   Reclassification adjustment for realized gains on marketable
     securities included in net income
   Foreign currency translation adjustment
   Transition adjustment for unrealized gain on derivative
     instruments at January 1, 2001
   Unrealized gains on derivative instruments during the period
   Reversal of unrealized gains (losses) on derivative instruments
     settled during the period
    Other comprehensive income (loss)
Comprehensive Income
$ 57,847 
 
(526)
 
(724)
 
(116)
- -- 
 
(2,102)
32,834 
 
29,366 
$ 87,213 
$ 91,763 
 
(1,407) 
 
- -- 
 
- -- 
286,928 
 
(149,379)
(143,335)
 
(7,193) 
$ 84,570 

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

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

ASSETS

June 30,
2002 December 31,
2001

Utility Plant: (at original cost, including construction work in
progress of $123,115 and $123,307 respectively)
   Electric
   Gas
   Common
   Less: Accumulated Depreciation and amortization
      Net utility plant

Other Property and Investments:
   Goodwill, net
   Intangibles, net
   Non-utility property and equipment, net
   Other
      Total other property and investments

Current Assets:
   Cash
   Restricted cash
   Accounts receivable, net
   Unbilled revenue
   Materials and supplies, at average cost
   Purchased gas receivable
   Current portion of unrealized gain on derivative instruments
   Prepayment and other
      Total current assets

Other Long-Term Assets:
   Regulatory asset for deferred income taxes
   Regulatory asset for PURPA buyout costs
   Unrealized gain on derivative instruments
   Other
      Total other long-term assets

Total Assets

 
$ 4,193,417 
1,589,701 
373,768 
(2,268,062)
3,888,824 


132,894 
16,755 
67,333 
153,319 
370,301

 
91,273 
5,869 
272,096 
69,970 
60,766 
- -- 
314 
10,279 
510,567 

 
183,721 
244,124 
8,479 
275,090 
711,414 

$ 5,481,106 

 
$ 4,167,920 
1,551,439 
362,670 
(2,194,048)
3,887,981 


102,151 
16,059 
48,369 
150,670 
317,249

 
92,356 
- -- 
279,321 
147,008 
90,333 
37,228 
3,315 
11,277 
660,838 

 
193,016 
244,635 
3,317 
239,941 
680,909 

$ 5,546,977 

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

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

CAPITALIZATION AND LIABILITIES

June 30,
2002 December 31,
2001

Capitalization:
  Common shareholders' investment:
    Common stock $0.01 par value, 250,000,000 shares
    authorized, 87,543,312 shares and 87,023,210 outstanding
    Additional paid-in capital
    Earnings reinvested in the business
    Accumulated other comprehensive income (loss)
  Preferred stock not subject to mandatory redemption
  Preferred stock subject to mandatory redemption
  Corporation obligated, mandatorily redeemable preferred
    securities of subsidiary trust holding solely junior
    subordinated debentures of the corporation
  Long-term debt
      Total capitalization

Minority interest in equity of a consolidated subsidiary

Current Liabilities:
  Accounts payable
  Short-term debt
  Current maturities of long-term debt
  Purchased gas liability
  Accrued expenses:
    Taxes
    Salaries and wages
    Interest
  Current portion of unrealized on derivative instruments
  Other
      Total current liabilities

Long-Term Liabilities:
  Deferred income taxes
  Other deferred credits
  Unrealized loss on derivative instruments
      Total long-term liabilities

Total Capitalization and Liabilities

 
 
$ 875 
1,362,327 
24,051 
45 
60,000 
43,162 
 
 
300,000 
2,197,457 
3,987,917 
 
9,947 

 
128,617 
125,107 
87,212 
91,385 
 
76,962 
12,068 
45,823 
4,821 
58,036 
630,031 

 
624,791 
228,378 
42 
853,211 

$ 5,481,106 

 
 
$   870 
1,358,946 
32,229 
(29,321)
60,000 
50,662 
 
 
300,000 
2,127,054 
3,900,440 
 
- -- 

 
167,426 
348,577 
119,523 
- -- 
 
70,708 
14,746 
42,505 
35,145 
46,178 
844,808 

 
605,315 
196,339 
75 
801,729 

$5,546,977 

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

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

2002 2001

Operating Activities:
Net Income
Adjustment to reconcile net income to net cash provided
  by operating activities:
   Depreciation and amortization
   Deferred federal and state income taxes and tax credits - net
   Net unrealized (gains) losses on derivative instruments
   Other
Change in certain current assets and current liabilities:
   Accounts receivable and unbilled revenue
   Materials and supplies
   Prepayments and other
   Purchases gas receivable/liability
   Accounts payable
   Accrued expenses and other
      Net Cash Provided by Operating Activities

Investing Activities:
   Construction and capital expenditures-excluding equity AFUDC
   Additions to energy conservation program
   Acquisitions by InfrastruX, net of cash acquired
   Restricted cash
   Loans to Schlumberger (formerly Cellnet Data Services)
   Other
      Net Cash Used by Investing Activities

Financing Activities
   Change in short-term debt - net
   Dividends paid
   Issuance of trust preferred stock
   Redemption of preferred stock
   Issuance of bonds and long term debt
   Redemption of bonds and notes
   Other
      Net Cash Provided (Used) by Financing Activities
Net Increase (Decrease) in Cash
Cash at Beginning of Year
Cash at End of Period
Supplemental Cash Flow Information:
Cash payments for:
   Interest (net of capitalized interest)
   Income taxes

$ 57,847 
 

113,256 
28,771 
(11,748)
8,197 
 
95,630 
31,560 
1,161 
128,613 
(42,126)
24,864 
436,025 

 
(128,081)
(4,434)
(40,261)
(5,869)
- -- 
(7,266)
(185,911)

 
(223,470)
(56,145)
- -- 
(7,500)
95,980 
(60,000)
(62)
(251,197)
(1,083)
92,356 
$ 91,273 
 
 
$ 95,779 
$ (577)

$ 91,763 
 

106,063 
3,997 
7,630 
10,446 
 
184,594 
(639)
(1,168)
(35,577)
(251,235)
(3,005)
112,869

 
(135,869)
(3,713)
(54,247)
- -- 
(12,158)
(5,903) (211,890)
 

(38,008)
(70,675)
200,000 
(7,500)
55,165 
- -- 
(6,685)
132,297 
33,276 
36,383 
$ 69,659 
 
 
$ 91,594 
$ 59,900 

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

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

2002 2001

 Operating Revenues:
   Electric
   Gas
   Other
      Total operating revenues
Operating Expenses:
Energy costs:
   Purchased electricity
   Purchased gas
   Electric generation fuel
   Residential Exchange
   Unrealized gain on derivative instruments
Utility operations and maintenance
Other operations and maintenance
Depreciation and amortization
Conservation amortization
Taxes other than federal income taxes
Federal income taxes
      Total operating expenses
Operating Income
Other income
Interest Before Interest Charges
Interest charges, net of AFUDC
Net Income
Less:  preferred stock dividends accrual
Income for Common Stock

$ 330,326 
144,384 
4,155 
478,865 
 
 
142,128 
88,520 
14,680 
(30,964)
(252)
73,630 
356 
54,053 
3,605 
49,339 
11,046 
406,141 
72,724 
3,455 
76,179 
47,340 
28,839 
1,940 
$ 26,899 

$ 719,694 
163,013 
7,243 
889,950 
 
 
535,277 
104,184 
63,134 
(10,304)
(41,527)
65,414 
3,496 
51,517 
1,603 
45,306 
10,221 
828,321 
61,629 
2,485 
64,114 
46,839 
17,275 
2,085 
$ 15,190 

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

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

2002 2001

 Operating Revenues:
   Electric
   Gas
   Other
      Total operating revenues
Operating Expenses:
Energy costs:
   Purchased electricity
   Purchased gas
   Electric generation fuel
   Residential Exchange
   Unrealized gain on derivative instruments
Utility operations and maintenance
Other operations and maintenance
Depreciation and amortization
Conservation amortization
Taxes other than federal income taxes
Federal income taxes
      Total operating expenses
Operating Income
Other income
Interest Before Interest Charges
Interest charges, net of AFUDC
Income Before Cumulative Effect of Accounting Change
Cumulative effect of implementation of FAS-133 derivative instruments
   and hedge activities, net of tax
Net Income
Less:  preferred stock dividends accrual
Income for Common Stock

$ 711,860 
458,875 
4,714 
1,175,449 
 
 
342,400 
293,318 
79,860 
(73,711)
(11,748)
139,571 
810 
107,731 
5,769 
112,904 
31,089 
1,027,993 
147,456 
3,764 
151,220 
96,683 
54,537 
 
- -- 
54,537 
3,952 
$ 50,585 

$ 1,484,701 
467,283 
29,290 
1,981,274 
 
 
925,493 
320,793 
165,518 
(27,045)
(15,061)
126,593 
6,619 
103,002 
3,205 
115,386 
65,032 
1,789,535 
191,739 
5,328 
197,067 
92,164 
104,903 
 
14,749 
90,154 
4,243 
$ 85,911 

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

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

2002 2001

Net Income
Other comprehensive income, net of tax:
   Unrealized holding losses on marketable securities
       arising during the period
   Unrealized gains (losses) on derivative instruments during the
     period
   Reversal of unrealized gains on derivative instruments
     settled during the period
    Other comprehensive income (loss)
Comprehensive Income (Loss)
$ 28,839 
 
(377)
 
3,513 
 
(1,347)
 
1,789 
$ 30,628 
$ 17,275 
 
(612)
 
(278,117)
 
(37,267)
 
(315,996)
$ (298,721)

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

2002 2001

Net Income
Other comprehensive income, net of tax:
   Unrealized holding losses on marketable securities
      arising during the period
   Reclassification adjustment for realized gains on marketable
     securities included in net income
   Transition adjustment for unrealized gain on derivative
     instruments at January 1, 2001
   Unrealized losses on derivative instruments during the period
   Reversal of unrealized (gains) losses on derivative instruments
     settled during the period
    Other comprehensive income (loss)
Comprehensive Income
$ 54,537 
 
(526)
 
(724)
 
- -- 
 
(2,102)
32,834 
 
29,482 
$ 84,019 
$ 90,154 
 
(1,407) 
 
- -- 
 
286,928 
 
(149,379)
(143,335)
 
(7,193) 
$ 82,961 

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

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

ASSETS

June 30,
2002 December 31,
2001

Utility Plant: (at original cost, including construction work in
progress of $123,115 and $123,307 respectively)
   Electric
   Gas
   Common
   Less: Accumulated depreciation and amortization
      Net utility plant

Other Property and Investments

Current Assets:
   Cash
   Restricted cash
   Accounts receivable, net
   Unbilled revenue
   Materials and supplies, at average cost
   Purchased gas receivable
   Current portion of unrealized gain on derivative instruments
   Prepayment and other
      Total current assets

Other Long-Term Assets:
   Regulatory asset for deferred income taxes
   Regulatory asset for PURPA buyout costs
   Unrealized gain on derivative instruments
   Other
      Total other long-term assets

Total Assets

 
$ 4,193,417 
1,589,701 
373,768 
(2,268,062)
3,888,824 

154,875 

 
68,159 
5,869 
205,104 
69,970 
55,625 
- -- 
314 
4,977 
410,018 

 
183,721 
244,124 
8,479 
275,090 
711,414 

$ 5,165,131 

 
$ 4,167,920 
1,551,439 
362,670 
(2,194,048)
3,887,981 

150,530 

 
82,708 
- -- 
235,348 
147,008 
85,318 
37,228 
3,315 
7,405 
598,330 

 
193,016 
244,635 
3,317 
239,941 
680,909 

$ 5,317,750 

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

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

CAPITALIZATION AND LIABILITIES

June 30,
2002 December 31,
2001

Capitalization:
  Common shareholders' investment:
    Common stock $10 stated value, 150,000,000 shares
    authorized, 85,903,791 shares outstanding
    Additional paid-in capital
    Earnings reinvested in the business
    Accumulated other comprehensive income (loss)
  Preferred stock not subject to mandatory redemption
  Preferred stock subject to mandatory redemption
  Corporation obligated, mandatorily redeemable preferred
    securities of subsidiary trust holding solely junior
    subordinated debentures of the corporation
  Long-term debt
      Total capitalization

Current Liabilities:
  Accounts payable
  Short-term debt
  Current maturities of long-term debt
  Purchased gas liability
  Accrued expenses:
    Taxes
    Salaries and wages
    Interest
  Current portion of unrealized loss on derivative instruments
  Other
      Total current liabilities

Long-Term Liabilities:
  Deferred income taxes
  Other deferred credits
  Unrealized loss on derivative instruments
      Total long-term liabilities

Total Capitalization and Liabilities

 
 
$ 859,038 
382,600 
53,737 
161 
60,000 
43,162 
 
 
300,000 
2,063,824 
3,762,522 

 
118,087 
108,046 
87,000 
91,385 
 
76,303 
12,068 
45,823 
4,821 
25,966 
569,499 

 
617,377 
215,691 
42 
833,110 

$ 5,165,131 

 
 
$ 859,038 
382,592 
55,345 
(29,321)
60,000 
50,662 
 
 
300,000 
2,053,815 
3,732,131 

 
154,600 
338,168 
117,000 
- -- 
 
70,210 
14,746 
42,505 
35,145 
25,178 
797,552 

 
601,001 
186,991 
75 
788,067 

$ 5,317,750 

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

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

2002 2001

Operating Activities:
Net Income
Adjustment to reconcile net income to net cash provided
  by operating activities:
   Depreciation and amortization
   Deferred federal and state income taxes and tax credits - net
   Net unrealized (gains) losses on derivative instruments
   Other
Change in certain current assets and current liabilities:
   Accounts receivable and unbilled revenue
   Materials and supplies
   Prepayments and other
   Purchases gas receivable/liability
   Accounts payable
   Accrued expenses and other
      Net Cash Provided by Operating Activities

Investing Activities:
   Construction and capital expenditures-excluding equity AFUDC
   Additions to energy conservation program
   Restricted cash
   Loans to Schlumberger (formerly Cellnet Data Services)
   Other
      Net Cash Used by Investing Activities

Financing Activities
   Change in short-term debt - net
   Dividends paid
   Issuance of trust preferred stock
   Redemption of preferred stock
   Issuance of bonds
   Redemption of bonds and notes
   Other
      Net Cash Provided (Used) by Financing Activities
Net Increase (Decrease) in Cash
Cash at Beginning of Year
Cash at End of Period
Supplemental Cash Flow Information:
Cash payments for:
   Interest (net of capitalized interest)
   Income taxes (net of refunds)
$ 54,537
 
 
 
107,731 
25,670 
(11,748)
5,231 
 
107,282 
29,693 
2,429 
128,613 
(36,650)
15,861 
428,649 

 
(113,133)
(4,434)
(5,869)
- -- 
(5,888)
(129,324)

 
(230,122)
(56,145)
- -- 
(7,500)
- -- 
(20,000)
(107)
(313,874)
(14,549)
82,708 
$ 68,159 
 
 
$ 93,033 
$ (838)
$ 90,154 
 
 
 
103,002 
8,074 
7,630 
17,495 
 
189,784 
(3,417)
(416)
(35,577)
(244,140)
(11,876)
120,713 

 
(135,420)
(3,713)
- -- 
(12,158)
(5,902)
(157,193)

 
(48,161)
(70,675)
200,000 
(7,500)
- -- 
- -- 
(6,346)
67,318  
30,838 
36,383 
$ 67,221 
 
 
$ 91,594 
$ 59,900 

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

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Consolidation Policy

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

       The consolidated financial statements contained in this Form 10-Q are unaudited. In the respective opinions of the managements of Puget Energy and PSE, all adjustments necessary for a fair presentation of the results for the interim periods have been reflected and were of a normal recurring nature. These condensed financial statements should be read in conjunction with the audited financial statements (and the Combined Notes thereto) included in the combined Puget Energy and PSE annual report on Form 10-K for the year ended December 31, 2001, which is available at the Securities and Exchange Commission website at www.sec.gov or at Puget Energy's website at www.pse.com.

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

       Puget Energy's basic earnings per common share have been computed based on weighted average common shares outstanding of 87,448,000 and 87,309,000 for the three and six months ended June 30, 2002, respectively and 86,303,000 and 86,169,000 for the three and six months ended June 30, 2001, respectively.

       Puget Energy's diluted earnings per common share have been computed based on weighted average common shares outstanding of 87,646,000 and 87,508,000 for the three and six months ended June 30, 2002, respectively, and 86,576,000 and 86,443,000 for the three and six months ended June 30, 2001, respectively. These shares include the dilutive effect of securities related to employee and director equity plans. The difference between the number of basic common shares and diluted common shares is immaterial.

(3) Segment Information  (Puget Energy Only)

       Puget Energy operates in primarily two business segments: "PSE" (regulated utility operations) and "InfrastruX" (utility infrastructure services). Puget Energy's regulated utility operation generates, purchases, transports and sells electricity, and natural gas. The service territory covers approximately 6,000 square miles in Washington state. InfrastruX specializes in contracting services to other gas and electric utilities, primarily in the Mid-West, Texas and the Eastern United States.

       The "Other" non-utility line of business includes a PSE real estate and development subsidiary and Puget Energy holding company related expenses. The assets of ConneXt, the developer and marketer of customer information and billing system software, were sold during the third quarter of 2001. Reconciling items between segments are not material.

      Financial data for business segments are as follows:

(Dollars in Thousands) Three Months Ended June 30, 2002	PSE	InfrastruX	Other	Total
Revenues	$ 474,710	$ 76,121	$ 4,156	$ 554,987
Depreciation and amortization	54,000	3,253	54	57,307
Federal income taxes	9,538	1,824	1,472	12,834
Operating income	70,547	4,177	2,109	76,833
Interest charges, net of AFUDC	47,340	1,342	--	48,682
Net income	26,662	2,598	2,109	31,369
Goodwill, net	--	132,894	--	132,894
Total assets	5,038,294	317,212	125,600	5,481,106
Goodwill, net at December 31, 2001	--	$ 102,151	--	$ 102,151
Total asset at December 31, 2001	$ 5,178,601	229,125	$ 139,251	5,546,977

Three Months Ended June 30, 2001	PSE	InfrastruX	Other	Total
Revenues	$ 882,707	$ 45,469	$ 7,243	$ 935,419
Depreciation and amortization	51,513	1,418	4	52,935
Federal income taxes	8,954	1,654	1,248	11,856
Operating income	59,211	4,480	2,380	66,071
Interest charges, net of AFUDC	46,731	1,336	107	48,174
Net income	14,956	2,228	2,281	19,465

Six Months Ended June 30, 2002	PSE	InfrastruX	Other	Total
Revenues	$ 1,170,735	$ 136,883	$ 4,714	$ 1,312,332
Depreciation and amortization	107,673	5,525	58	113,256
Federal income taxes	29,291	2,350	1,683	33,324
Operating income	145,021	6,162	2,221	153,404
Interest charges, net of AFUDC	96,683	2,397	--	99,080
Net income	52,280	3,524	2,043	57,847

Six Months Ended June 30, 2001	PSE	InfrastruX	Other	Total
Revenues	$ 1,951,984	$ 74,009	$ 29,290	$ 2,055,283
Depreciation and amortization	102,995	3,061	7	106,063
Federal income taxes	57,187	1,111	7,818	66,116
Operating income	177,039	4,924	14,649	196,612
Interest charges, net of AFUDC	91,951	1,445	213	93,609
Net income	75,375	1,661	14,727	91,763

(4) Accounting for Derivative Instruments and Hedging Activities

       On January 1, 2001, Puget Energy adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), as amended by Statement No. 138. Statement No. 133 requires that all contracts considered to be derivative instruments be recorded on the balance sheet at their fair value. The Company enters into both physical and financial contracts to manage its energy resource portfolio including forward physical and financial contracts, option contracts and swaps. The majority of these contracts qualify for the normal purchase and normal sale exception provided by Statement No. 133.

       On January 1, 2001, the Company recognized the cumulative effect of adopting Statement No. 133 by recording a liability and an offsetting after-tax decrease to current earnings of approximately $14.7 million for the fair value of electric derivatives that did not meet hedge criteria. The Company also recorded an asset and an offsetting increase to other comprehensive income of approximately $286.9 million for the fair value of derivative instruments that did meet hedge criteria on the implementation date.

       During the three months ended June 30, 2002, the Company recorded an increase in earnings for the change in the market value of derivative instruments not meeting cash flow hedge criteria of approximately $0.3 million pre-tax ($0.2 million after-tax) as compared to an increase in earnings of $41.5 million pre-tax ($27.0 million after-tax) for the same period in 2001. During the six month period ending June 30, 2002, the Company recorded an increase in earnings of approximately $11.7 million pre-tax ($7.6 million after-tax) as compared to a decrease in earnings of $7.6 pre-tax ($4.9 million after-tax) for the same period in 2001.

       At October 15, 2001, the Company had recorded a deferred liability of approximately $26.9 million after-tax for financial gas contracts to be used for electric production that until October 15, 2001 were designated as qualifying cash flow hedges. Changes in the market values of these de-designated contracts resulted in the recording of a loss of $7.8 million pre-tax ($5.1 million after-tax) to earnings in the fourth quarter of 2001. During the three months ended March 31, 2002, all of these contracts were settled or terminated, resulting in the loss being reversed during the first quarter of 2002.

       On September 19, 2001, the Financial Accounting Standards Board's Derivative Implementation Group for Statement No. 133 issued guidance under Issue C16 - "Applying the Normal Purchases and Normal Sales Exception to Contracts that Combine a Forward Contract and Purchased Option Contract" which became effective in the second quarter of 2002 for Puget Energy. Issue C16 establishes that fuel supply contracts that combine a forward contract with a purchased option cannot qualify for the normal purchase and normal sales exception because of the optionality of the quantity of fuel to be delivered under the contract.

       A review of the fuel supply contracts by the Company determined that two long term fuel supply contracts that deliver natural gas to the Company's Encogen combustion turbine plant contained provisions for the purchase of optional quantities of fuel, and as originally written, would no longer qualify as normal purchase contracts upon implementation of Issue C16. In the second quarter of 2002, the Company signed amendments to those contracts that remove the optional provisions, requiring that the Company purchase 100% of the contractual fuel quantities for the remaining terms of the contracts. As a result, the contracts continue to qualify for the normal purchase-normal sale exception to Statement 133.

(5) Acquisitions (Puget Energy Only)

       During the six months ended June 30, 2002, InfrastruX, a majority-owned subsidiary of Puget Energy, acquired Chapman Construction Company, an electric utility construction company, and Flowers Construction Company, an electric and gas utility construction and maintenance contractor. Both companies are based in Texas. With these acquisitions, InfrastruX's combined annualized revenues are expected to be approximately $320 million. During 2001, InfrastruX made six acquisitions of utility infrastructure companies in the Eastern United States, Mid-West and Texas. These companies provide utility infrastructure services such as: installing, replacing and restoring underground cables and pipes for utilities; transmission and distribution pipeline construction, maintenance and rehabilitation services for the natural gas and petroleum industries, including directional drilling and vacuum excavation; and transmission and distribution overhead electric construction services to electric utilities and cooperatives.

       The above acquisitions in both 2001 and 2002 were accounted for using the purchase method of accounting and, accordingly, the operating results of these companies have been included in Puget Energy's consolidated financial statements since their acquisition dates. Goodwill representing the excess of cost over the net tangible and identifiable intangible assets of the business at the time of purchase was approximately $137.3 million. During 2001, goodwill was being amortized on a straight-line basis using a 30-year life except for goodwill on two acquisitions made after June 30, 2001, which was not amortized per Statement of Financial Accounting Standards No. 142 - "Goodwill and Other Intangible Assets" (Statement No. 142). With the implementation of Statement No. 142 on January 1, 2002, Puget Energy discontinued amortizing goodwill and reclassified $5.2 million of intangible assets that no longer met the criteria of identifiable intangible assets to goodwill. In lieu of the amortization, Puget Energy performed an initial impairment review of goodwill and determined that no impairment would be recorded. Puget Energy will perform an annual impairment review hereafter or at the time an event or circumstance would reduce the fair value below the carrying value.

       The income statement effects of discontinuing amortization of goodwill for the comparative periods are as follows for Puget Energy:

Three Months Ended	Six Months Ended
June 30	June 30

(Dollars in Thousands) 2002 2001 2002 2001

Reported net income for common $ 29,429  $ 17,380  $ 53,895  $ 87,520 

Add back goodwill amortization --  676  --  1,303 

Adjusted net income for common $ 29,429  $ 18,056  $ 53,895  $ 88,823 

Basic earnings per share

  Reported net income for common $ 0.34  $ 0.20  $ 0.62  $ 1.02 

  Add back goodwill amortization --  0.01  --  0.01 

  Adjusted net income for common $ 0.34  $ 0.21  $ 0.62  $ 1.03 

Diluted earnings per share

  Reported net income for common $ 0.34  $ 0.20  $ 0.62  $ 1.01 

  Add back goodwill amortization --  0.01  --  0.01 

  Adjusted net income for common $ 0.34  $ 0.21  $ 0.62 $ 1.02 

     Identifiable intangible assets acquired as a result of acquisitions of companies are amortized over the expected useful lives of assets, which range from five to 20 years. As InfrastruX acquires more companies the total amortization amount in future periods will change. Identifiable intangible assets are as follows:

June 30, 2002 December 31, 2001

(Dollars in Thousands) Gross
Intangibles Accumulated
Amortization Net
Intangibles Gross
Intangibles Accumulated
Amortization Net
Intangibles

Covenant not to compete $ 4,061  $ 718  $ 3,343  $ 2,768  $ 364  $ 2,404 

Developed technology 14,190  1,360  12,830  14,190  1,005  13,185 

Patents 582  --  582  470  --  470 

Total $ 18,833 $ 2,078  $ 16,755  $ 17,428 $ 1,369 $ 16,059

     The identifiable intangible amortization expense for the three and six months ended June 30, 2002 was $0.4 million and $0.7 million, respectively, compared to $0.3 million and $0.5 million for the same periods of 2001. The identifiable intangible assets amortization for future periods based on the current acquisitions will be:

(Dollars in Thousands) 2002 2003 2004 2005 2006 2007

Future Intangible Amortization $ 761 $ 1,528 $ 1,528 $ 1,512 $ 1,181 $ 766

(6) Restricted Cash

       Restricted cash represents cash to be used for specific purposes. Approximately $4.8 million in restricted cash is for residential and small farm customers who receive a credit on their bills for the Residential and Farm Energy Exchange credit tariff. The restricted amount is the excess paid by the Bonneville Power Administration over the credit provided to these customers. Approximately $1.1 million in restricted cash is for a real estate development project that a city requires to ensure work is completed either by the Company or by the city.

(7) New Accounting Pronouncements

       In August 2001, the Financial Accounting Standards Board issued Statement No. 143 - "Accounting for Asset Retirement Obligations" (Statement No. 143). Statement No. 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the company will capitalize the cost as part of the asset's carrying amount and expense the retirement obligation over the asset's useful life. The adoption of this statement is for fiscal years beginning after June 15, 2002, although earlier adoption is encouraged. The Company is in the process of determining the impacts of this statement. The Federal Energy Regulatory Commission which has jurisdiction over utilities such as PSE, has not yet issued accounting guidance on Statement No. 143.

       The Emerging Issues Task Force of the Financial Accounting Standard's Board (EITF or Task Force) at its June 2002 meeting came to a consensus on one of three items included in EITF Issue 02-3 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-3). The Task Force has agreed that all mark-to-market gains and losses on energy trading contracts whether realized or unrealized will be shown net in the income statement (costs offset against revenues), irrespective of whether the contract is physically settled. The presentation will be applicable to financial statements for periods ending after July 15, 2002. The Company performs risk management activities to optimize the value of energy supply and transmission assets and to ensure that physical energy supply is available to meet the customer demand loads. The Company also purchases energy when demand exceeds available supplies in its portfolio; likewise the Company makes sales to other utilities and marketers when surplus energy is available. These transactions are part of the Company's normal operations to meet retail load. The Company reports these transactions gross in the income statement in electric operating revenue and purchased power. The Company's unrealized gains and losses are shown net in the income statement in operating expenses as a separate expense item. Beginning in the third quarter of 2002, the Company will present all actual settled energy contracts that meet this definition net in the income statement with all comparative financial statements reclassified to conform to the new presentation. The adoption of EITF 02-3 will not have any impact on the net income of the Company.

(8) Other

       On March 28, 2002, the Washington Commission approved a settlement agreement that was announced on March 20, 2002 which resolved the Company's request for an interim rate increase and three of the four significant financial issues in the Company's electric and gas general rate cases. As a result, an interim electric rate surcharge of $25 million was in effect for the period April 1, 2002 through June 30, 2002. The three important financial issues that were resolved for the general rate case included the equity capital ratio, the return on equity and adoption of an electric power cost adjustment mechanism. The settlement also created a fast track collaborative process for completion of any adjustments to the Company's requested revenue requirement for the gas general rate case by September 1, 2002. If the fast track collaborative process cannot be completed by September 1, 2002, then the completion of the gas general rate case would be no later than November 1, 2002.

       On June 20, 2002, the Washington Commission issued final regulatory approval of the comprehensive electric-rate settlement submitted by PSE, key constituents and customer groups, state regulatory staff and the state attorney general's Public Counsel Section. The authorization grants PSE a 4.6% electric general rate increase that will generate approximately an additional $59 million annually beginning July 1, 2002. In addition, the settlement provides for an 8.76% overall return on capital based on a projected capital structure with an equity component of 40% and an authorized 11% return on common equity. The settlement also resolved all electric and gas cost allocation issues and established an 8.76% overall return on capital for the gas general rate case. The settlement also includes a power cost adjustment mechanism that triggers if PSE's costs to provide customers' electricity falls outside certain bands from a normalized level of power costs established in the electric general rate case. The cumulative maximum pre-tax earnings exposure due to power cost variations over the four year period ending June 30, 2006 is limited to $40 million plus 1% of the excess. All significant variable power supply cost drivers are included in the power cost adjustment mechanism (hydroelectric generation variability, market price variability for purchased power and surplus power sales, natural gas and coal fuel price variability, generation unit forced outage risk and wheeling cost variability). The mechanism apportions increases or decreases in power costs, on a graduated scale, between PSE and its customers in the following manner:

Annual Power

Cost Variability Customers' Share Company's Share ⁽¹⁾

+/- $20 million   0% 100%

+/- $20-$40 million 50%  50%

+/- $40-$120 million 90%  10%

+/- $120+ million 95%   5%

⁽¹⁾ Over the four year period July 1, 2002 through June 30, 2006, the Company’s share of pre-tax power cost variances is capped at a cumulative $40 million plus 1% of the excess.

       Interest will be accrued on any overcollection or undercollection of the customer's share of the excess power cost that is deferred. The Company can also request a power cost adjustment rate surcharge if for any 12 month period the projected deferred power cost will exceed $30 million.

       On May 24, 2002, the Washington Commission allowed a Purchased Gas Adjustment rate reduction that was filed by PSE on May 6, 2002 to become effective June 1, 2002, lowering natural gas rates by 21.2%. This ended a temporary surcharge that went into effect September 1, 2001. The PGA mechanism passes through to customers increases or decreases in the gas supply portion of the natural gas service rates based upon changes in the prices. PSE's gas margin and net income is not affected by the change in gas rates.

       PSE was formally designated as a "potentially liable party" under the Washington State Model Toxics Control Act for a new site in Washington state on March 29, 2002, because PSE's predecessor companies operated a manufactured gas plant in the area from 1907 to 1956. During 1992, the Washington Commission issued an order regarding the treatment of certain environmental costs incurred by PSE under its remediation program. The order authorizes the Company to accumulate and defer prudently incurred cleanup costs paid to third parties for recovery in rates established in future rate proceedings. The Company believes its future environmental remediation costs are recoverable from either insurance companies, third parties or under the Washington Commission's order and has recorded a regulatory asset.

       For all gas environmental sites, legal and remediation activities incurred to date total approximately $58.3 million and approximately $37.6 million has been accrued for future remediation costs for this and other remediation sites. To date, the Company has recovered approximately $58.2 million from insurance carriers and other third parties. Based on all known facts and analyses, the Company believes it is not likely that the identified environmental liabilities will result in a material adverse impact on the Company's financial position, operating results or cash flow trends. The Company is currently pursuing claims against insurance companies and third parties for the amount spent on legal and remediation costs to date along with future remediation costs.

       In February 2002, the Company 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 any combination of common stock of Puget Energy, principal amount of senior notes of PSE secured by a pledge of first mortgage bonds, unsecured debentures of PSE or trust preferred securities of PSE.

       In June 2001, InfrastruX signed a three year credit agreement with several banks to provide up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In addition, InfrastruX's subsidiaries have $29.5 million in lines of credit with various banks. Borrowings available for InfrastruX are used to fund acquisitions and working capital requirements of InfrastruX and its subsidiaries. At June 30, 2002, InfrastruX and its subsidiaries had outstanding loans of $148.1 million, effectively reducing the available borrowing capacity under these lines of credit to $31.4 million.

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

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

Puget Energy
Results of Operations

       All of the operations of Puget Energy are conducted through its subsidiaries, PSE and InfrastruX. Puget Energy's net income for the three months ended June 30, 2002 was $31.4 million on operating revenues of $555.0 million, compared to net income of $19.5 million on operating revenues of $935.4 million for the same period in 2001. Net income for common stock was $29.4 million for the second quarter of 2002 compared to $17.4 million for the second quarter of 2001. Basic and diluted earnings per share were $0.34 for the second quarter of 2002 compared to $0.20 for the second quarter of 2001.

       For the first six months of 2002, net income was $57.8 million on operating revenues of $1.3 billion, compared to net income of $91.8 million on operating revenues of $2.1 billion for the corresponding period in 2001. Income for common stock was $53.9 million for the first half of 2002 and $87.5 million for the same period in 2001. Basic and diluted earnings per common share were $0.62 for the six months ended June 30, 2002 and $1.02 and $1.01, respectively, for the same period in 2001. The six months results of 2001 are net of a charge to earnings of $0.17 per basic and diluted share associated with the adoption of Statement No. 133.

       Total kilowatt-hour energy sales to retail electric consumers in the second quarter of 2002 were 4.4 billion compared to 4.7 billion in 2001. Kilowatt-hours transported to commercial and industrial transportation customers under a new electric tariff established in the third quarter of 2001 were 516.9 million for the second quarter of 2002. Those transport customers were served under a retail full service industrial tariff in 2001. Kilowatt-hour sales to wholesale customers were 1.4 billion in the second quarter of 2002 compared to 2.0 billion in 2001. Total gas sales to retail consumers in the second quarter of 2002 were 158.5 million therms compared to 160.7 million therms in 2001. Total gas delivered for transportation customers in the second quarter of 2002 was 49.0 million therms compared to 44.2 million therms in 2001. For the six month periods ended June 30, 2002 and 2001, total kilowatt-hour sales to retail electric consumers were 9.9 billion and 10.4 billion, respectively. Kilowatt-hours transported to transportation customers were 1.1 billion for the first six months of 2002. Kilowatt-hour sales to wholesale customers were 2.8 billion for the first six months of 2002 compared to 3.9 billion in 2001. Total gas sales to retail consumers for the first six months of 2002 were 505.5 million therms compared to 481.1 million therms in 2001. Total gas delivered for transportation customers for the first six months of 2002 was 103.8 million therms compared to 93.2 million therms in 2001.

       The Company's utility operating revenues and associated expenses are not generated evenly during the year. Variations in energy usage by consumers do occur from season to season and from month to month within a season, primarily as a result of weather conditions. The Company normally experiences its highest retail energy sales in the first and fourth quarters of the year. Varying wholesale electric prices and the amount of hydroelectric energy supplies available to the Company also make quarter-to-quarter comparisons difficult. In addition, operating revenues and associated expenses of InfrastruX vary quarter-to-quarter with its highest revenues in the second and third quarters, excluding the effects of any new acquisitions during the year.

       The Company meets its forecasted electric supply needs throughout the year through Company-controlled electric generation and by obtaining power through long-term contracts, annual contracts and short-term markets. The Company meets its forecasted natural gas supply needs throughout the year through Company-owned gas storage and by purchasing gas supplies through long-term contracts, annual contracts and short-term markets. The Company also performs risk management activities to optimize the value of energy supply and transmission assets and to ensure that physical energy supply is available to meet the customer demand loads. The Company also purchases energy when demand exceeds available supplies in its portfolio; likewise the Company makes sales to other utilities and marketers when surplus energy is available. These transactions are part of the Company's normal operations to meet retail load. Electric sales to other utilities and marketers vary by quarter and year depending principally upon water conditions for the generation of hydroelectric power, retail customer usage, the energy requirements of other utilities and energy market conditions in the Pacific Northwest. The June 27, 2002 seasonal water supply forecast published by the National Weather Service indicated that the total forecasted runoff into the Grand Coulee reservoir for the period April through September 2002 would be 110% of normal. This compares to 57% of normal for the same period in 2001. Although runoff conditions are above normal, PSE expects hydro generation from the Mid-Columbia projects will be slightly below normal in 2002 due to the refilling of the reservoirs that were drawn down by last year's drought conditions.

       Temperatures based on heating-degree-days measured at Seattle-Tacoma airport during the three month period ended June 30, 2002 were 7% cooler than normal as compared to heating-degree-days being 12% cooler than normal during the three month period ended June 30, 2001.

Results of Operations of Puget Energy
Comparative Three and Six Months Ended
June 30, 2002 vs. June 30, 2001
Increase (Decrease)
(Dollars in Millions)

Three Month
Period Six Month
Period

Operating revenue changes:

  Electric revenue sold at index rates $(62.6) $ (152.6)

  Electric revenue sold to conservation trust 5.6  11.7 

  Residential exchange credit (11.9) (22.7)

  Interim electric rate increase April - June 2002 25.0  25.0 

  Electric load and other 0.3  9.0 

  Electric transportation revenue 4.5  8.1 

  Electric sales to other utilities and marketers (350.3) (651.3)

     Total electric revenue change (389.4) (772.8)

  Retail gas revenue (19.3) (9.3)

  Gas transportation revenue and other 0.7  0.9 

     Total gas revenue change (18.6) (8.4)

  InfrastruX revenue 30.7  62.9 

  Other revenue (3.1) (24.6)

     Total operating revenue change (380.4) (742.9)

Operating expense changes:

Energy costs:

  Purchased electricity (393.1) (583.1)

  Residential exchange power cost credit (20.7) (46.7)

  Purchased gas (15.7) (27.5)

  Electric generation fuel (48.4) (85.7)

  Unrealized (gain) loss on derivative instruments 41.2  3.4 

Utility operations and maintenance:

  Production operations and maintenance 6.4  7.1 

  Personal energy management (1.4) (1.5)

  Other utility operations and maintenance 3.2  7.4 

Other operations and maintenance

  InfrastruX operations and maintenance 23.7  50.7 

  Other operations and maintenance (3.1) (5.5)

Depreciation and amortization 4.4  7.1 

Conservation amortization 2.0  2.6 

Taxes other than federal income taxes 9.3  4.8 

Federal income taxes 1.0  (32.8)

     Total operating expense change (391.2) (699.7)

Other income (net of tax) change 1.8  0.3 

Interest charges change 0.5  5.4 

Minority interest in earnings of consolidated subsidiary change 0.2  0.3 

FAS-133 transition loss (net of tax) change --  (14.7)

    Net income change $ 11.9  $ (33.9)

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

Operating Revenues - Electric

       Electric revenues for the three months ended June 30, 2002 were $330.3 million, a decrease of $389.4 million compared to the same period in 2001. Retail kWh sales volumes declined 7.6% from 4.7 billion kWh in 2001 to 4.4 billion kWh in 2002. Retail sales revenue decreased 15.7% as a result of industrial and commercial customers on market index rates switching to transportation rate tariffs beginning in July 2001, as allowed by a Washington Commission order dated April 5, 2001, authorizing the establishment of a transportation tariff. Transportation revenues were $4.5 million in the three months ended June 30, 2002. Electric sales to other utilities and marketers in the western wholesale market, including the Pacific Northwest, decreased $350.3 million in the three months ended June 30, 2002 compared to the same period in 2001 due to decreased prices in the wholesale electricity market. Wholesale sales volumes declined by 587.5 million kWh or 29.0% in the three months ended June 30, 2002 compared to the same period in 2001.

       Electric revenues for the six months ended June 30, 2002 were $711.9 million, a decrease of $772.8 million compared to the same period in 2001. Retail kWh sales volumes declined 5.1% from 10.4 billion kWh in 2001 to 9.9 billion kWh in 2002. Retail sales revenue decreased 15.8% as a result of industrial and commercial customers on market index rates switching to transportation rate tariffs beginning in July 2001, as allowed by a Washington Commission order dated April 5, 2001, authorizing the establishment of a transportation tariff. Transportation revenues were $8.0 million in the six months ended June 30, 2002. Electric sales to other utilities and marketers in the western wholesale market, including the Pacific Northwest, decreased $651.3 million in the six months ended June 30, 2002 compared to the same period in 2001 due to decreased prices in the wholesale electricity market. Wholesale sales volumes declined by 1.1 billion kWh or 27.6% in the six months ended June 30, 2002 compared to the same period in 2001.

       On April 25, 2001, the Washington Commission approved "time-of-day" rates for approximately 300,000 residential electric customers for the period May 1, 2001 through September 30, 2001. On September 26, 2001, the Washington Commission authorized the extension of the "time-of-day" rates pilot program for residential customers through May 31, 2002 and to allow approximately 20,000 business customers to participate in a "time-of-day" rates program from October 1, 2001 through September 30, 2002. Pursuant to the order, if the cumulative revenues collected under "time-of-day" tariffs during the beginning through the end of the programs exceed the revenues that would have been collected under the original tariffs, PSE must defer any overcollection and refund it to participating customers. Through June 30, 2002, revenues billed under the "time-of-day" tariff have been slightly less than the original tariffs by an immaterial amount, thus no deferred liability was established at June 30, 2002. This provision ended on July 1, 2002 when the electric general rate increase became effective. Personal Energy Management^TM consumption information is available to all classes of customers. Customers are able to monitor their energy usage and shift usage to low-demand off-peak periods. This program reduces the demand for peak power generation.

       Revenues from electric customers in the first six months of 2001 and 2002 were reduced by a Residential and Farm Energy Exchange credit tariff in place from October 1, 1995 through June 30, 2001 and an amended Residential Purchase and Farm Energy Exchange credit in place since July 1, 2001. On June 13, 2001, the Washington Commission approved an amended Residential Purchase and Sale Agreement between PSE and Bonneville Power Administration (BPA) under which PSE's residential and small farm customers would continue to receive benefits of federal power. Completion of this agreement enables PSE to continue to provide, and in fact increase, effective January 1, 2002, the Residential and Farm Energy Exchange credit. Under the amended Residential Purchases and Sale agreement, PSE receives cash payments during the period July 1, 2001 through September 30, 2006 and benefits in the form of power and/or cash equivalent to approximately 648 annual average MW from October 1, 2006 through September 30, 2011. The level and form of any federal benefits to be received by PSE's residential and small farm customers may vary, depending on the outcome of regulatory and legal proceedings and reviews. As of July 1, 2001, the cash payments received from BPA by PSE are passed-through to eligible residential and small farm customers, with an offsetting reduction in purchased electricity expense recorded. PSE expects payments from BPA spread monthly in the amount of $127.3 million for the period January 2002 through September 2002 and $702.2 million for the period October 2002 through September 2006.

       On March 28, 2002, the Washington Commission approved an electric interim rate surcharge that was announced on March 20, 2002 as part of the interim and general rate case proceedings. As a result, an interim electric rate surcharge of $25 million was in effect for the period April 1, 2002 through June 30, 2002.

       On June 20, 2002, the Washington Commission also issued final regulatory approval of a settlement agreement in the electric general rate case. The authorization grants PSE a 4.6% electric general rate increase that will generate approximately an additional $59 million annually beginning July 1, 2002. The approval also includes a power cost adjustment mechanism that triggers if PSE's costs to provide customers' electricity varies from a certain threshold

       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 hydroelectric generation and weather effects on customer demand, from time to time, PSE may have surplus power available for sale to wholesale customers. PSE manages its core energy portfolio through short and intermediate-term purchases, sales, arbitrage and other risk management techniques. PSE also operates its combustion turbine plants located in Western Washington when it is cost-effective to do so. During the first six months of 2001, PSE had operated its combustion turbine plants extensively to meet retail load requirements compared to the same period in 2002. As energy prices moderated in the fourth quarter of 2001 and the second quarter of 2002, PSE reduced operations of its combustion turbine plants which reduced electric generation fuel expenses compared to the first six months of 2001. In addition, the moderate electricity prices have reduced electric sales to other utilities and marketers as well as purchased electricity costs in the first six months of 2002 compared to the same period in 2001. Wholesale energy sales in the second and third quarters of 2002 have been adversely impacted by very low wholesale energy prices at a time when the Company typically has excess supplies of electricity, thus adversely affecting sales to other utilities and marketers.

       PSE operates within the western wholesale market and made sales into the California energy market during the fourth quarter of 2000. In 2001, Pacific Gas & Electric Company (PG&E) and Southern California Edison defaulted on payment obligations owed to various energy suppliers, including the California Independent System Operator (CAISO). Consequently, the CAISO defaulted on its payment obligations to PSE and various other energy suppliers. During the second quarter of 2001, PSE received partial payments related to these sales which resulted in a receivable balance of $68.0 million. PSE also has a bad debt and a transaction fee reserve totaling $41.5 million in connection with these receivables, such that the net receivable at June 30, 2002 was $26.5 million. On March 1, 2002, Southern California Edison paid its past due energy obligations to the CAISO and various other parties, however, those funds were not used to pay the outstanding balance of the CAISO obligations. PSE is currently pursuing recovery of these obligations.

        On July 25, 2001, FERC ordered an evidentiary hearing to determine what refunds, California energy buyers are due for purchases in the spot markets operated by the CAISO covering the period October 2, 2000 through June 20, 2001. In July 2002, the CAISO submitted testimony in the proceeding indicating the CAISO owes PSE $61.9 million less a refund due of $26.3 million for a net due PSE of $35.6 million. In July 2002, PSE and various other parties filed rebuttal testimony in the proceeding. If all of the adjustments to the CAISO refund claims proposed in PSE's testimony are adopted, PSE's refund liability would be reduced and PSE's net receivable would be $46.7 million. Hearings on the FERC proceeding are scheduled to resume August 19, 2002 in San Francisco, California, and be completed before the end of August. The Administrative Law Judge is expected to issue his report and recommendations in the fall, and FERC is expected to take action with respect to that report at an indefinite time thereafter.

       FERC Investigation into Western Energy Markets. On July 25, 2001, FERC also established a separate preliminary evidentiary proceeding for the purpose of exploring whether there have been excessive charges for spot market sales in the Pacific Northwest for the period December 25, 2000 through June 20, 2001. The presiding Administrative Law Judge in the Pacific Northwest proceeding has issued a recommendation that refunds with respect to such charges during such period were not warranted. FERC is reviewing this recommendation. PSE made transactions that may be subject to refund in this proceeding. PSE is unable to predict the outcome of this FERC proceeding or any judicial proceeding arising therefrom.

       On May 8, 2002, the FERC issued a data request, concerning specific trading strategies described in memos prepared by Enron, to all sellers, including PSE, of wholesale electricity and/or ancillary services to the CAISO and/or the California Power Exchange Corporation during the years 2000-2001. On May 21 and May 22, 2002, FERC issued two more data requests to all sellers of wholesale electricity or natural gas in the western United States, including PSE, concerning "wash" or "roundtrip" trading activities. Each of the three requests required such sellers to respond with an affidavit concerning the seller's use or knowledge of various trading practices identified in the request. In response to the data requests, PSE conducted a review of its activities, and denied engaging in the trading activity described in the applicable request.

Other California Proceedings. On May 31, 2002, FERC conditionally dismissed a complaint filed on March 20, 2002 by the California Attorney General in Docket EL02-71 that alleged violations of the Federal Power Act by FERC and all sellers (including PSE) of electric power and energy into California. The complaint asserted that FERC’s adoption and implementation of market rate authority was flawed, and that as a result, individual sellers such as PSE were liable for sales of energy at rates that were “unjust and unreasonable.” The condition for dismissal was that all sellers re-file transaction summaries of sales to (and, after a clarifying order issued on June 28, purchases from) certain California entities during 2000 and 2001. PSE re-filed such transaction summaries on July 1 and July 8, 2002. The order of dismissal is now subject to rehearing at the request of the California Attorney General and others.

       On the same day as FERC’s order in Docket EL02-71 was entered, the California Attorney General announced it had filed individual complaints against a number of sellers, including PSE, in California Superior Court in San Francisco. That complaint alleges that PSE’s sales to California violated the requirements of the Federal Power Act, and that as such, the sales also violated certain sections of the California Business Practices Act that forbid unlawful business practices. The complaint asserts that each such “violation” subjects PSE to a fine of up to $2,500 plus an award of attorneys’ fees, and asserts that there were “thousands” of such violations. PSE has removed that suit to federal court, and has moved to dismiss it on the grounds that the issues are within the exclusive or primary jurisdiction of FERC. A decision on that motion is expected in the Fall of 2002. PSE cannot predict the outcome of these proceedings at this time.

       During May 2002, PSE was served with two cross-complaints, by Reliant Energy Services and Duke Energy Trading & Marketing, respectively, in six consolidated class actions pending in Superior Court in San Diego, California. The original complaints in the actions allege violations by the original (approximately 40) defendants of various California Business Practices Act or Cartwright Act (antitrust) provisions. The cross-complaints assert essentially that the cross-defendants, including PSE, were also participants in the energy market in California at the relevant times, and that any remedies ordered against some market participants should be ordered against all. Reliant Energy Services and Duke Energy Trading & Marketing also seek indemnity and conditional relief as a buyer on transactions involving cross-defendants should the plaintiffs prevail. Those cross-complaints added over 30 new defendants, including PSE, to litigation that had been pending for well over a year and had been set for trial in state court. Some of the newly added defendants removed that litigation to federal court. PSE and numerous other defendants added by the cross-complaints have moved to dismiss these claims, and those motions are scheduled to be heard in September 2002, together with motions to remand the case back to state court filed by the original plaintiffs. As a result of the various motions, no trial date is set at this time. PSE cannot predict the outcome of this proceeding, nor can PSE evaluate any of the claims at this time.

Operating Revenues - Gas

       Gas sales to retail customers decreased $19.3 million (2.1 million therms) for the three month period ended June 30, 2002 compared to the same period in 2001 due to lower natural gas prices that are passed through to customers in the Purchased Gas Adjustment (PGA) and the switching of some industrial customers from retail to transportation tariffs. Gas delivered for transportation customers increased $0.4 million (4.8 million therms) for the three month period ended June 30, 2002.

       Gas sales to retail customers decreased $9.3 million while volume increased 24.4 million therms for the six month period ended June 30, 2002 compared to the same period in 2001 due to lower natural gas prices that are passed through to customers in the PGA and cooler temperatures increasing consumption. Gas delivered for transportation customers increased $0.5 million (10.6 million therms) for the six month period ended June 30, 2002.

       On August 29, 2001, the Washington Commission approved a decrease in PSE's natural gas rates of 8.9% due to lower natural gas costs purchased for customers under terms of the Purchased Gas Adjustment (PGA) mechanism effective September 1, 2001. Also, on May 24, 2002, the Washington Commission allowed a decrease in PGA rates of 21.2% to become effective on June 1, 2002. This ended a temporary surcharge that went into effect September 1, 2001. The PGA mechanism passes through to customers increases or decreases in the gas supply portion of the natural gas service rates based upon changes in the price of natural gas purchased from producers and wholesale marketers or changes in gas pipeline transportation costs. PSE's gas margin and net income are not affected by changes under the PGA.

Operating Revenues - Other

       Other operating revenues for the three and six months ended June 30, 2002 increased $27.6 million and $38.3 million from the same periods in 2001. This increase was due primarily to the acquisitions of several companies by InfrastruX in 2001, which contributed $30.7 million and $62.9 million for the three and six months ended June 30, 2002. Excluding the impact of acquisitions for InfrastruX for the three and six month periods ended June 30, 2002, InfrastruX's revenue increased $1.2 million and decreased $0.2 million, respectively. InfrastruX records revenues as services are performed or on a percent of completion for fixed price projects. Offsetting the increase from InfrastruX is a decrease of $3.1 million and $24.6 million for the three and six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to a decrease in property sales from PSE's real estate development subsidiary Puget Western, Inc.

Operating Expenses

       Purchased electricity expenses decreased $393.1 million and $583.1 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001. The decreases reflect the dramatic decline of wholesale electricity prices since June 2001. In addition, PSE experienced an 83-day unplanned outage of one of PSE's 104 MW combustion turbine electric generating units located at its Fredonia generating station from February 21, 2001 to May 14, 2001, resulting in higher purchased electricity costs during that period. The historic low hydroelectric power generation conditions experienced in 2001 forced PSE to purchase additional energy during that period to meet retail electric customer loads.

       Purchased gas expenses decreased $15.7 million and $27.5 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001. The decrease was due primarily to the impact of decreased gas costs, which are passed through to customers through the PGA mechanism. The PGA allows PSE to recover expected gas costs. PSE defers, as a receivable or liability, any gas costs that exceed or fall short of the amount in PGA rates and accrues interest under the PGA. The PGA balance was a receivable at June 30, 2001 of $131.6 million while the balance at June 30, 2002 was a liability of $91.4 million.

       Electric generation fuel expense decreased $48.4 million and $85.7 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 as a result of decreased generation costs at PSE-controlled combustion turbine facilities. These facilities operated at much higher levels during the six months ended June 30, 2001 compared to the same period in 2002 to meet retail electric customer loads due to adverse hydroelectric conditions in 2001.

       Residential exchange credits associated with the Residential Purchase and Sale Agreement with BPA increased $20.7 million and $46.7 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 due to the amended Residential Purchase and Sale Agreement between PSE and BPA as discussed in Operating Revenues - Electric. As of July 2001, all residential exchange credits are passed through to eligible residential and small farm customers by a corresponding reduction in revenues.

       Unrealized gains/losses on derivative instruments during the three months and six months ended June 30, 2002 resulted in an increase in earnings of $0.3 million, and $11.7 million compared to an increase of $41.5 million and $15.1 million respectively, for the same periods in 2001. The unrealized gains and losses recorded in the income statement are the result of the change in the market value of derivative instruments not meeting cash flow hedge criteria. In addition, Statement No. 133 was adopted on January 1, 2001, and as a result, a one-time $14.7 million after-tax transition loss was recorded in 2001 from recognizing the cumulative effect of this change in accounting principle. (For further discussion see Note 4).

       Production operations and maintenance cost increased $6.4 million and $7.1 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 due primarily to a $4.0 million pre-tax charge related to an industrial accident at Colstrip units 1 and 2, of which PSE is a 50% owner, and overall higher operating costs for the Colstrip generating facilities.

       Other utility operations and maintenance costs increased $3.2 million for the three months ended June 30, 2002 compared to the same period in 2001 due primarily to the final determination of the net curtailment gain recorded in the first quarter of 2002 for Statement of Financial Accounting Standards No. 88 - "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" (Statement No. 88) as calculated by PSE's actuary. The full impact of the Statement No. 88 gain is recorded in the income statement. Other utility operations and maintenance costs increased $7.4 million for the six months ended June 30, 2002 compared to the same period in 2001 due primarily to PSE employee severance costs totaling $4.2 million related to strategic outsourcing of operations work to service providers.

       InfrastruX operations and maintenance expenses increased $23.7 million and $50.7 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 due primarily to the acquisition of companies during 2001. Excluding the impact of acquisitions for the three and six month periods ended June 30, 2002, InfrastruX's operating expenses increased $0.9 million and decreased $1.0 million, respectively. PSE's other operations and maintenance expenses decreased $3.1 million and $5.5 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 primarily due to the sale of ConneXt's assets in the third quarter of 2001.

       Depreciation and amortization expense increased $4.4 million and $7.1 million for the three and six months ended June 30, 2002 compared to the same periods in 2001 due primarily to the effects of new plant placed into service during the past year. Also contributing to the increase are the acquisitions by InfrastruX which increased depreciation and amortization by $0.6 million and $1.7 million for the three and six month periods ended June 30, 2002, respectively.

       Taxes other than federal income taxes increased $9.3 million and $4.8 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 primarily due to property taxes, payroll taxes and a municipal tax expense of $1.7 million related to various claims by cities that PSE underpaid municipal taxes owed as a result of not collecting the tax in rural areas that were annexed by cities. Property taxes for PSE increased by $6.3 million and $5.9 million for the three and six months ended June 30, 2002 compared to the same periods in 2001 due primarily to increases in the valuation of plant. Payroll taxes for InfrastruX increased by $4.7 million and $6.4 million for the three and six months ended June 30, 2002 due primarily to an increased workforce as new acquisitions have been completed.

       Federal income taxes includes a one-time refund of $4.7 million, recorded in the second quarter of 2002, related to the audit of the Company's 1998 and 1999 federal income tax returns. Of this amount, $4.1 million reduced current tax expense and the balance, $0.6 million, was recorded as a deferred income tax liability. Additionally, the Company recorded interest income of $0.7 million in Other Income for a total refund amount of $5.4 million, which was received in the second quarter of 2002 from the Internal Revenue Service.

Interest Charges

       Interest charges, which consist of interest and amortization on long-term debt and other interest, increased $0.5 million and $5.4 million for the three and six month periods ended June 30, 2002 compared to the same periods in 2001 as detailed in the following table:

Interest Charges Increase (Decrease) Three Month Six Month

(Dollars in Millions) Period Period

PSE long-term debt interest $ 2.2  $ 6.4 

PSE other interest (1.7) (1.9)

PSE total interest charges change 0.5  4.5 

InfrastruX interest charges change --  0.9 

PE interest charges change $ 0.5  $ 5.4 

       PSE's interest on long-term debt increased primarily as a result of the issuance of $200 million 8.40% Trust Preferred Securities in May 2001. Other interest expense decreased compared to the same periods in 2001 due primarily to lower weighted average interest rates and lower average daily short-term borrowings. InfrastruX's six months ended June 30, 2002 interest charges increased due to an increase in the amount of debt outstanding.

Capital Expenditures, Capital Resources and Liquidity

Capital Requirements

Contractual Obligations and Commercial Commitments
       Puget Energy.  The following are Puget Energy's aggregate consolidated (including PSE) contractual and commercial commitments as of June 30, 2002:

Payments Due Per Period

PUGET ENERGY
Contractual Obligations
(in millions)

Total

2002
2003-
2004
2005-
2006
2007 and
Thereafter

Long-term debt $ 2,305.4  $ 58.9  $ 360.0  $ 115.0  $ 1,771.5 

Short-term debt 125.1  125.1  --  --  -- 

Trust preferred securities (1) 300.0  --  --  --  300.0 

Preferred dividends (2) 1.1  1.1  --  --  -- 

Service contract obligations 205.5  9.5  40.5  43.2  112.3 

Capital lease obligations 8.2  0.9  4.4  2.9  -- 

Non-cancelable operating leases 64.6  13.0  34.9  11.2  5.5 

Fredonia combustion turbines lease (3) 78.1  2.5  9.8  9.5  56.3 

Energy purchase obligations 4,818.5  407.0  1,211.7  832.5  2,367.3 

Financial hedge obligations 8.8  (5.6) 6.1  5.3  3.0 

   Total contractual cash obligations $ 7,915.3  $ 612.4  $ 1,667.4  $ 1,019.6  $ 4,615.9 

Amount of Commitment
Expiration Per Period

Commercial Commitments
(in millions)
Total
2002 2003-
2004 2005-
2006 2007 and
Thereafter

Guarantees (4) $ 131.0  --  $ 131.0  --  -- 

Lines of credit available(5) 298.4  2.1  296.3  --  -- 

   Total commercial commitments $ 429.4  $ 2.1  $ 427.3  --  -- 

(1)	In 1997 and 2001, PSE formed Puget Sound Energy Capital Trust I and Puget Sound Energy Capital Trust II, respectively, for the sole purpose of issuing and selling preferred securities (Trust Securities) and issuing common securities to PSE. The proceeds from the sale of Trust Securities were used by the Trusts to purchase Junior Subordinated Debentures (Debentures) from PSE. The Debentures are the sole assets of the Trusts and PSE owns all common securities of the Trusts.
(2)	On April 3, 2002, the Board of Directors of PSE declared a dividend payable on July 1, 2002 for preferred stock outstanding on June 13, 2002.
(3)	In April 2001, PSE entered into a lease line of up to $70 million with a financial institution, under which PSE leases two combustion turbines for its Fredonia 3 and 4 electric generation facility. The lease has a term expiring in 2011, but can be cancelled by PSE after three years. Lease payments and amortization under the lease include interest equal to 1.20% above the London inter-bank offered rate (LIBOR). At June 30, 2002, PSE’s outstanding balance under the lease was $62.1 million. For purposes of the table, lease payments assume a LIBOR of 1.85%. The expected residual value under the lease is the lesser of $36 million or 60% of the cost of the equipment. In the event the equipment is sold to a third party upon termination of the lease and the aggregate sales proceeds are less than 87% of the unamortized value of the equipment, PSE would be required to pay the lessor an amount equal to the deficiency.
(4)	In June 2001, InfrastruX signed a three-year credit agreement with several banks to provide up to $150 million in financing. Under the credit agreement, Puget Energy is the guarantor of the line of credit.
(5)	At June 30, 2002, PSE had $375 million in lines of credit with various banks, which provide credit support for the outstanding bank loans and commercial paper of $108.0 million, effectively reducing the available borrowing capacity under these lines of credit to $267.0 million. The line of credit will expire on February 13, 2003. InfrastruX had $179.5 million in lines of credits with various banks, which fund capital requirements of InfrastruX and its subsidiaries. InfrastruX and its subsidiaries had outstanding loans of $148.1 million, effectively reducing the available borrowing capacity under these lines of credit to $31.4 million.

       Puget Sound Energy. The following are PSE's aggregate contractual and commercial commitments as of June 30, 2002:

Payments Due Per Period

PUGET SOUND ENERGY
Contractual Obligations
(in millions)

Total

2002
2003-
2004
2005-
2006
2007 and
Thereafter

Long-term debt $ 2,150.8  $ 57.0  $ 210.5  $ 112.0  $ 1,771.3 

Short-term debt 108.0  108.0  --  --  -- 

Trust preferred securities (1) 300.0  --  --  --  300.0 

Preferred dividends (2) 1.1  1.1  --  --  -- 

Service contract obligations 205.5  9.5  40.5  43.2  112.3 

Non-cancelable operating leases 41.0  7.5  20.2  8.2  5.1 

Fredonia combustion turbines lease (3) 78.1  2.5  9.8  9.5  56.3 

Energy purchase obligations 4,818.5  407.0  1,211.7  832.5  2,367.3 

Financial hedge obligations 8.8  (5.6) 6.1  5.3  3.0 

   Total contractual cash obligations $ 7,711.8  $ 587.0  $ 1,498.8  $ 1,010.7  $ 4,615.3 

Amount of Commitment
Expiration Per Period

Commercial Commitments
(in millions)
Total
2002 2003-
2004 2005-
2006 2007 and
Thereafter

Lines of credit - available (4) $ 267.0 -- $ 267.0 -- --

(1)	See note (1) above.
(2)	See note (2) above.
(3)	See note (3) above.
(4)	See note (5) above with respect to PSE.

       In 1995 and 1997, PSE sold a stream of future electric revenues associated with $237.7 million of its investment in conservation assets in its electric general rate tariff to two grantor trusts. As a result of this sale, PSE collects these revenues from its electric customers and remits them to the trusts. During the three months ended June 30, 2002, PSE collected and remitted $2.7 million to the trusts as compared to $6.5 million for the same period in 2001. In the first quarter of 2002, PSE completed its final remittance to the 1997 trust. The remaining principal expected to be collected on behalf of the 1995 trust is $23.8 million at June 30, 2002.

Utility Construction Program. Current utility construction expenditures for generation, transmission and distribution are designed to meet continuing customer growth and to improve efficiencies of PSE's energy delivery systems. Construction expenditures, excluding equity Allowance for Funds Used During Construction (AFUDC), were $113.1 million for the six months ended June 30, 2002. PSE expects construction expenditures will be approximately $235.0 million in 2002. Construction expenditure estimates are subject to periodic review and adjustment in light of changing economic, regulatory, environmental and conservation factors.

Other Additions. Other property, plant and equipment additions were $15.0 million for the six months ended June 30, 2002. InfrastruX will continue to acquire companies related to utility infrastructure services with its available line of credit and cash.

Capital Resources

Cash From Operations. Cash generated from operations (net of dividends and equity and debt AFUDC) totaled $379.0 million for the six months ended June 30, 2002, and provided 287.9% of the $131.7 million of utility construction expenditures (net of equity and debt AFUDC) and other capital expenditure requirements during the first six months of 2002. Puget Energy and PSE expect to continue financing the utility construction program and other capital expenditure requirements with cash generated from operations and short-term borrowings under its committed bank lines.

Financing Program. Financing utility construction requirements and operational needs is dependent upon the cost and availability of external funds through capital markets and from financial institutions. Access to funds is dependent upon factors such as general economic conditions, regulatory authorizations and policies, and Puget Energy's and PSE's credit ratings. The Company expects to meet capital and operational needs for the balance of 2002 with cash generated from operations and short-term borrowings under its committed bank lines. The Company does not plan to issue long-term debt or preferred stock.

       The Company must meet certain required equity targets as outlined in the General and Interim Rate Proceeding section and, therefore, will issue common stock prior to the end of 2003 to help reach those targets. If the equity targets are not met then PSE's general rates are subject to a 2% reduction.

Restrictive Covenants. In determining the type and amount of future financing, PSE may be limited by restrictions contained in its electric and gas mortgage indentures, articles of incorporation and certain loan agreements. Under the most restrictive tests, at June 30, 2002, PSE could issue:

• no additional first mortgage bonds due to the interest coverage ratio being below the 2.0 times net earnings available for interest limit (1.95 at June 30,2002). The shortfall of interest coverage is due to under recovery of power costs prior to receiving the electric interim rate relief in the second quarter of 2002. With the interim and general rate relief, the Company expects to be in position to meet the interest coverage ratio and issue first mortgage bonds by the end of 2002. The Company has approximately $953.8 million of electric and gas bondable property available to use for issuance of up to $572.3 million of first mortgage bonds, subject to the interest coverage ratio limitation;
• no additional preferred stock; and
• approximately $232.4 million of unsecured long-term debt.

Credit Ratings. Neither Puget Energy nor PSE has any rating downgrade triggers that would accelerate the maturity dates of outstanding debt. However, a downgrade in the senior unsecured credit ratings could adversely affect the companies' ability to renew existing, or obtain access to new, credit facilities and could increase the cost of such facilities. For example, under PSE's revolving credit facility, the spreads over the index and commitment fee increase as PSE's secured long term debt ratings decline. A downgrade in commercial paper ratings could preclude PSE's ability to issue commercial paper under its current programs. The marketability of PSE commercial paper is currently limited by the A-3/P-2 ratings by Standard & Poor's and Moody's Investor Services. In addition, any downgrade below investment grade of the senior secured debt could allow counterparties in the wholesale electric, wholesale gas and financial derivative markets to require PSE to post a letter of credit or other collateral, make cash prepayments, obtain a guarantee agreement or provide other mutually agreeable security.

       The current ratings of Puget Energy and Puget Sound Energy, as of July 25, 2002, are:

	Standard & Poor's Ratings	Moody's Ratings
Puget Energy
Corporate credit/issuer rating	BBB-	Bal
Puget Sound Energy

  Corporate credit/issuer rating BBB- Baa3

  Senior secured debt BBB Baa2

  Shelf debt senior secured BBB Baa2

  Senior unsecured BB+ Baa3

  Preferred stock BB Ba2

  Commercial paper A-3 P-2

  Subordinate * Ba1

  Revolving Credit Facility * Baa3

  Ratings Outlook Negative Negative

* No rating provided.

       Standard & Poor's has stated that its negative outlook reflects the fact that current financial ratios are weak for the rating and a concern that Puget Energy and PSE might not be able to achieve current projections, which indicate that both entities should achieve financial targets consistent with the rating by 2004 and 2005. Standard & Poor's further stated that although the Washington Commission settlement agreement provides tools, such as power cost adjustment and required annual equity targets, that should enable Puget Energy and PSE to achieve its projections, additional investment in the unregulated InfrastruX subsidiary could hinder the financial recovery of Puget Energy. Standard & Poor's has raised the business profile on PSE from 5 to 4, stating that the business profile reflects PSE's conservative business strategy, strong markets served by the electric and gas business, and a favorable settlement with the Washington Commission. The Puget Energy business profile is 5, which incorporates the stronger utility business profile of 4 and the weaker InfrastruX business profile of 8. Moody's Investor Services has stated that its negative outlook is based upon lingering uncertainties about the final outcome of FERC investigations and legal proceedings with respect to western power market activities by utilities like PSE that sold power into the California market in 2000.

Shelf Registration. In February 2002, the Company filed a shelf registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $500 million principal amount of:

• common stock of Puget Energy,
• senior notes of PSE, secured by a pledge of PSE's first mortgage bonds,
• unsecured debentures of PSE, and
• trust preferred securities of Puget Sound Energy Capital Trust III.

       As of June 30, 2002, no securities had been issued under this shelf registration statement and the only securities available for issuance at this time due to restricted covenants are the common stock of Puget Energy and the unsecured debentures of PSE.

Borrowings and Commercial Paper. PSE's short-term borrowings from banks and the sale of commercial paper are used to provide working capital for the utility construction program. At June 30, 2002, PSE had available $375 million in lines of credit with various banks, which provide credit support for outstanding commercial paper of $78.0 million and $30.0 million of outstanding short-term borrowing, effectively reducing the available borrowing capacity under these lines of credit to $267.0 million. The line of credit will expire February 13, 2003.

       In June 2001, InfrastruX signed a three-year credit agreement with several banks to provide up to $150 million in financing. Puget Energy is the guarantor of the line of credit. In addition, InfrastruX's subsidiaries have $29.5 million in lines of credit with various banks. Borrowings available for InfrastruX are used to fund acquisitions and working capital requirements of InfrastruX and its subsidiaries. At June 30, 2002, InfrastruX and its subsidiaries had outstanding loans of $148.1 million, effectively reducing the available borrowing capacity under these lines of credit to $31.4 million.

Stock Purchase and Dividend Reinvestment Plan. Puget Energy has a stock purchase and dividend reinvestment plan pursuant to which existing shareholders and residents of the State of Washington may invest cash and cash dividends in shares of Puget Energy's common stock. Since new shares of common stock may be purchased directly from Puget Energy, Puget Energy may receive funds for general corporate purposes through the program. Puget Energy has registered 5,000,000 shares of common stock for sale pursuant to the plan. Puget Energy issued common stock from the Stock Purchase and Dividend Reinvestment Plan of $3.3 million (165,996 shares) and $9.8 million (470,110 shares) in the three and six months ended June 30, 2002, compared to $6.4 million (270,818 shares) and $12.8 million (534,280 shares) for the same periods in 2001.

       In April 2002, Puget Energy filed an amendment to the plan with the Securities and Exchange Commission to increase the number of shares registered under the plan to 10,000,000, and to permit any interested investor, even if the investor is not an existing shareholder or resident of the State of Washington, to invest cash in shares of Puget Energy's common stock. The registration statement relating to the amendment has not yet been declared effective by the Securities and Exchange Commission.

General and Interim Rate Proceedings. On March 28, 2002, the Washington Commission approved a settlement agreement that was announced on March 20, 2002 which resolved the Company's request for an interim rate increase and three of the four significant financial issues in the Company's electric and gas general rate cases. As a result, an interim electric rate surcharge of $25 million was in effect for the period April 1, 2002 through June 30, 2002. The three important financial issues that were resolved for the general rate case included the equity capital ratio, the return on equity and adoption of an electric power cost adjustment mechanism. The settlement also created a fast track collaborative process for completion of any adjustments to the Company's requested revenue requirement for the gas general rate case by September 1, 2002. If the fast track collaborative process cannot be completed by September 1, 2002, then the completion of the gas general rate case would be no later than November 1, 2002.

       On June 20, 2002, the Washington Commission issued final regulatory approval of the comprehensive electric-rate settlement submitted by PSE, key constituents and customer groups, state regulatory staff and the state attorney general's Public Counsel Section. The authorization grants PSE a 4.6% electric general rate increase that will generate approximately an additional $59 million annually beginning July 1, 2002. In addition, the settlement provides for an 8.76% overall return on capital based on a projected capital structure with an equity component of 40% and an authorized 11% return on common equity. The settlement also resolved all electric and gas cost allocation issues and established an 8.76% overall return on capital for the gas general rate case.

       The settlement also includes a power cost adjustment mechanism that triggers if PSE's costs to provide customers' electricity falls outside certain bands from a normalized level of power costs established in the electric general rate case. The cumulative maximum pre-tax earnings exposure due to power cost variations over the four year period ending June 30, 2006 is limited to $40 million plus 1% of the excess. All significant variable power supply cost drivers are included in the power cost adjustment mechanism (hydroelectric generation variability, market price variability for purchased power and surplus power sales, natural gas and coal fuel price variability, generation unit forced outage risk and wheeling cost variability). The mechanism apportions increases or decreases in power costs, on a graduated scale, between PSE and its customers in the following manner:

Annual Power

Cost Variability Customers' Share Company's Share ⁽¹⁾

+/- $20 million   0% 100%

+/- $20-$40 million 50%  50%

+/- $40-$120 million 90%  10%

+/- $120+ million 95%   5%

⁽¹⁾ Over the four year period July 1, 2002 through June 30, 2006, the Company’s share of pre-tax power cost variances is capped at a cumulative $40 million plus 1% of the excess.

       Interest will be accrued on any overcollection or undercollection of the customer's share of the excess power cost that is deferred. The Company can also request a power cost adjustment rate surcharge if for any 12 month period the projected deferred power cost will exceed $30 million.

       The settlement also gives PSE the financial flexibility to rebuild its common equity ratio to at least 39% over a 3 1/2 year period, with milestones of 34%, 36% and 39% at the end of 2003, 2004 and 2005, respectively. If PSE should fail to meet this schedule, it would be subject to a 2% rate reduction penalty.

Purchased Gas Adjustment Mechanism. On May 24, 2002, the Washington Commission allowed a Purchased Gas Adjustment rate reduction that was filed on May 6, 2002, effective June 1, 2002, lowering natural gas rates by 21.2%. This ended a temporary surcharge that went into effect September 1, 2001. The PGA mechanism passes through to customers increases or decreases in the gas supply portion of the natural gas service rates based upon changes in the prices. PSE’s gas margin and net income is not affected by the change in gas rates.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

Commodity Price Risk. The Company’s energy related businesses are exposed to risks related to changes in commodity prices. As part of its business, the Company 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. The Company’s energy risk management function manages its core electric and gas supply portfolio.
       The Company manages its energy supply portfolio to achieve three primary objectives:

1. Ensure that physical energy supplies are available to serve retail customer requirements;
2. Manage portfolio risks to limit undesired impacts on the Company's financial results; and
3. Optimize the value of the Company'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). At certain times, these sources of variability can mitigate portfolio imbalances; at other times they can exacerbate portfolio imbalances.

       Hedging strategies for the Company's energy supply portfolio interact with portfolio optimization activities. Some hedges can be implemented in ways that retain the Company'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 that 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. The Company may use forward delivery agreements, swaps and option contracts for the purpose of hedging commodity price risk. Unrealized changes in the market value of these derivatives are generally deferred and recognized upon settlement along with the underlying hedged transaction. Effective January 1, 2001, pursuant to Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivative instruments to be recorded on the balance sheet at fair value, changes in the fair value of the Company's derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as a qualifying hedge under the statement. The Company does not consider its current operation to meet the definition of trading activities as described by the Emerging Issues Task Force of the Financial Accounting Standards Board Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities".

       At June 30, 2002, the Company had an after-tax net asset of approximately $3.6 million of energy contracts designated as qualifying as cash flow hedges and a corresponding amount in other comprehensive income. The Company also had energy contracts that were marked-to-market through current earnings for the three month period ended June 30, 2002 of $0.2 million after-tax ($0.3 million pre-tax). A hypothetical 10% increase in the market prices of natural gas and electricity would increase the fair value of qualifying cash flow hedges by approximately $4.8 million after-tax and would have an immaterial impact on current earnings for those contracts marked-to-market in earnings.

       In addition, PSE believes its current rate design, including the various special contracts and the PGA mechanism, mitigate a portion of the commodity price risk. The approval in June 2002 of the electric general rate increase and the electric power cost adjustment mechanism will also reduce the commodity price risk. The electric power cost adjustment mechanism will significantly reduce market exposure to volatile wholesale energy and fuel prices.

       Market risk is managed subject to parameters established by the Board of Directors. The Company has established a Risk Management Committee composed of Company officers, separate from the units that manage these risks, that monitors compliance with the Company's policies and procedures. In addition, the Audit Committee of the Company's Board of Directors has oversight of the Risk Management Committee.

Interest Rate Risk. The Company believes interest rate risk of the Company primarily relates to the use of short-term debt instruments and new long-term debt financing needed to fund capital requirements. The Company manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. The Company does utilize bank borrowings, commercial paper and line of credit facilities to meet short-term cash requirements. These short-term obligations are commonly refinanced with fixed rate bonds or notes when needed and when interest rates are considered favorable. The Company may enter into swap instruments to manage the interest rate risk associated with these debts.

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings

Other California Proceedings. On May 31, 2002, FERC conditionally dismissed a complaint filed on March 20, 2002 by the California Attorney General in Docket EL02-71 that alleged violations of the Federal Power Act by FERC and all sellers (including PSE) of electric power and energy into California. The complaint asserted that FERC’s adoption and implementation of market rate authority was flawed, and that as a result, individual sellers such as PSE were liable for sales of energy at rates that were “unjust and unreasonable.” The condition for dismissal was that all sellers re-file transaction summaries of sales to (and, after a clarifying order issued on June 28, purchases from) certain California entities during 2000 and 2001. PSE re-filed such transaction summaries on July 1 and July 8, 2002. The order of dismissal is now subject to rehearing at the request of the California Attorney General and others.

       On the same day as FERC’s order in Docket EL02-71 was entered, the California Attorney General announced it had filed individual complaints against a number of sellers, including PSE, in California Superior Court in San Francisco. That complaint alleges that PSE’s sales to California violated the requirements of the Federal Power Act, and that as such, the sales also violate certain sections of the California Business Practices Act that forbids unlawful practices. The complaint asserts that each such “violation” subjects PSE to a fine of up to $2,500 plus an award of attorneys’ fees, and asserts that there were “thousands” of such violations. PSE has removed that suit to federal court, and has moved to dismiss it on the grounds that the issues are within the exclusive or primary jurisdiction of FERC. A decision on that motion is expected in the Fall of 2002. PSE cannot predict the outcome of these proceedings at this time.

       During May 2002, PSE was served with two cross-complaints, by Reliant Energy Services and Duke Energy Trading & Marketing, respectively, in six consolidated class actions pending in Superior Court in San Diego, California. The original complaints in the actions allege violations by the original (approximately 40) defendants of various California Business Practices Act or Cartwright Act (antitrust) provisions. The cross-complaints assert essentially that the cross-defendants, including PSE, were also participants in the energy market in California at the relevant times, and that any remedies ordered against some market participants should be ordered against all. Reliant Energy Services and Duke Energy Trading & Marketing also seek indemnity and conditional relief as a buyer on transactions involving cross-defendants should the plaintiffs prevail. Those cross-complaints added over 50 new defendants, including PSE, to litigation that had been pending for well over a year and had been set for trial in state court. Some of the newly added defendants removed that litigation to federal court. PSE and numerous other defendants added by the cross-complaints have moved to dismiss these claims, and those motions are scheduled to be heard in September 2002, together with motions to remand the case back to state court filed by the original plaintiffs. As a result of the various motions, no trial date is set at this time. PSE cannot predict the outcome of this proceeding, nor can PSE evaluate any of the claims at this time.

       Contingencies arising out of the normal course of the Company's business exist at June 30, 2002. 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 the Company.

Item 4. Submission of Matters to a Vote of Security Holders

       Puget Energy’s annual meeting of shareholders was held on May 14, 2002. At the annual meeting, the shareholders elected two directors that filled vacancies on the Board arising after the 2001 annual meeting to hold office until the annual meeting of shareholders in 2004 and three directors to hold office until the annual meeting of shareholders in 2005 or until their successors are elected and qualified. The vote was as follows:

Number of Shares

For Withheld

Term Expiring 2004

   Stephen P. Reynolds 70,903,403 2,077,924

   Dr. Kenneth P. Mortimer 70,196,685 2,784,642

Term Expiring 2005

   Charles W. Bingham 70,391,700 2,859,627

   Robert L. Dryden 70,859,974 2,121,353

   Sally G. Narodick 70,717,332 2,263,995

       There were no broker non-votes.

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

       Douglas P. Beighle
       Phyllis J. Campbell
       Craig W. Cole
       John D. Durbin
       Tomio Moriguchi

Item 6. Exhibits and Reports on Form 8-K

(a) See Exhibit Index for list of exhibits.

(b) Reports on Form 8-K

Filed by Puget Energy

Form 8-K dated April 17, 2002, Item 5 - Other Events, related to first quarter earnings.

Filed by Puget Energy & Puget Sound Energy

Form 8-K dated May 23, 2002, Item 5 - Other Events,related to the comprehensive settlement on PSE's electric general rate case.

Form 8-K dated June 6, 2002, Item 5 - Other Events, PSE's comprehensive settlement on electric general rate case.

Form 8-K dated June 21, 2002, Item 5 - Other Events, related to the Washington Commission approval of the comprehensive settlement of PSE's electric general rate case.

SIGNATURES

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

PUGET ENERGY, INC.

PUGET SOUND ENERGY, INC.

/s/ James W. Eldredge

James W. Eldredge

Corporate Secretary and Chief Accounting Officer

Date: August 12, 2002 Chief accounting officer and officer duly authorized to sign this report on behalf of each registrant

EXHIBIT INDEX

The following exhibits are filed herewith:

10-1 Power Sales Contract dated April 15, 2002 between Public Utility District No. 2 of Grant County, Washington and PSE, relating to the Priest Rapids Project.

10-2 Reasonable Portion Power Sales Contract dated April 15, 2002 between Public Utility District No. 2 of Grant County, Washington and PSE, relating to the Priest Rapids Project.

10-3 Additional Power Sales Contract dated April 15, 2002 between Public Utility District No. 2 of Grant County, Washington and PSE, relating to the Priest Rapids Project.

10-4 Change-in-control agreement with G.B. Swofford, Senior Vice President and Chief Operating Officer dated March 12, 1999.

10-5 Change-in-control agreement with T. J. Hogan, Senior Vice President, External Affairs dated March 12, 1999.

12-1 Statement setting forth computation of ratios of earnings to fixed charges (1997 through 2001 and 12 months ended June 30, 2002) for Puget Energy.

12-2 Statement setting forth computation of ratios of earnings to fixed charges (1997 through 2001 and 12 months ended June 30, 2002) for PSE.

99-1 Chief Executive Officer certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99-2 Chief Financial Officer certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

EX-10

Exhibit 10.1

PRIEST RAPIDS PROJECT
PRODUCT SALES CONTRACT
INDEX TO SECTIONS

INDEX TO SECTIONS

SECTION 1. TERM OF CONTRACT
SECTION 2. DEFINITIONS
SECTION 3. PRIEST RAPIDS PROJECT PRODUCT AND PURCHASER PRODUCT PERCENTAGES; REGULATORY APPROVALS
SECTION 4. TREATMENT OF THE SALE OF THE REASONABLE PORTION
SECTION 5. DETERMINATION OF PRODUCT AVAILABILITY, DISTRICT RESERVED SHARE AND RISK PREMIUM
SECTION 6. ANNUAL POWER COSTS
SECTION 7. PAYMENT FOR PRIEST RAPIDS PROJECT PRODUCTS AND RISK PREMIUM
SECTION 8. SUPPORT AND COOPERATION
SECTION 9. SCHEDULING OF DELIVERIES OF SURPLUS AND DISPLACEMENT PRODUCTS
SECTION 10. PAYMENT OF PROCEEDS FROM THE SALE OF DISPLACEMENT PRODUCT
SECTION 11. POINT OF DELIVERY
SECTION 12. METERING AND TRANSMISSION LOSSES
SECTION 13. INFORMATION TO BE MADE AVAILABLE TO THE PURCHASER
SECTION 14. INSURANCE
SECTION 15. ADDITIONAL FACILITIES AND PRODUCTS
SECTION 16. PROJECT INTEGRATION
SECTION 17. LIABILITY OF PARTIES
SECTION 18. NOTICES AND COMPUTATION OF TIME
SECTION 19. DISTRICT'S BOND RESOLUTIONS AND LICENSE
SECTION 20. GOVERNING LAW
SECTION 21. ASSIGNMENT OF CONTRACT
SECTION 22. REMEDIES ON DEFAULT
SECTION 23. VENUE AND ATTORNEY FEES
SECTION 24. COMPLIANCE WITH LAW
SECTION 25. HEADINGS
SECTION 26. ENTIRE AGREEMENT; MODIFICATION; CONFLICT IN PRECEDENCE
SECTION 27. NO PARTNERSHIP OR THIRD PARTY RIGHTS
SECTION 28. PURCHASERS' COMMITTEE; ARBITRATION
SECTION 29. REPRESENTATIONS AND WARRANTIES
SECTION 30. COUNTERPARTS


EXHIBITS
EXHIBIT A - MONTHLY AMOUNTS OF DISPLACEMENT RESOURCE
EXHIBIT B - BOND RESOLUTION SECTIONS
EXHIBIT C - AREAS SERVED OUTSIDE GRANT COUNTY

PRIEST RAPIDS PROJECT PRODUCT SALES CONTRACT

Executed by

PUBLIC UTILITY DISTR1CT NO. 2

OF GRANT COUNTY

And

PUGET SOUND ENERGY, INC.

This contract is entered into as of December 13, 2001 between Public Utility District No.2 of Grant County, Washington (the “District”), a municipal corporation of the State of Washington, and PUGET SOUND ENERGY, INC. (the “Purchaser”), a corporation organized and existing under the laws of the State of Washington. The District and the Purchaser are referred to as a “Party” and collectively as “Parties.”

SECTION 1. TERM OF CONTRACT.

(a) Except as otherwise provided herein, this contract shall be in full force and effect from and after it has been executed by the District and the Purchaser. Unless sooner terminated pursuant to other provisions, this contract shall remain in effect until the earlier of expiration or termination of the New FERC License or such time that the District no longer has authority to market Priest Rapids Project Products. Except as otherwise provided herein, all obligations accruing under this contract are preserved until satisfied.

(b) By executing this contract, the Purchaser has exercised all of the Purchaser’s rights, and the District has fulfilled and satisfied all of the District’s obligations under Section (l)(b) of the 1956 and 1959 Contracts. Upon execution of this contract by the District and the Purchaser, Section 1(b) of the 1956 and 1959 Contracts shall have no further force or effect; provided, however, by executing this contract the Parties intend to preserve the right of Purchaser to exercise the first right of refusal under Section 1(b) of the 1956 and 1959 Contracts against a successor licensee other than the District.

(c) Notwithstanding Section 1(a), the affirmative obligations of the Parties in Sections 3(a), 3(b), 3(e) and 4 through 7, 9 through 14, 16, 17 and 28 (a) and (b) (1-4) shall take effect on November 1, 2005.

(d) Parties to the 1956 Contract and the Idaho Cooperatives shall have until October 31, 2005 to execute this contract. Parties to the 1959 Contract shall have until October 31, 2009 to execute this contract.

SECTION 2. DEFINITIONS.

As used in this contract, the following terms when initially capitalized shall have the following meanings:

“1956 Contract” shall mean the contract entered into by the District and various parties during May 1956 for the sale of capacity and energy from the Priest Rapids Development as supplemented and amended from time to time.

“1959 Contract” shall mean the contract entered into by the District and various parties during June 1959 for the sale of capacity and energy from the Wanapum Development as supplemented and amended from time to time.

"Annual FERC License" shall mean a license for the Priest Rapids Project issued by FERC to the District for an interim period before a New FERC License.

“Bond Resolution” shall mean each and all of the resolutions adopted by the District authorizing the issuance of outstanding Debt for the Priest Rapids Project. “Contract Year” shall mean the 12 month period commencing at 12:01 a.m. on January 1 of each year and ending at 12:01 a.m. on the following January 1; provided, however, that the first Contract Year shall commence on November 1, 2005, and end the following January 1, 2006, and that the last Contract Year shall end on the last day of the New FERC License, or such time that the District no longer has authority to market Priest Rapids Project Products.

“Contract(s)” shall mean this contract and similar contracts between the District and other Purchasers.

“Debt” shall mean any bonds, notes, or other debt obligations of the District, including, but not limited to all bonds outstanding at the effective date of this contract, a line of credit, installment purchase agreement, financing lease, interfund loan, derivative securities or payment obligations and any other obligation for borrowed money, the proceeds of which will be used for the benefit of the Priest Rapids Project, including to finance betterments, renewals, replacements and additions to the Priest Rapids Project, to refund other debt, or any other lawful purpose related to the Priest Rapids Project. Debt does not include the Columbia River-Priest Rapids Hydro-Electric Production System Revenue Bonds, Series 1956, which have been paid, or the Wanapum Hydroelectric Refunding Revenue Bonds, Series 1963, which are scheduled to be repaid on or prior to January 1, 2004.

“Displacement Resource” means the monthly amounts of capacity and energy set forth in Exhibit A to this contract. If the District obtains a Replacement Contract, or if the District and the Purchaser mutually agree in writing to use some other resource as a Displacement Resource, the District and the Purchaser will revise Exhibit A to reflect the capacity and energy of such Replacement Contract or resource.

“Electric System” shall mean the separate electric utility system of the District, including all associated generation, transmission and distribution facilities and any betterments, renewals, replacements and additions of such system, but does not include the Priest Rapids Project or any other utility properties designated as a separate utility system of the District.

"Eligible Purchasers" means the parties to the 1956 and 1959 Contracts, and the Kootenai Electric Cooperative, Inc., Clearwater Power Company, Idaho County Light and Power Cooperative Association, Inc., Northern Lights, Inc. and the electric cooperative members of the Snake River Power Association, Inc. (collectively, the "Idaho Cooperatives") as of October 31, 2000.

"FERC" shall mean the Federal Energy Regulatory Commission or its successor.

“FERC License” shall mean any license for the Priest Rapids Project issued by FERC to the District.

“Market Price” shall mean the price (in dollars per megawatt-hour) on the wholesale power market for firm power in amounts equal to the Surplus Product and Displacement Product, respectively, forecast to be available to Purchaser during the next Contract Year pursuant to Sections 5(d) and 5(h), multiplied by such amounts of Surplus Product and Displacement Product.

“Marketing Plan” shall mean the plan for making available in a fair, equitable and non-discriminatory manner pursuant to market-based principles and procedures the Reasonable Portion as required by applicable law or PL 83-544 Orders.

“New FERC License” shall mean the license issued by FERC to the District following the expiration of the Original FERC License for operation of the Priest Rapids Project for a duration of 30 years or longer, not including any subsequent annual or other license.

“Operating Agreements” shall mean any agreements to which the District is or may become a party, which provide for operation of the Priest Rapids Project, including but not limited to, the Pacific Northwest Coordination Agreement, the Agreement for the Hourly Coordination of Projects on the Mid-Columbia River, the Western Systems Coordinating Council Agreement, the Agreement Relating to Wanapum Development Encroachment on the Rock Island Project and the Northwest Power Pool, which is the voluntary association of utilities formed in the Pacific Northwest for the purpose of ensuring the adequacy and reliability of the electric power systems in the Pacific Northwest.

"Original FERC License" shall mean the Federal Power Commission License for the Priest Rapids Project issued to the District on November 4, 1955, together with amendments thereto.

“Pacific Northwest” shall have the meaning ascribed thereto in Section 3(14) of the Regional Act.

“Priest Rapids Development” shall mean the separate utility system of the District, including a dam at the Priest Rapids Development, all generation and transmission facilities associated therewith, and all betterments, renewals, replacements, and additions to such system, as further described in Section 2(f) of Exhibit 1 of District Resolution No. 390 which is attached as Exhibit B, but shall not include any additional generation, transmission and distribution facilities hereafter constructed or acquired by the District as a part of the Electric System or the Wanapum Development or any other utility properties of the District acquired or constructed as a separate utility system.

"Priest Rapids Project" shall mean the hydroelectric project on the Columbia River in the State of Washington designated by the Federal Power Commission as Project No. 2114. The Priest Rapids Project consists of the Priest Rapids Development and the Wanapum Development.

“Priest Rapids Project Output” shall mean the amount of capacity, energy (both firm and non-firm), pondage, reactive power, ancillary services and any other product from the Priest Rapids Development from November 1, 2005 to November 1, 2009 and from the Priest Rapids Project from November 1, 2009 through the term of this contract under the operating conditions which exist during the term, including periods when the Priest Rapid Project may be wholly or partially inoperable for any reason, after correction for encroachment, Canadian entitlement, station and project use, and depletions required by the FERC License or other regulatory requirements.

"Priest Rapids Project Products" means those products that the District agrees to sell to the Purchaser, and the Purchaser agrees to purchase as more particularly described in Sections 3 and 5 hereof, and is limited to the Surplus Product and the Displacement Product.

“Prudent Utility Practice” means those practices, methods and acts which: (i) when engaged in are commonly used in prudent engineering and operations to operate electric equipment and associated mechanical and civil facilities lawfully and with safety, reliability, efficiency and expedition or (ii) in the exercise of reasonable judgment considering the facts known when engaged in, could have been reasonably expected to achieve the desired result consistent with applicable law, safety, reliability, efficiency and expedition. Prudent Utility Practice is not intended to be the optimum practice, method or act, to the exclusion of all others, but rather to be a spectrum of commonly used practices, methods or acts.

"Public Law 83-544" (or "PL 83-544") shall mean the legislation passed by the 83rd Congress authorizing the District to develop the Priest Rapids Project.

"Purchasers" shall mean the Purchaser and each person or entity that has entered into a contract with the District substantially similar to this contract.

“Purchase Product Percentage” shall mean the fixed percentage (stated to the second decimal point, e.g., 0.01 %) as set forth in Section 3 for each of the individual Priest Rapids Project Products made available under this contract. For parties to the 1956 and 1959 Contracts, Purchaser Product Percentage for anyone Priest Rapids Project Product in this contract may not exceed twice the average of their participation in the 1956 and 1959 Contracts except that for those Purchasers that were parties to the 1956 Contracts but were not parties to the 1959 Contracts their Purchaser Product Percentage for the period November 1, 2005 to October 31, 2009 may not exceed twice their participation in the 1956 Contract. For any individual Idaho Cooperative, Purchaser Product Percentage shall not exceed the Purchaser Product Percentage of any individual party to the 1956 or 1959 Contract that is one of the Purchasers except when the provisions of Section 3(c) are applied. Each of such fixed percentages is subject to revision pursuant to Sections 3(c), (d), (e), (f) and 5(j).

"Reasonable Portion" shall mean that 30% portion of the Priest Rapids Project Output required by FERC pursuant to Public Law 83-544 to be offered for sale by the District.

“Regional Act” shall mean Public Law 96-501, the Pacific Northwest Electric Power Planning and Conservation Act.

“Risk Premium” shall mean the sum of the following: (i) for the Surplus Product, the positive difference for a year determined by subtracting from the Market Price of the Surplus Product the cost to the Purchaser of the Surplus Product during each year pursuant to Section 7(a)(3); and (ii) for the Displacement Product, the positive difference for a year determined by subtracting from the Market Price of the Displacement Product the cost to the Purchaser of the Displacement Product during each year pursuant to Section 7(a)(4).

“Risk Premium Revenues” shall mean the payments received by the District from all Purchasers pursuant to Section 7(a)(5).

“Uncontrollable Forces” shall mean any cause reasonably beyond the control of the Party and which the Party subject thereto has made reasonable efforts to avoid, remove or mitigate, including but not limited to acts of God, fire, flood, explosion, strike, sabotage, act of the public enemy, civil or military authority, including court orders, injunctions, and orders of government agencies with proper jurisdiction, insurrection or riot, an act of the elements, failure of equipment or contractors, or inability to obtain or ship materials or equipment because of the affect of similar causes on suppliers or carriers; provided, however, that in no event shall an Uncontrollable Force excuse the Purchaser from the obligation to pay any amount when due and owing under this contract.

“Wanapum Development” shall mean the second stage of the Priest Rapids Project as more fully described in Section 2.2 of District Resolution No.474, which is attached as Exhibit B, but shall not include any generation, transmission and distribution facilities hereafter constructed or acquired by the District as a part of the Electric System or the Priest Rapids Development, or any other utility properties of the District acquired or constructed as a separate utility system.

The following terms are defined in the cited sections of this contract:

"Act of Default" at Section 22(a).
"Annual Power Costs" at Section 6(a).
"Committee" at Section 28.
"Coverage Requirement" at Section 6(a)(9).
"Displacement Product" at Section 3(b).
"District Reserved Share" at Section 5(b)(3).
"Estimated District Loads" at Section 5 (b)(1).
"Estimated Unmet District Load" at Section 5(f).
"Excess Costs" at Section 7(g).
"Financing Costs" at Section 6(a)(3).
"Idaho Cooperatives" at "Eligible Purchasers.
"Improvements" at Section 5(j)(4).
"New FERC License Costs" at Section 6(a)(6).
"Party" and "Parties" at the Preamble.
"PL 83-544 Orders" at Section 3(f).
"Purchaser Actual Cost" at Section 7(g).
"Purchaser Allocation of Pondage" at Section 9(d)(5).
"Purchaser Estimated Cost" at Section 7(a)(8).
"Purchaser Power Allocation" at Section 5(b)(4).
"Purchaser Product Percentage of Displacement Product" at Section 3(b).
"Purchaser Product Percentage of Surplus Product" at Section 3(a).
"Purchaser Risk Premium" at Section 7(a)(5).
"Refund Costs" at Section 7(g).
"Replacement Contract" at Section 3(b).
"Rock Island Hydroelectric Project" at Section 16(b).
"Supplemental Displacement Product Agreement" at Section 3(b).
"Surplus Product" at Section 3(a).

SECTION 3.  PRIEST RAPIDS PROJECT PRODUCTS AND PURCHASER PRODUCT PERCENTAGES; REGULATORY APPROVALS.

Upon execution of this contract, Purchaser shall select a Purchaser Product Percentage for each of the Priest Rapids Project Products described below; provided, however, that Purchaser must select a Purchaser Product Percentage of Surplus Product other than zero in order to select Purchaser Product Percentage for Displacement Product. Each of the Purchaser Product Percentages selected may be a different percentage, and the Purchaser Product Percentages for Displacement Product may be zero.

(a) SURPLUS PRODUCT. The District desires to market Priest Rapids Project Output that is surplus to its needs. To minimize the volatility of such marketing and in order to achieve stable retail rates, the District desires to market this surplus in a manner that the Purchaser assumes the uncertainty of future Priest Rapids Project Output, costs and market prices. To accomplish these objectives the District believes that the price for the Surplus Product should be at cost.

The District shall sell to the Purchaser and the Purchaser shall purchase 18.8 percent of Surplus Product (“Purchaser Product Percentage of Surplus Product”). The amount and cost of the Surplus Product is defined in Sections 5 and 6, respectively.

(b) DISPLACEMENT PRODUCT. The District desires to enhance its success in obtaining a New FERC License by making available to other electric utilities in the Pacific Northwest benefits that would not otherwise be possible but for the Priest Rapids Project. For this purpose, the District may, pursuant to this contract, offer tile Purchaser Priest Rapids Project Output that otherwise would be used by the District to meet Estimated District Loads but for capacity and energy acquired by the District from Displacement Resources.

The District shall sell to the Purchaser and the Purchaser shall purchase 18.8 percent of Displacement Product (“Purchaser Product Percentage of Displacement Product”). The amount and cost of Displacement Product is defined in Sections 5 and 6, respectively. The Displacement Product does not entail the resale of federal power available to the District.

By notification to the District by October 1, 2005, the Purchaser may elect to have the District market the Purchaser Product Percentage of the Displacement Product pursuant to a supplementary agreement between the Purchaser and the District. The District will assign to the Purchaser the cost incurred by the District in marketing such Displacement Product. The District may at its discretion seek a resource to extend the availability of the capacity and energy identified in Exhibit A beyond 2011 (“Replacement Contract”). If the District has determined to not seek a Replacement Contract, nevertheless upon the request of the Purchaser and after execution of an agreement or agreements (“Supplemental Displacement Product Agreement”) by the District and all requesting Purchasers setting forth the term of the Replacement Contract, the product to be purchased, and the obligation of requesting Purchasers to pay the District an amount equal to any and all costs, charges, surcharges and penalties payable under such Replacement Contract, the District will use reasonable efforts to obtain a Replacement Contract. If such a Replacement Contact is obtained, an amount equal to the capacity and energy available thereunder will be offered to the Purchaser pursuant to the terms of this contract as the Displacement Product, subject to the terms of any Supplemental Displacement Product Agreement.

(c) REALLOCATION. If collectively Purchasers subscribe to Purchaser Product Percentages for any Priest Rapids Project Product that total more than 100% either initially or at any time before the time limits set forth in Section l(d), then Purchaser Product Percentages for such Priest Rapids Project Product will be determined as follows; provided, however, that the application of the following formula shall not result in the Purchaser being assigned a Purchaser Product Percentage larger than that included in this contract on the date of execution:

(1) Step 1. Each such Priest Rapids Project Product will be divided between parties to the 1956 and 1959 Contracts, as a group, and the Idaho Cooperatives, as a group, in proportion to the number of retail electric customers located in the Pacific Northwest (determined by the number of retail meters) served by each group as of October 31, 2000.

(2) Step 2. Each Purchaser Product Percentage of such Priest Rapids Project Product will be determined as follows:

(A)    For parties to the 1956 and 1959 Contracts, the proportion of such Priest Rapids Project Product from Step 1 above will be distributed to individual Purchasers as follows:

(i) For November 1, 2005 through October 31, 2009 the Surplus Product shall be distributed in proportion to participation in the 1956 Contract and the Displacement Product shall be distributed in proportion to participation in the 1956 Contract and 1959 Contract weighted 25% and 75% respectively.

(ii) For the period after November 1, 2009 the Surplus Product and Displacement Product shall be distributed in proportion to the sum of participation in the 1956 Contract and 1959 Contract divided by two.

(iii) Notwithstanding any other provision of this contract, for those Eligible Purchasers that sign this contract after December 31, 2001, the Purchaser Product Percentage for the Surplus Product and the Displacement Product may not exceed the average of the Purchasers Power Allocations, as those terms are defined in the 1956 and 1959 Contracts, divided by 63.5 percent.

(iv) Notwithstanding any other provision of this contract, for those Eligible Purchasers that sign this contract after October 31, 2005 their participation in the Priest Rapids Development shall be deemed to be zero for purposes of determining their Purchaser Product Percentage for the Surplus Product and the Displacement Product under this contract.

(B)    For the Idaho Cooperatives, the proportion of such Priest Rapids Project Product from Step 1 will be distributed to individual cooperatives in proportion to the number of retail electric customers located in the Pacific Northwest (determined by number of retail meters) each cooperative served as of October 31, 2000.

(d) If the reallocation procedure of Section 3(c) is implemented, then for the period November 1, 2005 through October 31, 2009, the following shall apply to those Purchasers who were parties to the 1956 Contracts but were not parties to the 1959 Contracts:

(1) The Purchaser Product Percentage of Displacement Product shall be adjusted to be in proportion to participation in the 1956 Contract (the Purchaser’s percent participation in the 1956 Contract divided by 63.5%).

(2) The District shall be obligated to provide the Displacement Product pursuant to Section 5 using the Purchaser Product Percentage of Displacement Product as calculated pursuant to Section 3(d)(1), and the Purchaser shall be obligated to make payments for the Displacement Product pursuant to Sections 6 and 7 using such Purchaser Product Percentage of Displacement Product.

The adjustments to Purchaser Product Percentage of Displacement Product will have no effect on the Purchaser Product Percentage of any other Product hereunder, nor on the Purchaser Product Percentage of any other Purchaser.

(e) If a Contract with one of the Purchasers is terminated pursuant to Section 22 as a result of such Purchaser’s Act of Default, the District shall give the non-defaulting Purchasers notice of such default. Beginning with the first month that is at least 30 days following such notice, the Purchaser Product Percentages of Surplus and Displacement Products (other than zero) of non-defaulting Purchase shall be increased pro rata until either: (i) the Purchaser Product Percentages of Surplus and Displacement Products of the defaulting Purchaser have been fully allocated or (ii) a further pro rata increase to the Purchaser Product Percentages of Surplus and Displacement Products of the non-defaulting Purchasers would adversely affect the tax-exempt status of any outstanding Debt. In the event of (ii), the portion of the Purchaser Product Percentages of Surplus and Displacement Products of the defaulting Purchaser not yet allocated will be offered to all Purchasers that can accept such allocation without adversely affecting the tax-exempt status of any outstanding Debt. If after such offer there remains some portion of the Purchaser Product Percentages of Surplus and Displacement Products of the defaulting Purchaser not yet allocated, the District at its discretion may elect to accept such unallocated portion. If after all of the foregoing there remains unallocated Purchaser Product Percentages of Surplus and Displacement Products of the defaulting Purchaser, the Purchaser Product Percentages of Surplus and Displacement Products (other than zero) of non-defaulting Purchasers shall be increased pro rata based on each such non-defaulting Purchaser’s Purchaser Product Percentages of Surplus and Displacement Products before any allocation under this Section 3(e). In the event that the allocation described in the immediately preceding sentence adversely affects the tax-exempt status of Debt, any increased costs resulting therefrom will be included in Annual Power Costs. Nothing in this subsection is intended to limit any claims the non-defaulting Purchasers may assert against the defaulting Purchaser.

(f) REGULATORY APPROVALS. The District and the Purchaser believe that this contract fully complies with the requirements of Public Law 83-544. FERC has ordered that a Reasonable Portion of the Priest Rapids Project Output be offered for sale based on market principles and that Eligible Purchasers are to receive a meaningful priority. Additionally, FERC has stated that the District may negotiate power contracts as part of the license application process provided that implementation of such contracts is contingent on receipt of license authority. The District and the Purchaser agree that nothing this contract limits in any way the District’s ability to conform to these FERC requirements. Nothing in this contract, other than Section 8, limits the ability of the Purchaser from participating in any FERC or court proceedings that may address Public Law 83-544.

The Parties understand that FERC’s orders of February 11, 1998 and June 12, 1998 in Docket No. EL95-35 (the “PL 83-544 Orders”) require the District, as part of its application for a New FERC License, to file the Marketing Plan for making available the Reasonable Portion in a fair, equitable and non-discriminatory manner pursuant to market-based principles and procedures. The Parties further understand and agree that nothing in this contract is intended to affect or limit in any way the right of the District to develop and file the Marketing Plan which it determines is consistent with the PL 83-544 Orders.

In the event that FERC or a court of competent jurisdiction shall by order determine that any provision of this contract violates a requirement of either PL 83-544 or of any of the PL 83- 544 Orders, the Parties shall, within 30 days of the entry of such an order commence negotiations for the purpose of reaching agreement on such amendments to this contract, if any, as may be needed for the purpose of complying with that order and for the purpose of preserving the basic benefits and obligations of the Parties. If, within 90 days of commencement of negotiations, the Parties are not able to resolve their differences and to agree upon any necessary amendments, either Party may, after notice to the other Party, cause the matter to be submitted to binding arbitration as provided in Section 28.

If following the issuance of the arbitration decision, a Party reasonably determines that acceptance of such amendments will result in materially decreased benefits or materially increased obligations when compared to this contract, the Party may by notice to the other Party explain its reasons for the determination and, if given within 10 days of the arbitration decision, terminate this contract.

SECTION 4. TREATMENT OF THE SALE OF THE REASONABLE PORTION.

Pursuant to the PL 83-544 Orders, the Reasonable Portion must be offered for sale. Purchaser has no claim or right under this contract to receive any of the Reasonable Portion, or any proceeds from the sale thereof; provided, however, that nothing in this contract shall be interpreted as prohibiting the District and the Purchaser from entering one or more separate agreements regarding the Reasonable Portion and the disposition of the proceeds of the sale of the Reasonable Portion.

SECTION 5. DETERMINATION OF PRODUCT AVAILABILITY, DISTRICT RESERVED SHARE AND RISK PREMIUM.

(a) The Priest Rapids Project Products available to Purchaser during each Contract Year will be determined by the sequential application of the following provisions of this Section 5 (i.e., Section 5(b), then Section 5(c), then Section 5(d), etc.).

(b) For the purpose of determining the estimated amount of Surplus Product to be made available to the Purchaser, on or before 30 days prior to the beginning of each Contract Year, the District shall prepare and mail to the Purchaser a pro forma statement showing for the next Contract Year:

(1) “Estimated District Loads,” which shall mean all projected retail electric energy loads for, the next Contract Year based on average weather conditions, plus aggregated losses, projected to be used at locations served by the District during the next Contract Year with the exception of (i) locations outside of the geographic boundaries shown on Exhibit C and (ii) that portion of loads of individual retail customers that during a consecutive 12 month period after 2000 exceed by ten average megawatts or more the energy load of such customer for the immediately preceding consecutive 12 month period. Once load at a location is included in Estimated District Load, loads at such location shall continue to be included in full in future Contract Years without regard to the source of supply for such load. For example, if a load is expected to be served in all or part by an entity other than the District during the next Contract Year, the entire load shall continue to be included in Estimated District Loads. If a new load or increased load of one average megawatt or more at a single retail customer has been included in Estimated District Loads in the current Contract Year, and less than 90% of such new or increased load was actually measured in the current year, then Estimated District Loads shall be reduced for the next Contract Year by the difference between the amount included the current Contract Year and the amount measured. If there are more than one such new or increased loads for the current Contract Year, they shall be combined for determining both the 90% and the amount of any reduction. If in the current Contract Year a load of one average megawatt or more is placed on the District which was not included in the current Contract Year’s Estimated District Loads, then the next Contract Year’s Estimated District Loads shall be increased by the amount of such load measured in the current Contract Year. Except for such load correction calculations, Estimated District Loads for the next Contract Year shall be not less than the current Contract Year’s Estimated District Loads.

(2) Estimated Amount of firm energy from the Priest Rapids Project for the next Contract Year based on critical water planning using the procedures of Operating Agreements in effect on October 31, 2000, unless the District and Purchasers whose Purchaser Product Percentages of Surplus Product total 66% or more mutually agree to use procedures from a subsequent Operating Agreement.

(3) The “District Reserved Share” for the next Contract Year shall be: (A) prior to November 1, 2009, the smaller of: (i) the ratio of Estimated District Loads from Section 5(b)(1) less the District’s 36.5% of the estimated firm energy output of the Wanapum Development, to the estimated firm energy output of the Priest Rapids Development from Section 5(b)(2), expressed as a percentage or (ii) 100% minus the Reasonable Portion; and (B) on and after November 1, 2009, the smaller of: (i) the ratio of Estimated District Loads from Section 5(b)(1) to the estimated firm energy output of the Priest Rapids Project from Section 5(b)(2), expressed as a percentage or (ii) 100% minus the Reasonable Portion.

(4) The “Purchaser Power Allocation” shall be the product of: (i) 100% minus the sum of the District Reserved Share as determined in Section 5(b)(3) and the Reasonable Portion and (ii) the Purchaser Product Percentage of the Surplus Product.

(c) During each Contract Year, the District shall have available for its use and shall take the District Reserved Share multiplied by the actual Priest Rapids Project Output. The District shall have the unilateral right, without obligation to the Purchaser, to use Priest Rapids Project Output resulting from the District Reserved Share for any purpose. In no event shall the Purchaser have any right under this contract to any portion of the District Reserved Share of Priest Rapids Project Output or the associated revenues. The District may use the District Reserved Share of the non-firm portion of the actual output of the Priest Rapids Project in any manner the District deems appropriate, and shall have no obligation to use such non-firm portion to serve the District’s retail loads during any Contract Year.

(d) The Surplus Product available to the Purchaser in each Contact Year shall be the actual Priest Rapids Project Output multiplied by the Purchaser Power Allocation from Section 5(b)(4).

(e) For the purpose of determining the estimated amount of Displacement Product to be made available to the Purchaser, on or before 30 days prior to the beginning of each Contract Year, the District shall prepare and mail the Purchaser a pro forma statement showing for the next Contract Year the estimated amount of capacity and energy from Displacement Product.

(f) The monthly amount of “Estimated Unmet District Load” shall be determined as the Estimated District Load as calculated in Section 5(b)(1), less the estimated firm Priest Rapids Project Output from Section 5(b)(2). The difference so determined will be shaped on a monthly basis using the District’s historic load patterns.

(g) In those Contract Years when there is Estimated Unmet District Load forecasted pursuant to Section 5(f), the District shall be entitled to take and shall take from the Displacement Product that is not subject to a Supplemental Displacement Product Agreement pursuant to Section 3(b) an amount equal to the Estimated Unmet District Load from Section 5(f).

(h) The Purchaser shall have available for its use and shall take Displacement Product equal to the actual Displacement Resource available during the Contract Year minus the amount of Displacement Resource used by the District in such Contract Year as determined in Section 5(g), multiplied by the Purchaser Product Percentage of Displacement Product; provided, however, if the Purchaser has elected to have the District make sales pursuant to Section 3(b), then Purchaser will receive proceeds from such sales as set forth in Section 10 in lieu of the amounts of capacity and energy described in this Section 5(h).

(i) On or before 30 days prior to the beginning of each Contract Year, the District shall prepare and mail the Purchaser a pro forma statement showing for the next Contract Year an estimate of the Purchaser Risk Premium to be paid by the Purchaser, using a Risk Premium calculated with a Market Price determined by the District not more than 60 days prior to the start of the next Contract Year by reference to published future price data for the next Contract Year, and the applicable percentage from Section 7(a)(5).

(j) Deliveries of Priest Rapids Project Products may be reduced if the District does not obtain an Annual FERC License or New FERC License, or under any of the following conditions as determined by the District:

(1) Pursuant to Sections 5 or 9.

(2) If the District is unable to deliver Priest Rapids Project Products to the Purchaser due to Uncontrollable Forces.

(3) If failure to reduce deliveries, together with deliveries to all other Purchasers and deliveries to the District, would result in exceeding the capability of the Priest Rapids Project or subject it or its operation to undue hazard or violate the FERC License, any applicable law, regulation, or Operating Agreement.

(4) In case of emergencies or in order to install equipment in, make repairs to, make betterments, renewals, replacements, and additions to (“Improvements”), investigation and inspections of, or perform other maintenance work on the Priest Rapids Project.

The District will use its reasonable efforts to give advance notice to the Purchaser regarding any planned interruption or reduction, giving the reason therefor and stating the probable duration thereof.

(k) Notwithstanding any other Section of this contract, if the Priest Rapids Project is capable of producing Priest Rapids Project Output, but the amount of each Priest Rapids Project Product to be made available to the Purchaser is projected to be zero for a Contract Year, the Purchaser may give the District written notice, no later than 100 days after the start of the Contract Year, that the Purchaser elects to terminate this contract. In such event, this contract shall terminate effective upon receipt of such written notice by the District.

SECTION 6. ANNUAL POWER COSTS.

(a) “Annual Power Costs” as used in this contract shall include, for the Priest Rapids Development beginning November 1, 2005 and for the Priest Rapids Project beginning November 1, 2009, all of the District’s costs and expenses of every type, both direct and indirect, resulting from the ownership, operation, maintenance of and Improvements that are incurred or paid by the District during each Contract Year and that are incurred consistent with Prudent Utility Practice. Such costs and expenses shall for any Contract Year include, but not be limited to the following, in each case without duplication:

(1) All operations costs, maintenance costs, administrative costs, taxes, in lieu of tax payments relating to production and delivery of Priest Rapids Project Output (excluding depreciation) including, but not limited to, those specified in the Uniform System of Accounts as prescribed by the FERC for electric utilities and licensees.

(2) Amounts that the District determines are needed to pay for the prevention or correction of any loss or damage and for Improvements to keep the Priest Rapids Project in good operating condition. Subject to Section 28, the Purchaser agrees that the District shall have the sole right to determine what costs and expenses shall be incurred in connection with the ownership, operation, and maintenance of and Improvements to the Priest Rapids Project.

(3) Subject to Section 6(e), interest that accrues and is payable into the debt service fund with respect to outstanding Debt; principal that accrues and is payable into the debt service fund with respect to outstanding Debt, whether at maturity or by reason of redemption (including premiums for redeeming Debt prior to its scheduled maturity) amounts required to restore any reserve accounts maintained to secure Debt to the level required by the resolution authorizing the Debt and Financing Costs. “Financing Costs” include, but are not limited to, discounts, insurance premiums, letter of credit fees, costs of hedging interest rates, costs of compliance with disclosure requirements, legal and bond counsel fees, independent auditors, printing, financial advisor, bond registrar and trustee costs.

(4) Subject to Section 6(e), costs of creating and replenishing any reserve or contingency fund required to be maintained by any Bond Resolutions and working capital funds.

(5) Any liability or cost, including settlements and judgments, incurred as a result of or related to the ownership, operation or maintenance of the Priest Rapids Project and not covered by insurance.

(6) Costs incurred by the District in applying for a New FERC License as recorded on the District’s books of account for the Priest Rapids Project (account number 183090), including but not limited to those costs and interest expenses incurred before November 1, 2005 (‘“New FERC License Costs”). New FERC License Costs incurred prior to November 1, 2005 will be recovered uniformly over a 15-year amortization period commencing with the Contract Year starting on January 1, 2006. The estimated New FERC License Costs incurred by the District after November 1, 2005 will be included in Annual Power Costs. In the event of termination of this contract for any reason subsequent to the effective date of the New FERC License, the Purchaser shall pay the District an amount equal to the unrecovered New FERC License Costs multiplied by the Purchaser Power Allocation at the time of termination. In the event of termination of this contract for any reason prior to the effective date of the New FERC License, Purchaser shall have no liability for unrecovered New FERC License Costs.

(7) Obligations entered into by the District as part of its effort to obtain a New FERC License, including but not limited to the cost of replacing Priest Rapids Project Products that may be committed in such obligations.

(8) Costs incurred by the District to fulfill obligations, if any, to parties to the 1956 and 1959 Contracts who do not sign this contract, as such costs are required or approved by a court, or reasonably approved by the District after notice to the Purchaser.

(9) An amount equal to 15% of debt service in that Contract Year or such higher amount as may be required by a Bond Resolution (“Coverage Requirement”).

(b) The District shall credit against Annual Power Costs the following:

(1) Any insurance or other proceeds received by the District as reimbursement for damages, losses, costs or expenses included in the Annual Power Costs, and any insurance or other proceeds received as a result of the interruption or reduction of Priest Rapids Project Output.

(2) Revenue, if any, received from obligations entered into by the District as part of its effort to obtain a New FERC License.

(3) Revenue, if any, received as a result of the District fulfilling obligations to parties to the 1956 or 1959 Contracts that do not sign this contract, pursuant to Section (1)(b) of those contracts, excluding revenue required to be paid pursuant to the 1959 Contract.

(4) The Coverage Requirement, to the extent that it is not expended during a Contract Year for capital or other costs of the Priest Rapids Project (the amount not spent shall be credited against Annual Power Costs for the following Contract Year).

(5) Interest earnings on funds of the Priest Rapids Project that are not required to be retained by such fund by a Bond Resolution.

(6) An estimate of the cost of the Reasonable Portion, which shall be an amount equal to the product of the Reasonable Portion and the Annual Power Costs.

(c) Costs directly or indirectly associated with the District’s Electric System or any other separate system of the District shall not be part of Annual Power Costs other than the payment of Debt held by the Electric System.

(d) Any payment received by the District as a result of the taking of the whole or any portion of the Priest Rapids Project Output by any state or federal government agency shall be used by the District to credit Annual Power Costs or to retire, at or prior to maturity, Debt, whichever shall be proper under the circumstances existing at the time of the taking.

(e) The Purchaser agrees that the District shall have the sole discretion to determine what portion, if any, of the Priest Rapid Project financing will be accomplished by issuance of Debt and the terms and covenants of any Debt.

(1) To the extent that the District makes Improvements to the Priest Rapids Project that are not financed by Debt proceeds, Annual Power Costs will include a cost as determined by the following: the District shall determine all of the Improvements anticipated for the Priest Rapids Project for the Contract Year and the District shall estimate the weighted average economic service life of the Improvements, and shall calculate a weighted average market interest rate assuming the District were to issue Debt to finance such Improvements, both as reasonably determined by the District. Based on such calculations the District shall include in Annual Power Costs an amount sufficient to amortize the costs (including both interest and principal pursuant to this Section 6(e)(1)) of such Improvements on a level basis over a period equal to the estimated weighted average economic service life of the Improvements. The amortization period for any Improvements shall not exceed 30 years and land shall be deemed to have a service life of 30 years. The District may adjust prospectively the amortization of any Improvements to reflect the actual costs of such Improvements, to correct any error in computation or to reflect a material change in the District’s estimate of the average economic life of the Improvements. The District shall not be required to amortize capital expenditures that are estimated to cost below the amount that in accordance with the District’s capitalization policy are not required to be capitalized and may include such costs in Annual Power Costs.

(2) To the extent that the District issues Debt (i) with a final maturity that is not earlier than the expiration of the estimated weighted average service life of the Improvements, to be financed with the Debt and (ii) the total annual amounts required for the payment of interest, principal and sinking fund requirements of such Debt when due in a Contract Year do not vary by more than 10% from those required in any other Contract Year, then Annual Power Costs shall include the actual principal and sinking fund requirements that accrues and is payable into the debt service fund for that Debt for the Contract Year. To the extent that the District issues Debt that does not meet the requirements of (i) and (ii) in the prior sentence, then Annual Power Costs will include, with respect to such Debt, an amount as determined by the District as of the date of issuance of the Debt, sufficient to amortize the original principal amount of such Debt on a level debt service basis over a period equal to the estimated weighted average economic service life of the Improvements financed or refinanced by such Debt commencing on the later of (a) the date of issuance of the Debt or (b) the in service date of such Improvements, and based on an interest rate equal to, at the election of the District, either (i) the weighted average interest rate of the Debt or (ii) the weighted average market rate at the time of issuance of the Debt for debt with similar terms and borrowers similar to the District, as reasonably determined by the District. The amortization period for any Debt shall not exceed 30 years, land shall be deemed to have an economic useful life of 30 years, and any Debt proceeds deposited into a reserve account shall be credited against Annual Power Cost in the final year of the Debt. The District may adjust prospectively the amortization of the principal amount of any Debt to correct any error in computation or to reflect a material change in the District's reasonable estimate of the in service date or the average economic life of the Improvements

(3) To the extent that the District creates or replenishes reserve and contingency funds required by Bond Resolutions or working capital funds that are not financed by Debt proceeds, Annual Power Costs will include a cost determined in a manner analogous to the calculation in Section 6(e)(2) with such amounts amortized over 15 years. Upon termination of this contract, any such funds will belong to the District.

(f) On or prior to July 31st of each year, for budgetary purposes only and not for determining Priest Rapids Project Products or Purchaser’s payment obligations under this contract the District shall provide the Purchaser a pro forma budget showing an estimate of Annual Power Costs, Priest Rapids Project Output, and Estimated District Loads for the following Contract Year.

SECTION 7. PAYMENT FOR PRIEST RAPIDS PROJECT PRODUCTS AND RISK PREMIUM.

(a) On or before 30 days prior to the beginning of each Contract Year beginning in 2005, the District shall prepare and mail the Purchaser a pro forma statement for the next Contract Year showing:

(1) An estimate of Annual Power Costs specifically assigned to the Purchaser. Specific assignment shall occur whenever a Purchaser or a group of Purchasers cause identifiable costs to be placed on the Priest Rapids Project, including but not limited to increased interest costs of Debt that can not be issued as tax-exempt because of the Purchaser’s expected use of any Priest Rapids Project Product or violation of Section 24(b).

(2) A detailed estimate of the Annual Power Costs, less those costs specifically assigned in Section 7(a)(1), for the Contract Year.

(3) An estimate of the cost to the Purchaser of the Surplus Product, which shall be an amount obtained by multiplying the estimate Annual Power Costs from Section 7(a)(2) by the Purchaser Power Allocation calculated in Section 5(b)(4).

(4) An estimate of the cost to the Purchaser of the Displacement Product, which shall be the cost, including the costs of transmission and necessary services, to the District of acquiring Displacement Resources multiplied by the ratio of the Displacement Product available to Purchaser determined pursuant to Section 5(h) and the total Displacement Resource determined pursuant to Section 5(h).

(5) An estimate of the “Purchaser Risk Premium” to be paid by Purchaser equal to the product of the Risk Premium determined pursuant to Section 5(i) and the applicable percentage determined as follows:

(A)     The applicable percentage is zero if the Purchaser has executed this contract on or before December 31, 2001 or in the case of the City of Forest Grove, McMinnville, Milton-Freewater or Seattle City Light, has provided to the District written assurances on or before December 31, 2001 that the superintendent or city manager supports this contract and will so recommend to its respective city council and this contract is executed on or before March 31, 2002 in the case of Seattle City Light, and on or before February 1, 2002, in the case of Forest Grove, McMinnville or Milton-Freewater.

(B)     If Purchaser executed this contract after December 31, 2001, but on or before December 31, 2002, the applicable percentage is 25 percent.

(C)     If Purchaser executed this contract after December 31, 2002, but on or before December 31, 2003, the applicable percentage is 50 percent.

(D)     If Purchaser executed this contract after December 31, 2003, but on or before December 31, 2004, the applicable percentage is 75 percent.

(E)     If Purchaser executed this contract after December 31, 2004, but on or before December 31, 2009, the applicable percentage is 100 percent.

(F)    If Purchaser has violated any provision of Section 8, the applicable percentage is 100 percent.

(6) If the percentage of Risk Premium applicable to Purchaser, pursuant to Section 7(a)(5), is zero, Purchaser shall be entitled to a credit against Purchaser Estimated Cost equal to the sum of:

(A)     The product of the Purchaser Product Percentage of Surplus Product as set forth in Section 3(a) (or as reallocated pursuant to Section 3(c) or (d) among Purchasers with a Risk Premium percentage of zero) and the Risk Premium Revenues from the Surplus Product.

(B)     The product of the Purchaser Product Percentage of the Displacement Product as set forth in Section 3(b) (or as reallocated pursuant to Section 3(c) or (d) among Purchasers with a Risk Premium percentage of zero) and the Risk Premium Revenues from the Displacement Product.

The District shall retain for its own use any Risk Premium Revenues that are not allocated pursuant to Section 7(a)(6).

(7) An estimate of the cost to the District of selling capacity and energy using the Displacement Product, as elected by the Purchaser pursuant to Section 3 (b)

(8) The sum of amounts (expressed in dollars) calculated pursuant to Sections 7(a)(1), (3), (4), (5) and (6), hereinafter referred to as the ‘Purchaser Estimated Cost.”

(9) The amount of the monthly payments to be made by the Purchaser to pay the Purchaser Estimated Cost during the next Contract Year,

(b) The pro forma statement provided pursuant to Section 7(a) shall be in lieu of the issuance of monthly bills to the Purchaser by the District, and the Purchaser shall be obligated to pay the monthly amounts contained therein in accordance with this Section 7.

(c) In the event of receipts or payments substantially affecting the Annual Power Costs during any Contract Year, the District shall prepare and mail to the Purchaser a revised statement of estimated Annual Power Costs and Purchaser Estimated Cost, which revised statement shall supersede any previous statement or revised statement, and the Purchaser shall be obligated to make monthly payments set forth on such revised statement for the balance of the Contract Year.

(d) Purchaser Estimated Cost shall continue to accrue and the Purchaser shall make payment for the same up to the time of termination of this contract for whatever reason, irrespective of the condition of the Priest Rapids Project and whether or not it is capable of producing Priest Rapids Project Products. If the Priest Rapids Project is not capable of producing Priest Rapids Project Products, then the Purchaser Estimated Cost will be based on Priest Rapids Project Output in the last full year of operation. In this event, at the request of the Purchaser, the District will make its reasonable best efforts to acquire replacement Priest Rapids Products the cost of which will be added to the Purchaser Estimated Cost.

(e) The monthly payments of Purchaser Estimated Costs set forth in the statement or revised statement shall be due and payable by electronic funds transfer to the District’s account, designated in writing by the District, on the 20th calendar day of each month.

(f) If payment in full of any monthly payment amount set forth on a statement or revised statement is not received by the District on or before the close of business on the 20th day of the month, a delayed payment charge of 2% of the unpaid amount due will be made. Any bill which remains unpaid for more than 30 days after the due date shall, in addition to the delayed payment charge, accrue interest at the lesser of 1.5% per month or the maximum rate allowed by law. If the 20th calendar day of the month is a Saturday, Sunday or a District recognized holiday, the next following business day shall be the last day on which payment may be received without the addition of the delayed-payment charge. Additionally, if payment due to the District under this Section 7 remains unpaid 30 days after the due date, the District may thereafter suspend delivery of Priest Rapids Project Products to the Purchaser which would otherwise occur until payment in full of all amounts due and owing (including any interest and delay charges) is received by the District.

(g) On or before 150 days after the end of each Contract Year, the District will submit to the Purchaser a detailed statement of the Purchaser Estimated Cost and the Purchaser Actual Cost for the Contract Year. “Purchaser Actual Cost” on such statement shall be calculated in the same manner as Purchaser Estimated Cost as set forth in Sections 7(a)(1)-(7) but using the actual costs incurred by the District in the preceding Contract Year; provided, however, that the estimated values calculated pursuant to Sections 5(b)(1 )-(2) shall not be modified. If the Purchaser Actual Costs exceed the Purchaser Estimated Costs on such statement (“Excess Costs”), the District shall bill the Purchaser for an amount equal to such Excess Costs, and the Purchaser shall pay such bill within 30 days or be subject to the delayed-payment and interest charges as provided in Section 7(f). If the Purchaser Actual Costs are less than the Purchaser Estimated Costs, or if credits are due pursuant to Section 6(b)(1)-(5) or both (“Refund Costs”), the District shall give credit to the Purchaser against the Purchaser Estimated Costs for the current Contract Year in an amount equal to such Refund Costs; provided that if Refund Costs are due to Purchaser following the expiration of this contract, the District shall make a cash refund of such amount to the Purchaser.

(h) The District may use any payments received from the Purchaser under this contract in any manner that the District, in its sole discretion, shall determine. The District agrees to pay or cause to be paid for the Priest Rapids Project from lawfully available money of the District, including payments from the Purchaser and other Purchasers, all the operating costs, taxes and assessments, capital expenditures, payments required for Debt and other costs of the Priest Rapids Project. If the District issues tax-exempt Debt based on the governmental use of the Priest Rapids Project Output by the Purchaser, the Purchaser covenants that it shall not use any Priest Rapids Project Output in a manner, or take any other action, that will or is likely to adversely affect the tax-exempt status of any Debt.

SECTION 8. SUPPORT AND COOPERATION.

(a) The District shall make application and use reasonable efforts to obtain a New FERC License and obtain FERC approval of this contract if required. The District reserves the right to determine when such applications should be made.

(b) In accordance with FERC direction contained in the PL 83-544 Orders, the District commits to providing the Eligible Purchasers with a meaningful priority in the sale of the Reasonable Portion.

(c) Purchasers may also participate in the development by the District of a proposed Marketing Plan. This Marketing Plan will be submitted to FERC for approval as part of the relicensing process application; provided, however, that nothing in this Section shall be construed as compelling the Purchaser to comment on or refrain from commenting on the Marketing Plan.

(d) Purchaser covenants that it shall provide reasonable support, cooperation and assistance to the District in the District’s acquisition of a New and Annual FERC License, any necessary federal, state or local permits relating to the Priest Rapids Project, FERC approval of this contract, if FERC approval is requested by the District; provided, however, that nothing in this contract shall preclude the Purchaser from filing comments with FERC to protect the Purchaser’s economic benefits provided by this contract.

(e) In the event that the District believes that the Purchaser has violated any of the above covenants of Section 8(d) the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 10 business days within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to consider the action to be in breach of the covenants, the matter shall be resolved pursuant to arbitration conducted under Section 28. If the Purchaser is determined to be in breach of the covenants, the District shall have the right to terminate this contract effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell, in any manner the District determines, any Priest Rapids Project Product the Purchaser would have been otherwise entitled to under this contract.

(f) Purchaser covenants that it shall refrain from filing or supporting any FERC license application for the Priest Rapids Project other than that filed by the District and refrain from filing or supporting any effort that would lead to modification of the FERC decisions on Public Law 83-544 contained in the “PL 83-544 Orders” unless such a request or petition is filed by the District and the Purchaser agrees with that request or petition. For purposes of this Section 8(f), “refrain from supporting” means prepare no documents, sign no other agreement or contract other than this contract for Priest Rapids Project Output or for other products or that is contingent upon an entity other than the District receiving a license from FERC to operate the Priest Rapids Project, submit no testimony, engage in no lobbying and provide no funding.

(g) The Purchaser covenants that it will not take any action which, in the opinion of a neutral third party, would likely be construed as: (i) having a material adverse effect on the District’s ability to obtain an Annual FERC License or a New FERC License or the anticipated economic benefits of this contract or (ii) constituting a judicial challenge to the authority of the District or the Purchaser to enter into and implement the provisions of this contract. This covenant does not apply to anticipated economic benefits under other agreements between the District and third parties, such as with the Bonneville Power Administration.

(h) In the event that the District believes that the Purchaser has violated any of the above covenants of Section 8(f) or (g), the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 4 business days after receipt of such written notice by Purchaser within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to reasonably consider the action to be in breach of the covenants, the District shall have the right to terminate this contract and the 1956 and 1959 Contracts, effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell, in any manner the District determines, any Priest Rapids Project Product the Purchaser would have been otherwise entitled to under this contract and any output from the Priest Rapids Project under the 1956 or 1959 Contracts.

SECTION 9. SCHEDULING OF DELIVERIES OF SURPLUS AND DISPLACEMENT PRODUCTS.

(a) This Section 9 shall apply only to the scheduling of the Surplus and Displacement Products.

(b) It is the intent of the Parties that Priest Rapids Project Output shall be fully coordinated with other resources available to the Purchaser and with the resources of other Purchasers and that the operation of the Priest Rapids Project shall be consistent with existing Operating Agreements unless mutually agreed to by the Parties. If provisions of this Section 9 conflict with the provisions of any Operating Agreement to which both the District and the Purchaser are parties, the conflicting provisions of such Operating Agreement shall prevail. Scheduling of Priest Rapids Project Output shall be as requested by the Purchaser, acting singly or as a member of a group of Purchasers, subject to the limitations set forth in this contract.

(c) The Purchaser, acting singly or as a member or a group of Purchasers, shall make available to the District each normal working day, in conformance with then prevailing scheduling procedures for scheduling Pacific Northwest generating resources, hourly schedules of desired Surplus Product deliveries for the following day or days. The schedules will be completed in a time frame consistent with standard industry practices in the Pacific Northwest. Such schedule shall be based upon the probable water supply to the Priest Rapids Project (inflows) and the resulting probable output. Revisions in the schedule may be made at my time upon the request of the Purchaser if required by changes in estimated river flows or system loads. Deviations from schedules shall be held to a minimum by the District and corrected for as promptly as practicable on an hourly basis under conditions as nearly equivalent as practicable to those occurring when the deviations occurred. Alternatively, the Purchaser may provide scheduling information via a dynamic electronic signal.

(d) The schedules for Surplus Product requested by the Purchaser shall be in accordance with the following:

(1) The net hourly schedule for delivery or spill shall be within the limitations of the Purchaser Power Allocation and the Purchaser Power Allocation of the minimum discharge determined by the District.

(2) The District shall make all determinations concerning the Priest Rapids Project maximum output and minimum discharge; the District shall have the unilateral right to determine the maximum allowable amount of change in Priest Rapids Project Output during any time period and the maximum number of unit starts and stops allowable during any time period. Such operating guidelines will be reviewed annually with the Purchaser. The District will consider suggestions by the Purchaser, then make its final determination consistent with Prudent Utility Practice. The Purchaser shall schedule Priest Rapids Project Output requests within such guidelines.

(3) Each Purchaser’s schedule shall not be less than the Purchaser Power Allocation of the minimum operating capability of the Priest Rapids Project; provided, however, that if at times one or more Purchasers schedule more than their Purchaser Power Allocation of the minimum operating capability of the Priest Rapids Project, the Purchasers that have scheduled their Purchaser Power Allocation of such minimum operating capability may reduce their schedules during such times subject to meet the minimum operating requirements of the Priest Rapids Project.

(4) Subject to Section 5(j), the Purchaser shall be entitled to a share of the Priest Rapids Project Output each hour, determined by multiplying the total Priest Rapids Project inflows by the Purchaser Power Allocation.

(5) In addition to Priest Rapids Project Output available under Section 9(d)(4), the Purchaser shall be entitled to a share of the pondage available at the Priest Rapids Project (the “Purchaser Allocation of Pondage”), determined by multiplying the total of the pondage available by the Purchaser Power Allocation. The Pondage available at the Priest Rapids Project shall be determined by the District as the volume of water that can be stored between the then current maximum forebay elevation and the then current minimum forebay elevation.

(6) The District will establish and maintain for Purchaser a pondage account that will reflect the use of pondage by the Purchaser. The Purchaser may schedule more or less than its share of the Priest Rapids Project inflows determined in accordance with Section 9(c) by scheduling from or to such pondage account. The aggregate amount of the energy scheduled from the pondage account shall not exceed the Purchaser Allocation of Pondage determined in accordance with Section 9(d)(5) and scheduling by the Purchaser to its pondage account shall be only against its prior accumulated pondage draft.

(7) During any hour that spill is occurring at the Priest Rapids Project in order to control the forebay elevation, the spill shall first reduce the inflow of each of the Purchasers whose pondage account is overfull proportionate to the amount of the overfill, but not exceeding the amount of the overfill. If unallocated spill remains, it shall next be allocated to reduce the inflow of each of the Purchasers whose request for generation is less than its entitlement during the hour, in proportion to the amount by which its request is less than its entitlement. Any remaining unallocated spill shall be allocated to reduce the inflow of all Purchasers in proportion to each Purchase Power Allocation.

(8) During any hour that spill is occurring at the Priest Rapids Project for fish or any other non-power purpose determined necessary or desirable by the District, the spill shall be allocated to reduce the inflow of all Purchasers in proportion to each Purchaser Power Allocation.

(9) The District has the right to operate the Priest Rapids Project in such manner as it deems to be in its best interests so long as the same is consistent with the FERC License, applicable, laws and regulations, Prudent Utility Practiced this contract.

(10) The District shall have the unilateral right to restrict deliveries hereunder as may be necessary to fulfill any non-power regulatory or other legal requirements and shall have the unilateral right to determine the amounts of spill required at the Priest Rapids Project.

(e) The Displacement Product shall be scheduled to the Purchaser by the District from the Priest Rapids Project on the same basis that the capacity and energy from the Displacement Resource is scheduled to the District. The Purchaser may request an alternative schedule for the delivery of the Displacement Product, and the District will agree to such request if the District reasonably determines that doing so will not result in financial loss or operational harm to the District.

SECTION 10. PAYMENT OF PROCEEDS FROM THE SALE OF DISPLACEMENT PRODUCT.

If the Purchaser has elected to have the District market Purchaser Percentage of Displacement Product, then the proceeds from the sale of such portion of the Displacement Product, less any costs incurred by the District in making such sale, will be paid monthly to the Purchaser, in the month following receipt of such proceeds by the District.

SECTION 11. POINT OF DELIVERY.

(a) Priest Rapids Project Output supplied hereunder shall be approximately 230 kV, three-phase, alternating current, at approximately 60 hertz.

(b) The Surplus Product and the Displacement Product to be delivered hereunder shall be made available to the Purchaser, at its option, exercisable from time to time, at any one or more of the following points:

(1)     The 230 kV bus of the Bonneville Power Administration's Midway Substation;

(2)     The 230 kV bus of the switchyard of the Wanapum Development;

(3)     The 230 kV bus of the Vantage Substation; or

(4)     At any other location mutually agreed to by the District and Purchaser.

SECTION 12. METERING AND TRANSMISSION LOSSES.

(a) The District shall provide and maintain suitable meters in the generator leads of the Priest Rapids Project to indicate and record the Priest Rapids Project Output. The actual Priest Rapids Project Output shall be determined from totaled readings from the meters. The District shall also arrange for suitable metering at the point of delivery specified in Section 11 or at other points as agreed upon. The District or an agent of the District shall read meters and records thereof shall be made available to the Purchaser as may be reasonably requested.

(b) All losses of Purchaser Percentage of Surplus and Displacement Products purchased hereunder resulting from transformation and transmission shall be borne by the Purchaser.

SECTION 13. INFORMATION TO BE MADE AVAILABLE TO THE PURCHASER.

(a) The District agrees to keep records of the Priest Rapids Project in accordance with the Uniform System of Accounts as prescribed by FERC for electric utilities and licensees; provided, if there are inconsistencies between the Uniform System of Accounts and this contract, this contract shall control. The Purchaser, upon at least 30 days advance written notice to the District, shall have the right to audit or examine operating and financial records relating to the Priest Rapids Project during the District’s normal business hours. To the extent practicable, the Purchasers shall conduct any such audit or examination jointly to minimize the disruption to “the District’s business operations. All costs incurred by the District associated with such audit, including, but not limited to, District labor, materials and reproduction services shall be billed to the Purchaser, and shall be promptly reimbursed by the Purchaser in accordance with Section 7(e).

(b) Upon request, any audit reports of the Priest Rapids Project by a firm of certified public accountants employed by the District or by the State Auditor’s Office of the State of Washington will be provided to the Purchaser.

(c) Policies of insurance carried by the District pursuant to Section 14 shall be available at the office of the District for inspection by the Purchaser.

(d) The Purchaser’s representatives shall at all times be given reasonable access to the Priest Rapids Project, subject to the District’s applicable safety rules and regulations.

(e) Upon request, the Purchaser may obtain information to document the capability of the Priest Rapids Project to produce Priest Rapids Project Output

SECTION 14.INSURANCE.

The District shall have the right to self-insure and/or obtain and maintain insurance with policies payable to the District for the following coverage:

(a) Obligations of the District under any state or federal Workmen's Compensation laws or other employer’s liability;

(b) Public liability for bodily injury and property damage;

(c) Physical loss or damage to the Priest Rapids Project on a replacement cost basis; and

(d) Any other insurance determined to be necessary.

SECTION 15. ADDITIONAL FACILITIES AND PRODUCTS.

(a) From time to time during the term of this contract the District may decide in its sole discretion, and in the absence of any requirement by FERC or any state or federal agency, to take actions to increase the Priest Rapids Project Output, including but not limited to installation of additional generating facilities or raising the forebay elevation. Whenever the District proposes to so increase the Priest Rapids Project Output, it shall give notice in writing of such intent to the Purchaser stating:

(1)     The estimated additional Priest Rapids Project Output that is expected to be available as a result of the installation of the proposed changes;

(2)     The estimated incremental cost (i.e. the costs which will be incurred as a result of installing the proposed changes which costs would not be incurred were such proposed additional facilities not installed) of the additional Priest Rapids Project Output on an annual basis;

(3)    The estimated construction period for the installation of the proposed changes; and

(4)     Other available pertinent information.

(b) Following the issuance of notice of a proposal as provided in Section 15(a), the Purchaser shall have the following options: (i) Purchaser may terminate this contract effective one year after the date of the issuance of a FERC order approving the changes to the Priest Rapids Project or (ii) Purchaser may elect not to participate in the proposed increase in the Priest Rapids Project Output and to retain this contract, in which case the Parties shall attempt in good faith to negotiate a mutually acceptable agreement setting out, among other matters, any adjustments to Purchaser Product Percentages of Priest Rapids Project Products and Purchaser’s responsibility for the Annual Power Costs. Such options shall be exercised by giving written notice to the District of Purchaser’s election on or before the expiration of 90 days from the date of receipt of the written notice issued pursuant to Section l5(a). In the event that Purchaser has elected option (ii) above and the Parties fail to negotiate a mutually acceptable agreement, Purchaser may elect to terminate this contract pursuant to option (i) so long as the written notice of termination is received by the District on or before the expiration of 180 days from the date of receipt of the written notice issued pursuant to Section 15(a). If the Purchaser does not exercise either of its options pursuant to this Section 15(b) or if the Parties fail to negotiate a mutually acceptable agreement and the Purchaser does not timely provide the District with a notice of termination, then the Purchaser shall be obligated to pay its proportionate share of the costs and expenses related to the additional generating capability as provided in Sections 6 and 7, and shall be entitled to receive a percentage of such additional Priest Rapids Project Output determined on the basis of the Purchaser Power Allocation.

(c) If at any time the District determines that it is not desirable for it to proceed with the changes as proposed pursuant to Section 15(a), the District shall be under no obligation to proceed with such changes and shall so notify the Purchaser in writing of such determination not to proceed. If the Purchaser has exercised its option to terminate this contract pursuant to Section 15(b), such termination shall be cancelled upon the issuance of the written notification by the District pursuant to this Section 15 (c), but only if such written notification by the District is issued within one year of the date of the issuance of a FERC order approving the changes.

(d) All costs of studies, engineering, and administrative activities necessary to apply for and receive FERC approval of the proposed changes to the Priest Rapids Project shall be included as Annual Power Costs and the Purchaser shall pay its share of such costs pursuant to Section 7; provided, however, if the Purchaser has given notice of termination of this contract in accordance with Section l5(b) and such termination has not been cancelled pursuant to Section 15(c), then the Purchaser shall not be liable for any such costs.

(e) Not withstanding any other provisions of this Section 15, whenever the District determines that it is necessary or in its best interest to modify the Priest Rapids Project in any way or to install additional facilities at or in the Priest Rapids Project to comply with any law, rule, regulation, or order of FERC or any state or federal agency with. authority to issue or make and enforce such an order, rule, regulation or decision, the Purchaser shall share the benefits and costs resulting from the modification or installation of the additional facilities in the same manner and to the same extent as provided above, except that the Purchaser shall not have the option to terminate or adjust its interest and participation in this contract as provided in Section 15(b).

(f) At any time a Purchaser may request the District to modify the Priest Rapids Project or propose conservation projects within Grant County. The District commits to consider such requests in good faith; however, the District is under no obligation to agree to implement such requests.

SECTION 16. PROJECT INTEGRATION.

(a) It is the intention of the Parties hereto that the operation of the Priest Rapids Project shall be integrated and that all benefits accruing as a result of such integration shall be shared equally by the Priest Rapids and Wanapum Developments. It is also agreed that before November 1, 2009 and after such date if required by any Bond Resolution, all joint costs of the Priest Rapids and Wanapum Developments shall be equitably allocated between them as determined by the District.

(b) The Parties agree that any compensation (whether energy or money) due or which may become due the owner of the Rock Island Hydroelectric Project because of encroachment by the Priest Rapids Project after November 1, 2009 on the Rock Island Hydroelectric Project will either proportionately reduce the amount of Priest Rapids Project Output or be included in Annual Power Costs, as appropriate, but shall not reduce the amount required to be paid by the Purchaser under Sections 6 and 7. “Rock Island Hydroelectric Project” shall mean the FERC Hydroelectric Project No. 943 currently operated by Public Utility District No. 1 of Chelan County, Washington.

SECTION 17. LIABILITY OF PARTIES.

(a) Except as otherwise provided in this contract, each Party hereby releases the other Party and its commissioners, officers, directors, agents and employees from any claim for loss or damage arising out of the ownership, operation, and maintenance of the Priest Rapids Project including any loss of profits or revenues, loss of use of power system, cost of capital, cost of purchased or replacement power, other substantially similar liability or other direct or indirect consequential loss or damage, except as provided in the Agreement Limiting Liability Among Western Interconnected Systems for parties to that agreement. This release shall not include any claim by the Purchaser for refund for over-payments made to the District nor any claim for specific performance of the District’s obligation to deliver to the Purchaser during the term of this contract the Priest Rapids Project Products to which the Purchaser is entitled under this contract.

(b) The Purchaser shall have no claim of any type or right of action against the District: (i) as a result of a FERC or court order or amendment described in Section 3(f); (ii) as a result of the failure to receive an Annual FERC License or a New FERC license or the adjustment of delivery of Priest Rapids Products pursuant to Section 5(j) whether arising under the terms of this contract or otherwise; or (iii) as a result of the District’s purchasing or selling power or energy on behalf of the Purchaser pursuant to Section 3(b), and the Purchaser hereby releases the District and its commissioners, officers, agents and employees from any claim for loss or damage arising out of the events described in this paragraph.

SECTION 18.NOTICES AND COMPUTATION OF TIME.

Any notice or demand, except those provided for in Section 7, by the Purchaser under this contract to the District shall be deemed properly given if mailed postage prepaid and addressed to Manager, Public Utility District No. 2 of Grant County, Box 878, Ephrata Washington 98823; any notice or demand by the District to the Purchaser under this contract shall be deemed properly given if mailed postage prepaid and addressed to Purchaser:

PUGET SOUND ENERGY, INC.
ATTENTION, VICE PRESIDENT, ENERGY SUPPLY
ONE BELLEVUE CENTER BUILDING
411 108TH AVENUE, 15TH FLOOR
BELLEVUE, WA 98004-5515

In computing any period of time from such notice, such period shall commence at 12:00 A.M. (midnight) on the date mailed. The designations of the name and address to which any such notice or demand is directed may be changed at any time by either Party giving notice as provided above.

SECTION 19. DISTRICT’S BOND RESOLUTIONS AND LICENSE.

It is recognized by the Parties that the District, in its operation of the Priest Rapids Project, must comply with the requirements of the Bond Resolution and with the FERC License together with amendments thereof from time to time made, and the District is hereby authorized to take such actions as the District determines are necessary and appropriate to comply with such Bond Resolution and FERC License.

SECTION 20. GOVERNING LAW.

The Parties agree that the laws of the State of Washington shall govern this contract.

SECTION 21. ASSIGNMENT OF CONTRACT.

Neither the Purchaser nor the District shall by contract, operation of law or otherwise, assign this contract or any right or interest in this contract without the prior written consent of the other Party, which shall not be unreasonably withheld; provided, however, a Party may, without the consent of the other party (and without relieving itself from liability hereunder): (i) transfer or assign this contract to an affiliate of the party provided that the affiliate’s creditworthiness is equal or higher than that of the Party; or (ii) transfer or assign this contract to any person or entity succeeding to all or substantially all of the distribution and generating facilities of the Party whose creditworthiness is equal or higher than that of the Party; provided, however, that in each such case, any such assignee shall agree in writing to be bound by the terms and conditions in this contract and the transferring Party shall deliver such tax and enforceability assurance as the other Party may reasonably request.

SECTION 22. REMEDIES ON DEFAULT.

(a) "Act of Default" shall mean: "

(1) The failure of a Party to make, when due, any payment required under this contract if such failure is not remedied within three days after written notice, provided that the payment is not the subject of a good faith dispute pursuant to Section 28. If requested by the District, the Purchaser shall deposit the disputed amount in escrow with a bank acceptable to the Parties.

(2) Any representation or warranty in this contract is false or misleading in any material respect when made or ceases to remain true during the term of this contract.

(3) The failure of the Purchaser, after Section 8 or any provision thereof has been found by a court to be void, unlawful or unenforceable, to perform in accordance with the provisions of Section 8, including without limitation any provision or provisions found to be void, unlawful or unenforceable.

(4) A Party shall make an assignment or any general arrangement for the benefit of creditors; file a petition or otherwise commence or acquiesce in the commencement of a proceeding under any bankruptcy or similar law for the protection of creditors; or otherwise becomes bankrupt or insolvent or unable to pay its debts as they fall due.

(b) If a party commits an Act of Default during the term of this contract, the non-defaulting Party may take any one or more of the following remedial steps:

(1) Take any action or exercise any remedy provided to the Party under the provisions of Sections 7 or 8.

(2) Except where a different time period is set forth herein, if the defaulting Party fails to remedy an Act of Default within ten days after receiving written notification of the default, then the non-defaulting Party may give a written notice of termination of this contract on a date specified in such notice, which date shall be not less than 30 days after the date of such notice. If the Purchaser is given written notice as provided herein, this contract shall terminate upon the date specified in such notice, the Purchaser thereafter shall have no right, title, or interest in, to, or with respect to the Priest Rapids Project, or any Priest Rapids Project Product, or any Priest Rapids Project Output, but the Purchaser shall remain liable for all amounts due the District which have accrued prior to the date of termination.

(3) The District may, prior to the termination of this contract pursuant to Section 22(b)(2), at any time suspend any and all rights of the Purchaser to the Priest Rapids Project Products upon not less than five days’ notice to the Purchaser. The District may, without further notice to the Purchaser, grant any or all of such suspended rights to any person or entity for the duration of the suspension. In such event, the Purchaser shall, in addition to its other obligations under this contract, upon demand, pay to the District all expenses and any losses incurred in connection with such suspension and any grant of the suspended rights to another person or entity. No suspension of any or all of the rights of the Purchaser to Priest Rapids Project Products shall be construed as an election to terminate the interests of the Purchaser in, to, and under this contract unless a written notice of termination is given to the Purchaser pursuant to this contract or unless such termination be decreed by a court of competent jurisdiction.

(4) The non-defaulting Party may begin and maintain successive proceedings against the defaulting Party for the recovery of damages or for a sum equal to any and all payments required to be made pursuant to this contract.

(5) A Party may take whatever action at law or in, equity as may appear necessary or desirable to collect the amounts payable by the defaulting Party under this contract then due and thereafter to become due or to enforce performance and observation of any obligation, agreement or covenant of the defaulting Party under this contract.

(6) No right or remedy conferred upon or reserved to a Party is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing, upon the occurrence of any Act of Default. Failure of the District to insist at any time on the strict observance or performance by the Purchaser of any of the provisions of this contract, or to exercise any right or remedy provided for in this contract shall not impair any such right or remedy nor be construed as a waiver or relinquishment thereof for the future. Receipt by the District of any payment required to be made hereunder with knowledge of the breach of any provisions of this contract shall not be deemed a waiver of such breach. In addition to all other remedies provided in this contract, the District shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation or attempted or threatened violation, of any of the provisions of this contract, or to a decree requiring performance of any of the provisions of this contract or to any other remedy legally allowed to the District.

(7) The District shall not have the right to accelerate future payment obligations of the Purchaser in the event of default under this contract.

SECTION 23. VENUE AND ATTORNEY FEES. .

Venue of any action filed to enforce or interpret the provisions of this contract shall be exclusively in the United States District Court for the Eastern District of Washington or the Superior Court of, the State of Washington for Grant County and the Parties irrevocably submit to the jurisdiction of any such court. In the event of litigation to enforce the provisions of this contract, the prevailing Party shall be entitled to reasonable attorney’s fees in addition to any other relief allowed.

SECTION 24. COMPLIANCE WITH LAW.

(a) The Parties shall conform to and comply with all laws, rules, regulations, license conditions or restrictions promulgated by the FERC or any other governmental agency or entity having jurisdiction over the Priest Rapids Project. The Purchaser shall cooperate and take whatever action is necessary to cooperate fully with the District in meeting such requirements. Obligations of the District contained in this contract are hereby expressly made subordinate and subject to such compliance.

(b) The Purchaser shall ensure that Priest Rapids Project Products available to Purchaser under this contract are not sold, resold, distributed for use or used outside the Pacific Northwest in violation of the Bonneville Project Act, Public Law 75-329, the Pacific Northwest Consumer Power Preference Act, Public Law 88-552, the Regional Act or in contravention of any applicable state or federal law, order, regulation, or policy. If such sales occur in violation of the foregoing, the Purchaser shall reimburse the District for any penalties imposed on and costs incurred by the District as a consequence of such violation.

SECTION 25. HEADINGS.

The headings of sections and paragraphs of this contract are for convenience of reference only and are not intended to restrict, affect or be of any weight in the interpretation or construction of the provisions of such sections and paragraphs.

SECTION 26. ENTIRE AGREEMENT; MODIFICATION; CONFLICT IN PRECEDENCE.

This contract does not modify the terms and conditions contained in the 1956 and 1959 Contracts except as provided in Sections 1(b) and 8. This contract constitutes the entire agreement between the Parties with respect to the subject matter of this contract, and supersedes all previous communications between the Parties, either verbal or written, with respect to such matter. No modifications of this contract shall be binding upon the Parties unless such modifications are in writing signed by each Party. To the extent there are any conflicting provisions between this contract and the 1956 Contract, or this contract and the 1959 Contract after November 1, 2009, the terms an conditions in this contract shall take precedence and be controlling and the 1956 and 1959 Contracts are hereby amended accordingly.

SECTION 27. NO PARTNERSHIP OR THIRD PARTY RIGHTS

(a) This contract shall not be interpreted or construed to create an association, joint venture or partnership between the Parties, or to impose any partnership obligations or liability upon any Party. Without limiting the foregoing, Purchaser shall not be liable for, and the District hereby releases the Purchaser from, the payment of Debt except as provided in Sections 6 and 7.

(b) This contract shall not be construed to create rights in or grant remedies to any third party as a beneficiary of this contract.

SECTION 28. PURCHASERS’ COMMITTEE; ARBITRATION.

There is hereby established a Purchasers’ committee (the “Committee”). Each Purchaser may appoint one representative (and one alternate) as a Committee member to attend Committee meetings. The members of the Committee shall elect a chair, and may adopt such rules for the conduct of business as it deems appropriate. Meetings between the District and Purchasers shall be held routinely, but not more frequently than once a quarter, provided, however, that such meetings may be held more frequently than once each quarter at the request of the District or upon the request of members of the Committee whose Purchaser Product Percentage of Surplus Products totals 66% or more. All meetings between the District and Purchaser will be held in Grant County, Washington, unless the District and the Purchasers agree to another location.

(b) In addition to other matters subject to arbitration pursuant to other provisions of this contract, if approved by members of the Committee whose Purchaser Product Percentage of Surplus Product totals 66% or more, the Committee may submit to binding arbitration the following issues:

(1) Have the Estimated District Loads been forecast in accordance with Prudent Utility Practice and, if not, what is the appropriate Estimated District Loads in accordance with Prudent Utility Practice for the Contract Year?

(2) Have the Annual Power Costs been determined by the District in accordance with Prudent Utility Practice and have such costs been incurred for the benefit of Priest Rapids Project Output and, if not, what are the appropriate Annual Power Costs in accordance with Prudent Utility Practice for the Contract Year; provided that nothing in this Section shall be interpreted to limit the ability of the District to meet its payment obligations under a Bond Resolution?

(3) Are discretionary outages that would reduce Priest Rapids Project Output by more than 25% scheduled so as to be fair to both the District and Purchasers given that the benefit of the Priest Rapids Project to the Purchasers declines over time and, if not, what should be the appropriate schedule for outages? Current or future market conditions for electricity will not be a factor in arbitrating this issue. If failure to perform the proposed outage would reasonably reduce Priest Rapids Project Output or conflict with Section 18, the outage will not be subject to arbitration.

(4) What modifications to this contract, pursuant to Section 3(f), are necessary to comply with FERC or court orders and to preserve the basic benefits and obligations of the Parties?

(5) Has the Purchaser violated the covenants in Section 8(e)?

(c) The board of arbitrators shall be composed of three persons, one of whom shall be appointed by the District, one of whom shall be appointed by majority vote of the Committee, and the third person to be appointed by the two persons so appointed, The District and the Committee shall appoint their arbitrator within 15 days after notification of the Committee’s vote to submit a matter to binding arbitration. In the event the two members cannot agree upon the appointment of a third person within l0 days, then such third person shall, be appointed by the presiding judge of the Superior Court of Kittitas County, Washington. The arbitration shall be conducted jointly by the participating Purchasers, and under rules as may be determined by the arbitrators; provided, however, that all parties shall be afforded discovery consistent with the Federal Rules of Civil Procedure; and, provided further, if the arbitrators do not unanimously agree on the rules governing the arbitration, the arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The board so designated shall conduct a hearing within 30 days of completion of their selection, and within 15 days after the hearing (unless such time is extended by agreement of the Parties) shall notify the Parties of their decision in writing, stating the reasons therefore and separately listing their findings of fact, conclusions of law and order. Insofar as the Parties hereto may legally do so, they agree to abide by the decision of the board. All factual determinations made by the board shall be conclusive and binding on the Parties and not subject to judicial review. Any conclusions of law made by the board shall be subject to review by a court specified in Section 23; provided, that the order issued by the board shall be effective unless and until a stay is issued by the board or such court suspends the effectiveness of the order.

SECTION 29. REPRESENTATIONS AND WARRANTIES.

Each Party represents and warrants to the other Party that;

(a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation.

(b) The execution, delivery and performance of this contract are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, or order applicable to it.

(c) This contract constitutes a legally valid and binding obligation enforceable against it in accordance with its terms, subject to equitable defenses and applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally.

The District hereby represents and warrants to the Purchaser that during the term of this contract, the District will not waive, reduce or otherwise forego the collection of the Risk Premium pursuant to Section 7 of this and all other Contracts.

SECTION 30. COUNTERPARTS.

This contract may be executed in counterparts, each of which shall be an original and all of which shall constitute the same contract.

PUBLIC UTILITY DISTRICT NO. 2
OF GRANT COUNTY, WASHINGTON

By:

Mike Conley

(SEAL) President, Board of Commissioners

ATTEST:

Thomas W. Flint

Secretary, Board of Commissioners

Date:

PUGET SOUND ENERGY, INC.

By:

William A. Gaines

(SEAL) Title: Vice President, Energy Supply

EXHIBITS

EXHIBIT A

MONTHLY AMOUNT OF DISPLACEMENT RESOURCE

A. For the period November 1, 2005 through September 30, 2006:

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Capacity (MW)	123	123	121	197	249	252	219	151	138	n/a	123	124
Energy (MWh)	91,512	82,656	90,024	141,643	185,256	181,440	162,936	112,344	99,360	n/a	88,560	92,256

B. For the period October 1, 2006 through September 30, 2011:

	Jan	Feb1	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Capacity (MW)	148	149	150	222	270	268	234	167	161	159	163	163
Energy (MWh)	110,112	100,128	111,600	159,618	200,880	192,960	174,096	124,248	115,920	118,455	117,360	121,272

1.  MWH in February 2008 are 103,704

EXHIBIT B

DEFINITIONS OF PRIEST RAPIDS DEVELOPMENT
AND WANAPUM DEVELOPMENT

RESOLUTION NO. 390 - DEFINITION OF PRIEST RAPIDS DEVELOPMENT

Section 2(f) of Exhibit 1.“Priest Rapids Development” shall mean those properties and facilities consisting of the Priest Rapids dam, site, reservoir, switchyard and power plant, including all generating facilities associated therewith up to and including the first ten (10) main turbine generator units each with a nameplate rating of approximately 78,850 kilowatts and any additional generating facilities which may be installed as provided for in Section 19 of the Original Power Sales Contract, together with the associated transmission facilities consisting of two 230 KV transmission lines and terminal facilities interconnecting the Priest Rapids switchyard and the Bonneville Power Administration’s Midway Substation and an undivided one-half (1/2) interest in the interconnecting facilities between the Priest Rapids switchyard and the Wanapum switchyard.

RESOLUTION NO. 474 - DEFINITION OF WANAPUM DEVELOPMENT

Section 2.2. The District specifies and adopts the plan and system hereinafter set forth for the acquisition, by purchase or condemnation and construction of the following generation and transmission facilities as a separate utility system of the District constituting the Wanapum Development of the District, to wit:

A.     The District shall construct an e1ectric generating plant and associated facilities on the Columbia River at approximately river mile 415 from the mouth of said river at the Wanapum site on said river, in Grant and Kittitas Counties, Washington, as authorized by the Federal Power Commission License for Project No. 2114, originally issued November 4, 1955, and all amendments thereto; said generating plant to have an installed nameplate rating of approximately 831,250 kilowatts, and said generating plant and associated facilities to include, but not limited to, a concrete gravity dam, a fully enclosed reinforced concrete powerhouse containing ten (10) turbo-generating units with provisions in the intake structure for the installation of six (6) additional turbo-generating units, a reservoir, waterways, fish ladders and other fish protective devices; provisions for future installation of navigation locks; transforming facilities; a switchyard; transmission facilities necessary to connect the powerhouse to the existing transmission facilities of the Priest Rapids Development and to the transmission facilities of the Bonneville Power Administration in the vicinity of said Project; railroad siding, shops, warehouses, construction camp, offices, and dwellings; and all other structures, fixtures, equipment or facilities used or useful in the construction, maintenance and operation of the Wanapum Development and all necessary water rights, development rights, permits and licenses, easements, rights-of-way, flowage rights and rights permitting the storage of water, riparian rights and shore rights.

Exhibit C
Grant County PUD
Service Area

AMENDMENT NO. 1 TO THE
PRIEST RAPIDS PROJECT PRODUCT SALES CONTRACT

The Public Utility District No. 2 of Grant County, Washington, (“District”), and Puget Sound Energy, Inc.(“Purchaser”), hereby agree to this Amendment No.1 to the Priest Rapids Project Product Sales Contract dated December 13, 2001 (the “Product Contract”). Unless otherwise defined herein, all capitalized terms defined in the Product Contract shall have the meanings set forth therein when used in this Amendment.

1. Term of Amendment No. 1

This Amendment No.1 shall take effect on upon the execution by the District and Purchaser, and shall expire on the earlier of the expiration or termination date of the Product Contract.

2. Amendments to Provisions of the Product Contract

Purchaser and the District agree that the Product Contract is hereby amended as follows:

2.1 The definition of the term Priest Rapids Project Output set forth in Section 2 is deleted in its entirety and replace with the following:

“Priest Rapids Project Output” shall mean the amount of capacity, energy (both firm and non-firm), pondage, reactive power, ancillary services (including dynamic load following services) and any other product from the Priest Rapids Development from November 1, 2005 to November 1, 2009 and from the Priest Rapids Project from November 1, 2009 through the term of this contract under the operating conditions which exist during the term, including periods when the Priest Rapid Project may be wholly or partially inoperable for any reason, after correction for encroachment, Canadian entitlement, station and project use, and depletions required by the FERC License or other regulatory requirements.

2.2 Section 6(b)(6) is deleted in its entirety.

2.3 Section 7(a)(4) is deleted in its entirety and replaced with the following:

An estimate of the cost to the Purchaser of the Displacement Product, which shall be the Purchaser Product Percentage of (i) the cost, including the costs of transmission and necessary services, to the District of acquiring Displacement Resources, (ii) less the cost, including the costs of transmission and necessary services, of that portion of the total Displacement Resources reserved by the District pursuant to Section 5(b).

2.4 Section 8(h) is deleted in its entirety and replaced with the following:

In the event that the District believes that the Purchaser has violated any of the above covenants of Section 8(f) or (g), the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 4 business days after receipt of such written notice by Purchaser within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to reasonably consider the action to be in breach of the covenants, the District shall have the right to terminate this contract, effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell, in any manner the District determines, any Priest Rapids Project Product the Purchaser would have been otherwise entitled to under this contract.

2.5 Section 9(d)(8) of the Product Contract is amended by adding at the end of such Section 9(d)(8) the following sentence:

For purposes of Sections 9(d)(7) and (8), spill shall mean the product of the spill occurring at the Priest Rapids Project during any hour and the sum of the Purchaser Power Allocations of all Purchasers. Any actual spill that is not allocated to Purchasers pursuant to such sections shall be allocated to the District.

2.6 The Product Contract is amended by adding a new Exhibit D, Purchasers Product Percentage Allocations, which is attached hereto.

In Witness Whereof, Purchaser and the District have caused this Amendment No. 1 to be executed in their respective names by their duly authorized officers.

Purchaser
PUGET SOUND ENERGY, INC. PUBLIC UTILITY DISTRICT NO. 2 OF
GRANT COUNTY, WASHINGTON

By: By:

         William A. Gaines          Mike Conley

Title: Vice President, Energy Supply Title: President, Board of Commissioners

Date Signed:    4/03/2002 Date Signed:    4/15/2002

By:

         Thomas W. Flint

         Secretary, Board of Commissioners

Date Signed:   4/15/2002

EXHIBIT A, AMENDMENT 1

Purchasers Product Percentage Allocations

Requested Number of Section 3c/e Section 3c/d Step 2 Allocation¹ Adjustment for 2005-2009

Historical Shares Purchaser Customers Step 1 Reasonable Added Displace Reasonable Added

Purchasers Name 1956 1959 Product % 2000 Allocation Surplus Displace Portion Products⁷ Surplus^{2 3} Portion ⁴ Products⁷

A. 1956/1959 Purchasers

  PacifiCorp 13.9% 18.7% 32.6% 778,446 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Portland General 13.9% 18.7% 32.6% 726,039 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Puget Sound Energy 8.0% 10.8% 18.8% 915,851 14.43% 14.43% 14.43% 14.80% 12.28% 15.51% 13.36% 12.60%

  Avista Utilities 6.1% 8.2% 25.0% 309,986 10.98% 10.98% 10.98% 11.26% 9.37% 11.79% 10.17% 9.61%

  Cowlitz PUD 2.0% 2.7% 4.7% 44,361 3.61% 3.61% 3.61% 3.70% 3.07% 3.88% 3.34% 3.15%

  Eugene Water & Elec 1.7% 2.3% 4.0% 80,097 3.07% 3.07% 3.07% 3.15% 2.61% 3.30% 2.84% 2.68%

  City of Forest Grove 0.5% 0.7% (5)% 8,592 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of McMinnville 0.5% 0.7% (5) 13,973 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of Milton-Freewater 0.5% 0.7% (5) 4,581 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

B. 1956 Only Purchasers²

  Seattle City Light 8.0% n/a (5) 349,557 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Tacoma Power 8.0% n/a 16.0% 147,819 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Kittitas PUD 0.4% n/a 3,078 0.31% 0.31% 0.31% 0.31% 0.61% 0.61% 0.61% 0.63%

      Total A+B 3,392,380 97.51% 97.51% 97.51% 97.51% 100.00% 97.51%% 116.40% 103.81% 100.00%

C. No. Idaho Purchasers

  Clearwater n/a n/a 10.43% 9,314 0.27% 0.27% 0.27% n/a 0.27% 0.27% 0.27% n/a

  Idaho Co. Light & Power n/a n/a 2.41% 3,007 0.09% 0.09% 0.09% n/a 0.09% 0.09% 0.09% n/a

  Kootenai n/a n/a 16.28% 16,244 0.47% 0.47% 0.47% n/a 0.47% 0.47% 0.47% n/a

  Northern Lights n/a n/a 12.30% 14,541 0.42% 0.42% 0.42% n/a 0.42% 0.42% 0.42% n/a

D. Snake River Purchasers

  Fall River Rural Elec. n/a n/a (6) 10,992 0.32% 0.32% 0.32% n/a 0.32% 0.32% 0.32% n/a

  Lost River Electric n/a n/a (6) 2,327 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  Lower Valley Electric n/a n/a (6) 19,182 0.55% 0.55% 0.55% n/a 0.55% 0.55% 0.55% n/a

  Raft River Rural Elec. n/a n/a (6) 2,927 0.08% 0.08% 0.08% n/a 0.08% 0.08% 0.08% n/a

  Salmon River Electric n/a n/a (6) 2,570 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  United Electric n/a n/a (6) 5,515 0.16% 0.16% 0.16% n/a 0.16% 0.16% 0.16% n/a

     Associated Total 1.24% 43,513 1.25% 1.25% 1.25% n/a 1.25% 1.25% 1.25% n/a

      Total C+D 86,619 2.49% 2.49% 2.49% 2.49% n/a 2.49% 2.49% 2.49% n/a

Total 63.5% 63.5% 100.00% 100.00% 100.00% 100.00% 100.00 100.00% 118.89% 106.30% 100.00%

NOTES: ⁽¹⁾ Allocated per average of 1956 and 1956 Shares or, for Idaho Purchasers, per number of customers.

⁽²⁾ Allocated per 1956 Shares Surplus Product and, for Idaho Purchasers, per number of customers.

⁽³⁾ Allocated per 25% of 1956 Shares and 75% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁴⁾ Allocated per 75% of 1956 Shares and 25% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁵⁾ Have Intent to Sign Contract Letter without Requested Purchaser Product Percent.

⁽⁶⁾ Snake River Purchaser's Contract with the Association.

⁽⁷⁾ Allocated only to the 1956/1959 and Only 1956 Purchasers per 1956 Shares for 2005-2009, then average of 1956 and 1959 Shares post-2009.

EX-10

Exhibit 10.2

PRIEST RAPIDS PROJECT
REASONABLE PORTION
POWER SALES CONTRACT

INDEX TO SECTIONS

SECTION 1. TERM OF CONTRACT
SECTION 2. DEFINITIONS
SECTION 3. PROCEEDS FROM THE SALE OF THE REASONABLE PORTION
SECTION 4. DETERMINATION OF ESTIMATED PURCHASER REVENUE ALLOCATION OF REASONABLE PORTION PROCEEDS
SECTION 5. ANNUAL POWER COSTS
SECTION 6. PAYMENT FOR PRIEST RAPIDS PROJECT PURCHASER REVENUE ALLOCATION
SECTION 7. SUPPORT AND COOPERATION
SECTION 8. PAYMENT OF THE REASONABLE PORTION PROCEEDS
SECTION 9. INFORMATION TO BE MADE AVAILABLE TO THE PURCHASER
SECTION 10. INSURANCE
SECTION 11. PROJECT INTEGRATION
SECTION 12. LIABILITY OF PARTIES
SECTION 13. NOTICES AND COMPUTATION OF TIME
SECTION 14. DISTRICT'S BOND RESOLUTIONS AND LICENSE
SECTION 15. GOVERNING LAW
SECTION 16. ASSIGNMENT OF CONTRACT
SECTION 17. REMEDIES ON DEFAULT
SECTION 18. VENUE AND ATTORNEY FEES
SECTION 19. COMPLIANCE WITH LAW
SECTION 20. HEADINGS
SECTION 21. ENTIRE AGREEMENT; MODIFICATION; CONFLICT IN PRECEDENCE
SECTION 22. NO PARTNERSHIP OR THIRD PARTY RIGHTS
SECTION 23. PURCHASERS' COMMITTEE; ARBITRATION
SECTION 24. REPRESENTATIONS AND WARRANTIES
SECTION 25. COUNTERPARTS


EXHIBITS
EXHIBIT A - BOND RESOLUTION SECTIONS
EXHIBIT B - AREAS SERVED OUTSIDE GRANT COUNTY

PRIEST RAPIDS PROJECT REASONABLE PORTION
POWER SALES CONTRACT


Executed by
PUBLIC UTILITY DISTRICT NO. 2
OF GRANT COUNTY
And
PUGET SOUND ENERGY, INC.

This contract is entered into as of December 13, 2001 between Public Utility District No. 2 of Grant County, Washington (the "District"), a municipal corporation of the State of Washington, and PUGET SOUND ENERGY, INC. (the "Purchaser"), a corporation organized and existing under the laws of the State of Washington. The District and the Purchaser are referred to as a "Party" and collectively as "Parties".

SECTION 1. TERM OF CONTRACT.

(a) Except as otherwise provided herein, this contract shall be in full force and effect from and after it has been executed by the District and the Purchaser. Unless sooner terminated pursuant to other provisions, this contract shall remain in effect until the earlier of expiration or termination of the New FERC License or such time that the District no longer has authority to market Priest Rapids Project Output. Except as otherwise provided herein, all obligations accruing under this contract are preserved until satisfied.

(b) Notwithstanding Section 1(a), the affirmative obligations of the Parties in Sections 3(a), 3(b), 3(c), 3(d), 3(g), 4 through 6, 8 through 12 and 23 (a) and (b) (1-2, and 5) shall take effect on November 1, 2005.

(c) Except as provided in Section 1(d), all Eligible Purchasers shall have until December 31, 2001 to execute this contract.

(d) If the City of Forest Grove, McMinnvil1e, Milton-Freewater or Seattle City Light provides the District written assurance on or before December 31, 2001, that its superintendent or its city manager supports the execution of this contract and will so recommend to its city council, then if Seattle City Light provides such written assurance it shall have until March 31, 2002, to execute this contract, and if Forest Grove, McMinnville or Milton Freewater provides the District such written assurance, the city providing such written assurance shall have until February 1, 2002, to execute this contract.

SECTION 2. DEFINITIONS.

As used in this contract, the following terms when initially capitalized shall have the following meanings:

“1956 Contract” shall mean the contract entered into by the District and various parties during May 1956 for the sale of capacity and energy from the Priest Rapids Development as supplemented and amended from time to time.

“1959 Contract” shall mean the contract entered into by the District and various parties during June 1959 for the sale of capacity and energy from the Wanapum Development as supplemented and amended from time to time.

"Annual FERC License" shall mean a license for the Priest Rapids Project issued by FERC to the District for an interim period before a New FERC License.

“Bond Resolution” shall mean each and all of the resolutions adopted by the District authorizing the issuance of outstanding Debt for the Priest Rapids Project.

“Contract Year” shall mean the 12 month period commencing at 12:01 a.m. on January 1 of each year and ending at 12:01 a.m. on the following January 1; provided, however, that the first Contract Year shall commence on November 1, 2005, and end the following January 1, 2006, and that the last Contract Year shall end on the last day of the New FERC License, or such time that the District no longer has authority to market Priest Rapids Project Output.

“Contract(s)” shall mean this contract and similar contracts between the District and other Purchasers.

“Debt” shall mean any bonds, notes, or other debt obligations of the District, including, but not limited to all bonds outstanding at the effective date of this contract, a line of credit, installment purchase agreement, financing lease, interfund loan, derivative securities or payment obligations and any other obligation for borrowed money, the proceeds of which will be used for the benefit of the Priest Rapids Project, including to finance betterments, renewals, replacements and additions to the Priest Rapids Project, to refund other debt, or any other lawful purpose related to the Priest Rapids Project. Debt does not include the Columbia River-Priest Rapids Hydro-Electric Production System Revenue Bonds, Series 1956, which have been paid, or the Wanapum Hydroelectric Refunding Revenue Bonds, Series 1963, which are scheduled to be repaid on or prior to January 1, 2004.

“Electric System” shall mean the separate electric utility system of the District, including all associated generation, transmission and distribution facilities and any betterments, renewals, replacements and additions of such system, but does not include the Priest Rapids Project or any other utility properties designated as a separate utility system of the District.

"Eligible Purchasers" means the Purchasers who are parties to the 1956 and 1959 Contracts, and the Kootenai Electric Cooperative, Inc., Clearwater Power Company, Idaho County Light and Power Cooperative Association, Inc., Northern Lights, Inc. and the electric cooperative members of the Snake River Power Association, Inc. (collectively, the "Idaho Cooperatives") as of October 31, 2000.

"FERC" shall mean the Federal Energy Regulatory Commission or its successor.

“FERC License” shall mean any license for the Priest Rapids Project issued by FERC to the District.

“Marketing Plan” shall mean the plan for making available in a fair, equitable and non-discriminatory manner pursuant to market-based principles and procedures the Reasonable Portion as required by applicable law or PL 83-544 Orders.

“New FERC License” shall mean the license issued by FERC to the District following the expiration of the Original FERC License for operation of the Priest Rapids Project for a duration of 30 years or longer, not including any subsequent annual or other license.

“Operating Agreements” shall mean any agreements to which the District is or may become a party, which provide for operation of the Priest Rapids Project, including but not limited to, the Pacific Northwest Coordination Agreement, the Agreement for the Hourly Coordination of Projects on the Mid-Columbia River, the Western Systems Coordinating Council Agreement, the Agreement Relating to Wanapum Development Encroachment on the Rock Island Project and the Northwest Power Pool, which is the voluntary association of utilities formed in the Pacific Northwest for the purpose of ensuring the adequacy and reliability of the electric power systems in the Pacific Northwest.

"Original FERC License" shall mean the Federal Power Commission License for the Priest Rapids Project issued to the District on November 4, 1955, together with amendments thereto.

“Pacific Northwest” shall have the meaning ascribed thereto in Section 3(14) of the Regional Act.

“Priest Rapids Development” shall mean the separate utility system of the District, including a dam at the Priest Rapids Development, all generation and transmission facilities associated therewith, and all betterments, renewals, replacements, and additions to such system, as further described in Section 2(f) of Exhibit 1 of District Resolution No. 390 which is attached as Exhibit A, but shall not include any additional generation, transmission and distribution facilities hereafter constructed or acquired by the District as a part of the Electric System or the Wanapum Development or any other utility properties of the District acquired or constructed as a separate utility system.

"Priest Rapids Project" shall mean the hydroelectric project on the Columbia River in the State of Washington designated by the Federal Power Commission as Project No. 2114. The Priest Rapids Project consists of the Priest Rapids Development and the Wanapum Development.

“Priest Rapids Project Output” shall mean the amount of capacity, energy (both firm and non-firm), pondage, reactive power, ancillary services and any other product from the Priest Rapids Development from November 1, 2005 to November 1, 2009 and from the Priest Rapids Project from November 1, 2009 through the term of this contract under the operating conditions which exist during the term, including periods when the Priest Rapid Project may be wholly or partially inoperable for any reason, after correction for encroachment, Canadian entitlement, station and project use, and depletions required by the FERC License or other regulatory requirements.

“Prudent Utility Practice” means those practices, methods and acts which: (i) when engaged in are commonly used in prudent engineering and operations to operate electric equipment and associated mechanical and civil facilities lawfully and with safety, reliability, efficiency and expedition or (ii) in the exercise of reasonable judgment considering the facts known when engaged in, could have been reasonably expected to achieve the desired result consistent with applicable law, safety, reliability, efficiency and expedition. Prudent Utility Practice is not intended to be the optimum practice, method or act, to the exclusion of all others, but rather to be a spectrum of commonly used practices, methods or acts.

"Public Law 83-544" (or "PL 83-544") shall mean the legislation passed by the 83rd Congress authorizing the District to develop the Priest Rapids Project.

"Purchasers" shall mean the Purchaser and each person or entity that has entered into a contract with the District substantially similar to this contract.

"Purchaser Revenue Allocation" shall mean the fixed percentage (stated to the second decimal point, e.g., 0.01%) as set forth in Section 3 (b) of the proceeds from and the costs of the sale of the Reasonable Portion made available under this contract. For parties to the 1956 and 1959 Contracts, Purchaser Revenue Allocation may not exceed twice the average of their participation in the 1956 and 1959 Contracts except that for those Purchase that were parties to the 1956 Contracts but were not parties to the 1959 Contracts their Purchaser Revenue Allocation for the period November 1, 2005 to October 31, 2009 may not exceed twice their participation in the 1956 Contract. For any individual Idaho Cooperative, Purchaser Revenue Allocation shall not exceed the Purchaser Product Percentage of any individual party to the 1956 or 1959 Contract that is one of the Purchasers except when the provisions of Section 3(e) are applied. The Purchaser Revenue Allocation set forth in Section 3(b) is subject to revision pursuant to Sections 3(e), 3(f), 3(g), 3(h) and 4(f).

"Reasonable Portion" shall mean that 30% portion of the Priest Rapids Project Output required by FERC pursuant to Public Law 83-544 to be offered for sale by the District.

“Reasonable Portion Proceeds” shall mean the proceeds derived from the sale of the Reasonable Portion pursuant to the Marketing Plan.

“Regional Act” shall mean Public Law 96-501, the Pacific Northwest Electric Power Planning and Conservation Act.

“Uncontrollable Forces” shall mean any cause reasonably beyond the control of the Party and which the Party subject thereto has made reasonable efforts to avoid, remove or mitigate, including but not limited to acts of God, fire, flood, explosion, strike, sabotage, act of the public enemy, civil or military authority, including court orders, injunctions, and orders of government agencies with proper jurisdiction, insurrection or riot, an act of the elements, failure of equipment or contractors, or inability to obtain or ship materials or equipment because of the affect of similar causes on suppliers or carriers; provided, however, that in no event shall an Uncontrollable Force excuse the Purchaser from the obligation to pay any amount when due and owing under this contract.

“Wanapum Development” shall mean the second stage of the Priest Rapids Project as more fully described in Section 2.2 of District Resolution No.474, which is attached as Exhibit A, but shall not include any generation, transmission and distribution facilities hereafter constructed or acquired by the District as a part of the Electric System or the Priest Rapids Development, or any other utility properties of the District acquired or constructed as a separate utility system.

The following terms are defined in the cited sections of this contract:

"Act of Default" at Section 17(a).
"Annual Power Costs" at Section 5(a).
"Committee" at Section 23.
"Coverage Requirement" at Section 5(a)(9).
"Estimated District Loads" at Section 4(c)(1).
"Estimated District Power Costs" at Section 4(c)(4).
"Estimated Power Cost Shortfall" at Section 8(a)(4).
"Estimated Unmet District Load" at Section 4(c)(3).
"Excess Costs" at Section 6(g).
"Financing Costs" at Section 5(a)(3).
"Idaho Cooperatives" at "Eligible Purchasers".
"Improvements" at Section 4(f)(4).
"Multi-Year Contracts" at Section 8(a)(3).
"New FERC License Costs" at Section 5(a)(6).
"Party" and "Parties" at the Preamble.
"PL 83-544 Orders" at Section 3(h).
"Purchaser Estimated Cost" at Section 6(a)(5).
"Refund Costs" at Section 6(g).
"Rock Island Hydroelectric Project" at Section 11(b).
"Zero Year" at Section 8(a)(3).

SECTION 3.  PROCEEDS FROM THE SALE OF THE REASONABLE PORTION.

(a) Pursuant to the PL 83-544 Orders, the Reasonable Portion must be offered for sale. The District, therefore, desires to mitigate the risk associated with generating the Reasonable Portion including, but not limited to, the uncertainty of future Priest Rapids Project Output, costs and market prices. The District believes that this can be best accomplished by allocating to Purchasers the costs and proceeds from the sale of the Reasonable Portion.

(b) Upon execution of the contract, Purchaser shall select a percentage allocation of the costs and proceeds from the sale of the Reasonable Portion as described below. The percentage of the allocation of the costs and proceeds from the sale of the Reasonable Portion ("Purchaser Revenue Allocation") shall be 18.8 percent. The amount of the proceeds and the costs from the sale of the Reasonable Portion are defined in Sections 4 and 6, respectively.

(c) The District will use the Purchaser Revenue Allocation of the Reasonable Portion Proceeds to purchase capacity and energy for the Purchaser pursuant to a supplementary agreement between the Purchaser and the District. The District will directly assign to the Purchaser the cost incurred by the District in using the Purchaser Revenue Allocation to purchase such capacity and energy.

(d) By notification to the District pursuant to Section 4(b), the Purchaser may elect to receive its Purchaser Revenue Allocation of Reasonable Portion Proceeds in cash rather than receiving energy and capacity.

(e) REALLOCATION. If collectively Purchasers subscribe to Purchaser Revenue Allocations that total more than 100%, then Purchaser Revenue Allocations will be determined as follows; provided, however, that the application of the following formula shall not result in the Purchasers being assigned a Purchaser Revenue Allocation larger than that included in this contract on the date of execution:

(1) Step 1. One-hundred percent of the Purchaser Revenue Allocation will be divided between the Purchasers who are parties to the 1956 and 1959 Contracts, as a group, and the Purchasers who are included in the Idaho Cooperatives, as a group, in proportion to the number of retail electric customers located in the Pacific Northwest (determined by the number of retail meters) served by each group as of October 31, 2000.

(2) Step 2. Each Purchaser's Revenue Allocation will be determined as follows:

(A)    For Purchasers who are parties to the 1956 and 1959 Contracts, the proportion of such Purchaser Revenue Allocations from Step 1 above will be distributed to individual Purchasers as follows:

(i) For November 1, 2005 through October 31, 2009 the Purchaser Revenue Allocations shall be distributed in proportion to participation in the 1956 Contract and 1959 Contract weighted 75% and 25%, respectively.

(ii) For the period after November 1, 2009 the Purchaser Revenue Allocations shall be distributed in proportion to the sum of participation in the 1956 Contract and 1959 Contract divided by two.

(B)    For the Purchasers who are included in the Idaho Cooperatives, the proportion of such Purchaser Revenue Allocations from Step 1 will be distributed to such individual cooperatives in proportion to the number of retail electric customers located in the Pacific Northwest (determined by number of retail meters) each cooperative served as of October 31, 2000.

(f) If the reallocation procedure of Section 3(e) is implemented, then for the period November 1, 2005 through October 31, 2009, the following shall apply to Purchasers who were parties to the 1956 Contracts but were not parties to the 1959 Contracts:

(1) The Purchaser Revenue Allocation shall be adjusted to be in proportion to participation in the 1956 Contract (the Purchaser's percent participation in the 1956 Contract divided by 63.5%).

(2) The District shall be obligated to provide the Reasonable Portion Proceeds pursuant to Section 5 using the Purchaser Revenue Allocation, calculated pursuant to Section 3(f)(1), and the Purchaser shall be obligated to make payments pursuant to Sections 5 and 6 using such Purchaser Revenue Allocation.

The adjustments to Purchaser Revenue Allocation pursuant to this Section 3(f) will have no effect on the Purchaser Revenue Allocation of any other Purchaser.

(g) If a Contract with one of the Purchasers is terminated pursuant to Section 17 as a result of such Purchaser's Act of Default, the District shall give the non-defaulting Purchasers notice of such default. Beginning with the first-month that is at least 30 days following such notice, the Revenue Allocations (other than zero) of non-defaulting Purchasers shall be increased pro rata until either: (i) the Purchaser Revenue Allocation of the defaulting Purchaser have been fully allocated or (ii) a further pro rata increase to the Purchaser Revenue Allocations of the non-defaulting Purchasers would adversely affect the tax-exempt status of any outstanding Debt. In the event of (ii), the portion of the Purchaser Revenue Allocation of the defaulting Purchaser not yet allocated will be offered to all Purchasers that can accept such allocation without adversely affecting the tax-exempt status of any outstanding Debt. If after such offer there remains some portion of the Purchaser Revenue Allocation of the defaulting Purchaser not yet allocated, the District at its discretion may elect to accept such unallocated portion. If after all of the foregoing there remains unallocated Purchaser Revenue Allocation of the defaulting Purchaser, the Purchaser Revenue Allocations (other than zero) of non-defaulting Purchasers shall be increased pro rata based on each such non-defaulting Purchaser's Purchaser Revenue Allocation before any allocation under this Section 3(g). In the event that the allocation described in the immediately preceding sentence adversely affects the tax-exempt status of Debt, any increased costs resulting therefrom will be included in Annual Power Costs. Nothing in this subsection is intended to limit any claims the non-defaulting Purchasers may assert against the defaulting Purchaser.

(h) REGULATORY APPROVALS. The District and the Purchaser believe that this contract fully complies with the requirements of Public Law 83-544. FERC has ordered that a Reasonable Portion of the Priest Rapids Project Output be offered for sale based on market principles and that Eligible Purchasers are to receive a meaningful priority. Additionally, FERC has stated that the District may negotiate power contracts as part of the license application process provided that implementation of such contracts is contingent on receipt of license authority. The District and the Purchaser agree that nothing in this contract limits in any way the District's ability to conform to these FERC requirements. Nothing in this contract, other than Section 7, limits the ability of the Purchaser from participating in any FERC or court proceedings that may address Public Law 83-544.

The Parties understand that FERC’s orders of February 11, 1998 and June 12, 1998 in Docket No. EL95-35 (the “PL 83-544 Orders”) require the District, as part of its application for a New FERC License, to file the Marketing Plan for making available the Reasonable Portion in a fair, equitable and non-discriminatory manner pursuant to market-based principles and procedures. The Parties further understand and agree that nothing in this contract is intended to affect or limit in anyway the right of the District to develop and file the Marketing Plan which it determines is consistent with the PL 83-544 Orders.

In the event that FERC or a court of competent jurisdiction shall by order determine that any provision of this contract violates a requirement of either PL 83-544 or of any of the PL 83-544 Orders, the Parties shall, within 30 days of the entry of such an order, commence negotiations for the purpose of reaching agreement on such amendments to this contract, if any, as may be needed for the purpose of complying with that order and for the purpose of preserving the basic benefits and obligations of the Parties. If, within 90 days of commencement of negotiations, the Parties are not able to resolve their differences and to agree upon any necessary amendments, either Party may, after notice to the other Party, cause the matter to be submitted to binding arbitration as provided in Section 23.

If following the issuance of the arbitration decision, a Party reasonably determines that acceptance of such amendments will result in materially decreased benefits or materially increased obligations when compared to this contract, the Party may by notice to the other Party explain its reasons for the determination and, if given within 10 days of the arbitration decision, terminate this contract.

SECTION 4. DETERMINATION OF ESTIMATED PURCHASER REVENUE ALLOCATION OF REASONABLE PORTION PROCEEDS.

(a) The estimated Purchaser Revenue Allocation of the Reasonable Portion Proceeds expected to be available to Purchaser during each Contract Year will be determined by application of the following provisions of this Section 4.

(b) On or before 60 days prior to the beginning of each Contract Year, Purchaser shall provide the District with written notification if it wishes to elect, pursuant to Section 3(d), to receive its Purchaser Revenue Allocation of Reasonable Portion Proceeds in cash instead of the District purchasing energy and capacity therewith. In the event that Purchaser fails to make such annual election pursuant to this section, the District will provide Purchaser with energy and capacity pursuant to Section 3(c).

(c) For the purpose of determining the estimated Purchaser Revenue Allocation of the Reasonable Portion Proceeds for the next Contract Year, on or before 30 days prior to the beginning of each Contract Year, the District shall prepare and mail to the Purchaser a pro forma statement showing for the next Contract Year:

(1) "Estimated District Loads," which shall mean all projected retail electric energy loads for the next Contract Year based on average weather conditions, plus aggregated losses, projected to be used at locations served by the District during the next Contract Year with the exception of (i) locations outside of the geographic boundaries shown on Exhibit B and (ii) that portion of loads of individual retail customers that during a consecutive 12 month period after 2000 exceed by ten average megawatts or more the energy load of such customer for the immediately preceding consecutive 12 month period. Once load at a location is included in Estimated District Loads, loads at such location shall continue to be included in full in future Contract Years without regard to the source of supply for such load. For example, if a load is expected to be served in all or part by an entity other than the District during the next Contract Year, the entire load shall continue to be included in Estimated District Loads. If a new load or increased load of one average megawatt or more at a single retail customer has been included in Estimated District Loads in the current Contract Year, and less than 90% of such new or increased load was actually measured in the current year, then Estimated District Loads shall be reduced for the next Contract Year by the difference between the amount included in the current Contract Year and the amount measured. If there are more than one such new or increased loads for the current Contract Year, they shall be combined for determining both the 90% and the amount of any reduction. If in the current Contract Year a load of one average megawatt or more is placed on the District which was not included in the current Contract Year's Estimated District Loads, then the next Contract Year's Estimated District Loads shall be increased by the amount of such load measured in the current Contract Year. Except for such load correction calculations, Estimated District Loads for the next Contract Year shall be not less than the current Contract Year's Estimated District Loads.

(2) The estimated amount of firm energy from the Priest Rapids Project for the next Contract Year based on critical water planning using the procedures of Operating Agreements in effect on October 31, 2000, unless the District and Purchasers whose Purchaser Revenue Allocation total 66% or more mutually agree to use procedures from a subsequent Operating Agreement.

(3) The monthly amount of "Estimated Unmet District Load" determined as follows:

(A)    Prior to November 1, 2009, the Estimated District Load as calculated in Section4(c)(1) less 70% of the estimated firm energy output of the Priest Rapids Development less 36.5% of the estimated firm energy output of the Wanapum Development both as calculated in Section 4(c)(2).

(B)    On or after November 1, 2009, the Estimated District Loads as calculated in Section 4(c)(1) less 70% of the estimated firm energy output of the Priest Rapids Project as calculated in Section 4(c)(2).

(C)    In the event that the calculation in Section 4(c)(3)(A) or (B) above is less than zero the Estimated Unmet District Load will be zero.

(D)    The difference so determined will be shaped on a monthly basis using the District's historic load patterns.

(4) The "Estimated District Power Costs" which shall equal the estimated cost, including the costs of transmission and other necessary services, of acquiring the monthly amount of capacity and energy identified in Section 4(c)(3) determined by references to published futures price data and firm power supply contracts entered into by the District, and rates for transmission and other necessary services. Prior to the start of the next Contract Year, any Purchaser may provide the District with a written firm and irrevocable bid(s) for all or part of the capacity and energy needed to serve the Estimated Unmet District Load from Section 4(c)(3) for the next Contract Year, and for which the District has not procured a firm power supply. If such bid(s), or in the case of a partial supply bid the combination of the bid and the Estimated Power Cost for the remaining Estimated Unmet District Load, is less costly than the Estimated District Power Cost set forth in the pro forma statement as determined by the District, the District may either: (i) acquire from the Purchaser the capacity and energy offered, and use the bid price in the calculation of the Estimated District Power Costs for the Estimated Unmet District load so served; or (ii) substitute the bid price for the portion of the Estimated Unmet District Load that could have been served with the capacity and energy so bid in the calculation of Estimated District Power Costs.

(5) The estimated Reasonable Portion Proceeds.

(d) Subject to Section 8, in those Contract Years when the District has Estimated District Power Costs as determined pursuant to Section 4(c)(4), the District shall be entitled to and shall take from the actual Reasonable Portion Proceeds the Estimated District Power Costs calculated pursuant to Section 4(c)(4).

(e) Subject to Section 8, the Purchaser shall have available the capacity and energy purchased pursuant to Section 3(c) with an amount equal to the actual Reasonable Portion Proceeds received by the District, minus the Estimated District Power Costs as calculated in Section 4(c)(4), multiplied by the Purchaser Revenue Allocation; provided, however, if the Purchaser has elected to receive cash rather than capacity and energy, Purchaser shall be entitled to receive in cash an amount equal to the actual Reasonable Portion Proceeds received by the District, minus the Estimated District Power Costs as calculated in Section 4(c)(4), multiplied by the Purchaser Revenue Allocation.

(f) The Purchaser Revenue Allocation of the Reasonable Portion Proceeds available to Purchaser may be reduced if the District does not obtain an Annual FERC License or New FERC License, and under any of the following conditions as determined by the District:

(1) Pursuant to Section 4.

(2) If the District is unable to produce the Reasonable Portion due to Uncontrollable Forces.

(3) If failure to reduce deliveries of the Reasonable Portion would result in exceeding the capability of the Priest Rapids Project or subject it or its operation to undue hazard or violate the FERC License, any applicable law, regulation, or Operating Agreement.

(4) In case of emergencies or in order to install equipment in, make repairs to make betterments, renewals, replacements, and additions to ("Improvements"), investigations and inspections of, or perform other maintenance work on the Priest Rapids Project.

The District will use its reasonable efforts to give advance notice to the Purchaser regarding any planned interruption or reduction, giving the reason therefor and stating the probable duration thereof.

(g) Notwithstanding any other Section of this contract, if the Priest Rapids Project is capable of producing Priest Rapids Project Output, but the Purchaser Revenue Allocation of the Reasonable Portion Proceeds to be made available to the Purchaser is projected to be zero for a Contract Year, the Purchaser may give the District written notice, no later than 100 days after the start of the Contract Year, that the Purchaser elects to terminate this contract. In such event, this contract shall terminate effective upon receipt of such written notice by the District.

SECTION 5. ANNUAL POWER COSTS.

(a) "Annual Power Costs" as used in this contract shall include, for the Priest Rapids Development beginning November 1, 2005 and for the Priest Rapids Project beginning November 1, 2009, all of the District's costs and expenses of every type, both direct and indirect, resulting from the ownership, operation, maintenance of and Improvements that are incurred or paid by the District during each Contract Year and that are incurred consistent with Prudent Utility Practice. Such costs and expenses shall for any Contract Year include, but not be limited to the following, in each case without duplication:

(1) All operations costs, maintenance costs, administrative costs, taxes, in lieu of tax payments relating to production and delivery of Priest Rapids Project Output (excluding depreciation) including, but not limited to, those specified in the Uniform System of Accounts as prescribed by the FERC for electric utilities and licensees.

(2) Amounts that the District determines are needed to pay for the prevention or correction of any loss or damage and for Improvements to keep the Priest Rapids Project in good operating condition. Subject to Section 23, the Purchaser agrees that the District shall have the solo right to determine what costs end expenses shall be incurred in connection with the ownership, operation, and maintenance of and Improvements to the Priest Rapids Project.

(3) Subject to Section 5(e), interest that accrues and is payable into the debt service fund with respect to outstanding Debt; principal that accrues and is payable into the debt service fund with respect to outstanding Debt, whether at maturity or by reason of redemption (including premiums for redeeming Debt prior to its scheduled maturity), amounts required to restore any reserve accounts maintained to secure Debt to the level required by the resolution authorizing the Debt and Financing Costs. "Financing Costs" include, but are not limited to, discounts, insurance premiums, letter of credit fees, costs of hedging interest rates, costs of compliance with disclosure requirements, legal and bond counsel fees, independent auditors, printing, financial advisor, bond registrar and trustee costs.

(4) Subject to Section 5(e), costs of creating and replenishing any reserve or contingency fund required to be maintained by any Bond Resolutions and working capital funds.

(5) Any liability or cost, including settlements and judgments, incurred as a result of or related to the ownership, operation or maintenance of the Priest Rapids Project and not covered by insurance.

(6) Costs incurred by the District in applying for a New FERC License as recorded on the District's books of account for the Priest Rapids Project (account number 183090), including but not limited to those costs and interest expenses incurred before November 1, 2005 (“New FERC License Costs”). New FERC License Costs incurred prior to November 1, 2005 will be recovered uniformly over a 15-year amortization period commencing with the Contract Year starting on January 1, 2006. The estimated New FERC License Costs incurred by the District after November 1, 2005 will be included in Annual Power Costs. In the event of termination of this contract for any reason subsequent to the effective date of the New FERC License, the Purchaser shall pay the District an amount equal to the unrecovered New FERC License Costs multiplied by the Purchaser Power Allocation at the time of termination. In the event of termination of this contract for any reason prior to the effective date of the New FERC License, Purchaser shall have no liability for unrecovered New FERC License Costs.

(7) Obligations entered into by the District as part of its effort to obtain a New FERC License, including but not limited to the cost of replacing Priest Rapids Project Products that maybe committed in such obligations.

(8) Costs incurred by the District to fulfill obligations, if any, to parties to the 1956 and 1959 Contracts who do not sign this contract, as such costs are required or approved by a court, or reasonably approved by the District after notice to the Purchaser.

(9) An amount equal to 15% of debt service in that Contract Year or such higher amount as may be required by a Bond Resolution ("Coverage Requirement").

(b) The District shall credit against Annual Power Costs the following:

(1) Any insurance or other proceeds received by the District as reimbursement for damages, losses, costs or expenses included in the Annual Power Costs, and any insurance or other proceeds received as a result of the interruption or reduction of Priest Rapids Project Output.

(2) Revenue, if any, received from obligations entered into by the District as part of its effort to obtain a New FERC License.

(3) Revenue, if any, received as a result of the District fulfilling obligations to parties to the 1956 or 1959 Contracts that do not sign this contract, pursuant to Section (l)(b) of those contracts, excluding revenue required to be paid pursuant to the 1959 Contract.

(4) The Coverage Requirement, to the extent that it is not expended during a Contract Year for capital or other costs of the Priest Rapids Project (the amount not spent shall be credited against Annual Power Costs for the following Contract Year).

(5) Interest earnings on funds of the Priest Rapids Project that are not required to be retained by such fund by a Bond Resolution.

(c) Costs directly or indirectly associated with the District's Electric System or any other separate system of the District shall not be part of Annual Power Costs other than the payment of Debt held by the Electric System.

(d) Any payment received by the District as a result of the taking of the whole or any portion of the Priest Rapids Project Output by any state or federal government agency shall be used by the District to credit Annual Power Costs or to retire, at or prior to maturity, Debt, whichever shall be proper under the circumstances existing at the time of the taking.

(e) The Purchaser agrees that the District shall have the sole discretion to determine what portion, if any, of the Priest Rapid Project financing will be accomplished by issuance of Debt and the terms and covenants of any Debt.

(1) To the extent that the District makes Improvements to the Priest Rapids Project that are not financed by Debt proceeds, Annual Power Costs will include a cost as determined by the following: the District shall determine all of the Improvements anticipated for the Priest Rapids Project for the Contract Year and the District shall estimate the weighted average economic service life of the Improvements, and shall calculate a weighted average market interest rate assuming the District were to issue Debt to finance such Improvements, both as reasonably determined by the District. Based on such calculations the District shall include in Annual Power Costs an amount sufficient to amortize the costs (including both interest and principal pursuant to this Section 5(e)(1)) of such Improvements on a level basis over a period equal to the estimated weighted average economic service life of the Improvements. The amortization period for any Improvements shall not exceed 30 years and land shall be deemed to have a service life of 30 years. The District may adjust prospectively the amortization of any Improvements to reflect the actual costs of such Improvements, to correct any error in computation or to reflect a material change in the District's estimate of the average economic life of the Improvements. The District shall not be required to amortize capital expenditures that are estimated to cost below the amount that in accordance with the District's capitalization policy are not required to be capitalized and may include such costs in Annual Power Costs.

(2) To the extent that the District issues Debt (i) with a final maturity that is not earlier than the expiration of the estimated weighted average service life of the Improvements, to be financed with the Debt and (ii) the total annual amounts required for the payment of interest, principal and sinking fund requirements of such Debt when due in a Contract Year do not vary by more than 10% from those required in any other Contract Year, then Annual Power Costs shall include the actual principal and sinking fund requirements that accrues and is payable into the debt service fund for that Debt for the Contract Year. To the extent that the District issues Debt that does not meet the requirements of (i) and (ii) in the prior sentence, then Annual Power Costs will include, with respect to such Debt, an amount as determined by the District as of the date of issuance of the Debt, sufficient to amortize the original principal amount of such Debt on a level debt service basis over a period equal to the estimated weighted average economic service life of the Improvements financed or refinanced by such Debt, commencing on the later of (a) the date of issuance of the Debt or (b) the in service date of such Improvements, and based on an interest rate equal to, at the election of the District, either (i) the weighted average interest rate of the Debt or (ii) the weighted average market rate at the time of issuance of the Debt for debt with similar terms and borrowers similar to the District, as reasonably determined by the District. The amortization period for any Debt shall not exceed 30 years, land shall be deemed to have an economic useful life of 30 years, and any Debt proceeds deposited into a reserve account shall be credited against Annual Power Cost in the final year of the Debt. The District may adjust prospectively the amortization of the principal amount of any Debt to correct any error in computation or to reflect a material change in the District's reasonable estimate of the in service date or the average economic life of the Improvements.

(3) To the extent that the District creates or replenishes reserve and contingency funds required by Bond Resolutions or working capital funds that are not financed by Debt proceeds, Annual Power Costs will include a cost determined in a manner analogous to the calculation in Section 5(e)(2) with such amounts amortized over 15 years. Upon termination of this contract, any such funds will belong to the District.

(f) On or prior to July 31st of each year, for budgetary purposes only and not for determining Priest Rapids Project Products or Purchaser's payment obligations under this contract, the District shall provide the Purchaser a pro forma budget showing an estimate of Annual Power Costs, Priest Rapids Project Output, Purchaser Revenue Allocation and Estimated District Loads for the following Contract Year.

SECTION 6. PAYMENT FOR PRIEST RAPIDS PROJECT PURCHASER REVENUE ALLOCATION.

(a) On or before 30 days prior to the beginning of each Contract Year beginning in 2005, the District shall prepare and mail the Purchaser a pro forma statement for the next Contract Year showing:

(1) An estimate of Annual Power Costs specifically assigned to the Purchaser. Specific assignment shall occur whenever a Purchaser or a group of Purchasers cause identifiable costs to be placed on the Priest Rapids Project.

(2) A detailed estimate of the Annual Power Costs, less those costs specifically assigned in Section 6(a)(1), for the Contract Year.

(3) An estimate of the cost to the Purchaser attributable to the Purchaser Revenue Allocation of the costs of the Reasonable Portion, which shall be an amount equal to the product of the Reasonable Portion and the Annual Power Costs from Section 6(a)(2) multiplied by the ratio of the estimated Reasonable Portion Proceeds to be received by the Purchaser calculated pursuant to Section 4(e) to the estimated total Reasonable Portion Proceeds from Section 4(c)(5).

(4) An estimate of the cost of purchasing capacity and energy with the Purchaser Revenue Allocation of the Reasonable Portion Proceeds pursuant to Section 3(c).

(5) The sum of amounts (expressed in dollars) calculated pursuant to Sections 6(a)(1), (3), and (4), hereinafter referred to as the "Purchaser Estimated Cost."

(6) The amount of the monthly payments to be made by the Purchaser to pay the Purchaser Estimated Cost during the next Contract Year.

(b) The pro forma statement provided pursuant to Section 6(a) shall be in lieu of the issuance of monthly bills to the Purchaser by the District, and the Purchaser shall be obligated to pay the monthly amounts contained therein in accordance with this Section 6.

(c) In the event of receipts or payments substantially affecting the Annual Power Costs during any Contract Year, the District shall prepare and mail to the Purchaser a revised statement of estimated Annual Power Costs and Purchaser Estimated Cost, which revised statement shall supersede any previous statement or revised statement, and the Purchaser shall be obligated to make monthly payments set forth on such revised statement for the balance of the Contract Year.

(d) Purchaser Estimated Cost shall continue to accrue and the Purchaser shall make payment for the same up to the time of termination of this contract for whatever reason, irrespective of the condition of the Priest Rapids Project and whether or not it is capable of producing Priest Rapids Project Output, the Reasonable Portion or the Purchaser Revenue Allocation of the Reasonable Portion Proceeds. If the Priest Rapids Project is not capable of producing Priest Rapids Project Output then the Purchaser Estimated Cost will be based on Priest Rapids Project Output in the last full year of operation. In this event, at the request of the Purchaser, the District will makes its reasonable best efforts to acquire replacement Priest Rapids Products the cost of which will be added to the Purchaser Estimated Cost.

(e) The monthly payments of Purchaser Estimated Costs set forth in the statement or revised statement shall be due and payable by electronic funds transfer to the District's account, designated in writing by the District, on the 20th calendar day of each month.

(f) If payment in full of any monthly payment amount set forth on a statement or revised statement is not received by the District on or before the close of business on the 20th day of the month, a delayed payment charge of 2% of the unpaid amount due will be made. Any bill which remains unpaid for more than 30 days after the due date shall, in addition to the delayed payment charge, accrue interest at the lesser of 1.5% per month or the maximum rate allowed by law. If the 20th calendar day of the month is a Saturday, Sunday or a District recognized holiday, the next following business day shall be the last day on which payment may be received without the addition of the delayed-payment charge. Additionally, if payment due to the District under this Section 6 remains unpaid 30 days after the due date, the District may thereafter suspend payment of the Purchaser Revenue Allocation to the Purchaser which would otherwise occur until payment in full of all amounts due and owing (including any interest and delay charges) is received by the District.

(g) On or before 150 days after the end of each Contract Year, the District will submit to the Purchaser a detailed statement of the Purchaser Estimated Cost and the Purchaser Actual Cost for the Contract Year. Purchaser Actual Cost on such statement shall be calculated in the same manner as Purchaser Estimated Cost as set forth in Sections 6(a)(1)-(5) but using the actual costs incurred by the District in the preceding Contract Year; provided, however, that the estimated values calculated pursuant to Sections 4(c)(1)-(2) and 4(c)(5) shall not be modified. If the Purchaser Actual Costs exceed the Purchaser Estimated Costs on such statement ("Excess Costs"), the District shall bill the Purchaser for an amount equal to such Excess Costs, and the Purchaser shall pay such bill within 30 days or be subject to the delayed-payment and interest charges as provided in Section 6(f). If the Purchaser Actual Costs are less than the Purchaser Estimated Costs, or if credits are due pursuant to Section 5(b) or both (“Refund Costs”), the District shall give credit to the Purchaser against the Purchaser Estimated Costs for the current Contract Year in an amount equal to such Refund Costs; provided, that if Refund Costs are due to Purchaser following the expiration of this contract, the District shall make a cash refund of such amount to the Purchaser.

(h) The District may use any payments received from the Purchaser under this contract in any manner that the District, in its sole discretion, shall determine. The District agrees to pay or cause to be paid for the Priest Rapids Project from lawfully available money of the District, including payments from the Purchaser and other Purchasers, all the operating costs, taxes and assessments, capital expenditures, payments required for Debt and other costs of the Priest Rapids Project. If the District issues tax-exempt Debt based on the governmental use of the Priest Rapids Project Output by the Purchaser, the Purchaser covenants that it shall not use any Priest Rapids Project Output in a manner, or take any other action, that will or is likely to adversely affect the tax-exempt status of any Debt.

SECTION 7. SUPPORT AND COOPERATION.

(a) The District shall make application and use reasonable efforts to obtain a New FERC License and obtain FERC approval of this contract, if required. The District reserves the right to determine when such applications should be made.

(b) In accordance with FERC direction contained in the PL 83-544 Orders, the District commits to providing the Eligible Purchasers with a meaningful priority in the sale of the Reasonable Portion.

(c) Purchasers may also participate in the development by the District of a proposed Marketing Plan. This Marketing Plan will be submitted to FERC for approval as part of the relicensing process application; provided, however, that nothing in this Section shall be construed as compelling the Purchaser to comment on or refrain from commenting on the Marketing Plan.

(d) Purchaser covenants that it shall provide reasonable support, cooperation and assistance to the District in the District's acquisition of a New and Annual FERC License, any necessary federal, state or local permits relating to the Priest Rapids Project, FERC approval of this contract, if FERC approval is requested by the District; provided, however, that nothing in this contract shall preclude the Purchaser from filing comments with FERC to protect the Purchaser's economic benefits provided by this contract.

(e) In the event that the District believes that the Purchaser has violated any of the above covenants of Section 7(d), the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 10 business days within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to consider the action to be in breach of the covenants, the matter shall be resolved pursuant to arbitration conducted under Section 23. If the Purchaser is determined to be in breach of the covenants, the District shall have the right to terminate this contract effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell in any manner the District determines, the Purchaser Revenue Allocation the Purchaser would have been otherwise entitled to under this contract.

(f) Purchaser covenants that it shall refrain from filing or supporting any FERC license application for the Priest Rapids Project other than that filed by the District and refrain from filing or supporting any effort that would lead to modification of the FERC decisions on Public Law 83-544 contained in the PL 83-544 Orders, unless such a request or petition is filed by the District and the Purchaser agrees with that request or petition. For purposes of this Section 7(f), “refrain from supporting” means prepare no documents, submit no testimony, sign no other agreement or contract other than this contract for Priest Rapids Project Output or for other products or that is contingent upon a party other than the District receiving a license from FERC to operate the Priest Rapids Project, engage in no lobbying and provide no funding.

(g) The Purchaser covenants that it will not take any action which, in the opinion of a neutral third party, would likely be construed as: (i) having a material adverse effect on the District's ability to obtain an Annual FERC License or a New FERC License or on the anticipated economic benefits of this contract or (ii) constituting a judicial challenge to the authority of the District or the Purchaser to enter into and implement the provisions of this contract. This covenant does not apply to anticipated economic benefits under other agreements between the District and third parties, such as with the Bonneville Power Administration.

(h) In the event that the District believes that the Purchaser has violated any of the above covenants of Section 7(f) or (g), the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 4 business days after receipt of such written notice by Purchaser within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to reasonably consider the action to be in breach of the covenants, the District shall have the right to terminate this contract and the 1956 and 1959 Contracts, effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell, in any manner the District determines, the Purchaser Revenue Allocation the Purchaser would have been otherwise entitled to under this contract and any output from the Priest Rapids Project under the 1956 or 1959 Contracts.

SECTION 8. PAYMENT OF THE REASONABLE PORTION PROCEEDS.

(a) The Purchaser Revenue Allocation of the Reasonable Portion Proceeds shall be paid to the Purchaser monthly, as follows:

(1) The monthly payment to the Purchaser shall be the product of the Purchaser Revenue Allocation and the difference between the actual monthly payments of the Reasonable Portion Proceeds received by the District and the monthly Estimated District Power Costs pursuant to Section 4(c)(4); provided, however, if the Purchaser has elected to have the District make purchases of capacity and energy under a supplementary agreement pursuant to Section 3(c), then Purchaser will receive such capacity and energy in lieu of the proceeds described in this Section 8(a)(l). Nothing in this Section 8(a)(1) will result in a negative payment or a bill to the Purchaser when such Estimated District Power Costs exceed the actual monthly Reasonable Portion Proceeds received by the District.

(2) Payments due from the District to Purchaser pursuant to Section 8(a)(1) shall be made in accordance with the provisions of Section 6, and such payment shall be due not later than the 20th calendar day of each month.

(3) During the term of this contract, the District may be entitled to take during a Contract Year all of the Reasonable Portion Proceeds pursuant to Section 4(d) resulting in a zero payment to purchaser ("Zero Year"). If in any Zero Year the District has in place one or more multiple year contracts, the terms of which include or span the Zero Year (“Mu1ti-Year Contracts”), then the payments to the Purchaser from such Multi-Year Contracts included in the calculations performed pursuant to Section 4(e) shall be proportional to the annual market price of power as forecast at the time the Multi-Year Contracts were agreed to by the District.

(4) If in any month the Estimated District Power Costs from Section 4(c)(4) exceed the actual Reasonable Portion Proceeds received in such month ("Estimated Power Cost Shortfall"), the Estimated Power Cost Shortfall shall be carried forward to the next month or months remaining in the Contract Year in which such Estimated Power Cost Shortfall occurred until paid in full from the Reasonable Portion Proceeds received by the District.

SECTION 9. INFORMATION TO BE MADE AVAILABLE TO THE PURCHASER.

(a) The District agrees to keep records of the Priest Rapids Project in accordance with the Uniform System of Accounts as prescribed by FERC for electric utilities and licensees; provided, if there are inconsistencies between the Uniform System of Accounts and this contract, this contract shall control. The Purchaser, upon at least 30 days advance written notice to the District, shall have the right to audit or examine operating and financial records relating to the Priest Rapids Project during the District's normal business hours. To the extent practicable, the Purchasers shall conduct any such audit or examination jointly to minimize the disruption to the District's business operations. All costs incurred by the District associated with such audit, including, but not limited to, District labor, materials and reproduction services shall be billed to the Purchaser, and shall be promptly reimbursed by the Purchaser in accordance with Section 6(e).

(b) Upon request, any audit reports of the Priest Rapids Project by a firm of certified public accountants employed by the District or by the State Auditor's Office of the State of Washington will be provided to the Purchaser.

(c) Policies of insurance carried by the District pursuant to Section 10 shall be available at the office of the District for inspection by the Purchaser.

(d) The Purchaser's representatives shall at all times be given reasonable access to the Priest Rapids Project, subject to the District's applicable safety rules and regulations.

(e) Upon request, the Purchaser may obtain information to document the capability of the Priest Rapids Project to produce Priest Rapids Project Output.

SECTION 10. INSURANCE.

The District shall have the right to self-insure and/or obtain and maintain insurance with policies payable to the District for the following coverage:

(a) Obligations of the District under any state or federa1 Workmen's Compensation laws or other, employer's liability;

(b) Public liability for bodily injury and property damage;

(c) Physical loss or damage to the Priest Rapids Project on a replacement cost basis; and

(d) Any other insurance determined to be necessary.

SECTION 11. PROJECT INTEGRATION.

(a) It is the intention of the Parties hereto that the operation of the Priest Rapids Project shall be integrated and that all benefits accruing as a result of such integration shall be shared equally by the Priest Rapids and Wanapum Developments. It is also agreed that before November 1, 2009 and after such date if required by any Bond Resolution, all joint costs of the Priest Rapids and Wanapum Developments shall be equitably allocated between them as determined by the District.

(b) The Parties agree that any compensation (whether energy or money) due or which may become due the owner of the Rock Island Hydroelectric Project because of encroachment by the Priest Rapids Project after November 1, 2009 on the Rock Island Hydroelectric Project will either proportionately reduce the amount of Priest Rapids Project Output or be included in Annual Power Costs, as appropriate, but shall not reduce the amount required to be paid by the Purchaser under Sections 5 and 6. "Rock Island Hydroelectric Project" shall mean the FERC Hydroelectric Project No. 943 currently operated by Public Utility District No. 1 of Chelan County, Washington.

SECTION 12. LIABILITY OF PARTIES.

(a) Except as otherwise provided in this contract, each Party hereby releases the other Party and its commissioners, officers, directors, agents and employees from any claim for loss or damage arising out of the ownership, operation, and maintenance of the Priest Rapids Project including any loss of profits or revenues, loss of use of power system, cost of capital, cost of purchased or replacement power, other substantially similar liability or other direct or indirect consequential loss or damage, except as provided in the Agreement Limiting Liability Among Western Interconnected Systems for parties to that agreement. This release shall not include any claim by the Purchaser for refunds for over-payments made to the District nor any claim for specific performance of the District's obligation to deliver to the Purchaser during the term of this contract the Purchaser Revenue Allocation to which the Purchaser is entitled under this contract.

(b) The Purchaser shall have no claim of any type or right of action against the District: (i) as a result of a FERC or court order or amendment described in Section 3(h); (ii) as a result of the failure to receive an Annual FERC License or a New FERC license or the adjustment of delivery of Priest Rapids Products pursuant to Section 4(f) whether arising under the terms of this contract or otherwise; or (iii) as a result of the District's purchasing power or energy on behalf of the Purchaser pursuant to Sections 3(c), and the Purchaser hereby releases the District and its commissioners, officers, agents and employees from any claim for loss or damage arising out of the events described in this paragraph.

SECTION 13. NOTICES AND COMPUTATION OF TIME.

Any notice or demand, except those provided for in Section 6, by the Purchaser under this contract to the District shall be deemed properly given if mailed postage prepaid and addressed to Manager, Public Utility District No. 2 of Grant County, Box 878, Ephrata Washington 98823; any notice or demand by the District to the Purchaser under this contract shall be deemed properly given if mailed postage prepaid and addressed to the Purchaser:

PUGET SOUND ENERGY, INC.
ATTENTION, VICE PRESIDENT, ENERGY SUPPLY
ONE BELLEVUE CENTER BUILDING
411 108TH AVENUE, 15TH FLOOR
BELLEVUE, WA 98004-5515

In computing any period of time from such notice, such period shall commence at 12:00 A.M. (midnight) on the date mailed. The designations of the name and address to which any such notice or demand is directed may be changed at any time by either Party giving notice as provided above.

SECTION 14. DISTRICT'S BOND RESOLUTIONS AND LICENSE.

It is recognized by the Parties that the District, in its operation of the Priest Rapids Project, must comply with the requirements of the Bond Resolution and with the FERC License together with amendments thereof from time to time made, and the District is hereby authorized to take such actions as the District determines are necessary and appropriate to comply with such Bond Resolution and FERC License.

SECTION 15. GOVERNING LAW.

The Parties agree that the laws of the State of Washington shall govern this contract.

SECTION 16. ASSIGNMENT OF CONTRACT.

Neither the Purchaser nor the District shall by contract, operation of law or otherwise, assign this contract or any right or interest in this contract without the prior written consent of the other Party, which shall not be unreasonably withheld; provided, however, a Party may, without the consent of the other Party (and without relieving itself from liability hereunder): (i) transfer or assign this contract to an affiliate of the Party provided that the affiliate's creditworthiness is equal or higher than that of the Party; or (ii) transfer or assign this contract to any person or entity succeeding to all or substantially all of the distribution and generating facilities of the Party whose creditworthiness is equal or higher than that of the Party; provided, however, that in each such case, any such assignee shall agree in writing to be bound by the terms and conditions in this contract and the transferring Party shall deliver such tax and enforceability assurance as the other Party may reasonably request.

SECTION 17. REMEDIES ON DEFAULT.

(a) "Act of Default shall mean:

(1) The failure of a Party to make, when due, any payment required under this contract if such failure is not remedied within three days after written notice, provided that the payment is not the subject of a good faith dispute pursuant to Section 23. If requested by the District, the Purchaser shall deposit the disputed amount in escrow with a bank acceptable to the Parties.

(2) Any representation or warranty in this contract is false or misleading in any material respect when made or ceases to remain true during the term of this contract.

(3) The failure of the Purchaser, after Section 7 or any provision thereof has been found by a court to be void, unlawful or unenforceable, to perform in accordance with the provisions of Section 7, including without limitation my provision or provisions found to be void, unlawful or unenforceable.

(4) A Party shall make an assignment or any general arrangement for the benefit of creditors; file a petition or otherwise commence or acquiesce in the commencement of a proceeding, under any bankruptcy or similar law for the protection of creditors; or otherwise becomes bankrupt or insolvent or unable to pay its debts as they fall due.

(b) If a Party commits an Act of Default during the term of this contract, the non-defaulting Party may take any one or more of the following remedial steps:

(1) Take any action or exercise any remedy provided to the Party under the provisions of Sections 6 or 7.

(2) Except where a different time period is set forth herein, if the defaulting Party fails to remedy an Act of Default within ten days after receiving written notification of the default, then the non-defaulting Party may give a written notice of termination of this contract on a date specified in such notice, which date shall be not less than 30 days after the date of such notice. If the Purchaser is given written notice as provided herein, this contract shall terminate upon the date specified in such notice, the Purchaser thereafter shall have no right, title, or interest in, to, or with respect to the Priest Rapids Project, or any Purchaser Revenue Allocation, or any Priest Rapids Project Output, but the Purchaser shall remain liable for all amounts due the District which have accrued prior to the date of termination.

(3) The District may, prior to the termination of this contract pursuant to Section 17(b)(2), at any time suspend any and all rights of the Purchaser to the Purchaser Revenue Allocation upon not less than five days' notice to the Purchaser. The District may, without further notice to the Purchaser, grant any or all of such suspended rights to any person or entity for the duration of the suspension. In such event, the Purchaser shall, in addition to its other obligations under this contract, upon demand, pay to the District all expenses and any losses incurred in connection with such suspension and any grant of the suspended rights to another person or entity. No suspension of any or all of the rights of the Purchaser Revenue Allocation shall be construed as an election to terminate the interests of the Purchaser in, to, and under this contract unless a written notice of termination is given to the Purchaser pursuant to this contract or unless such termination be decreed by a court of competent jurisdiction.

(4) The non-defaulting Party may begin and maintain successive proceedings against the defaulting Party for the recovery of damages or for a sum equal to any and all payments required to be made pursuant to this contract.

(5) A Party may take whatever action at law or in equity as may appear necessary or desirable to collect the amounts payable by the defaulting Party under this contract then due and thereafter to become due, or to enforce performance and observation of any obligation, agreement or covenant of the defaulting Party under this contract.

(6) No right or remedy conferred upon or reserved to a Party is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing, upon the occurrence of any Act of Default. Failure of the District to insist at any time on the strict observance or performance by the Purchaser of any of the provisions of this contract, or to exercise any right or remedy provided for in this contract shall not impair any such right or remedy nor be construed as a waiver or relinquishment thereof for the future. Receipt by the District of any payment required to be made hereunder with knowledge of the breach of any provisions of this contract shall not be deemed a waiver of such breach. In addition to all other remedies provided in this contract, the District shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the provisions of this contract, or to a decree requiring performance of any of the provisions of this contract or to any other remedy legally allowed to the District.

(7) The District shall not have the right to accelerate future payment obligations of the Purchaser in the event of default under this contract.

SECTION 18. VENUE AND ATTORNEY FEES.

Venue of any action filed to enforce or interpret the provisions of this contract shall be exclusively in the United States District Court for the Eastern District of Washington or the Superior Court of the State of Washington for Grant County and the Parties irrevocably submit to the jurisdiction of any such court. In the event of litigation to enforce the provisions of this contract, the prevailing Party shall be entitled to reasonable attorney's fees in addition to any other relief allowed.

SECTION 19. COMPLIANCE WITH LAW.

The Parties shall conform to and comply with all laws, rules, regulations, license conditions or restrictions promulgated by the FERC or any other governmental agency or entity having jurisdiction over the Priest Rapids Project. The Purchaser shall cooperate and take whatever action is necessary to cooperate fully with the District in meeting such requirements. Obligations of the District contained in this contract are hereby expressly made subordinate and subject to such compliance.

SECTION 20. HEADINGS.

The headings of sections and paragraphs of this contract are for convenience of reference only and are not intended to restrict, affect or be of any weight in the interpretation or construction of the provisions of such sections and paragraphs.

SECTION 21. ENTIRE AGREEMENT; MODIFICATION; CONFLICT IN PRECEDENCE.

This contract does not modify the terms and conditions contained in the 1956 and 1959 Contracts except as provided in Sections 1(b) and 7. This contract constitutes the entire agreement between the Parties with respect to the subject matter of this contract, and supersedes all previous communications between the Parties, either verbal or written, with respect to such subject matter. No modifications of this contract shall be binding upon the Parties unless such modifications are in writing signed by each Party. To the extent there are any conflicting provisions between this contract and the 1956 Contract, or this contract and the 1959 Contract after November 1, 2009, the terms and conditions in this contract shall take precedence and be controlling and the 1956 and 1959 Contracts are hereby amended accordingly.

SECTION 22. NO PARTNERSHIP OR THIRD PARTY RIGHTS.

(a) This contract shall not be interpreted or construed to create an association, joint venture or partnership between the Parties, or to impose any partnership obligations or liability upon any Party. Without limiting the foregoing, the Purchaser shall not be liable for, and the District hereby releases the Purchaser from, the payment of Debt except as provided in Sections 5 and 6.

(b) This contract shall not be construed to create rights in or grant remedies to any third party as a beneficiary of this contract.

SECTION 23. PURCHASERS' COMMITTEE; ARBITRATION.

(a) There is hereby established a Purchasers' committee (the "Committee"). Each Purchaser may appoint one representative (and one alternate) as a Committee member to attend Committee meetings. The members of the Committee shall elect a chair, and may adopt such rules for the conduct of business as it deems appropriate. Meetings between the District and Purchasers shall be held routinely, but not more frequently than once a quarter, provided, however, that such meetings may be held more frequently than once each quarter at the request of the District or upon the request of members of the Committee whose Purchaser Revenue Allocations total 66% or more. All meetings between the District and Purchaser will be held in Grant County, Washington, unless the District and the Purchasers agree to another location.

(b) In addition to other matters subject to arbitration pursuant to other provisions of this contract, if approved by members of the Committee whose Purchaser Revenue Allocations total 66% or more, the Committee may submit to binding arbitration the following issues:

(1) Have the Estimated District Loads been forecast in accordance with Prudent Utility Practice and, if not, what is the appropriate Estimated District Loads in accordance with Prudent Utility Practice for the Contract Year?

(2) Have the Annual Power Costs been determined by the District in accordance with Prudent Utility Practice and have such costs been incurred for the benefit of Priest Rapids Project Output and, if not, what are the appropriate Annual Power Costs in accordance with Prudent Utility Practice for the Contract Year; provided that nothing in this Section shall be interpreted to limit the ability of the District to meet its payment obligations under a Bond Resolution?

(3) What modifications to this contract, pursuant to Section 3(h), are necessary to comply with FERC or court orders and to preserve the basic benefits and obligations of the Parties?

(4) Has the Purchaser violated the covenants in Section 7(e)?

(5) Are the annual proceeds from the sales of the Reasonable Portion pursuant to Multi-Year Contracts proportional to the annual market price of power, as forecast at the time the Multi-Year Contracts were agreed to by the District, and if not, what adjustments are necessary to the payments to Purchaser pursuant to Section 4(e) to reflect such forecast annual market price of power for sales made pursuant to such Multi-Year Contracts?

(c) The board of arbitrators shall be composed of three persons, one of whom shall be appointed by the District, one of whom shall be appointed by majority vote of the Committee, and the third person to be appointed by the two persons so appointed. The District and the Committee shall appoint their arbitrator within 15 days after notification of the Committee's vote to submit a matter to binding arbitration. In the event the two members cannot agree upon the appointment of a third person within 10 days, then such third person shall be appointed by the presiding judge of the Superior Court of Kittitas County, Washington. The arbitration shall be conducted jointly by the participating Purchasers, and under rules as may be determined by the arbitrators; provided, however, that all parties shall be afforded discovery consistent with the Federal Rules of Civil Procedure; and, provided further, if the arbitrators do not unanimously agree on the rules governing the arbitration, the arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The board so designated shall conduct a hearing within 30 days of completion of their selection, and within 15 days after the hearing (unless such time is extended by agreement of the Parties) shall notify the Parties of their decision in writing, stating the reasons therefore and separately listing their findings of fact, conclusions of law and order. Insofar as the Parties hereto may legally do so, they agree to abide by the decision of the board. All factual determinations made by the board shall be conclusive and binding on the Parties and not subject to judicial review. Any conclusions of law made by the board shall be subject to review by a court specified in Section 23; provided, that the order issued by the board shall be effective unless and until a stay is issued by the board or such court suspends the effectiveness of the order.

SECTION 24. REPRESENTATIONS AND WARRANTIES.

Each Party represents and warrants to the other Party that:

(a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation.

(b) The execution, delivery and performance of this contract are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, or order applicable to it.

(c) This contract constitutes a legally valid and binding obligation enforceable against it in accordance with its terms, subject to equitable defenses and applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally.

SECTION 25. COUNTERPARTS.

This contract may be executed in counterpart, each of which shall be an original and all of which shall constitute the same contract.

PUBLIC UTILITY DISTRICT NO. 2
OF GRANT COUNTY, WASHINGTON

By:

Mike Conley

(SEAL) President, Board of Commissioners

ATTEST:

Thomas W. Flint

Secretary, Board of Commissioners

Date:

PUGET SOUND ENERGY, INC.

By:

William A. Gaines

(SEAL) Title: Vice President, Energy Supply

EXHIBIT A

DEFINITIONS OF PRIEST RAPIDS DEVELOPMENT
AND WANAPUM DEVELOPMENT

RESOLUTION NO. 390 - DEFINITION OF PRIEST RAPIDS DEVELOPMENT

Section 2(f) of Exhibit 1.“Priest Rapids Development” shall mean those properties and facilities consisting of the Priest Rapids dam, site, reservoir, switchyard and power plant, including all generating facilities associated therewith up to and including the first ten (10) main turbine generator units each with a nameplate rating of approximately 78,850 kilowatts and any additional generating facilities which may be installed as provided for in Section 19 of the Original Power Sales Contract, together with the associated transmission facilities consisting of two 230 KV transmission lines and terminal facilities interconnecting the Priest Rapids switchyard and the Bonneville Power Administration’s Midway Substation and an undivided one-half (1/2) interest in the interconnecting facilities between the Priest Rapids switchyard and the Wanapum switchyard.

RESOLUTION NO. 474 - DEFINITION OF WANAPUM DEVELOPMENT

Section 2.2. The District specifies and adopts the plan and system hereinafter set forth for the acquisition, by purchase or condemnation and construction of the following generation and transmission facilities as a separate utility system of the District constituting the Wanapum Development of the District, to wit:

A.     The District shall construct an e1ectric generating plant and associated facilities on the Columbia River at approximately river mile 415 from the mouth of said river at the Wanapum site on said river, in Grant and Kittitas Counties, Washington, as authorized by the Federal Power Commission License for Project No. 2114, originally issued November 4, 1955, and all amendments thereto; said generating plant to have an installed nameplate rating of approximately 831,250 kilowatts, and said generating plant and associated facilities to include, but not limited to, a concrete gravity dam, a fully enclosed reinforced concrete powerhouse containing ten (10) turbo-generating units with provisions in the intake structure for the installation of six (6) additional turbo-generating units, a reservoir, waterways, fish ladders and other fish protective devices; provisions for future installation of navigation locks; transforming facilities; a switchyard; transmission facilities necessary to connect the powerhouse to the existing transmission facilities of the Priest Rapids Development and to the transmission facilities of the Bonneville Power Administration in the vicinity of said Project; railroad siding, shops, warehouses, construction camp, offices, and dwellings; and all other structures, fixtures, equipment or facilities used or useful in the construction, maintenance and operation of the Wanapum Development and all necessary water rights, development rights, permits and licenses, easements, rights-of-way, flowage rights and rights permitting the storage of water, riparian rights and shore rights.

Exhibit B
Grant County PUD
Service Area

AMENDMENT NO. 1 TO THE
PRIEST RAPIDS PROJECT REASONABLE PORTION
POWER SALES CONTRACT

The Public Utility District No. 2 of Grant County, Washington, (“District”), and Puget Sound Energy, Inc.(“Purchaser”), hereby agree to this Amendment No. 1 to the Priest Rapids Project Reasonable Power Sales Contract dated December 13, 2001 (the “Product Contract”). Unless otherwise defined herein, all capitalized terms defined in the Reasonable Portion Contract shall have the meanings set forth therein when used in this Amendment.

1. Term of Amendment No. 1

This Amendment No. 1 shall take effect on upon the execution by the District and Purchaser, and shall expire on the earlier of the expiration or termination date of the Reasonable Portion Contract.

2.

Amendments to Provisions of the Product Contract
Purchaser and the District agree that the Product Contract is hereby amended as follows:

2.1 The definition of the term Priest Rapids Project Output set forth in Section 2 is deleted in its entirety and replace with the following:

“Priest Rapids Project Output” shall mean the amount of capacity, energy (both firm and non-firm), pondage, reactive power, ancillary services (including dynamic load following services) and any other product from the Priest Rapids Development from November 1, 2005 to November 1, 2009 and from the Priest Rapids Project from November 1, 2009 through the term of this contract under the operating conditions which exist during the term, including periods when the Priest Rapid Project may be wholly or partially inoperable for any reason, after correction for encroachment, Canadian entitlement, station and project use, and depletions required by the FERC License or other regulatory requirements.

2.2 Section 4(c)(4) is amended by adding the following sentence after the last sentence thereof:

After the District has acquired capacity and energy as needed to serve its Estimated Unmet District Load, the District shall not subsequently substitute therefore more costly capacity and energy, in order to provide the less costly capacity and energy to other wholesale or retail power customers of the District.

2.3 Section 7(h) is deleted in its entirety and replaced with the following:

In the event that the District believes that the Purchaser has violated any of the above covenants of Section 7(f) or (g), the District may by written notice to the Purchaser describe the alleged violation in reasonable detail and give the Purchaser no less than 4 business days after receipt of such written notice by Purchaser within which to cease the activity in question or to provide to the District a written explanation as to why the Purchaser believes the activity does not constitute a violation of any of the aforementioned covenants. If the Purchaser does not cure the alleged default and the District continues to reasonably consider the action to be in breach of the covenants, the District shall have the right to terminate this contract, effective immediately upon written notice to the Purchaser, without any liability or further obligation on the part of the District. In the event of such termination, the District shall have the right to use or sell, in any manner the District determines, the Purchaser Revenue Allocation the Purchaser would have been otherwise entitled to under this contract.

2.4 The Reasonable Portion Contract is amended by adding a new Exhibit C, Purchasers Product Percentage Allocations, which is attached hereto.

In Witness Whereof, Purchaser and the District have caused this Amendment No. 1 to be executed in their respective names by their duly authorized officers.

Purchaser
PUGET SOUND ENERGY, INC. PUBLIC UTILITY DISTRICT NO. 2 OF
GRANT COUNTY, WASHINGTON

By: By:

         William A. Gaines          Mike Conley

Title: Vice President, Energy Supply Title: President, Board of Commissioners

Date Signed:    4/03/2002 Date Signed:    4/15/2002

By:

         Thomas W. Flint

         Secretary, Board of Commissioners

Date Signed:   4/15/2002

EXHIBIT A, AMENDMENT 1

Purchasers Product Percentage Allocations

Requested Number of Section 3c/e Section 3c/d Step 2 Allocation¹ Adjustment for 2005-2009

Historical Shares Purchaser Customers Step 1 Reasonable Added Displace Reasonable Added

Purchasers Name 1956 1959 Product % 2000 Allocation Surplus Displace Portion Products⁷ Surplus^{2 3} Portion ⁴ Products⁷

A. 1956/1959 Purchasers

  PacifiCorp 13.9% 18.7% 32.6% 778,446 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Portland General 13.9% 18.7% 32.6% 726,039 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Puget Sound Energy 8.0% 10.8% 18.8% 915,851 14.43% 14.43% 14.43% 14.80% 12.28% 15.51% 13.36% 12.60%

  Avista Utilities 6.1% 8.2% 25.0% 309,986 10.98% 10.98% 10.98% 11.26% 9.37% 11.79% 10.17% 9.61%

  Cowlitz PUD 2.0% 2.7% 4.7% 44,361 3.61% 3.61% 3.61% 3.70% 3.07% 3.88% 3.34% 3.15%

  Eugene Water & Elec 1.7% 2.3% 4.0% 80,097 3.07% 3.07% 3.07% 3.15% 2.61% 3.30% 2.84% 2.68%

  City of Forest Grove 0.5% 0.7% (5)% 8,592 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of McMinnville 0.5% 0.7% (5) 13,973 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of Milton-Freewater 0.5% 0.7% (5) 4,581 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

B. 1956 Only Purchasers²

  Seattle City Light 8.0% n/a (5) 349,557 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Tacoma Power 8.0% n/a 16.0% 147,819 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Kittitas PUD 0.4% n/a 3,078 0.31% 0.31% 0.31% 0.31% 0.61% 0.61% 0.61% 0.63%

      Total A+B 3,392,380 97.51% 97.51% 97.51% 97.51% 100.00% 97.51%% 116.40% 103.81% 100.00%

C. No. Idaho Purchasers

  Clearwater n/a n/a 10.43% 9,314 0.27% 0.27% 0.27% n/a 0.27% 0.27% 0.27% n/a

  Idaho Co. Light & Power n/a n/a 2.41% 3,007 0.09% 0.09% 0.09% n/a 0.09% 0.09% 0.09% n/a

  Kootenai n/a n/a 16.28% 16,244 0.47% 0.47% 0.47% n/a 0.47% 0.47% 0.47% n/a

  Northern Lights n/a n/a 12.30% 14,541 0.42% 0.42% 0.42% n/a 0.42% 0.42% 0.42% n/a

D. Snake River Purchasers

  Fall River Rural Elec. n/a n/a (6) 10,992 0.32% 0.32% 0.32% n/a 0.32% 0.32% 0.32% n/a

  Lost River Electric n/a n/a (6) 2,327 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  Lower Valley Electric n/a n/a (6) 19,182 0.55% 0.55% 0.55% n/a 0.55% 0.55% 0.55% n/a

  Raft River Rural Elec. n/a n/a (6) 2,927 0.08% 0.08% 0.08% n/a 0.08% 0.08% 0.08% n/a

  Salmon River Electric n/a n/a (6) 2,570 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  United Electric n/a n/a (6) 5,515 0.16% 0.16% 0.16% n/a 0.16% 0.16% 0.16% n/a

     Associated Total 1.24% 43,513 1.25% 1.25% 1.25% n/a 1.25% 1.25% 1.25% n/a

      Total C+D 86,619 2.49% 2.49% 2.49% 2.49% n/a 2.49% 2.49% 2.49% n/a

Total 63.5% 63.5% 100.00% 100.00% 100.00% 100.00% 100.00 100.00% 118.89% 106.30% 100.00%

NOTES: ⁽¹⁾ Allocated per average of 1956 and 1956 Shares or, for Idaho Purchasers, per number of customers.

⁽²⁾ Allocated per 1956 Shares Surplus Product and, for Idaho Purchasers, per number of customers.

⁽³⁾ Allocated per 25% of 1956 Shares and 75% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁴⁾ Allocated per 75% of 1956 Shares and 25% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁵⁾ Have Intent to Sign Contract Letter without Requested Purchaser Product Percent.

⁽⁶⁾ Snake River Purchaser's Contract with the Association.

⁽⁷⁾ Allocated only to the 1956/1959 and Only 1956 Purchasers per 1956 Shares for 2005-2009, then average of 1956 and 1959 Shares post-2009.

EX-10

Exhibit 10.3

ADDITIONAL PRODUCTS SALES AGREEMENT

INDEX TO SECTIONS

Section 1. Term of Contract
Section 2. Definitions
Section 3. Purchaser's Products
Section 4. Treatment of the Reasonable Portion
Section 5. Determination of Product Availability and Product Costs
Section 6. Scheduling of Products; Points of Delivery and Risk of Loss
Section 7. Payment for Products
Section 8. Liability of Parties
Section 9. Notices and Computation of Time
Section 10. Governing Law
Section 11. Assignment of Agreement
Section 12. Remedies
Section 13. Venue and Attorney Fees
Section 14. Compliance With Law
Section 15. Headings
Section 16. Entire Agreement; Modification
Section 17. No Partnership or Third Party Rights
Section 18. Representations and Warranties
Section 19. Conflicts
Section 20. Counterparts


Exhibits
Exhibit 1 - Non-Firm Generation Product

ADDITIONAL PRODUCTS SALES AGREEMENT


Executed by
PUBLIC UTILITY DISTRICT NO. 2
OF GRANT COUNTY
And
PUGET SOUND ENERGY, INC.

This Additional Products Sales Agreement ("Agreement") is entered into as of December 13, 2001 between Public Utility District No. 2 of Grant County, Washington (the "District"), a municipal corporation of the State of Washington, and Puget Sound Energy, Inc. (the "Purchaser"), a corporation organized and existing under the laws of the State of Washington. The District and the Purchaser are referred to as a "Party" and collectively as "Parties."

SECTION 1. TERM OF AGREEMENT.

Except as otherwise provided herein, this Agreement shall be in full force and effect from and after it has been executed by the District and the Purchaser. Unless sooner terminated pursuant to other provisions, this Agreement shall remain in effect until the earlier of expiration or termination of the New FERC License or such time that the District no longer has authority to market Priest Rapids Project Products. Except as otherwise provided herein, all obligations accruing under this Agreement are preserved until satisfied.

SECTION 2. DEFINITIONS.

As used in this Agreement, the following terms when initial capitalization herein shall have the meaning ascribed to them in the Priest Rapids Project Product Sales Contract, or as set forth below:

"Agreement(s)" mean this Agreement and similar agreements between the District and other Purchasers.

"Heavy Load Hours" shall mean those hours, as defined by then current industry standards, that constitute the higher value, or higher demand hours in the week. Currently, these hours are defined as hour ending 0600 through hour ending 2200, Monday through Saturday excluding holidays defined by the National Electric Reliability Council.

"Interest Rate" shall mean the Prime Rate for Large Banks as reported in the Wall Street Journal, as reported on the first day of the month in which payment was received by the District.

"Light Load Hours" shall mean those hours, as defined by then current industry standards, that constitute the lower value, or lower demand hours in the week. Currently, these hours are defined as all hours that are not Heavy Load Hours.

"Products" means those products that the District agrees to sell to the Purchaser, and the Purchaser agrees to purchase as more particularly described in Sections 3 and 5 hereof.

"Purchasers" shall mean the Purchaser and each person or entity that has entered into an agreement with the District substantially similar to this Agreement.

SECTION 3. PURCHASER'S PRODUCTS.

Subject to the terms and conditions of this Agreement, Purchaser hereby agrees to purchase and the District hereby agrees to make available and sell to the Purchaser the Product set below.

Non-Firm Generation Product

SECTION 4. TREATMENT OF THE SALE OF THE REASONABLE PORTION.

Pursuant to the PL 83-544 Orders, the Reasonable Portion must be offered for sale. Purchaser has no claim or right under this Agreement to receive any of the Reasonable Portion, or any proceeds from the sale thereof; provided, however, that nothing in this Agreement shall be interpreted as prohibiting the District and the Purchaser from entering one or more separate agreements regarding the Reasonable Portion and the disposition of the proceeds of the sale of the Reasonable Portion.

SECTION 5. DETERMINATION OF PRODUCT AVAILABILITY AND PRODUCT COSTS.

(a) The amount of each Product that the District will make available to Purchaser during each Contract Year, and the cost of each Product that will be charged to the Purchaser, will be determined by the terms of the exhibit listed below:

Non-firm Generation Product - Exhibit 1.

(b) Purchaser agrees to pay to the District, in accordance with Section 7, the costs of the Product listed in Section 5(a).

(c) Deliveries of Product pursuant to this Agreement will be terminated if the District does not obtain an Annual FERC License or New FERC License, and may be reduced under any of the following conditions as determined by the District:

(1) Pursuant to Section 5.

(2) If the District is unable to deliver the Product to the Purchaser due to Uncontrollable Forces.

(3) If failure to reduce deliveries, together with deliveries to all other Purchasers and deliveries to the District, would result in exceeding Priest Rapids Project Output or subject it or its operation to undue hazard or violate the FERC License, any applicable law, regulation, or Operating Agreement.

(4) In case of emergencies or in order to install equipment in, make repairs to, make betterments, renewals, replacements, and additions to ("Improvements"), investigations and inspection of, or perform other maintenance work on the Priest Rapids Project.

The District will use its reasonable efforts to give advance notice to the Purchaser regarding any planned interruption or reduction, giving the reason therefor and stating the probable duration thereof.

SECTION 6. SCHEDULING OF PRODUCT DELIVERIES; METERING, TRANSMISSION LOSSES, POINTS OF DELIVERY AND RISK OF LOSS.

(a) The scheduling of deliveries of the Product provided hereunder shall be governed by the provisions of Exhibit 1.

(b) The treatment of metering, transmission losses end Points of Delivery of the Product provided hereunder shall be governed by the provisions of Exhibit 1.

(c) Unless otherwise provided in Exhibit 1, title to and risk of loss for the Product provided hereunder shall reside with the District until such Product reaches the Point of Delivery, at which time risk of 1oss and title to such Product shall reside with the Purchaser.

SECTION 7. PAYMENT FOR PRODUCT.

(a) The District shall provide to Purchaser for each Product provided hereunder as specified in Exhibit 1, either a pro forma annual statement of estimated Product costs, or a monthly invoice for the costs of the Product made available to the Purchaser in the preceding month.

(b) The monthly payments set forth in the pro forma annual statement of estimated Product costs shall be due and payable by Purchaser by electronic funds transfer to the District's account, designated in writing by the District, on the 20th calendar day of each month. The payment of monthly invoices by Purchaser shall be due and payable by electronic funds transfer to the District's account, designated in writing by the District, on the 20th calendar day after the date of issuance of the monthly invoice.

(c) If payment in full of any monthly payment amount set forth on a pro forma annual statement or a monthly invoice is not received by the District on or before the due date as set forth in Subsection 7(b), a delayed payment charge of 2% of the unpaid amount due will be made. Any bill which remains unpaid for more than 30 days after the due date shall, in addition to the delayed payment charge, accrue interest at the lesser of 1.5% per month or the maximum rate allowed by law. If the due date as set forth in Subsection 7(b) is a Saturday, Sunday or a District recognized holiday, the next following business day shall be the last day on which payment may be received without the addition of the delayed payment charge. Additionally, if payment due to the District under this Section 7 remains unpaid 30 days after the due date, the District may thereafter suspend delivery of Product to the Purchaser which would otherwise occur until payment in full of all amounts due and owing (including any interest and delay charges) is received by the District.

(d) For Products that are billed on a pro forma annual statement of estimated Product costs, on or before 180 days after the end of each Contract Year, the District will either credit against estimated Product costs due from Purchaser in the then current Contract Year, or bill to Purchaser, the true-up amount, if any, as determined pursuant to the provisions of Exhibit 1; provided, that if a refund of costs are due to Purchaser following the expiration of this Agreement, the District shall make a cash refund of such amount to the Purchaser.

(e) In the event that the Purchaser in good faith disputes a monthly invoice, Purchaser shall pay the amount of the monthly invoice in full and designate in writing to the District on or before the due date the portion of the monthly invoice that is subject to the dispute. The Parties shall in good faith attempt to resolve such dispute. If upon the final resolution of such dispute, whether by agreement of the Parties or otherwise, payment of all or any portion of the disputed amount is due to the Purchaser, such payment amount shall include interest on the amount to be paid to the Purchaser, calculated from the date of payment by Purchaser to the date of payment to Purchaser, using the Interest Rate.

(f) If a payment due from Purchaser to the District pursuant to this Section 7 is due and unpaid for a period of sixty (60) days or more, the District may terminate this Agreement by providing to the Purchaser written notice of such termination not less than ten (10) days prior to the date of termination.

SECTION 8. LIABILITY OF PARTIES.

(a) Except as otherwise provided in this Agreement, each Party hereby releases the other Party and its commissioners, officers, directors, agents and employees from any claim for loss or damage arising out of the ownership, operation, and maintenance of the Priest Rapid Project including my loss of profits or revenues, loss of use of power system, cost of capital, cost of purchased or replacement power, other substantially similar liability or other direct or indirect consequential loss or damage, except as provided in the Agreement Limiting Liability Among Western Interconnected Systems for parties to that agreement. This release shall not include any claim by the Purchaser for refunds for over-payments made to the District nor any claim for specific performance of the District's obligation to deliver to the Purchaser during the term of this Agreement the Products to which the Purchaser is entitled under this Agreement.

(b) The Purchaser shall have no claim of any type or right of action against the District: (i) as a result of a FERC or court order or amendment; (ii) as a result of the failure to receive an Annual FERC License or a New FERC license or the adjustment of delivery of Priest Rapids Products pursuant to Section 5(c) whether arising under the terms of this Agreement or otherwise; and the Purchaser hereby releases the District and its commissioners, officers, agents and employees from any claim for loss or damage arising out of the events described in this paragraph.

SECTION 9. NOTICES AND COMPUTATION OF TIME.

Any notice or demand, except those provided for in Section 7, under this Agreement shall be deemed properly given if such notice is given pursuant to Section 18 of the Purchaser's Product Sales Contract. In computing any period of time from such notice, such period shall commence at 12:00 A.M. (midnight) on the date mailed. The designations of the name and address to which any such notice or demand is directed may be changed at any time by either Party giving notice as above provided.

SECTION 10. GOVERNING LAW.

The Parties agree that the laws of the State of Washington shall govern this Agreement.

SECTION 11. ASSIGNMENT OF AGREEMENT.

Neither the Purchaser nor the District shall by contract, operation of law or otherwise, assign this Agreement or any right of interest in this Agreement without the prior written consent of the other Party, which shall not be unreasonably withheld; provided, however, a Party may, without the consent of the other Party (and without relieving itself from liability hereunder) (i) transfer or assign this Agreement to an affiliate of the Party provided that the affiliate's creditworthiness is equal or higher than that of the Party or (ii) transfer or assign this Agreement to any person or entity succeeding to all or substantially all of the distribution and generating facilities of the Party whose creditworthiness is equal or higher than that of the Party; provided, however, that in each such case, any such assignee shall agree in writing to be bound by the terms and conditions in this Agreement and the transferring Party shall deliver such tax and enforceability assurance as the other Party may reasonably request.

SECTION 12. REMEDIES.

(a) A Party may take whatever action at law or in equity as may appear necessary or desirable to collect the amounts payable by the defaulting Party under this Agreement then due and thereafter to become due, or to enforce performance and observation of any obligation, agreement or covenant of the defaulting Party under this Agreement.

(b) No right or remedy conferred upon or reserved to a Party is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing, upon the occurrence of any default. Failure of the Party to insist at any time on the strict observance or performance by the other Party of any of the provisions of this Agreement, or to exercise any right or remedy provided for in this Agreement shall not impair any such right or remedy nor be construed as a waiver or relinquishment thereof for the future. Receipt by the District of any payment required to be made hereunder with knowledge of the breach of any provisions of this Agreement shall not be deemed a waiver of such breach.

SECTION 13. VENUE AND ATTORNEY FEES.

Venue of any action filed to enforce or interpret the provisions of this Agreement shall be exclusively in the United States District Court for the Eastern District of Washington or the Superior Court of the State of Washington for Grant County and the Parties irrevocably submit to the jurisdiction of any such court. In the event of litigation to enforce the provisions of this Agreement, the prevailing Party shall be entitled to reasonable attorney's fees in addition to any other relief allowed.

SECTION 14. COMPLIANCE WITH LAW.

(a) The Parties shall conform to and comply with all laws, rules, regulations, license conditions or restrictions promulgated by the FERC or any other governmental agency or entity having jurisdiction over the Priest Rapids Project. The Purchaser shall cooperate and take whatever action is necessary to cooperate fully with the District in meeting such requirements. Obligations of the District contained in this Agreement are hereby expressly made subordinate and subject to such compliance.

(b) The Purchaser shall ensure that Products available to Purchaser under this Agreement are not sold, resold, distributed for use or used outside the Pacific Northwest in violation of the Bonneville Project Act, Public Law 75-329, the Pacific Northwest Consumer Power Preference Act, Public Law 88-552, the Regional Act or in contravention of any applicable state or federal law, order, regulation, or policy. If such sales occur in violation of the foregoing, the Purchaser, shall reimburse the District for any penalties imposed on and costs incurred by the District as a consequence of such violation.

SECTION 15. HEADINGS.

The headings of sections and paragraphs of this Agreement are for convenience of reference only and are not intended to restrict, affect or be of any weight in the interpretation or construction of the provisions of such sections and paragraphs.

SECTION 16. ENTIRE AGREEMENT; MODIFICATION.

This Agreement constitutes the entire agreement between the Parties with respect to the subject matter of this Agreement, and supersedes all previous communications between the Parties, either verbal or written, with respect to such subject matter. No modifications of this Agreement shall be binding upon the Parties unless such modifications are in writing signed by each Party.

SECTION 17. NO PARTNERSHIP OR THIRD PARTY RIGHTS.

(a) This Agreement shall not be interpreted or construed to create an association, joint venture or partnership between the Parties, or to impose any partnership obligations or liability upon any Party.

(b) This Agreement shall not be construed to create rights in or grant remedies to any third party as a beneficiary of this Agreement.

SECTION 18. REPRESENTATIONS AND WARRANTIES.

Each Party represents and warrants to the other Party that:

(a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation.

(b) The execution, delivery and performance of this Agreement are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, or order applicable to it.

(c) This Agreement constitutes a legally valid and binding obligation enforceable against it in accordance with its terms, subject to equitable defenses and applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally.

SECTION 19. CONFLICTS.

In the event of a conflict between any provision of this Agreement and those contained in the Priest Rapids Project Product Sales Contract, the provisions of the Priest Rapids Project Product Sales Contract shall prevail.

SECTION 20. COUNTERPARTS.

This Agreement may be executed in counterparts, each of which shall be an original and all of which shall constitute the same Agreement.

PUBLIC UTILITY DISTRICT NO. 2
OF GRANT COUNTY, WASHINGTON

By:     /s/ Mike Conley

Mike Conley

(SEAL) President, Board of Commissioners

ATTEST:

By:     /s/ Thomas W. Flint

Thomas W. Flint

Secretary, Board of Commissioners

Date:     4/15/02

PUGET SOUND ENERGY, INC.

By:     William A. Gaines

William A. Gaines

(SEAL) Title: Vice President, Energy Supply

Exhibit

Exhibit 1

NON-FIRM GENERATION PRODUCT
(and exchange for Load Following Product)

Except as otherwise provided in this Exhibit 1 or in the Agreement, terms used herein with initial capitalization shall have the meanings set forth in Section 2 of the Priest Rapids Project Product Sales Contract.

1. Non-Firm Generation Product Description

The Non-Firm Generation Product is a portion of the non-firm energy available to the District from the Priest Rapids Project as and when such energy is available, as determined by the District.

2. Purchasers Share of Non-Firm Generation Product

The District will make available Purchaser's Share (defined below) of the Non-Firm Generation Product that the District determines is available each day during the term of this Agreement in accordance with this Exhibit 1. The Purchaser's Share shall be the Purchaser's percent participation in the 1956 Contract divided by 63.5% from November 1, 2005 through October 31, 2009 after which it shall be the average of the Purchaser's participation in the 1956 and 1959 Contracts divided by 63.5%.

As part of the pro forma statement provided to Purchaser pursuant to Section 5(b) of the Priest Rapids Project Product Sales Contract, the District shall provide to Purchaser an estimate for the next Contract Year of the amount of Priest Rapids Project Non-Firm Generation by month that the Priest Rapids Project is expected to produce based on information available at the time such estimate is prepared.

3. Availability or Non-Firm Generation Product

The Non-Firm Generation Product will be available commencing November 1, 2005.

The amount of Non-Firm Generation Product for each day is the Project Non-Firm Generation for such day multiplied by a percentage equal to 100% less the sum of all Purchaser Power Allocations from all of the Priest Rapids Project Product Sales Contracts, less the Reasonable Portion and less 36.5%. For purposes of such calculation, Project Non-Firm Generation is the actual energy generation (in mwhrs) of the Priest Rapids Project Output less the product of firm energy calculated pursuant to Section 5(b)(2) of the Priest Rapids Project Product Sales Contract, distributed on a shaped basis over each day, and a factor of 1.08 for Monday through Friday, and factor of 0.8 for Saturdays and Sundays. In the event that the calculation of Project Non-firm Generation is less than zero, the actual Non-firm Generation will be zero.

For example: If firm energy is 250 mw and actual generation is 300 mw, then Project Non-Firm Generation on Monday through Friday would be 300-(250*1.08)=30 mw. Project Non-Firm Generation on Saturday and Sunday would be 300-(250*0.8)=100 mw.

The District will estimate the Purchaser's Non-firm Generation Product on a daily preshedule basis according to available data ("Estimated Purchaser's Non-firm"). On Monday through Saturday, such schedule shall be delivered with the same amount of megawatt-hours delivered in Heavy Load Hours as in Light Load Hours. On Sundays, such schedule shall be delivered in equal hourly amounts over all 24 hours. On an after-the-fact basis, the District will compute the amount of Purchaser's Non-firm and will maintain a deviation account to track the difference in the daily Estimated Purchaser's Non-firm and the actual Purchaser's Non-firm. Positive and negative balances in the deviation account will be used to adjust the daily Estimated Purchaser's Non-firm that is delivered on a preschedule basis. Positive and negative balances will carry through from month to month.

Preschedule deliveries to Purchasers will be reduced or eliminated in realtime in the event of a contingency that reduces or eliminates the District's ability to generate the daily Estimated Purchaser's Non-firm at the Priest Rapids Project.

4. Pricing and Payment

For each Contract Year during the term of this Agreement, the Purchaser shall pay the District in twelve equal monthly installments the product of the estimated Annual Power Cost contained in the pro forma statement prepared pursuant to Section 7(a) of the Priest Rapids Project Product Sales Contract and the ratio of Purchaser Estimated Non-Firm to the average total generation of the Priest Rapids Project estimated pursuant to the Operating Agreements. The pro forma statement provided to purchaser pursuant to Section 7(a) of the Priest Rapids Project Product Sales Contract shall separately set forth the Purchaser's estimated monthly payment obligation for Non-Firm Generation Product for the next Contract Year.

The payments made by Purchaser for the Non-Firm Generation Product on an estimated basis will be trued up to actual values not later than 150 days after end of each Contract Year using actual Annual Power Costs prepared pursuant to Section 7(g) of the Priest Rapids Project Product Sales Contract, and actual metered amounts of Non-Firm Generation Product. Any amounts due to Purchaser will be credited against Purchaser's payment obligation in the then current Contract Year, and any amounts due from Purchaser to the District will be invoiced to Purchaser, all in accordance with such Section 7(g).

5. Exchange of Non-Firm Generation Product for Load Following Product

(a) Exchange Defined — The Load Following Product provides capacity and associated energy for short periods of time. The Purchaser then returns the same amount of energy within 168 hours.

Upon notice to the District by January 1, 2003, the Purchaser may make a one-time irrevocable exchange of their entire share of Non-Firm Generation Product for Load Following Product on the basis of 1.5 megawatts of Load Following Product for each megawatt of Non-Firm Generation Product. For the purpose of this calculation of this exchange the Project Non-firm Generation shall be calculated pursuant to Operating Agreements based on the average historical river flows.

The total amount exchanged by all Purchases shall not exceed the Monthly Maximum Load Following Product defined below which shall be allocated on a first come first served basis. The Purchaser's Share of Load Following Product will be the ratio of the number of megawatts of Non-firm Generation Product exchanged by an individual Purchaser to the total exchanged by all Purchasers.

(b) Availability - The Load Following Product will be available commencing November 1, 2005. Load Following Product will be available only after all other obligations of the Priest Rapids Project, including but not limited to, meeting and following the District's loads, meeting commercial arrangements entered into prior to this Agreement, requirements of Operating Agreements, meeting regulatory requirements, and after accounting for water conditions and the status of the Priest Rapids Project. Notwithstanding the table below the amount of Load Following Product will be reduced if the District is unable to meet these obligations or if it would otherwise be forced to the market to buy Load Following Product.

The monthly Maximum Load Following Product will be 50 megawatts from November 2005 through October 31, 2009 or 100 megawatts after October 31, 2009 and associated energy.

On or before the tenth day preceding each month the District will identify to the Purchaser the estimated Monthly Minimum Load Following Product (in megawatts) that the District expects to be available during the next month, but will not be less than the firm amounts shown below.

2005-2009

Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May	Jun.	Jul.	Aug.	Sep.	Oct.
0	50	50	50	50	0	25	25	50	50	50	0

2009 forward

Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May	Jun.	Jul.	Aug.	Sep.	Oct.
100	100	100	100	100	50	100	100	100	100	100	100

Each day, the District shall provide the Purchaser with the Daily Load Following Product (in megawatts) that the District determines will be available for the subsequent preschedule day or days. The actual Daily Load Following Product shall be between the Monthly Minimum Load following Product and the Monthly Maximum Load Following product.

The Purchaser's Load Following Product shall be the lesser of the amount of Load Following Product exchanged pursuant to Section 5a of this Exhibit 1 or the Daily Load Following Product times the Purchaser's Share.

(c) Return of Energy - Energy associated with the Load Following Product used by Purchaser shall be returned to the District in like quantities (hour for hour) on like days 168 hours after the delivery by the District to the Purchaser. Energy returned to the District shall be delivered at the District's Point of Delivery as specified in Section 7 of this Exhibit 1.

If, in real-time, the District determines that Purchaser's schedule of return energy to the District is in excess of the estimated Purchaser's Load Following Product in future hours, and that such excess will cause spill, then District may, at its option, require the Purchaser to reduce its schedule. Purchaser shall reduce its schedule by such excess amount. Purchaser shall schedule the remaining energy to the District at the earliest time possible for both District and Purchaser.

District shall meter the actual Load Following Product used to meet Purchasers load signal in each hour.

(d) Charge for Spill - The District will charge the Purchaser for any spill allocated to the District if it is determined by the District that such spill was directly attributable to the actions of the Purchaser under this Agreement. Such charge will equal the product of such spill (in megawatt-hours) and the Market Energy Rate for the daily diurnal period in which such spill occurred.

Market Energy Rate shall mean the rate (in $/mwhr) at which firm energy is available on the wholesale power market, for quantities comparable to the spill caused by the actions of Purchaser, during the diurnal period that the spill occurred, as determined by the District.

(e) Excess Load Following Product and Energy Not Returned - In the event that Purchaser takes in any hour Load Following Product in excess of its Purchaser's Share, Purchaser shall be subject to a charge equal to 150% of the Mid-C Market Capacity Rate for the daily diurnal period in which the Load Following Product was taken times the amount of Load Following Product (in megawatts) taken in excess of Purchaser's Share.

Market Capacity Rate shall mean the rate (in $/mw-mo.) as quoted by the Bonneville Power Administration, for quantities comparable to the Load Following Product made available to Purchasers, during the diurnal period that Purchaser took Load Following Product in excess of its Purchaser's Share.

In the event that Purchaser does not return energy associated with Load Following Product delivered by Purchaser, then Purchaser shall be considered in Default pursuant to Section 22 of the Priest Rapids Project Product Sales Contract.

6. Billing

Purchaser shall pay the amounts set forth in the pro forma statement provided to Purchaser pursuant to section 7(a) of the Priest Rapids Project Product Sales Contract.

Not later than ten (10) days after the end of each month during the term, the District will prepare and provide to the Purchaser an invoice setting forth the payment due from Purchaser to the District for the Load Following Product made available for the preceding month.

7. Points of Delivery

The District shall make available to the Purchaser the Non-Firm Generation Product at the Points of Delivery specified in Section 11 of the Priest Rapids Project Product Sales Contract.

The District shall make available to the Purchaser the Load Following Product and associated energy, and Purchaser shall return energy to the District, at the Points of Delivery specified in Section 11 of the Priest Rapids Project Product Sales Contract.

8. Metering, Transmission and Losses

Metering, transmission and losses will be in accordance with Section 12 of the Priest Rapids Project Product Sales Contract.

9. Information and Communications

Purchaser shall be responsible for the costs of installing and maintaining any communications equipment necessary to effectuate the delivery of the Non-Firm Generation Product or Load Following Product between the District and the Purchaser.

10. Scheduling and Accounting

Scheduling and accounting shall be performed according to the current industry standards.

AMENDMENT NO. 1 TO THE
ADDITIONAL PRODUCTS SALES AGREEMENT

The Public Utility District No. 2 of Grant County, Washington, ("District"), and Puget Sound Energy, Inc.(“Purchaser"), hereby agree to this Amendment No.1 to the Additional Products Sales Agreement dated December 13, 2001 (the "Product Agreement"). Unless otherwise defined herein, all capitalized terms defined in the Product Agreement shall have the meanings set forth therein when used in this Amendment.

1. Term of Amendment No. 1

This Amendment No. 1 shall take effect on upon the execution by the District and Purchaser, and shall expire on the earlier of the expiration or termination date of the Product Agreement.

2. Amendments to Provisions of the Product Agreement

Purchaser and the District agree that the Product Agreement is hereby amended as follows:

2.1 The first paragraph of Section 2 of Exhibit 1 is amended by adding after the last sentence thereof the following:

The amount of Non-Firm Generation Product available to Purchaser shall equal the product of Purchaser's Share and the Non-Firm Generation Product.

2.2 The second paragraph of Section 3 of Exhibit 1 is deleted in its entirety and is replaced with the following:

The amount of Non-Firm Generation Product for each day is the Project Non-Firm Generation for such day multiplied by a percentage equal to 100% less the sum of all Purchaser Power Allocations from all of the Priest Rapids Project Product Sales Contracts, less the Reasonable Portion and less 36.5%. For purposes of such calculation, Project Non-Firm Generation shall be the actual energy generation (in mwhrs) of the Priest Rapids Project Output less the firm energy calculated pursuant to Section 5(b)(2) of the Priest Rapids Project Product Sales Contract, times the shaping factors described below. For example, based on current operating requirements of the Priest Rapids Project, the Project Firm Generation is distributed on a shaped basis over the week, using a factor of 1.08 for Monday through Friday, and a factor of 0.8 for Saturdays and Sundays. These factors will be changed by the District to reflect changes in operating constraints applicable to the Priest Rapids Project. In the event that the calculation of Project Non-firm Generation is less than zero, there will be no obligation on the part of the Purchaser to schedule Non- Firm Generation Product back to the District, but such negative amount will be included in the deviation account.

2.3 The third paragraph of Section 3 of Exhibit 1 is deleted in its entirety and is replaced with the following:

For example: Assume that flows during the week are 324 MW and that flows during the weekend are 240 MW. If firm energy (critical generation) is 250 MW then Project Non-Firm Generation on Monday through Friday would be 324-(250* 1.08)=54 MW times 24 hours = 1,296 MWh for each weekday. The amount of power scheduled during the weekend would be 240-(250*0.8)=40 MW times 24 hours = 960 MWh for each weekend day.

2.4 The fourth and fifth sentences of the fourth paragraph of Section 3 of Exhibit 1 are revised as follows:

Whenever they appear in such sentences, the phrase "Estimated Purchaser's Non-Firm" is revised to read "Estimated Purchaser's Non-Firm Generation Product", and the phrase "Purchaser's Non-Firm" is revised to read "Purchaser's Non-Firm Generation Product".

2.5 The second paragraph of Section 5(a) of Exhibit 1 is deleted in its entirety and is replaced with the following:

Upon notice to the District by January 1, 2003, the Purchaser may make a one-time irrevocable exchange of their entire share of Non-Firm Generation Product for Load Following Product on the basis of 1.5 megawatts of Load Following Product for each average annual megawatt of Non-Firm Generation Product. For the purpose of the calculation of this exchange, the Project Non-firm Generation shall be calculated pursuant to Operating Agreements based on the average historical river flows.

For purposes of determining Purchaser's entitlement to Load Following Product, the exchange ratio set forth above shall be applied to the amount of Non-Firm Generation Product initially available to Purchaser hereunder, but such ratio shall be applied in subsequent years to any increased amount of Non-Firm Generation Product to which the Purchaser would have been entitled absent its election hereunder.

2.6 Section 5 of Exhibit 1 is amended by adding a new subsection 5(f) as follows:

If the one-time exchange has been made as provided in this section 5, Purchaser's compensation to the District for the Load Following Product shall be limited to the return of energy and the charges set forth in Sections 5(c), (d) and (e). Purchaser shall not be required to pay to the District as compensation for the Load Following Product any portion of the Annual Power Costs of the Priest Rapids Project pursuant to section 4 of this Exhibit 1.

2.7 The Product Agreement is amended by adding a new Exhibit 2, Purchasers Product Percentage Allocations, which is attached hereto.

In Witness Whereof, Purchaser and the District have caused this Amendment No.1 to be executed in their respective names by their duly authorized officers.

Purchaser
PUGET SOUND ENERGY, INC. PUBLIC UTILITY DISTRICT NO. 2 OF
GRANT COUNTY, WASHINGTON

By:     /s/ William A. Gaines By:     /s/ Mike Conley

         William A. Gaines          Mike Conley

Title: Vice President, Energy Supply Title: President, Board of Commissioners

Date Signed:    4/03/2002 Date Signed:    4/15/2002

By:     /s/ Thomas W. Flint

         Thomas W. Flint

         Secretary, Board of Commissioners

Date Signed:   4/15/2002

EXHIBIT A, AMENDMENT 1

Purchasers Product Percentage Allocations

Requested Number of Section 3c/e Section 3c/d Step 2 Allocation¹ Adjustment for 2005-2009

Historical Shares Purchaser Customers Step 1 Reasonable Added Displace Reasonable Added

Purchasers Name 1956 1959 Product % 2000 Allocation Surplus Displace Portion Products⁷ Surplus^{2 3} Portion ⁴ Products⁷

A. 1956/1959 Purchasers

  PacifiCorp 13.9% 18.7% 32.6% 778,446 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Portland General 13.9% 18.7% 32.6% 726,039 25.03% 25.03% 25.03% 25.67% 21.34% 26.87% 23.19% 21.89%

  Puget Sound Energy 8.0% 10.8% 18.8% 915,851 14.43% 14.43% 14.43% 14.80% 12.28% 15.51% 13.36% 12.60%

  Avista Utilities 6.1% 8.2% 25.0% 309,986 10.98% 10.98% 10.98% 11.26% 9.37% 11.79% 10.17% 9.61%

  Cowlitz PUD 2.0% 2.7% 4.7% 44,361 3.61% 3.61% 3.61% 3.70% 3.07% 3.88% 3.34% 3.15%

  Eugene Water & Elec 1.7% 2.3% 4.0% 80,097 3.07% 3.07% 3.07% 3.15% 2.61% 3.30% 2.84% 2.68%

  City of Forest Grove 0.5% 0.7% (5)% 8,592 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of McMinnville 0.5% 0.7% (5) 13,973 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

  City of Milton-Freewater 0.5% 0.7% (5) 4,581 0.92% 0.92% 0.92% 0.94% 0.77% 1.00% 0.84% 0.79%

B. 1956 Only Purchasers²

  Seattle City Light 8.0% n/a (5) 349,557 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Tacoma Power 8.0% n/a 16.0% 147,819 6.14% 6.14% 6.14% 6.30% 12.28% 12.28% 12.28% 12.60%

  Kittitas PUD 0.4% n/a 3,078 0.31% 0.31% 0.31% 0.31% 0.61% 0.61% 0.61% 0.63%

      Total A+B 3,392,380 97.51% 97.51% 97.51% 97.51% 100.00% 97.51%% 116.40% 103.81% 100.00%

C. No. Idaho Purchasers

  Clearwater n/a n/a 10.43% 9,314 0.27% 0.27% 0.27% n/a 0.27% 0.27% 0.27% n/a

  Idaho Co. Light & Power n/a n/a 2.41% 3,007 0.09% 0.09% 0.09% n/a 0.09% 0.09% 0.09% n/a

  Kootenai n/a n/a 16.28% 16,244 0.47% 0.47% 0.47% n/a 0.47% 0.47% 0.47% n/a

  Northern Lights n/a n/a 12.30% 14,541 0.42% 0.42% 0.42% n/a 0.42% 0.42% 0.42% n/a

D. Snake River Purchasers

  Fall River Rural Elec. n/a n/a (6) 10,992 0.32% 0.32% 0.32% n/a 0.32% 0.32% 0.32% n/a

  Lost River Electric n/a n/a (6) 2,327 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  Lower Valley Electric n/a n/a (6) 19,182 0.55% 0.55% 0.55% n/a 0.55% 0.55% 0.55% n/a

  Raft River Rural Elec. n/a n/a (6) 2,927 0.08% 0.08% 0.08% n/a 0.08% 0.08% 0.08% n/a

  Salmon River Electric n/a n/a (6) 2,570 0.07% 0.07% 0.07% n/a 0.07% 0.07% 0.07% n/a

  United Electric n/a n/a (6) 5,515 0.16% 0.16% 0.16% n/a 0.16% 0.16% 0.16% n/a

     Associated Total 1.24% 43,513 1.25% 1.25% 1.25% n/a 1.25% 1.25% 1.25% n/a

      Total C+D 86,619 2.49% 2.49% 2.49% 2.49% n/a 2.49% 2.49% 2.49% n/a

Total 63.5% 63.5% 100.00% 100.00% 100.00% 100.00% 100.00 100.00% 118.89% 106.30% 100.00%

NOTES: ⁽¹⁾ Allocated per average of 1956 and 1956 Shares or, for Idaho Purchasers, per number of customers.

⁽²⁾ Allocated per 1956 Shares Surplus Product and, for Idaho Purchasers, per number of customers.

⁽³⁾ Allocated per 25% of 1956 Shares and 75% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁴⁾ Allocated per 75% of 1956 Shares and 25% of 1959 Shares for 1956/1959 Purchasers, per 1956 Shares for the Only 1956 Purchaser, and number of customers for No. Idaho and Snake River Purchasers.

⁽⁵⁾ Have Intent to Sign Contract Letter without Requested Purchaser Product Percent.

⁽⁶⁾ Snake River Purchaser's Contract with the Association.

⁽⁷⁾ Allocated only to the 1956/1959 and Only 1956 Purchasers per 1956 Shares for 2005-2009, then average of 1956 and 1959 Shares post-2009.

EX-10

Exhibit 10.4

CHANGE OF CONTROL AGREEMENT

       AGREEMENT by and between Puget Sound Energy, Inc., a Washington corporation (the "Company"), and GARY B. SWOFFORD (the "Executive"), dated as of the 12th day of March, 1999.

       The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to ensure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes that it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied, which are competitive with those of other corporations and which align the Executive's interests with those of the Company's shareholders. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

   NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1. Certain Definitions

1. "Accrued Obligations" is defined in Section 6(a)(i).
   
   
2. "Affiliated company" means any company controlled by, controlling or under common control with the Company.
   
   
3. "Annual Base Salary" means an annual base salary at least equal to 12 times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect to the 12-month period immediately preceding the month in which the Effective Date occurs.
   
   
4. "Annual Bonus" is defined in Section 4(b)(ii).
   
   
5. "Business Combination" means (i) a reorganization, exchange of securities, merger or consolidation of the Company or (ii) the sale or other disposition of all or substantially all the assets of the Company.
   
   
6. "Change of Control" is defined in Section 2.
   
   
7. The "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the first anniversary of the date hereof and on each successive anniversary (each a “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company gives notice to the Executive that the Change of Control Period shall not be so extended.
   
   
8. "Code" means the Internal Revenue Code of 1986, as amended.
   
   
9. "Date of Termination" is defined in Section 5(f).
   
   
10. "Disability" is defined in Section 5(a).
    
    
11. "Disability Effective Date" is defined in Section 5(a).
    
    
12. "Effective Date" means the first date during the Change of Control Period on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment
    
    
13. "Employment Period" is defined in Section 3.
    
    
14. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
    
    
15. "Good Reason" is defined in Section 5(d).
    
    
16. "Incentive Plan" means the Company's 1995 Long-Term Incentive Compensation Plan or any successor plan.
    
    
17. "Incumbent Director" means a member of the Board who has been either (i) nominated by a majority of the directors of the Company then in office or (ii) 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 promulgated 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.
    
    
18. "Notice of Termination" is defined in Section 5(e).
    
    
19. "Other Benefits" is defined in Section 6(a)(iv).
    
    
20. "Outstanding Company Common Stock" means the shares of Common Stock of the Company ("Common Stock") outstanding at the time of the determination.
    
    
21. "Outstanding Company Voting Securities" means the combined voting power of the outstanding voting securities of the Company entitled to vote generally in the election of directors at the time of the determination.
    
    
22. "Person" means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d) of the Exchange Act).
    
    
23. "Retirement Plan" means the Company's qualified pension plan or any successor plan thereto.
    
    
24. "SERP" means the Company's Supplemental Executive Retirement Plan or any other supplemental and/or excess retirement plan or agreement of the Company and its affiliated companies providing benefits for the Executive.
    
    
25. "Welfare Benefit Continuation" is defined in Section 6(a)(ii).

2. Change of Control

          For the purpose of this Agreement, a "Change of Control" means:

1. 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 either (A) the Outstanding Company Common Stock or (B) the Outstanding Company Voting Securities; 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) of this Section 2 are satisfied; or
   
   
2. 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 are occupied by individuals who were neither (i) nominated by a majority of the Incumbent Directors nor (ii) appointed by directors so nominated; or
   
   
3. 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 and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination in substantially the same proportion as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or the corporation resulting from or effecting such Business Combination and any Person beneficially owning, immediately prior to such Business Combination, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) 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 at the time of the execution of the initial agreement or action of the Board providing for such Business Combination.

3. Employment Period

          The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"), in the executive capacity of Vice President, Chief Operating Officer - Delivery, or a substantially comparable position of the Company, responsible for, among other things, the ongoing management and coordination of the operations of the delivery business unit including establishing company objectives, policies, long-range goals and operating plans for the unit, and, subject to the general supervision of the Board as required by the Washington Business Corporation Act, such other duties and responsibilities as are not inconsistent with the express terms of this Agreement. The Company agrees that it will not take any action, or make any demands on the Executive, that may be deemed to arbitrarily, unreasonably or unnecessarily interfere with the performance of the services to be rendered by the Executive hereunder.

4. Terms of Employment

1. Position and Duties.

(i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be in accordance with Section 3 and (B) the Executive's services shall be performed within the Seattle/Bellevue metropolitan area, except for required travel in the Company's business to the extent consistent with the Executive's duties in Section 3.

(ii) During the Employment Period, and excluding any periods of paid time off to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, or (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company.

2. Compensation.

(i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to 12 times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. For purposes of this Agreement, Annual Base Salary shall not include any payments by the Company on the Executive's behalf pursuant to any incentive, savings or retirement plans, any welfare benefit plans or any fringe benefit plans, in each case, of the Company or any affiliated company, of the type identified in paragraphs (iii) through (vii) of this Section 4(b), or any reimbursement of expenses by the Company or any affiliated company in accordance with paragraph (v) of this Section 4(b). During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase, and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased.

(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be eligible to receive, for each fiscal year ending during the Employment Period, a target annual bonus (the “Annual Bonus”) in cash at least equal to the greater of (A) the Executive’s target annual bonus in effect on the Effective Date and (B) the average (annualized for any fiscal year in which the Executive has been employed by the Company for less than 12 full months) target bonus for which the Executive was eligible in the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs. Each such Annual Bonus earned shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is earned unless the Executive shall elect to defer the receipt of such Annual Bonus.

(iii) Incentive, Savings and Retirement Plans.

(A) During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies (including, without limitation, the plans in effect on the date of this Agreement or any successor plans), but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, that are less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other executives of the Company and its affiliated companies.

(B) Upon the Effective Date the Executive shall become vested under the Company's Supplemental Executive Retirement Plan ("SERP") so that the Executive shall be entitled to receive a Retirement Benefit (as defined in the SERP) at age 62 or, at the election of the Executive, at any age between 55 and 62 a Retirement Benefit reduced one-third percent (1/3%) for each month that benefits commence prior to the beginning of the month coincident with or next following the date the Executive would attain age 62.

(iv) Equity Incentive Plans.

(A) Any outstanding stock options or stock appreciation rights issued to the Executive under the Company's existing plans or any successor plan shall become fully vested and exercisable on the Effective Date. All restrictions on shares of restricted stock issued to the Executive shall lapse.

(B) with respect to all performance awards granted to the Executive pursuant to the Incentive Plan or any successor plan that are outstanding immediately prior to the Effective Date, the Company shall issue to the Executive within 30 days after the Effective Date:

(i) if the Change of Control is not being accounted for as a pooling of interests, cash equal to the higher of (1) the average of the last sale prices of the Company's (or its successor'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 an 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 performance award and (y) such higher number of shares payable upon full vesting of each such award if the Company achieved for each four-year award cycle the percentile ranking against the comparable universe of EEI companies 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; or

(ii) if the Change of Control is being accounted for as a pooling of interests, an 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 performance award and (y) such higher number of shares payable upon full vesting of each such award if the Company achieved for each four-year award cycle the percentile ranking against the comparable universe of EEI companies 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

(iii) cash equal to the amount of the dividend equivalents associated with the number of shares determined under subparagraph (i) or (ii) above, in accordance with the Incentive Plan.

(v) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, dental, disability, salary continuance, life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

(vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(vii) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(viii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

5. Termination of Employment

1. Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 120 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be unreasonably withheld).
   
   
2. Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), for a period of 30 days after written notice of demand for substantial performance has been delivered to Employee by the Board of Directors which specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, or (ii) the willful engaging by Employee in gross misconduct materially and demonstrably injurious to the Company, as determined by the Board of Directors after notice to Employee and an opportunity for a hearing. No act, nor failure to act, on Employee's part shall be considered "willful" unless he has acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interests of the Company.
   
   
3. Without Cause. The Company may terminate the Executive's employment at any time during the Employment Period without Cause.
   
   
4. Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean

(i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibility as contemplated by Sections 3 and 4(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii) any failure by the Company to comply with any of the provisions of Section 4(b), other than an isolated, insubstantial and inadvertent failure not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(iii) the Company's requiring to be based at any location other than that described in Section 4(a)(i)(B);

(iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or

(v) any failure by the Company to comply with and satisfy Section 11(c), provided that such successor has received at least ten days' prior written notice from the Company or the Executive of the requirements of Section 11(c).

For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive.

1. Notice of Termination. Any termination by the Company for Cause or without Cause or by the Employee for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b). For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
   
   
2. Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company, whether for Cause or without Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, and (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

6. Obligations of the Company Upon Termination

1. Good Reason; Without Cause; Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment Without Cause or for Death or Disability or the Executive shall terminate employment for Good Reason:

(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

(A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination, (2) a pro rata portion of the Executive’s Annual Bonus for the year in which the Date of Termination occurs, based on the number of days of employment that year up to the Date of Termination divided by 365 days, ) and (3) any accrued paid time off pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and

(B) the amount equal to the sum of (x) Annual Base Salary and (y) the Annual Bonus for which the Executive was eligible for the year in which the Date of Termination occurs; and

(C) if Executive executes a release of in the form set forth in Exhibit I attached hereto, and said release of claims becomes effective by its terms, the additional amount equal to two times the sum of (x) Annual Base Salary and (y) the Annual Bonus for which the Executive was eligible for the year in which the Date of Termination occurs; and

(D) a separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Effective Date) of the benefit payable under the Retirement Plan and any SERP providing benefits for the Executive that the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and (ii) for the remainder of the Employment Period, assuming for this purpose that all accrued normal and early retirement benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP; and

(ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Sections 4(b)(v) and 4(b)(vii) if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation") and the Executive shall no longer be entitled to receive fringe benefits from the Company. For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; provided, however, that the Executive shall be entitled to the more favorable of the retiree benefits in effect on the Date of Termination or the retiree benefits in effect on the date that would have been the last date of the Employment Period if the Executive had remained employed; and

(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and

(iv) if the Executive is age 55 or older, in lieu of receiving monthly benefits under the SERP the Executive may elect, by giving at least 120 days written notice to the Company, to receive the Actuarial Equivalent (as defined in the SERP) lump sum value of the normal form of payment of SERP benefits based upon the retirement benefit payable under the SERP at Executive's age upon the Date of Termination, or to have such Actuarial Equivalent lump sum value transferred to the Company's Deferred Compensation Plan or any successor deferred compensation plan. If the Executive is younger than the minimum age for eligibility for payment of SERP benefits, the Executive may elect to receive the discounted present value, using a seven percent discount rate, of the Actuarial Equivalent lump sum value of the SERP benefits to which the Executive would be entitled at the minimum age.

2. Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations (which shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits.
   
   
3. Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations (which shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits.
   
   
4. Cause; Other Than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay the Executive's Annual Base Salary through the Date of Termination, plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period other than for Good Reason, this Agreement shall terminate without further obligations to the Executive other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

7. Nonexclusivity of Rights

Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any written plan provided by the Company or any of its affiliated companies for executives generally and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any written contract with the Company or any of its affiliated companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any such plan or contract with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or contract or agreement except as explicitly modified by this Agreement.

8. Full Settlement; Resolution of Disputes

1. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and, except as provided in Section 6(b), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly upon invoice, to the full extent permitted by law, all legal fees and expenses that the Executive may incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement).
   
   
2. If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was (A) in connection with or in anticipation of a Change of Control under clauses (i) or (ii) of Section 1(l), or (B) for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was not in connection with or in anticipation of a Change of Control or for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled.

9. Excise Taxes

Notwithstanding any other provisions of this Agreement, if any payments or distributions in the nature of compensation are made to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (including the vesting of stock options, the lapse of restrictions on restricted stock and any other events that result in a "payment in the nature of compensation" within the meaning of Section 280G of the Code) are characterized as Excess Parachute Payments within the meaning of Section 280G of the Code or any successor provision, then the Company shall pay to the Executive an additional amount equal to the excise taxes imposed by Section 4999 of the Code or any successor provision on the Executive's Excess Parachute Payments, plus an amount equal to the federal and (if applicable) state income and excise taxes, including without limitation FICA and Medicare taxes or other taxes which will be payable by Employee as a result of this additional payment.

10. Confidential Information

The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, that shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and that shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

11. Successors

1. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
   
   
2. This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns.
   
   
3. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise.

12. Miscellaneous

1. This Agreement shall be governed by and construed in accordance with the laws of the state of Washington, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
   
   
2. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Gary Swofford

Vice President, Chief Operating Officer - Delivery

Puget Sound Energy

P.O. Box 97034

Bellevue, WA 98009

If to the Company:

Puget Sound Energy, Inc.

P.O. Box 97034 OBC-15

Bellevue, WA 98009-9734

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

3. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
   
   
4. The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
   
   
5. The Executive's or the Company's failure to insist on strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including without limitation the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
   
   
6. The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement.
   
   
7. This Agreement may be executed in counterparts, each of which counterparts shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to authorization from the Board, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written.

PUGET SOUND ENERGY, INC.

By     /s/ William S. Weaver

                William S. Weaver

Its: President and Chief Executive Officer

GARY B. SWOFFORD

     /s/ Gary B. Swofford

EX-10

Exhibit 10.5

CHANGE OF CONTROL AGREEMENT

       AGREEMENT by and between Puget Sound Energy, Inc., a Washington corporation (the "Company"), and TIMOTHY J. HOGAN (the "Executive"), dated as of the 12th day of March, 1999.

       The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to ensure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes that it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied, which are competitive with those of other corporations and which align the Executive's interests with those of the Company's shareholders. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

   NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1. Certain Definitions

1. "Accrued Obligations" is defined in Section 6(a)(i).
   
   
2. "Affiliated company" means any company controlled by, controlling or under common control with the Company.
   
   
3. "Annual Base Salary" means an annual base salary at least equal to 12 times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect to the 12-month period immediately preceding the month in which the Effective Date occurs.
   
   
4. "Annual Bonus" is defined in Section 4(b)(ii).
   
   
5. "Business Combination" means (i) a reorganization, exchange of securities, merger or consolidation of the Company or (ii) the sale or other disposition of all or substantially all the assets of the Company.
   
   
6. "Change of Control" is defined in Section 2.
   
   
7. The "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the first anniversary of the date hereof and on each successive anniversary (each a “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company gives notice to the Executive that the Change of Control Period shall not be so extended.
   
   
8. "Code" means the Internal Revenue Code of 1986, as amended.
   
   
9. "Date of Termination" is defined in Section 5(f).
   
   
10. "Disability" is defined in Section 5(a).
    
    
11. "Disability Effective Date" is defined in Section 5(a).
    
    
12. "Effective Date" means the first date during the Change of Control Period on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment
    
    
13. "Employment Period" is defined in Section 3.
    
    
14. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
    
    
15. "Good Reason" is defined in Section 5(d).
    
    
16. "Incentive Plan" means the Company's 1995 Long-Term Incentive Compensation Plan or any successor plan.
    
    
17. "Incumbent Director" means a member of the Board who has been either (i) nominated by a majority of the directors of the Company then in office or (ii) 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 promulgated 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.
    
    
18. "Notice of Termination" is defined in Section 5(e).
    
    
19. "Other Benefits" is defined in Section 6(a)(iv).
    
    
20. "Outstanding Company Common Stock" means the shares of Common Stock of the Company ("Common Stock") outstanding at the time of the determination.
    
    
21. "Outstanding Company Voting Securities" means the combined voting power of the outstanding voting securities of the Company entitled to vote generally in the election of directors at the time of the determination.
    
    
22. "Person" means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d) of the Exchange Act).
    
    
23. "Retirement Plan" means the Company's qualified pension plan or any successor plan thereto.
    
    
24. "SERP" means the Company's Supplemental Executive Retirement Plan or any other supplemental and/or excess retirement plan or agreement of the Company and its affiliated companies providing benefits for the Executive.
    
    
25. "Welfare Benefit Continuation" is defined in Section 6(a)(ii).
    

2. Change of Control

          For the purpose of this Agreement, a "Change of Control" means:

1. 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 either (A) the Outstanding Company Common Stock or (B) the Outstanding Company Voting Securities; 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) of this Section 2 are satisfied; or
   
   
2. 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 are occupied by individuals who were neither (i) nominated by a majority of the Incumbent Directors nor (ii) appointed by directors so nominated; or
   
   
3. 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 and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination in substantially the same proportion as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or the corporation resulting from or effecting such Business Combination and any Person beneficially owning, immediately prior to such Business Combination, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) 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 at the time of the execution of the initial agreement or action of the Board providing for such Business Combination.
   

3. Employment Period

          The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"), in the executive capacity of Vice President System Operations, or a substantially comparable position of the Company, responsible for, among other things, the design and implementation of policies and programs that direct both the marketing, sale and expansion of the organizations energy services and energy utilization programs, and, subject to the general supervision of the Board as required by the Washington Business Corporations Act, such other duties and responsibilities as are not inconsistent with the express terms of this Agreement. The Company agrees that it will not take any action, or make any demands on the Executive, that may be deemed to arbitrarily, unreasonably or unnecessarily interfere with the performance of the services to be rendered by the Executive hereunder.

4. Terms of Employment

1. Position and Duties.

(i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be in accordance with Section 3 and (B) the Executive's services shall be performed within the Seattle/Bellevue metropolitan area, except for required travel in the Company's business to the extent consistent with the Executive's duties in Section 3.

(ii) During the Employment Period, and excluding any periods of paid time off to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, or (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company.

2. Compensation.

(i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to 12 times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. For purposes of this Agreement, Annual Base Salary shall not include any payments by the Company on the Executive's behalf pursuant to any incentive, savings or retirement plans, any welfare benefit plans or any fringe benefit plans, in each case, of the Company or any affiliated company, of the type identified in paragraphs (iii) through (vii) of this Section 4(b), or any reimbursement of expenses by the Company or any affiliated company in accordance with paragraph (v) of this Section 4(b). During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase, and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased.

(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be eligible to receive, for each fiscal year ending during the Employment Period, a target annual bonus (the “Annual Bonus”) in cash at least equal to the greater of (A) the Executive’s target annual bonus in effect on the Effective Date and (B) the average (annualized for any fiscal year in which the Executive has been employed by the Company for less than 12 full months) target bonus for which the Executive was eligible in the three fiscal years immediately preceding the fiscal year in which the Effective Date occurs. Each such Annual Bonus earned shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is earned unless the Executive shall elect to defer the receipt of such Annual Bonus.

(iii) Incentive, Savings and Retirement Plans.

(A) During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies (including, without limitation, the plans in effect on the date of this Agreement or any successor plans), but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, that are less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other executives of the Company and its affiliated companies.

(B) Upon the Effective Date the Executive shall become vested under the Company's Supplemental Executive Retirement Plan ("SERP") so that the Executive shall be entitled to receive a Retirement Benefit (as defined in the SERP) at age 62 or, at the election of the Executive, at any age between 55 and 62 a Retirement Benefit reduced one-third percent (1/3%) for each month that benefits commence prior to the beginning of the month coincident with or next following the date the Executive would attain age 62.

(iv) Equity Incentive Plans.

(A) Any outstanding stock options or stock appreciation rights issued to the Executive under the Company's existing plans or any successor plan shall become fully vested and exercisable on the Effective Date. All restrictions on shares of restricted stock issued to the Executive shall lapse.

(B) with respect to all performance awards granted to the Executive pursuant to the Incentive Plan or any successor plan that are outstanding immediately prior to the Effective Date, the Company shall issue to the Executive within 30 days after the Effective Date:

(i) if the Change of Control is not being accounted for as a pooling of interests, cash equal to the higher of (1) the average of the last sale prices of the Company's (or its successor'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 an 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 performance award and (y) such higher number of shares payable upon full vesting of each such award if the Company achieved for each four-year award cycle the percentile ranking against the comparable universe of EEI companies 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; or

(ii) if the Change of Control is being accounted for as a pooling of interests, an 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 performance award and (y) such higher number of shares payable upon full vesting of each such award if the Company achieved for each four-year award cycle the percentile ranking against the comparable universe of EEI companies 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

(iii) cash equal to the amount of the dividend equivalents associated with the number of shares determined under subparagraph (i) or (ii) above, in accordance with the Incentive Plan.

(v) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, dental, disability, salary continuance, life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.

(vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(vii) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(viii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

(ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.

5. Termination of Employment

1. Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 120 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be unreasonably withheld).
   
   
2. Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), for a period of 30 days after written notice of demand for substantial performance has been delivered to Employee by the Board of Directors which specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, or (ii) the willful engaging by Employee in gross misconduct materially and demonstrably injurious to the Company, as determined by the Board of Directors after notice to Employee and an opportunity for a hearing. No act, nor failure to act, on Employee's part shall be considered "willful" unless he has acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interests of the Company.
   
   
3. Without Cause. The Company may terminate the Executive's employment at any time during the Employment Period without Cause.
   
   
4. Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean

(i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibility as contemplated by Sections 3 and 4(a) or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii) any failure by the Company to comply with any of the provisions of Section 4(b), other than an isolated, insubstantial and inadvertent failure not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(iii) the Company's requiring to be based at any location other than that described in Section 4(a)(i)(B);

(iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or

(v) any failure by the Company to comply with and satisfy Section 11(c), provided that such successor has received at least ten days' prior written notice from the Company or the Executive of the requirements of Section 11(c).

For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive.

1. Notice of Termination. Any termination by the Company for Cause or without Cause or by the Employee for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b). For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
   
   
2. Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company, whether for Cause or without Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, and (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

6. Obligations of the Company Upon Termination

1. Good Reason; Without Cause; Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment Without Cause or for Death or Disability or the Executive shall terminate employment for Good Reason:

(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

(A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination, (2) a pro rata portion of the Executive’s Annual Bonus for the year in which the Date of Termination occurs, based on the number of days of employment that year up to the Date of Termination divided by 365 days, ) and (3) any accrued paid time off pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and

(B) the amount equal to the sum of (x) Annual Base Salary and (y) the Annual Bonus for which the Executive was eligible for the year in which the Date of Termination occurs; and

(C) if Executive executes a release of in the form set forth in Exhibit I attached hereto, and said release of claims becomes effective by its terms, the additional amount equal to two times the sum of (x) Annual Base Salary and (y) the Annual Bonus for which the Executive was eligible for the year in which the Date of Termination occurs; and

(D) a separate lump-sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Effective Date) of the benefit payable under the Retirement Plan and any SERP providing benefits for the Executive that the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and (ii) for the remainder of the Employment Period, assuming for this purpose that all accrued normal and early retirement benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Effective Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Effective Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP; and

(ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Sections 4(b)(v) and 4(b)(vii) if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation") and the Executive shall no longer be entitled to receive fringe benefits from the Company. For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; provided, however, that the Executive shall be entitled to the more favorable of the retiree benefits in effect on the Date of Termination or the retiree benefits in effect on the date that would have been the last date of the Employment Period if the Executive had remained employed; and

(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and

(iv) if the Executive is age 55 or older, in lieu of receiving monthly benefits under the SERP the Executive may elect, by giving at least 120 days written notice to the Company, to receive the Actuarial Equivalent (as defined in the SERP) lump sum value of the normal form of payment of SERP benefits based upon the retirement benefit payable under the SERP at Executive's age upon the Date of Termination, or to have such Actuarial Equivalent lump sum value transferred to the Company's Deferred Compensation Plan or any successor deferred compensation plan. If the Executive is younger than the minimum age for eligibility for payment of SERP benefits, the Executive may elect to receive the discounted present value, using a seven percent discount rate, of the Actuarial Equivalent lump sum value of the SERP benefits to which the Executive would be entitled at the minimum age.

2. Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations (which shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits.
   
   
3. Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations (which shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits.
   
   
4. Cause; Other Than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay the Executive's Annual Base Salary through the Date of Termination, plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period other than for Good Reason, this Agreement shall terminate without further obligations to the Executive other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

7. Nonexclusivity of Rights

Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any written plan provided by the Company or any of its affiliated companies for executives generally and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any written contract with the Company or any of its affiliated companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any such plan or contract with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or contract or agreement except as explicitly modified by this Agreement.

8. Full Settlement; Resolution of Disputes

1. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and, except as provided in Section 6(b), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly upon invoice, to the full extent permitted by law, all legal fees and expenses that the Executive may incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement).
   
   
2. If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was (A) in connection with or in anticipation of a Change of Control under clauses (i) or (ii) of Section 1(l), or (B) for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was not in connection with or in anticipation of a Change of Control or for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled.

9. Excise Taxes

Notwithstanding any other provisions of this Agreement, if any payments or distributions in the nature of compensation are made to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise (including the vesting of stock options, the lapse of restrictions on restricted stock and any other events that result in a "payment in the nature of compensation" within the meaning of Section 280G of the Code) are characterized as Excess Parachute Payments within the meaning of Section 280G of the Code or any successor provision, then the Company shall pay to the Executive an additional amount equal to the excise taxes imposed by Section 4999 of the Code or any successor provision on the Executive's Excess Parachute Payments, plus an amount equal to the federal and (if applicable) state income and excise taxes, including without limitation FICA and Medicare taxes or other taxes which will be payable by Employee as a result of this additional payment.

10. Confidential Information

The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, that shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and that shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

11. Successors

1. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
   
   
2. This Agreement shall inure to the benefit of and be binding on the Company and its successors and assigns.
   
   
3. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise.

12. Miscellaneous

1. This Agreement shall be governed by and construed in accordance with the laws of the state of Washington, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
   
   
2. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Timothy J. Hogan

Vice President System Operations

Puget Sound Energy, Inc.

P.O. Box 97034-9734

Bellevue, WA 98009

If to the Company:

Puget Sound Energy, Inc.

P.O. Box 97034 OBC-15

Bellevue, WA 98009-9734

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

3. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
   
   
4. The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
   
   
5. The Executive's or the Company's failure to insist on strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including without limitation the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
   
   
6. The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement.
   
   
7. This Agreement may be executed in counterparts, each of which counterparts shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to authorization from the Board, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written.

PUGET SOUND ENERGY, INC.

By:     /s/ William S. Weaver

                William S. Weaver

Its: President and Chief Executive Officer

TIMOTHY J. HOGAN

     /s/ Timothy J. Hogan

EX-12

Exhibit 12.1

PUGET ENERGY, INC.
STATEMENT SETTING FORTH COMPUTATIONS OF RATIOS OF
EARNINGS TO COMBINED FIXED CHARGES AND DIVIDEND REQUIREMENTS
(Dollars in Thousands)

 
 
EARNINGS AVAILABLE FOR COMBINED FIXED 12 Months
Ending
June  
 
Year Ended December 31

CHARGES AND PREFERRED DIVIDEND
REQUIREMENTS 2002 2001 2000 1999 1998 1997

Pre-tax Income:

  Net income per statement of income 72,923  121,587  193,831  185,567  169,612  125,698 

  Federal income taxes 45,214  78,006  128,973  109,164  105,814  44,916 

  Federal income taxes charged to
    other income-net
5,116 
4,590 
1,411 
2,909 
3,986 
14,807 

Subtotal 123,253  204,183  324,215  297,640  279,412  185,421 

  Capitalized Interest (1,198) (883) (1,264) (3,692) (1,782) (360)

  Undistributed (earnings) or losses
    of less-than-fify-percent-owned
    entities

0 

0 

0 

0 

0 

(680)

Total 122,055  203,300  322,951  293,948  277,630  184,453 

Fixed Charges:

  Interest on long-term debt 197,926  194,505  184,405  160,966  146,248  123,543 

  Other interest 1,198  883  1,264  3,692  1,782  360 

  Portion of rentals representative of
    the interest factor
8,207 
7,379 
5,002 
4,575 
2,878 
3,143 

Total 207,331  202,767  190,671  169,233  150,908  127,046 

Earnings Available for combined Fixed Charges
and Preferred Dividend requirements
329,386 
406,067 
513,622 
463,181 
428,538 
311,499 

Ratio of earnings to fixed charges 1.59  2.00  2.69  2.74  2.84  2.45 

COMBINED FIXED CHARGES AND PREFERRED
DIVIDEND REQUIREMENTS:

  Fixed charges above 207,311  202,767  190,671  160,233  150,908  127,046 

  Preferred dividend requirements below 13,728  14,128  15,044  17,747  21,421  26,266 

Total 221,059  216,895  205,715  186,980  172,329  153,312 

Ratio of earnings to combined fixed charges
and preferred dividend requirements
1.49 
1.87 
2.50 
2.48 
2.49 
2.03 

COMPUTATION OF PREFERRED DIVIDEND
REQUIREMENTS:

  (a) Pre-tax income 123,253  204,183  324,215  297,640  279,412  185,421 

  (b) Net income 72,923  121,587  193,831  185,567  169,612  125,698 

  (c) Ratio of (a) to (b) 1.6902  1.6793  1.6727  1.6039  1.6474  1.4751 

  (d) Preferred dividends 8,122  8,413  8,994  11,065  13,003  17,806 

Preferred dividend requirements

  [(d) multiplied by (c)] 13,728  14,128  15,044  17,747  21,421  26,266 

EX-12

Exhibit 12.2

PUGET SOUND ENERGY, INC.
STATEMENT SETTING FORTH COMPUTATIONS OF RATIOS OF
EARNINGS TO COMBINED FIXED CHARGES AND DIVIDEND REQUIREMENTS
(Dollars in Thousands)

 
 
EARNINGS AVAILABLE FOR COMBINED FIXED 12 Months
Ending
June  
 
Year Ended December 31

CHARGES AND PREFERRED DIVIDEND
REQUIREMENTS 2002 2001 2000 1999 1998 1997

Pre-tax Income:

  Net income per statement of income 68,766  119,130  193,831  185,567  169,612  125,698 

  Federal income taxes 41,740  75,683  128,973  109,164  105,814  44,916 

  Federal income taxes charged to
    other income-net
5,153 
4,590 
1,411 
2,909 
3,986 
14,807 

Subtotal 115,659  199,403  324,215  297,640  279,412  185,421 

  Capitalized Interest (1,198) (883) (1,264) (3,692) (1,782) (360)

  Undistributed (earnings) or losses
    of less-than-fify-percent-owned
    entities

0 

0 

0 

0 

0 

(680)

Total 114,461  198,520  322,951  293,948  277,630  184,453 

Fixed Charges:

  Interest on long-term debt 193,318  190,849  184,405  160,966  146,248  123,543 

  Other interest 1,198  883  1,264  3,692  1,782  360 

  Portion of rentals representative of
    the interest factor
6,291 
5,633 
5,002 
4,575 
2,878 
3,143 

Total 200,807  197,365  190,671  169,233  150,908  127,046 

Earnings Available for combined Fixed Charges
and Preferred Dividend requirements
315,268 
395,885 
513,622 
463,181 
428,538 
311,499 

Ratio of earnings to fixed charges 1.57  2.01  2.69  2.74  2.84  2.45 

COMBINED FIXED CHARGES AND PREFERRED
DIVIDEND REQUIREMENTS:

  Fixed charges above 200,807  197,365  190,671  169,233  150,908  127,046 

  Preferred dividend requirements below 13,660  14,028  15,044  17,747  21,421  26,266 

Total 214,467  211,447  205,715  186,980  172,329  153,312 

Ratio of earnings to combined fixed charges
and preferred dividend requirements
1.47 
1.87 
2.50 
2.48 
2.49 
2.03 

COMPUTATION OF PREFERRED DIVIDEND
REQUIREMENTS:

  (a) Pre-tax income 115,659  199,403  324,215  297,640  279,412  185,421 

  (b) Net income 68,766  119,130  193,831  185,567  169,612  125,698 

  (c) Ratio of (a) to (b) 1.6819  1.6738  1.6727  1.6039  1.6474  1.4751 

  (d) Preferred dividends 8,122  8,413  8,994  11,065  13,003  17,806 

Preferred dividend requirements

  [(d) multiplied by (c)] 13,660  14,082  15,044  17,747  21,421  26,266 

EX-99

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Quarterly Report of Puget Energy, Inc. and Puget Sound Energy, Inc. (the “Companies”) on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Stephen P. Reynolds, Chief Executive Officer and President of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)      The Form 10–Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)      The information contained in the Form 10–Q fairly presents, in all material respects, the financial condition and result of operations of the Companies.

August 12, 2002
	/s/ Stephen P. Reynolds
	Stephen P. Reynolds
	Chief Executive Officer and President

EX-99

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Quarterly Report of Puget Energy, Inc. and Puget Sound Energy, Inc. (the “Companies”) on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Stephen A. McKeon, Senior Vice President Finance and Legal, Chief Financial Officer of the Companies, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)      The Form 10–Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)      The information contained in the Form 10–Q fairly presents, in all material respects, the financial condition and result of operations of the Companies.

August 12, 2002
	/s/ Stephen A. McKeon
	Stephen A. McKeon
	Senior Vice President Finance and Legal, Chief Financial Officer