As filed with the Securities and Exchange Commission on February 2, 2011

Registration 333-            

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

PUGET ENERGY, INC.

(Exact name of registrant as specified in its charter)

Washington	6719	91-1969407
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

10885 N.E. 4th Street, Suite 1200

Bellevue, Washington 98004

(425) 454-6363

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Steve Secrist

Vice President, General Counsel and Chief Ethics and Compliance Officer

Puget Energy, Inc.

10885 N.E. 4th Street, Suite 1200

Bellevue, Washington 98004

(425) 454-6363

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Andrew Bor

Perkins Coie LLP

1201 Third Avenue, Suite 4800

Seattle, Washington 98101-3099

(206) 359-8000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Unit (1)(2)	Proposed Maximum Aggregate Offering Price (1)(2)	Amount of Registration Fee
6.500% Senior Secured Notes due 2020	$450,000,000	100%	$450,000,000	$52,245

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) under the Securities Act of 1933.

(2) Equals the aggregate principal amount of the securities being registered.

The information in this Prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer and sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2011

P R O S P E C T U S

Puget Energy, Inc.

OFFER TO EXCHANGE ITS

6.500% Senior Secured Notes due 2020

that have been registered under the Securities Act of 1933, as amended

for any and all of its outstanding

6.500% Senior Secured Notes due 2020

that were issued and sold in a transaction

exempt from registration

under the Securities Act of 1933, as amended

Puget Energy, Inc., a Washington corporation, hereby offers to exchange, upon the terms and conditions set forth in this prospectus and the accompanying letter of transmittal, up to $450 million in aggregate principal amount of its 6.500% Senior Secured Notes due 2020, which we refer to as the “exchange notes,” for the same principal amount of its outstanding 6.500% Senior Secured Notes Due 2020, which we refer to as the “original notes.” We refer to the original notes and the exchange notes, collectively, as the “Notes.” The original notes are and the exchange notes will be senior secured obligations and rank and will rank pari passu in right of payment with all of our existing and future senior secured indebtedness and will rank senior to all of our future subordinated indebtedness. Subject to certain exceptions, the Notes are and will be secured by a security interest in (i) substantially all of our assets, which for all practical purposes consists mainly of all of the issued and outstanding stock in our wholly owned operating subsidiary, Puget Sound Energy, Inc. (“PSE”) and (ii) all of our equity interests owned by our parent company, Puget Equico LLC (“Puget Equico”). These same assets also secure our obligations under our senior secured credit facility on an equal and ratable basis and may secure other obligations in the future on an equal and ratable basis.

The terms of the exchange notes are substantially identical to the terms of the original notes, except that the exchange notes will generally be freely transferable and do not contain certain terms with respect to registration rights and liquidated damages. We will issue the exchange notes under the indenture governing the original notes. For a description of the principal terms of the exchange notes, see “Description of Notes.”

The exchange offer will expire at 5:00 p.m. New York City time, on             , 2011, unless we extend the offer. At any time prior to the expiration date, you may withdraw your tender of any original notes; otherwise, such tender is irrevocable. We will receive no cash proceeds from the exchange offer.

The exchange notes constitute a new issue of securities for which there is no established trading market. Any original notes not tendered and accepted in the exchange offer will remain outstanding. To the extent original notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, original notes could be adversely affected. Following consummation of the exchange offer, the original notes will continue to be subject to their existing transfer restrictions and we will generally have no further obligations to provide for the registration of the original notes under the Securities Act of 1933, as amended, or the Securities Act. We cannot guarantee that an active trading market will develop or give assurances as to the liquidity of the trading market for either the original notes or the exchange notes. We do not intend to apply for listing of either the original notes or the exchange notes on any exchange or market.

Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of its exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer for a period of 180 days following the consummation of the exchange offer (or until such broker-dealer is no longer required to deliver a prospectus) in connection with resales of exchange notes received in exchange for notes where the notes were acquired by the broker-dealer as a result of market-making activities or other trading activities. See “Plan of Distribution.”

  Investing in the exchange notes involves certain risks. Please read “Risk Factors” beginning on page 9 of this prospectus.

This prospectus and the letter of transmittal are first being mailed to all holders of the original notes on or about             , 2011.

Neither the Securities and Exchange Commission, or the SEC or the Commission, nor any state securities commission has approved or disapproved of the exchange notes or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is             , 2011.

You should rely only on the information provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with information different from that contained in this prospectus. We are offering to exchange original notes for exchange notes only in jurisdictions where such offer is permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any other date other than the date on the front of these documents.

No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this prospectus in connection with the exchange offer, and, if given or made, such information or representations must not be relied upon as having been authorized by Puget Energy. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer or a solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstance create an implication that there has been no change in the affairs of Puget Energy since the date hereof of this prospectus.

TABLE OF CONTENTS

Forward-Looking Statements	ii
Prospectus Summary	1
Risk Factors	9
Private Placement	20
The Exchange Offer	21
Use of Proceeds	30
Ratio of Earnings to Fixed Charges	30
Capitalization	30
Selected Financial Information	31
Management’s Discussion and Analysis	32
Description of Business	41
Description of Notes	50
Material United States Federal Income Tax Considerations	81
Plan of Distribution	81
Legal Matters	83
Experts	83
Where You Can Find More Information	83
Index to Consolidated Financial Statements	83

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FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. This act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these as forward-looking and provide meaningful cautionary language identifying important factors that could cause actual results to differ from the prospective information. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative of such terms or other comparable terminology. Forward-looking statements provide our current expectations or forecasts of future events.

Any or all of our forward-looking statements in this prospectus and in any other public statements we make may turn out to be wrong. Forward-looking statements reflect our current expectations and are inherently uncertain. Inaccurate assumptions we might make and known or unknown risks and uncertainties can affect the accuracy of our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and our actual results may differ materially. Some important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include:

• Governmental policies and regulatory actions, including those of the FERC and the Washington Commission, with respect to allowed rates of return, cost recovery, financings, industry and rate structures, transmission and generation business structures within PSE, acquisition and disposal of assets and facilities, operation, maintenance and construction of electric generating facilities, operation, maintenance and construction of natural gas and electric distribution and transmission facilities, licensing of hydroelectric operations and natural gas storage facilities, recovery of other capital investments, recovery of power and natural gas costs, recovery of regulatory assets and present or prospective wholesale and retail competition;

• Failure of PSE to comply with FERC or Washington Commission standards and/or rules, which could result in penalties based on the discretion of either commission;

• Findings of noncompliance with electric reliability standards developed by the North American Electric Reliability Corporation or the Western Electricity Coordinating Council for users, owners and operators of the power system, which could result in penalties;

• Changes in, adoption of and compliance with laws and regulations, including decisions and policies concerning the environment, climate change, greenhouse gas or other emissions or byproducts of electric generation (including coal ash or other substances), natural resources, and fish and wildlife (including the Endangered Species Act) as well as the risk of litigation arising from such matters, whether involving public or private claimants or regulatory investigative or enforcement measures;

• The ability to recover costs arising from changes in enacted federal, state or local tax laws in a timely manner;

• Changes in tax law, related regulations or differing interpretation or enforcement of applicable law by the Internal Revenue Service (“IRS”) or other taxing jurisdiction;

• Inability to realize deferred tax assets and use production tax credits due to insufficient future taxable income;

• Accidents or natural disasters, such as hurricanes, windstorms, earthquakes, floods, fires and landslides, which can interrupt service and lead to lost revenues, cause temporary supply disruptions and/or price spikes in the cost of fuel and raw materials and impose extraordinary costs;

• Commodity price risks associated with procuring natural gas and power in wholesale markets;

• Wholesale market disruption, which may result in a deterioration of market liquidity, increase the risk of counterparty default, affect the regulatory and legislative process in unpredictable ways, negatively affect wholesale energy prices and/or impede PSE’s ability to manage its energy portfolio risks and procure energy supply, affect the availability and access to capital and credit markets and/or impact delivery of energy to PSE from its suppliers;

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• Financial difficulties of other energy companies and related events, which may affect the regulatory and legislative process in unpredictable ways, adversely affect the availability of and access to capital and credit markets and/or impact delivery of energy to PSE from its suppliers;

• The effect of wholesale market structures (including, but not limited to, regional market designs or transmission organizations) or other related federal initiatives;

• PSE electric or natural gas distribution system failure, which may impact PSE’s ability to deliver energy supply to its customers;

• Changes in climate or weather conditions in the Pacific Northwest, which could have effects on customer usage and PSE’s revenues;

• Regional or national weather, which can have a potentially serious impact on PSE’s ability to procure adequate supplies of natural gas, fuel or purchased power to serve its customers and on the cost of procuring such supplies;

• Variable hydrologic conditions, which can impact streamflow and PSE’s ability to generate electricity from hydroelectric facilities;

• Electric plant generation and transmission system outages, which can have an adverse impact on PSE’s expenses with respect to repair costs, added costs to replace energy or higher costs associated with dispatching a more expensive generation resource;

• The ability of a natural gas or electric plant to operate as intended;

• The ability to renew contracts for electric and natural gas supply and the price of renewal;

• Blackouts or large curtailments of transmission systems, whether PSE’s or others’, which can affect PSE’s ability to deliver power or natural gas to its customers and generating facilities;

• The ability to restart generation following a regional transmission disruption;

• The failure of the interstate natural gas pipeline delivering to PSE’s system, which may impact PSE’s ability to adequately deliver natural gas supply or electric power to its customers;

• Industrial, commercial and residential growth and demographic patterns in the service territories of PSE;

• General economic conditions in the Pacific Northwest, which may impact customer consumption or affect PSE’s accounts receivable;

• The loss of significant customers, changes in the business of significant customers or the condemnation of PSE’s facilities, which may result in changes in demand for PSE’s services;

• The failure of information systems or the failure to secure information system data, which may impact the operations and cost of PSE’s customer service, generation, distribution and transmission;

• The impact of acts of God, terrorism, flu pandemic or similar significant events;

• Capital market conditions, including changes in the availability of capital and interest rate fluctuations;

• Employee workforce factors, including strikes, work stoppages, availability of qualified employees or the loss of a key executive;

• The ability to obtain insurance coverage and the cost of such insurance;

• The ability to maintain effective internal controls over financial reporting and operational processes;

• Changes in our or PSE’s credit ratings, which may have an adverse impact on the availability and cost of capital for us or PSE generally, or the failure to comply with the covenants in our or PSE’s credit facilities, which would limit our and PSE’s ability to utilize such facilities for capital; and

• Deteriorating values of the equity, fixed income and other markets which could significantly impact the value of investments of PSE’s retirement plan, post-retirement medical benefit plan trusts and the funding of obligations thereunder.

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Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we 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 us to predict all such factors, nor can we 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. You are also advised to consult “Risk Factors” included elsewhere in this prospectus.

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PROSPECTUS SUMMARY

This section contains a general summary of certain of the information contained in this prospectus and does not include all of the information that may be important to you. You should read this entire prospectus, including the “Risk Factors” section and the financial statements and notes to those statements contained in this prospectus before making an investment decision. See also “Where You Can Find More Information.” As used herein, unless otherwise stated or indicated by context, references to “we,” “our” and “us” refer to Puget Energy, Inc. References to “PSE” are to Puget Sound Energy, Inc., our wholly owned subsidiary.

Puget Energy, Inc.

Overview

We are an energy services holding company incorporated in the state of Washington in 1999. All of our operations are conducted through our subsidiary PSE. We have no significant assets other than the common stock of PSE.

In February 2009, we completed our merger with Puget Holdings LLC (“Puget Holdings”), as a result of which we are the direct wholly owned subsidiary of Puget Equico and an indirect wholly owned subsidiary of Puget Holdings. Puget Holdings is owned by a consortium of the following long-term infrastructure investors (the “Consortium”): Macquarie Infrastructure Partners I (“MIP I”), Macquarie Infrastructure Partners II (“MIP II”), Macquarie Capital Group Limited (“MCAP”), Macquarie-FSS Infrastructure Trust (which, together with MIP I, MIP II and MCAP, owned 45.5% of Puget Holdings as of September 30, 2010), the Canada Pension Plan Investment Board (which owned 31.6% of Puget Holdings as of September 30, 2010), the British Columbia Investment Management Corporation (which owned 15.8% of Puget Holdings as of September 30, 2010) and the Alberta Investment Management Corporation (which owned 7.1% of Puget Holdings as of September 30, 2010).

We are the direct parent company of PSE, the oldest and largest electric and natural gas utility headquartered in the state of Washington, primarily engaged in the business of electric transmission, distribution, generation and natural gas distribution. Our business strategy is to generate stable cash flows by offering reliable electric and natural gas service in a cost-effective manner through PSE.

PSE furnishes electric and natural gas services to residential and commercial customers within a service territory covering approximately 6,000 square miles, principally in the Puget Sound region of the state of Washington. At September 30, 2010, PSE had approximately 1,079,100 electric customers, of which approximately 88.3% were residential customers, 11.0% were commercial customers and 0.7% were industrial, transportation and other customers. At September 30, 2010, PSE had approximately 749,000 gas customers, of which approximately 92.5% were residential customers, 7.1% were commercial customers and 0.4% were industrial and transportation customers.

PSE is affected by various seasonal weather patterns and therefore, utility revenues and associated expenses are not generated evenly during the year. Energy usage varies seasonally and monthly, primarily as a result of weather conditions. PSE experiences its highest retail energy sales in the first and fourth quarters of the year. Sales of electricity to wholesale customers also vary by quarter and year depending principally upon fundamental market factors and weather conditions. PSE has a Purchased Gas Adjustment (“PGA”) mechanism in retail natural gas rates to recover variations in natural gas supply and transportation costs. PSE also has a Power Cost Adjustment (“PCA”) mechanism in retail electric rates to recover variations in electricity costs on a shared basis with customers.

Since all of our operations are conducted through PSE, our primary source of funds for the repayment of our indebtedness is dividends paid from PSE, which is subject to numerous restrictions on its ability to pay dividends, some of which derive from state corporate law, PSE’s gas and electric mortgage indentures and its credit agreements, state regulations and commitments made to the Washington Commission in connection with the Washington Commission’s order approving our merger with Puget Holdings.

Our executive office is located at 10885 N.E. 4th Street, Suite 1200, Bellevue, Washington 98004, and our mailing address is P.O. Box 97034, Bellevue, Washington, 98009-9734. Our telephone number is (425) 454-6363. Our website address is www.pugetenergy.com. Information found on our website is not incorporated into or otherwise part of this prospectus.

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Summary of the Exchange Offer

In December 2010, we completed a private offering of the original notes. We received aggregate proceeds, before expenses, commissions and discounts, of $450 million from the sale of the original notes.

In connection with the offering of original notes, we entered into a registration rights agreement with the initial purchasers of the original notes in which we agreed to use best efforts to cause an exchange offer registration statement of which this prospectus is a part to be declared effective by the SEC within 90 days of the issuance of the original notes as part of an exchange offer for the original notes. In an exchange offer, you are entitled to exchange your original notes for exchange notes, with substantially identical terms as the original notes. The exchange notes will be accepted for clearance through The Depository Trust Company, or the DTC, and Clearstream Banking SA, or Clearstream, or Euroclear Bank S.A./ N.V., as operator of the Euroclear System, or Euroclear, with a new CUSIP and ISIN number and common code. You should read the discussions under the headings “The Exchange Offer,” “Description of Notes,” and “Book-Entry; Delivery and Form” respectively, for more information about the exchange offer and exchange notes. After the exchange offer is completed, you will no longer be entitled to any exchange or, with limited exceptions, registration rights for your original notes.

The Exchange Offer	We are offering to exchange up to $450 million principal amount of the exchange notes for up to $450 million principal amount of the original notes. Original notes may only be exchanged in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof.
	The terms of the exchange notes are identical in all material respects to those of the original notes, except the exchange notes will not be subject to transfer restrictions and holders of the exchange notes, with limited exceptions, will have no registration rights. Also, the exchange notes will not include provisions contained in the original notes that required payment of liquidated damages in the event we failed to satisfy our registration obligations with respect to the original notes.
	Original notes that are not tendered for exchange will continue to be subject to transfer restrictions and, with limited exceptions, will not have registration rights. Therefore, the market for secondary resales of original notes that are not tendered for exchange is likely to be minimal.
	We will issue registered exchange notes promptly after the expiration of the exchange offer.
Expiration Date	The exchange offer will expire at 5:00 p.m. New York City time, on , 2011, unless we decide to extend the expiration date. Please read “The Exchange Offer — Extensions, Delay in Acceptance, Termination or Amendment” for more information about extending the expiration date.
Withdrawal of Tenders	You may withdraw your tender of original notes at any time prior to the expiration date. We will return to you, without charge, promptly after the expiration or termination of the exchange offer any original notes that you tendered but that were not accepted for exchange.
Conditions to the Exchange Offer	We will not be required to accept original notes for exchange if there is a question as to whether the exchange offer would be unlawful.
	The exchange offer is not conditioned on any minimum aggregate principal amount of original notes being tendered. Please read “The Exchange Offer — Conditions to the Exchange Offer” for more information about the conditions to the exchange offer.
Procedures for Tendering Original Notes	If your original notes are held through DTC and you wish to participate in the exchange offer, you may do so through DTC’s automated tender offer

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	program. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with this prospectus as though you had signed the letter of transmittal. By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:
	•    you are not our “affiliate,” as defined in Rule 405 under the Securities Act; •    you are acquiring the exchange notes in the ordinary course of your business; •    you do not intend to participate in the distribution of the original notes or the exchange notes; •    if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and •    if you are a broker-dealer or you are using the exchange offer to participate in the distribution of exchange notes, you agree and acknowledge that you could not, under Commission policy, rely on certain no-action letters, and you must comply with the registration and prospectus delivery requirements in connection with a secondary resale transaction.
Special Procedures for Beneficial Owner	If you own a beneficial interest in original notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender the original notes in the exchange offer, please contact the registered holder as soon as possible and instruct the registered holder to tender on your behalf and to comply with our instructions described in this prospectus.
Guaranteed Delivery Procedures	You must tender your original notes according to the guaranteed delivery procedures described in “The Exchange Offer — Guaranteed Delivery Procedures” if any of the following apply:
	•    you wish to tender your original notes but they are not immediately available; •    you cannot deliver your original notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date; or •    you cannot comply with the applicable procedures under DTC’s automated tender offer program prior to the expiration date.
Resales	Except as indicated in this prospectus, we believe that the exchange notes may be offered for resale, resold and otherwise transferred without compliance with the registration and prospectus delivery requirements of the Securities Act provided that:
	•    you are not our affiliate; •    you are acquiring the exchange notes in the ordinary course of your business; •    you do not intend to participate in the distribution of the original notes or the exchange notes; •    if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and •    if you are a broker-dealer or you are using the exchange offer to participate in the distribution of exchange notes, you agree and acknowledge that you could not, under Commission policy, rely on

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	certain no-action letters, and you must comply with the registration and prospectus delivery requirements in connection with a secondary resale transaction.
	Our belief is based on existing interpretations of the Securities Act by the SEC staff set forth in several no-action letters to third parties. We do not intend to seek our own no-action letter, and there is no assurance that the SEC staff would make a similar determination with respect to the exchange notes. If this interpretation is inapplicable, and you transfer any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from such requirements, you may incur liability under the Securities Act. We do not assume, or indemnify holders against, such liability.
	Each broker-dealer that is issued exchange notes for its own account in exchange for original notes that were acquired by the broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes during the Exchange Offer Registration Period. See “Plan of Distribution.”
United States Federal Income Tax Considerations	The exchange of original notes for exchange notes will not be a taxable exchange for United States federal income tax purposes. Please see “Material United States Federal Income Tax Considerations.”
Use of Proceeds	We will not receive any proceeds from the issuance of the exchange notes pursuant to the exchange offer. We will pay certain expenses incident to the exchange offer. See “The Exchange Offer — Transfer Taxes.”
Registration Rights	If we fail to complete the exchange offer as required by the registration rights agreement, we may be obligated to pay additional interest to holders of the original notes. Please see “Description of Notes — Registration Rights; Additional Interest” for more information regarding your rights as a holder of the original notes.

The Exchange Agent

We have appointed Wells Fargo Bank, National Association as exchange agent for the exchange offer. Please direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent. As described in more detail under the caption “The Exchange Offer—Procedures for Tendering,” if you are not tendering under DTC’s automated tender offer program, you should send the letter of transmittal and any other required documents to the exchange agent as follows:

Wells Fargo Bank, National Association

By Mail (Registered or Certified Mail Recommended), Overnight Courier or Hand:	By Facsimile Transmission (for Eligible Institutions Only):	Confirm Receipt of Tenders by Telephone:
Wells Fargo Bank, N.A. Corporate Trust Services 608 2nd Avenue South, 12th Floor Minneapolis, MN 55402 ATTN: Bondholder Communications	(612) 667-6282	(800) 344-5128

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The Exchange Notes

The form and terms of the exchange notes to be issued in the exchange offer are substantially identical to the form and terms of the original notes, except that the exchange notes will be registered under the Securities Act and therefore, will not bear legends restricting their transfer, will not contain terms providing for liquidated damages if we fail to perform our registration obligations with respect to the original notes and, with limited exceptions, will not be entitled to registration rights under the Securities Act. The exchange notes will evidence the same debt as the original notes, and both the original notes and the exchange notes are governed by the same indenture.

Registration Rights	Puget Energy, Inc.
Notes Offered	$450,000,000 aggregate principal amount of 6.500% Senior Secured Notes due 2020.
Maturity Date	December 15, 2020.
Interest Payment Dates	December 15 and June 15 of each year, beginning June 15, 2011.
Listing	The exchange notes will not be listed on any exchange or market.
Optional Redemption	We may redeem the exchange notes, at our option, in whole or in part, at any time, at a redemption price equal to the greater of (1) 100% of the principal amount of the exchange notes then outstanding to be redeemed, and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the exchange notes being redeemed (not including any portion of such interest payments accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, plus in either case, accrued and unpaid interest, including additional interest, thereon to the date of redemption.
Ranking	The exchange notes will be our senior secured obligations and will:
	•      rank pari passu in right of payment, to the extent of the value of the Collateral securing the exchange notes, with all of our existing and future senior secured indebtedness (as of the date hereof, our obligations under our senior secured credit facility constitute our only other senior secured indebtedness) •      be senior in right of payment to any of our future subordinated indebtedness; and •      be structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of our subsidiaries, including PSE.
	As of September 30, 2010, on an adjusted basis after giving effect to this offering, we had approximately $1.5 billion of senior secured debt outstanding, and PSE had approximately $3.2 billion of senior secured debt and other liabilities outstanding.
Collateral	Our obligations under the exchange notes will be secured by a security interest in substantially all of our assets and our equity interests owned by our parent company, Puget Equico, as provided in the indenture. The Collateral, as defined in the indenture, consists mainly of all of the issued and outstanding stock in our wholly owned operating subsidiary, PSE These assets also secure our obligations under our senior secured credit facility on an equal and ratable basis and may secure other obligations in the future on an equal and ratable basis. See “Description of Notes—Security.” The Collateral will exclude certain of our assets as more

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	specifically set forth in the Collateral documents, including without limitation, (a) any lease, license, contract or agreement to which we are a party, and any of its rights or interest thereunder, if and to the extent that a security interest is prohibited by or in violation of (i) any law, rule or regulation applicable to us, or (ii) a term, provision or condition of any such lease, license, contract, property right or agreement (unless such law, rule, regulation, term, provision or condition would be rendered ineffective with respect to the creation of the security interest hereunder pursuant to the Uniform Commercial Code as in effect from time to time in the State of New York (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity, and (b) any proceeds of Collateral or amounts required to be deposited in the Lock-Up Account pursuant to our senior secured credit facility and the Security Agreement.
Change of Control	Upon the occurrence of a change of control triggering event, each holder of the exchange notes will have the right, at the holder’s option, to require us to repurchase all or any part of the holder’s exchange notes at a purchase price in cash equal to 101% of the principal thereof, plus accrued and unpaid interest, including additional interest, if any, to the date of such purchase in accordance with the procedures set forth in the indenture. See “Description of Notes—Purchase of Notes Upon Change of Control Repurchase Event.”
Further Issuances	We may, from time to time, without notice to or the consent of the holders of the exchange notes, create and issue additional senior secured notes equal in rank and having the same maturity, payment terms, redemption features, CUSIP numbers and other terms as the exchange notes offered by this prospectus. These further senior secured notes may be consolidated and form a single series with the exchange notes offered by this prospectus.
Covenants	The indenture governing the exchange notes contains certain covenants that, among other things, restrict our ability to merge, consolidate or transfer or lease all or substantially all of our assets. These covenants are subject to important exceptions and qualifications as described in this prospectus under the caption “Description of Notes—Certain Covenants.”

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Summary Consolidated Financial Information

The following summary consolidated financial information as of and for each of the three fiscal years in the periods ended December 31, 2009, 2008 and 2007 is derived from our audited consolidated financial statements. Our audited consolidated financial statements as of December 31, 2007, December 31, 2008 and December 31, 2009 are included in this prospectus. The results for the nine months ended September 30, 2010 are not necessarily indicative of results for the full fiscal year or any future period. The results of the nine month periods ended on September 30, 2010 and 2009 are unaudited. The summary consolidated financial information provided below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” the consolidated financial statements, the related notes, and other financial information, included elsewhere in this prospectus.

	Fiscal Year Ended December 31,									Nine Months Ended September 30,
	2007			2008			2009			2009 (1)			2010
	(dollars in thousands)
Income statement data:
Operating revenue	$	3,220,147		$	3,357,773		$	3,328,861		$	2,386,818		$	2,174,322
Operating expenses		2,779,113			2,975,025			2,818,588			2,015,506			2,059,377
Balance sheet and other data (at end of period):
Cash and cash equivalents	$	40,797		$	38,526		$	78,527		$	83,537		$	86,316
Debt and preferred stock		3,120,735			3,645,449			4,377,698			4,279,109			4,702,368
Shareholders’ equity		2,521,954			2,273,201			3,423,468			3,324,840			3,223,541
Cash flow statement data:
Net cash from operating activities	$	564,001		$	536,582		$	1,068,345		$	784,925		$	767,856
Net cash from investing activities		(756,999	)		(931,855	)		(836,576	)		(630,946	)		(689,588	)
Net cash from financing activities		205,678			393,002			(277,486	)		(194,686	)		(70,479	)
Other financial data:
Capital expenditures	$	737,258		$	846,001		$	775,688		$	586,558		$	667,597
EBITDA (2)		805,975			817,731			863,561			631,720			620,324

(1) Income statement data, Cash flow statement data, and Other financial data for nine months ended September 30, 2009 and the fiscal year ended December 31, 2009 includes combined predecessor and successor company results following our 2009 merger.

(2) EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short term, such as depreciation and amortization, taxation and interest expense, and unrealized gains or losses on derivative instruments. EBITDA measures our financial performance based on operational factors that management can influence in the short term, namely the cost structure or expenses of the organization.

EBITDA has limitations as an analytical tool. Material limitations in making the adjustments to our net income “(loss) to calculate EBITDA include, but are not limited to:

• the items excluded from the calculation of EBITDA generally represent income or expense items that may have a significant effect on our financial results;

• items determined to be non-recurring in nature could, nevertheless, re-occur in the future;

• EBITDA excludes certain tax payments that may represent a reduction in cash available to us;

• EBITDA does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

• EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and

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• EBITDA does not reflect the interest expense associated with, or the cash requirements necessary to service interest or principal payments on, our indebtedness.

EBITDA is not an alternative to net income, income from continuing operations, or cash flows provided by or used in operating activities as calculated and presented in accordance with GAAP. You should not rely on EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation presented below, along with our consolidated balance sheets, statements of operations and cash flows. In addition, because EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, these measures as presented may differ from and may not be comparable to similarly titled measures used by other companies.

	Fiscal Year Ended December 31,									Nine Months Ended September 30,
	2007			2008			2009			2009			2010
	(dollars in thousands)
Consolidated Net Income	$	184,464		$	154,929		$	186,771		$	132,893		($	53,427	)
Consolidated Puget Energy Interest Expense (excluding AFUDC)		217,823			202,582			282,966			206,749			244,839
Consolidated Puget Energy Income Tax Expense		72,582			59,906			91,038			63,388			(37,895	)
Consolidated Puget Energy Depreciation & Amortization		279,222			312,128			332,685			247,124			270,776
Conservation Amortization		39,955			61,650			66,467			47,395			60,874
Extraordinary or Non-cash Charges:
Consolidated Puget Energy Unrealized Losses (Gains) on Derivative Instruments (1)		(2,687	)		7,538			(152,734	)		(121,299	)		109,183
Tenaska Amortization (2)		24,343			28,272			32,147			24,122			27,717
PSE Bonneville Exchange Power Amortization		3,527			3,527			3,527			2,645			2,645
Consolidated Puget Energy Merger & Related Costs (3)		8,143			9,252			47,055			47,055			0
California ISO Receivable Write-off (4)		0			0			0			0			17,763
Non-cash Gains or Extraodinary Gain		212			0			0			0			0
PSE AFUDC (5)		(18,754	)		(19,933	)		(24,888	)		(17,633	)		(21,477	)
Cash Interest Income		(2,855	)		(2,120	)		(1,473	)		(719	)		(671	)
EBITDA		805,975			817,731			863,561			631,720			620,327

(1) Unrealized gains or losses on derivative instruments related to mark-to-market valuation of derivatives done in normal course of business to stabilize customer rates.

(2) Amortization of the Tenaska gas construct restructuring regulatory asset.

(3) Expenses related to Puget Energy’s merger in February 2009 with Puget Holdings as described in this document.

(4) Partial write-off (per regulatory order) of regulatory asset related to the California Independent System Operator wholesale energy sales receivables dating to the California energy crisis; no amount remains.

(5) Allowance for Funds Used During Construction is a regulatory non-cash return for financing capital projects before being placed in service.

	2007		2008		Period from January 1, 2009 through February 5, 2009		Period from February 6, 2009 through December 31, 2009		Twelve Months Ended September 30, 2010
Ratio of earnings to fixed charges:		2.07x		1.94x		2.16x		1.87x		1.13x	(1)

(1) Ratio is 0.90x when including $77.7 million of unrealized losses on derivative instruments for the period.

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RISK FACTORS

You should carefully consider the following risks, as well as the other information contained in this prospectus, before exchanging the notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations and our ability to service the exchange notes.

RISKS RELATING TO THE EXCHANGE OFFER

Because there is no public market for the exchange notes, you may not be able to sell your exchange notes.

The exchange notes will be registered under the Securities Act, but will constitute a new issue of securities with no established trading market. There can be no assurance as to:

• The liquidity of any trading market that may develop;

• The ability of holders to sell their exchange notes; or

• The price at which the holders would be able to sell their exchange notes.

The exchange notes will not be listed on any exchange or market. If a trading market were to develop, the exchange notes might trade at higher or lower prices than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar securities and our financial performance.

Any market-making activity in the exchange notes will be subject to the limits imposed by the Securities Act and the Exchange Act. There can be no assurance that an active trading market will exist for the exchange notes or that any trading market that does develop will be liquid.

In addition, any original note holder who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

Your original notes will not be accepted for exchange if you fail to follow the exchange offer procedures.

We will issue exchange notes pursuant to the exchange offer only after a timely receipt of your original notes, a properly completed and duly executed letter of transmittal and all other required documents. Therefore, if you want to tender your original notes, please allow sufficient time to ensure timely delivery. If we do not receive your original notes, letter of transmittal and other required documents by the expiration date of the exchange offer, we will not accept your original notes for exchange. We are under no duty to give notification of defects or irregularities with respect to the tenders of original notes for exchange. If there are defects or irregularities with respect to your tender of original notes, we may not accept your original notes for exchange.

If you do not exchange your original notes, your original notes will continue to be subject to the existing transfer restrictions and you may be unable to sell your outstanding original notes.

We did not register the original notes and do not intend to do so following the exchange offer. Original notes that are not tendered will therefore continue to be subject to the existing transfer restrictions and may be transferred only in limited circumstances under applicable securities laws. If you do not exchange your original notes, you will lose your right, except in limited circumstances, to have your original notes registered under the federal securities laws. As a result, if you hold original notes after the exchange offer, you may be unable to sell your original notes and the value of the original notes may decline. We have no obligation, except in limited circumstances, and do not currently intend, to file an additional registration statement to cover the resale of original notes that did not tender in the exchange offer or to re-offer to exchange the exchange notes for original notes following the expiration of the exchange offer.

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RISKS RELATING TO PUGET ENERGY’S CORPORATE STRUCTURE

As a holding company, we depend on PSE’s ability to pay dividends.

As a holding company with no significant operations of our own, the primary source of funds for the repayment of debt and other expenses, as well as payment of dividends to our shareholder, are cash dividends PSE pays us. PSE is a separate and distinct legal entity and has no obligation to pay any amounts to us, whether by dividends, loans or other payments. The ability of PSE to pay dividends or make distributions to us, and accordingly, our ability to pay interest on indebtedness or other expenses, will depend on PSE’s earnings, capital requirements and general financial condition. If we do not receive adequate distributions from PSE, we may not be able to meet our obligations.

The payment of dividends by PSE to us is restricted by provisions of certain covenants applicable to longterm debt contained in PSE’s mortgage indentures. In addition, beginning February 6, 2009, as approved in the Washington Commission merger order, PSE dividends may not be declared or paid if its common equity ratio is 44.0% or below except to the extent a lower equity ratio is ordered by the Washington Commission. In addition, pursuant to the merger order, PSE may not declare or make any distribution on the date of distribution unless: (a) the ratio of PSE’s Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) to PSE interest for the most recently ended four fiscal quarter periods prior to such date is equal to or greater than three to one; and (b) PSE’s corporate credit/issuer rating is equal to or greater than BBB- with Standard & Poor’s (“S&P”) and Baa3 with Moody’s Investor Services (“Moody’s”). PSE’s ability to pay dividends is also limited by the terms of its credit facilities, pursuant to which PSE is not permitted to pay dividends during any event of default (as defined in the facilities), such as failure to comply with certain financial covenants.

The Notes will be structurally subordinated to claims of creditors of PSE and our other subsidiaries.

The Notes will be structurally subordinated to indebtedness and other liabilities of PSE and our other subsidiaries. Any right that we have pursuant to our equity interest in PSE to receive any assets of PSE upon the liquidation or reorganization of PSE, and the consequent rights of holders of the Notes to realize proceeds from the sale of PSE’s assets, will be effectively subordinated to the claims of PSE’s creditors, including trade creditors. Accordingly, in the event of a bankruptcy, liquidation or reorganization of PSE, PSE will pay the holders of its indebtedness and its trade creditors before it will be able to distribute any of its assets to us on account of our equity interest in PSE. The security interest in the pledged stock of PSE will not alter the effective subordination of the Notes to the claims of creditors of PSE.

RISKS RELATING TO PSE’s BUSINESS

The actions of regulators can significantly affect PSE’s earnings, liquidity and business activities.

The rates that PSE is allowed to charge for its services are the single most important item influencing its financial position, results of operations and liquidity. PSE is regulated and the rates that it charges its wholesale and retail customers are determined by both the Washington Utilities and Transportation Commission (the “Washington Commission”) and Federal Energy Regulatory Commission (“FERC”).

PSE is also subject to the regulatory authority of the Washington Commission with respect to accounting, operations, the issuance of securities and certain other matters, and the regulatory authority of FERC with respect to the transmission of electric energy, the sale of electric energy at wholesale, accounting and certain other matters. Policies and regulatory actions by these regulators could have a material impact on PSE’s financial position, results of operations and liquidity.

PSE’s recovery of costs is subject to regulatory review and its operating income may be adversely affected if its costs are disallowed.

The Washington Commission determines the rates PSE may charge to its electric retail customers based in part on historic test year costs plus weather normalized assumptions about rate year hydro conditions and power costs. Non-energy costs for natural gas retail customers are based on historic test year costs. If in a specific year PSE’s costs are higher than what is allowed to be recovered in rates, revenues may not be sufficient to permit PSE to

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earn its allowed return or to cover its costs. In addition, the Washington Commission decides what level of expense and investment is reasonable and prudent in providing electric and natural gas service. If the Washington Commission decides that part of PSE’s costs do not meet the standard, those costs may be disallowed partially or entirely and not recovered in rates. For these reasons, the rates authorized by the Washington Commission may not be sufficient to earn the allowed return or recover the costs incurred by PSE in a given period.

The Power Cost Adjustment (“PCA”) mechanism, by which variations in PSE’s power costs are apportioned between PSE and its customers pursuant to a graduated scale, could result in significant increases in PSE’s expenses if power costs are significantly higher than the baseline rate.

PSE has a PCA mechanism that provides for recovery of power costs from customers or refunding of power cost savings to customers, as those costs vary from the “power cost baseline” level of power costs which are set, in part, based on normalized assumptions about weather and hydro conditions. Excess power costs or power cost savings will be apportioned between PSE and its customers pursuant to the graduated scale set forth in the PCA mechanism. As a result, if power costs are significantly higher than the baseline rate, PSE’s expenses could significantly increase.

PSE may be unable to acquire energy supply resources to meet projected customer needs or may fail to successfully integrate such acquisitions.

PSE projects that future energy needs will exceed current purchased and PSE-controlled power resources. As part of PSE’s business strategy, it plans to acquire additional electric generation and delivery infrastructure to meet customer needs. If PSE cannot acquire further additional energy supply resources at a reasonable cost, it may be required to purchase additional power in the open market at a cost that could significantly increase its expenses and reduce earnings and cash flows. Additionally, PSE may not be able to timely recover some or all of those increased expenses through ratemaking. While PSE expects to identify the benefits of new energy supply resources prior to their acquisition and integration, it may not be able to achieve the expected benefits of such energy supply sources.

PSE’s cash flow and earnings could be adversely affected by potential high prices and volatile markets for purchased power, increased customer demand for energy, recurrence of low availability of hydroelectric resources, outages of its generating facilities or a failure to deliver on the part of its suppliers.

The utility business involves many operating risks. If PSE’s operating expenses, including the cost of purchased power and natural gas, significantly exceed the levels recovered from retail customers, its cash flow and earnings would be negatively affected. Factors which could cause purchased power and natural gas costs to be higher than anticipated include, but are not limited to, high prices in western wholesale markets during periods when PSE has insufficient energy resources to meet its load requirements and/or high volumes of energy purchased in wholesale markets at prices above the amount recovered in retail rates due to:

• Increases in demand due, for example, either to weather or customer growth;

• Below normal energy generated by PSE-owned hydroelectric resources due to low stream flow conditions or precipitation;

• Extended outages of any of PSE-owned generating facilities or the transmission lines that deliver energy to load centers;

• Failure to perform on the part of any party from which PSE purchases capacity or energy; and

• The effects of large-scale natural disasters on a substantial portion of distribution infrastructure.

PSE’s electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses and increased power purchase costs.

PSE owns and operates coal, natural gas-fired, hydroelectric, wind-powered and oil-fired generating facilities. Operation of electric generating facilities involves risks that can adversely affect energy output and efficiency levels. Included among these risks are:

• Increased prices for fuel and fuel transportation as existing contracts expire;

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• Facility shutdowns due to a breakdown or failure of equipment or processes or interruptions in fuel supply;

• Disruptions in the delivery of fuel and lack of adequate inventories;

• Labor disputes;

• Inability to comply with regulatory or permit requirements;

• Disruptions in the delivery of electricity;

• Operator error or safety related stoppages;

• Terrorist attacks; and

• Catastrophic events such as fires, explosions, floods or other similar occurrences.

PSE is subject to the commodity price, delivery and credit risks associated with the energy markets.

In connection with matching loads and resources, PSE engages in wholesale sales and purchases of electric capacity and energy, and, accordingly, is subject to commodity price risk, delivery risk, credit risk and other risks associated with these activities. Credit risk includes the risk that counterparties owing PSE money or energy will breach their obligations. Should the counterparties to these arrangements fail to perform, PSE may be forced to enter into alternative arrangements. In that event, PSE’s financial results could be adversely affected. Although PSE takes into account the expected probability of default by counterparties, the actual exposure to a default by a particular counterparty could be greater than predicted.

To lower its financial exposure related to commodity price fluctuations, PSE may use forward delivery agreements, swaps and option contracts to hedge commodity price risk with a diverse group of counterparties. However, PSE does not always cover the entire exposure of its assets or positions to market price volatility, and the coverage will vary over time. To the extent PSE has unhedged positions or its hedging procedures do not work as planned, fluctuating commodity prices could adversely impact its results of operations.

Costs of compliance with environmental, climate change and endangered species laws are significant and the cost of compliance with new and emerging laws and regulations and the incurrence of associated liabilities could adversely affect PSE’s results of operations.

PSE’s operations are subject to extensive federal, state and local laws and regulations relating to environmental, climate change and endangered species protection. To comply with these legal requirements, PSE must spend significant amounts on measures including resource planning, remediation, monitoring, analysis, mitigation measures, pollution control equipment and emissions related abatement and fees. New environmental, climate change, emissions and endangered species laws and regulations affecting PSE’s operations may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to PSE or its facilities which may substantially increase environmental, climate change, emissions and endangered species expenditures made by PSE in the future. Compliance with these or other future regulations could require significant capital expenditures by PSE and adversely affect PSE’s financial position, results of operations, cash flows and liquidity. In addition, PSE may not be able to recover all of its costs for such expenditures through electric and natural gas rates at current levels in the future.

With respect to endangered species laws, the listing or proposed listing of several species of salmon in the Pacific Northwest is causing a number of changes to the operations of hydroelectric generating facilities on Pacific Northwest rivers, including the Columbia River. These changes could reduce the amount, and increase the cost, of power generated by hydroelectric plants owned by PSE or in which PSE has an interest and increase the cost of the permitting process for these facilities.

Under current law, PSE is also generally responsible for any on-site liabilities associated with the environmental condition of the facilities that it currently owns or operates or has previously owned or operated. The incurrence of a material environmental liability or the new regulations governing such liability could result in substantial future costs and have a material adverse effect on PSE’s results of operations and financial condition.

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Specific to climate change, Washington State has adopted both a renewable portfolio standard and greenhouse gas legislation, including an emission performance standard provision. PSE cannot yet determine the costs of compliance with the recently enacted legislation. Recent decisions related to climate change by the United States Supreme Court and the Environmental Protection Agency, together with efforts by Congress have drawn greater attention to this issue at the federal, state and local level. While PSE cannot yet determine costs associated with these or future decisions or potential future legislation, there may be a significant impact on the cost of carbon-intensive coal generation, in particular.

PSE’s business is dependent on its ability to successfully access capital.

PSE relies on access to bank borrowings and short-term money markets as sources of liquidity and longerterm debt markets to fund its utility construction program and other capital expenditure requirements not satisfied by cash flow from its operations or equity investment from us (its parent). If PSE is unable to access capital on reasonable terms, its ability to pursue improvements or acquisitions, including generating capacity, which may be relied on for future growth and to otherwise implement its strategy, could be adversely affected. Capital and credit market disruptions, a downgrade of PSE’s credit rating or the imposition of restrictions on borrowings under its credit facilities in the event of a deterioration of financial ratios, may increase PSE’s cost of borrowing or adversely affect the ability to access one or more financial markets.

PSE’s operating results fluctuate on a seasonal and quarterly basis.

PSE’s business is seasonal and weather patterns can have a material impact on its revenues, expenses and operating results. Because natural gas is heavily used for residential and commercial heating, demand depends heavily on weather patterns in PSE’s service territory, and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. However, conservation efforts may result in decreased customer demand, despite normal or lower than normal temperatures. Demand for electricity is also greater in the winter months associated with heating. Accordingly, PSE’s operations have historically generated less revenues and income when weather conditions are milder in the winter. In the event that PSE’s service territory experiences unusually mild winters, results of operations and financial condition could be adversely affected.

PSE may be adversely affected by extreme events in which PSE is not able to promptly respond and repair the electric and gas infrastructure system.

PSE must maintain an emergency planning and training program to allow PSE to quickly respond to extreme events. Without emergency planning, PSE is subject to availability of outside contractors during an extreme event which may impact the quality of service provided to PSE’s customers. In addition, a slow response to extreme events may have an adverse affect on earnings as customers may be without electricity and natural gas for an extended period of time.

PSE may be negatively affected by its inability to attract and retain professional and technical employees.

PSE’s ability to implement a workforce succession plan is dependent upon PSE’s ability to employ and retain skilled professional and technical workers in an aging workforce. Without a skilled workforce, PSE’s ability to provide quality service to PSE’s customers and meet regulatory requirements will be challenged and could affect earnings.

PSE depends on an aging workforce and third-party vendors to perform certain important services.

PSE continues to be concerned about the availability and aging of skilled workers for special complex utility functions. PSE also hires third parties to perform a variety of normal business functions, such as power plant maintenance, data warehousing and management, electric transmission, electric and gas distribution construction and maintenance and certain billing and metering processes. The unavailability of skilled workers or unavailability of such vendors could adversely affect the quality and cost of PSE’s gas and electric service and accordingly PSE’s results of operations.

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Poor performance of pension and postretirement benefit plan investments and other factors impacting plan costs could unfavorably impact PSE’s cash flow and liquidity.

PSE provides a defined benefit pension plan to PSE employees and postretirement benefits to certain PSE employees and former employees. Costs of providing these benefits are based in part on the value of the plan’s assets and therefore, continued adverse market performance could result in lower rates of return for the investments that fund PSE’s pension and postretirement benefits plans and could increase PSE’s funding requirements related to the pension plans. Any contributions to PSE’s plans and the timing of the recovery of such contributions in general rate cases could impact PSE’s cash flow and liquidity.

RISKS RELATING TO OUR AND PSE’S BUSINESS

A downgrade in Puget Energy’s or PSE’s credit rating could negatively affect their ability to access capital and the ability to hedge in wholesale markets.

A downgrade in our or PSE’s credit ratings could adversely affect either company’s ability to renew existing or obtain access to new credit facilities and could increase the cost of such facilities. For example, under each of our and PSE’s facilities, the borrowing spreads over the London Interbank Offered Rate (“LIBOR”) and commitment fees increase if their respective corporate credit ratings decline. A downgrade in commercial paper ratings could increase the cost of commercial paper and limit or preclude PSE’s ability to issue commercial paper under its current programs.

Any downgrade below investment grade of PSE’s senior secured debt could cause counterparties in the wholesale electric, wholesale natural 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, all of which would expose PSE to additional costs.

We may be negatively affected by unfavorable changes in the tax laws or their interpretation.

Changes in tax law, related regulations or differing interpretation or enforcement of applicable law by the IRS or other taxing jurisdiction could have a material adverse impact on our financial statements. The tax law, related regulations and case law are inherently complex. We must make judgments and interpretations about the application of the law when determining the provision for taxes. Disputes over interpretations of tax laws may be settled with the taxing authority in examination, upon appeal or through litigation. Our tax obligations include income, real estate, public utility, municipal, sales and use, business and occupation and employment-related taxes and ongoing appeals issues related to these taxes. These judgments may include reserves for potential adverse outcomes regarding tax positions that may be subject to challenge by the taxing authorities.

RISKS RELATING TO THE NOTES

Proceeds from the Collateral may be inadequate to satisfy payments on the Notes.

The value of the Collateral will depend on market and economic conditions at the time, the availability of buyers and other factors beyond our control. The proceeds of any sale of the Collateral following a default by us may not be sufficient to satisfy the amounts due on the Notes. No appraisal of the fair market value of the Collateral has been prepared in connection with this offering, the value of the interest of the holders of the Notes in the Collateral may not equal or exceed the principal amount of the Notes. The Collateral is by its nature illiquid, and therefore may not be able to be sold in a short period of time or at all.

In addition, the indenture and our senior secured credit facility permit us to incur additional debt secured equally and ratably by the Collateral. Therefore, the value of the Collateral may be inadequate to satisfy the amounts due under our secured indebtedness, including our senior secured credit facility, the Notes and any future indebtedness secured by the Collateral.

It may be difficult to realize the value of the Collateral securing the Notes.

The trustee’s ability to foreclose on the Collateral on behalf of the holders of the Notes may be subject to perfection, the consent of third parties, regulatory approvals, priority issues and other practical problems associated

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with the realization of the trustee’s security interest in the Collateral. We cannot assure holders of the Notes that any consents or approvals will be given if required and therefore, the trustee may not have the ability to foreclose upon those assets or assume or transfer the right to those assets.

In addition, bankruptcy laws may limit the ability of the trustee to realize value from the Collateral. The right of the trustee to repossess and dispose of the Collateral upon the occurrence of an event of default under the indenture is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us. Under applicable bankruptcy law, secured creditors such as the holders of the Notes would be prohibited from foreclosing upon or disposing of a debtor’s property without prior bankruptcy court approval.

The Indenture permits us to incur additional debt.

The indenture governing the Notes does not place any limitation on the amount of debt that may be incurred by us or PSE. We may therefore incur a significant amount of additional debt, including secured debt secured equally and ratably by the Collateral, as described under “Description of Notes—Security.” PSE may also incur additional debt, which could affect its ability to pay dividends to us. The incurrence of additional debt may have important consequences for holders of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes, a loss in the trading value of the Notes, if any, and a risk that the credit rating of the Notes is lowered or withdrawn.

We may incur additional indebtedness that may share in the liens on the Collateral securing the Notes, which will dilute the value of the Collateral.

The Collateral also secures the senior secured credit facility. Under the terms of the indenture governing the Notes, we also will be permitted in the future to incur additional indebtedness and other obligations that may be secured by additional liens on the Collateral securing the Notes. Any additional obligations secured by a lien on the Collateral will dilute the value of the Collateral securing the Notes. See “Description of Notes—Security.”

The proceeds from the sale of all such Collateral may not be sufficient to satisfy the amounts outstanding under the Notes and all other indebtedness and obligations secured by such liens. If such proceeds were not sufficient to repay amounts outstanding under the Notes, then holders (to the extent not repaid from the proceeds of the sale of the Collateral) would only have an unsecured claim against our remaining assets.

To the extent a security interest in any of the Collateral is created or perfected following the date of the issuance of the Notes, the security interest would remain at risk of being voided as a preferential transfer by a trustee in bankruptcy or being subject to the liens of intervening creditors.

The imposition of certain permitted liens could adversely affect the value of the Collateral.

The Collateral securing the Notes will be subject to liens permitted under the terms of the indenture governing the Notes, whether arising on or after the date the Notes are issued. The existence of any permitted liens could adversely affect the value of the Collateral securing the Notes as well as the ability of the directing agent to realize or foreclose on such Collateral. The Collateral that will secure the Notes also secures our obligations under our senior secured credit facility may also secure future indebtedness and other obligations of ours to the extent permitted by the indenture and the security documents. Your rights to the Collateral would be diluted by any increase in the indebtedness secured by this Collateral. To the extent we incur any permitted liens, the liens of holders may not be first priority.

You will have limited rights to enforce remedies under the security documents, and the Collateral may be released without your consent in certain circumstances.

A Collateral Agent has been appointed by the holders of the liens on the Collateral, and such Collateral Agent (directly or through co-agents or sub-agents) is authorized to enforce all liens on the Collateral on behalf of the authorized representatives for the holders of the obligations secured by liens on the Collateral, including the holders. Under the terms of the security documents, subject to certain exceptions, for so long as the senior secured credit facility remains outstanding, the Collateral Agent will pursue remedies and take other action related to the

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Collateral, including the release thereof, pursuant to the direction of the Collateral Agent under the senior secured credit facility. Accordingly, during such time, the collateral agent under our senior secured credit facility will have a right to control all remedies and the taking of other actions related to the Collateral, including the release thereof, without the consent of holders and the trustee under the indenture governing the Notes.

In addition, in the event the senior secured credit facility is no longer outstanding, the collateral agent will pursue remedies and take other action related to the Collateral, including the release thereof, pursuant to the direction of the authorized representative for the holders of the largest class of outstanding obligations secured by liens on the Collateral, including the Notes. We will be permitted under the terms of the indenture to incur additional indebtedness secured on an equal basis with the Notes. As a result, the Notes may not ever represent the largest class of any remaining obligations secured by liens on the Collateral. Accordingly, holders may not ever have the right to control the remedies and the taking of other actions related to the Collateral.

In addition, all Collateral sold or otherwise disposed of in accordance with the terms of the documents governing the first lien obligations will automatically be released from the lien securing the Notes and the lien securing the other secured obligations. Accordingly, any such sale may result in a release of the Collateral subject to such sale or disposition.

Under the collateral agency agreement, the authorized representative of the holders may not object following the filing of a bankruptcy petition to any debtor-in-possession financing or to the use of the shared Collateral to secure that financing, subject to conditions and limited exceptions.

After such a filing, the value of the Collateral could materially deteriorate, and holders would be unable to raise an objection.

The Notes will be secured only to the extent of the value of the assets that have been granted as security for the Notes and, as a result, there may not be sufficient Collateral to pay all or any of the Notes.

The Collateral has not been appraised in connection with this offering. The value of the Collateral and the amount that may be received upon a sale of the Collateral will depend upon many factors including, among others, the condition of the Collateral and of the electric transmission, distribution and generation and natural gas distribution industries, the ability to sell the Collateral in an orderly sale, the condition of the international, national and local economies, the availability of buyers and similar factors. By their nature, portions of the Collateral are illiquid and may have no readily ascertainable market value.

Additionally, applicable law requires that every aspect of any foreclosure or other disposition of Collateral be “commercially reasonable.” If a court were to determine that any aspect of the collateral agent’s exercise of remedies was not commercially reasonable, the ability of the trustee and you to recover the difference between the amount realized through such exercise of remedies and the amount owed on the Notes may be adversely affected and, in the worst case, you could lose all claims for such deficiency amount.

There are certain circumstances other than repayment or discharge of the Notes under which certain Collateral securing the Notes can be released without consent of the trustee or the holders.

Under certain circumstances, certain Collateral securing the Notes can be released without consent of the trustee or the holders, including:

• upon a sale or other disposition of such Collateral in a transaction not prohibited under the indenture, or

• a release of less than a material portion of the Collateral, if consent to the release of all liens on such Collateral has been given by the required voting parties, which do not include the trustee or holders of the Notes; however, release of a material portion or more of the Collateral will require unanimous consent of the voting parties, which does include the trustee.

Any of these events will reduce the aggregate value of the Collateral securing the Notes.

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We will in most cases have control over certain Collateral, and the sale of particular assets by us could reduce the pool of assets securing the Notes.

The security documents allow us to remain in possession of, retain exclusive control over, freely operate, and collect, invest and dispose of any income from, the Collateral securing the Notes (other than capital stock that has been pledged). So long as no default or event of default under the indenture would result therefrom, we may, among other things, without any release or consent by the Collateral Agent for the holders, conduct ordinary course activities with respect to Collateral (other than capital stock that has been pledged), such as selling, factoring, abandoning or otherwise disposing of Collateral and making ordinary course cash payments (including repayments of indebtedness). To the extent that additional indebtedness and obligations are secured by the Collateral, our control over the Collateral may be diminished.

Your security interests in certain items of present and future Collateral may not be perfected. Even if your security interests in certain items of Collateral are perfected, it may not be practicable for you to enforce or economically benefit from your rights with respect to such security interests.

The security interests will not be perfected with respect to certain items of Collateral that cannot be perfected by the filing of financing statements. Security interests in Collateral such as deposit accounts, which require other actions, may not be perfected or may not have priority with respect to the security interests of other creditors. To the extent that the security interests in any items of Collateral are unperfected, the rights of holders with respect to such Collateral will be equal to the rights of our general unsecured creditors in the event of any bankruptcy filed by or against us under applicable U.S. federal bankruptcy laws.

There are certain categories of property that are excluded from the Collateral.

Certain categories of assets are excluded from the Collateral securing the Notes. Excluded assets include, among other categories any asset, and any rights or interest thereunder, if and to the extent that a security interest is prohibited by or in violation of any law, any provision or condition of any agreement. The rights of holders with respect to such excluded property will be equal to the rights of our general unsecured creditors in the event of any bankruptcy filed by or against us under applicable U.S. federal bankruptcy laws.

Intervening creditors may have a perfected security interest in the Collateral.

The Collateral is subject to liens permitted under the terms of our senior secured credit facility and the indenture governing the Notes whether arising before, on or after the date the Notes are issued. There is a risk that there may be a creditor whose liens are permitted under our senior secured credit facility or the indentures governing the Notes or other intervening creditor that has a perfected security interest in the Collateral securing the Notes, and if there is such an intervening creditor, the lien of such creditor, whether or not permitted under our senior secured credit facility or the indentures governing the Notes, may be entitled to a higher priority than the liens securing the Notes. The existence of any liens securing intervening creditors, including liens permitted under the senior secured credit facility or the indentures governing the Notes and incurred or perfected prior to the liens securing the Notes, could adversely affect the value of the Collateral securing the Notes as well as the ability of the directing agent to realize or foreclose on such Collateral.

The Collateral will also be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be permitted by the senior secured credit facility or the indenture governing the Notes. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the Collateral as well as the ability of the directing agent to realize or foreclose on the Collateral for the benefit of holders. Any such exceptions, defects, encumbrances, liens and imperfections could adversely affect the value of the Collateral that will secure the Notes as well as the ability of the directing agent to realize or foreclose on the Collateral for the benefit of holders.

Rights of holders in the Collateral may be adversely affected by the failure to perfect security interests in certain Collateral acquired in the future.

The security interest in the Collateral securing the Notes includes assets, both tangible and intangible, whether now owned or acquired or arising in the future. Applicable law requires that certain property and rights

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acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. There can be no assurance that the trustee or the collateral agent for the holders will monitor, or that we will inform the trustee or the collateral agent for the holders of, the future acquisition of property and rights that constitute Collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired property. The trustee and the collateral agent for the holders have no obligation to monitor the acquisition of additional property or rights that constitute Collateral or the perfection of any security interest therein. Such failure may result in the loss of the security interest therein or the priority of the security interest in favor of the Notes against third parties.

Rights of holders in the Collateral may be adversely affected by bankruptcy proceedings.

The right and ability of the directing agent or collateral agent for the holders to repossess and dispose of the Collateral securing the Notes upon an event of default is likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against us prior to or possibly even after the directing agent has repossessed and disposed of the Collateral. Under the U.S. Bankruptcy Code, a secured creditor, such as the collateral agent for the holders, is prohibited from repossessing Collateral from a debtor in a bankruptcy case, or from disposing of Collateral repossessed from a debtor, without bankruptcy court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use Collateral, and the proceeds, products, rents or profits of the Collateral, even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the Collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the Collateral as a result of the stay of repossession or disposition or any use of the Collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the directing agent could repossess or dispose of the Collateral, or whether or to what extent holders would be compensated for any delay in payment of loss of value of the Collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the Collateral is not sufficient to repay all amounts due on the Notes, holders would have “undersecured claims” as to the difference. Federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy case.

Any future pledge of Collateral might be voidable in bankruptcy.

Any future pledge of Collateral in favor of the collateral agent for holders, including pursuant to security documents delivered after the date of the indenture governing the Notes, might be voidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the pledge permits holders to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period.

Federal and state fraudulent transfer laws may permit a court to void the Notes, subordinate claims in respect of the Notes and require holders to return payments received and, if that occurs, you may not receive any payments on the Notes.

Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the Notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the delivery of the Notes could be voided as a fraudulent transfer or conveyance if (a) we or Puget Equico, as applicable, issued the Notes or granted securing interests on assets with the intent of hindering, delaying or defrauding creditors or (b) we or Puget Equico, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the Notes or granted securing interests on assets and, in the case of (b) only, one of the following is also true at the time thereof:

• we or Puget Equico, as applicable, were insolvent or rendered insolvent by reason of the issuance of the Notes;

• the issuance of the Notes left us with an unreasonably small amount of capital to carry on the business;

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• we or Puget Equico intended to, or believed that we or Puget Equico would, incur debts beyond our or such Puget Equico’s ability to pay such debts as they mature; or

• we or Puget Equico was a defendant in an action for money damages, or had a judgment for money damages docketed against us or Puget Equico, in either case, after final judgment, the judgment is unsatisfied.

A court would likely find that we or Puget Equico did not receive reasonably equivalent value or fair consideration for the Notes or granted securing interests on assets if we or Puget Equico did not substantially benefit directly or indirectly from the issuance of the Notes or the granting of security interests. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor.

We cannot be certain as to the standards a court would use to determine whether or not we or Puget Equico were solvent at the relevant time or, regardless of the standard that a court uses, that the granting of security interests would not be further subordinated to our or any of Puget Equico’s other debt. Generally, however, an entity would be considered insolvent if, at the time it incurred indebtedness:

• the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;

• the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

• it could not pay its debts as they become due.

If a court were to find that the issuance of the Notes or granting or securing interests was a fraudulent transfer or conveyance, the court could void the payment obligation under the Notes or such securing interests or further subordinate the Notes or such security interests to presently existing and future indebtedness of ours or Puget Equico, or require holders to repay any amounts received with respect to such security interests. In the event of a finding that a fraudulent conveyance occurred, you may not receive any repayment on the Notes. Further, the voidance of the Notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of such debt.

The value of the Collateral may not be sufficient to secure post-petition interest.

In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, holders will only be entitled to post-petition interest under the U.S. Bankruptcy Code to the extent that the value of their respective security interests in their Collateral is greater than their respective pre-bankruptcy claims. Holders may be deemed to have an unsecured claim to the extent that the fair market value of the Collateral securing the Notes, together with the other obligations secured by the same lien, is less than the face amount of all obligations secured by the same lien. In such case, holders will not be entitled to post-petition interest under the U.S. Bankruptcy Code. Upon a finding by a bankruptcy court that the Notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the Notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the Collateral. Other consequences of a finding of under collateralization would be, among other things, a lack of entitlement on the part of the unsecured portion of the Notes to receive other “adequate protection” under the U.S. Bankruptcy Code. In addition, if any payments of post-petition interest had been made at the time of such a finding of undercollateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Notes. No appraisal of the fair market value of the Collateral has been prepared in connection with the issuance of the Notes and, therefore, the value of the interests of holders in the Collateral may not equal or exceed the principal amount of the Notes and may not be sufficient to satisfy our obligations under all or any part of the Notes.

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In addition, under most circumstances, while you share equally and ratably with the other secured parties in all proceeds from any realization on the Collateral, subject to certain exceptions, you will not control the rights and remedies with respect to the Collateral upon an event of default and the exercise of any such rights and remedies following such an event of default will be made by the directing agent, acting at the direction of the collateral agent under our senior secured credit facility or the authorized representative of the largest outstanding debt secured by a pari passu lien on the Collateral.

We may not be able to repurchase the Notes upon a change in control or upon the exercise of the holders’ options to require repurchase of the Notes.

Upon the occurrence of specific types of change in control events, holders will have the right to require us to repurchase the Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus accrued and unpaid interest, including additional interest, if any. In the event that we experience a change in control that results in a repurchase of the Notes or requires us to repurchase the Notes, we may not have sufficient financial resources to satisfy all of our obligations under the Notes. In addition, restrictions under our senior secured credit facility may not allow us to repurchase the Notes or otherwise refinance such indebtedness to satisfy our obligations.

An active trading market for the Notes may not develop.

There is currently no public market for the Notes and we do not currently plan to list the Notes on any national securities exchange. In addition, the liquidity of any trading market in the Notes, and the market price quoted for the Notes, may be adversely affected by changes in the overall market for these securities and by changes in our financial performance or prospects. A liquid trading market in the Notes may not develop. The Notes have not been registered under the Securities Act or any state or foreign securities laws and until so registered, are subject to the restrictions on transfer and resale. We intend to file a registration statement under the Securities Act with respect to the Notes and to use our reasonable best efforts to have such registration statement declared effective by the SEC. The SEC, however, has broad discretion to determine whether any registration statement will be declared effective and may delay or deny the effectiveness of any such registration statement filed by us for a variety of reasons. Failure to have such registration statement declared effective could adversely affect the liquidity and price of the Notes.

PRIVATE PLACEMENT

We issued $450 million in principal amount of the original notes on December 6, 2010 to the initial purchasers of those notes and received proceeds that after deducting expenses and commissions represented an aggregate of approximately $443,799,000 million in net proceeds. We issued the original notes to the initial purchasers in transactions exempt from or not subject to registration under the Securities Act. The initial purchasers then offered and resold the original notes to qualified institutional buyers in compliance with Rule 144A or non-U.S. persons in compliance with Regulation S under the Securities Act.

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THE EXCHANGE OFFER

Purpose of the Exchange Offer

In connection with the sale of the original notes, we entered into a registration rights agreement with the initial purchasers of the original notes. In that agreement, we agreed to file a registration statement relating to an offer to exchange the original notes for the exchange notes. We also agreed to use our best efforts to have the SEC declare that registration statement effective by March 6, 2011. We are offering the exchange notes under this prospectus in an exchange offer for the original notes to satisfy our obligations under the registration rights agreement. We refer to our offer to exchange the exchange notes for the original notes as the “exchange offer.”

Resale of Exchange Notes

Based on interpretations of the SEC staff in no-action letters issued to third parties, we believe that each exchange note issued in the exchange offer may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act if:

• you are not our affiliate within the meaning of Rule 405 under the Securities Act;

• you are acquiring such exchange notes in the ordinary course of your business;

• you do not intend to participate in the distribution of exchange notes; and

• you are not a broker-dealer and are not engaged in, and do not intend to engage in, the distribution of the exchange notes.

If you tender your original notes in the exchange offer with the intention of participating in any manner in a distribution of the exchange notes, you:

• cannot rely on such interpretations of the SEC staff; and

• must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the exchange notes.

Unless an exemption from registration is otherwise available, the resale by any security holder intending to distribute exchange notes should be covered by an effective registration statement under the Securities Act containing the selling security holder’s information required under the Securities Act. This prospectus may be used for an offer to resell, a resale or other retransfer of exchange notes only as specifically described in this prospectus. Each broker-dealer that receives exchange notes for its own account in exchange for original notes, where that broker-dealer acquired such original notes as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. Please read “Plan of Distribution” for more details regarding the transfer of exchange notes.

Terms of the Exchange Offer

Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, we will accept for exchange any original notes properly tendered and not withdrawn prior to the expiration date of the exchange offer. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of original notes surrendered under the exchange offer and accepted by us. Original notes may be tendered only in integral multiples of $1,000, subject to a $2,000 minimum, and untendered original notes may only be in a minimum denomination of $2,000 and integral multiples of $1,000 in excess thereof.

The terms of the exchange notes are identical in all material respects to those of the original notes, except the exchange notes will not be subject to transfer restrictions and holders of the exchange notes and with limited exceptions, will have no registration rights. Also, the exchange notes will not include provisions contained in the original notes that required payment of liquidated damages in the event we failed to satisfy our registration obligations with respect to the original notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding notes.

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The exchange offer is not conditioned on any minimum aggregate principal amount of original notes being tendered for exchange.

As of the date of this prospectus, $450 million principal amount of original notes are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of the original notes. There will be no fixed record date for determining registered holders of the original notes entitled to participate in the exchange offer.

We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the SEC rules and regulations. Original notes that are not tendered for exchange in the exchange offer:

• will remain outstanding,

• will continue to accrue interest, and,

• will be entitled to the rights and benefits that holders have under the indenture relating to the notes and, under limited circumstances, the registration rights agreement.

We will be deemed to have accepted for exchange properly tendered original notes when we have given oral or written notice of the acceptance to the exchange agent and complied with the applicable provisions of the registration rights agreement. The exchange agent will act as agent for the tendering holders for the purposes of receiving the exchange notes from us. We will issue the exchange notes promptly after the expiration of the exchange offer.

If you tender original notes in the exchange offer, you will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of original notes. We will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. It is important that you read “The Exchange Offer—Fees and Expenses” for more details about fees and expenses incurred in the exchange offer.

We will return any original notes that we do not accept for exchange for any reason without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer.

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on             , 2011, unless at our sole discretion we extend the offer.

Extensions, Delay in Acceptance, Termination or Amendment

We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. We may delay acceptance for exchange of any original notes by giving oral or written notice of the extension to their holders. During any such extensions, all original notes you have previously tendered will remain subject to the exchange offer for that series, and we may accept them for exchange.

To extend the exchange offer, we will notify the exchange agent orally or in writing of any extension. We also will make a public announcement of the extension no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

If any of the conditions described below under “The Exchange Offer—Conditions to the Exchange Offer” have not been satisfied with respect to the exchange offer, we reserve the right, at our sole discretion:

• to extend the exchange offer,

• to delay accepting for exchange any original notes, or

• to terminate the exchange offer.

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We will give oral or written notice of such extension, delay or termination to the exchange agent. Subject to the terms of the registration rights agreement, we also reserve the right to amend the terms of the exchange offer in any manner.

Any such extension, delay in acceptance, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders of the original notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose that amendment by means of a prospectus supplement. We will distribute the supplement to the registered holders of the original notes. Depending on the significance of the amendment and the manner of disclosure to the registered holders, we may extend, pursuant to the terms of the registration rights agreement and the requirements of federal securities law, the exchange offer if the exchange offer would otherwise expire during such period.

Without limiting the manner in which we may choose to make public announcements of any extension, delay in acceptance, termination or amendment of the exchange offer, we have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency.

Conditions to the Exchange Offer

Notwithstanding any other provision of the exchange offer and subject to the terms of the registration rights agreement, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any original notes and may terminate or amend the exchange offer, if at any time before the expiration date of the exchange offer there is a question as to whether the exchange offer is permitted by applicable law.

In addition, we will not be obligated to accept for exchange the original notes of any holder that has not made to us:

• the representations described under “The Exchange Offer—Procedures for Tendering” and “Plan of Distribution,” and

• such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registering the exchange notes under the Securities Act.

We expressly reserve the right to amend or terminate the exchange offer notwithstanding the satisfaction of the foregoing, and to reject for exchange any original notes upon the occurrence of any of the conditions to the exchange offer specified above. We will give oral or written notice of any extension, non-acceptance, termination or amendment to the holders of the original notes as promptly as practicable.

These conditions are for our sole benefit, and we may assert them or waive them in whole or in part at any time or at various times at our sole discretion. Our failure at any time to exercise any of these rights will not mean that we have waived our rights. Each right will be deemed an ongoing right that we may assert at any time or at various times. If we waive a condition, we may be required in order to comply with applicable securities laws, to extend the expiration date of the exchange offer.

In addition, we will not accept for exchange any original notes tendered, and will not issue exchange notes in exchange for any such original notes, if at such time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture relating to the notes under the Trust Indenture Act of 1939.

Procedures for Tendering

How to Tender Generally

Only a holder of the original notes as determined by our records or those of the Trustee or DTC may tender original notes in the exchange offer. To tender in the exchange offer, a holder must either (1) comply with the procedures for physical tender or (2) comply with the automated tender offer program procedures of DTC, described below.

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To complete a physical tender, a holder must:

• complete, sign and date the letter of transmittal or a facsimile of the letter of transmittal,

• have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires,

• mail or deliver the letter of transmittal or facsimile to the exchange agent prior to the expiration date, and

• deliver the original notes to the exchange agent prior to the expiration date or comply with the guaranteed delivery procedures described below.

To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at its address provided above under “Prospectus Summary—The Exchange Agent” prior to the expiration date.

To complete a tender through DTC’s automated tender offer program, the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such original notes into the exchange agent’s account at DTC according to the procedure for book-entry transfer described below or a properly transmitted agent’s message.

The tender by a holder that is not withdrawn prior to the expiration date and our acceptance of that tender will constitute an agreement between the holder and us in accordance with the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

THE METHOD OF DELIVERY OF ORIGINAL NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK. RATHER THAN MAIL THESE ITEMS, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR ORIGINAL NOTES TO US. YOU MAY REQUEST YOUR BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE ABOVE TRANSACTIONS FOR YOU.

How to Tender if You Are a Beneficial Owner

If you beneficially own original notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender those notes, you should contact the registered holder as soon as possible and instruct the registered holder to tender on your behalf. If you are a beneficial owner and wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your original notes, either:

• make appropriate arrangements to register ownership of the original notes in your name, or

• obtain a properly completed bond power from the registered holder of your original notes.

The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date.

Signatures and Signature Guarantees

You must have signatures on a letter of transmittal or a notice of withdrawal described below under “The Exchange Offer—Withdrawal of Tenders” guaranteed by an eligible institution unless the original notes are tendered:

• by a registered holder who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal, or

• for the account of an eligible institution.

An “eligible institution” is a member firm of a registered national securities exchange, a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution within the meaning of Rule 17Ad-15 under the Exchange Act, that is a member of one of the recognized signature guarantee programs identified in the letter of transmittal.

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When Endorsements or Bond Powers Are Needed

If a person other than the registered holder of any original notes signs the letter of transmittal, the original notes must be endorsed or accompanied by a properly completed bond power. The registered holder must sign the bond power as the registered holder’s name appears on the original notes. An eligible institution must guarantee that signature.

If the letter of transmittal or any original notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, or officers of corporations or others acting in a fiduciary or representative capacity, those persons should so indicate when signing. Unless we waive this requirement, they also must submit evidence satisfactory to us of their authority to deliver the letter of transmittal.

Tendering Through DTC’s Automated Tender Offer Program

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s automated tender offer program to tender. Accordingly, participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the original notes to the exchange agent in accordance with its procedures for transfer. DTC will then send an agent’s message to the exchange agent.

An agent’s message is a message transmitted by DTC to and received by the exchange agent and forming part of the book-entry confirmation, stating that:

DTC has received an express acknowledgment from a participant in DTC’s automated tender offer program that is tendering original notes that are the subject of such book-entry confirmation;

• the participant has received and agrees to be bound by the terms of the letter of transmittal, or, in the case of an agent’s message relating to guaranteed delivery, the participant has received and agrees to be bound by the applicable notice of guaranteed delivery; and

• we may enforce the agreement against such participant.

Determinations Under the Exchange Offer

We will determine at our sole discretion all questions as to the validity, form, eligibility, time of receipt, acceptance of tendered original notes and withdrawal of tendered original notes. Our determination will be final and binding. We reserve the absolute right to reject any original notes not properly tendered or any original notes our acceptance of which, in the opinion of our counsel, might be unlawful. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties.

Unless waived, any defects or irregularities in connection with tenders of original notes must be cured within such time as we determine. Neither we, the exchange agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of original notes, nor will we or those persons incur any liability for failure to give such notification. Tenders of original notes will not be deemed made until such defects or irregularities have been cured or waived. Any original notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

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When We Will Issue Exchange Notes

In all cases, we will issue exchange notes for original notes that we have accepted for exchange in the exchange offer only after the exchange agent timely receives:

• original notes or a timely book-entry confirmation of transfer of such original notes into the exchange agent’s account at DTC, and

• a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

Return of Original Notes Not Accepted or Exchanged

If we do not accept any tendered original notes for exchange for any reason described in the terms and conditions of the exchange offer or if original notes are submitted for a greater principal amount than the holder desires to exchange, we will return the unaccepted or non-exchanged original notes without expense to their tendering holder. In the case of original notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described below, such non-exchanged original notes will be credited to an account maintained with DTC. These actions will occur as promptly as practicable after the expiration or termination of the exchange offer.

Your Representations to Us

By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:

• you are acquiring the exchange notes in the ordinary course of your business;

• you are not engaged in, and do not intend to engage in, and you have no arrangement or understanding with any person to participate in, the distribution of the original notes or the exchange notes within the meaning of the Securities Act;

• you are not our affiliate, as defined in Rule 405 under the Securities Act;

• if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and

• if you are a broker-dealer or you are using the exchange offer to participate in the distribution of exchange notes, you agree and acknowledge that you could not under Commission policy, rely on certain no-action letters, and you must comply with the registration and prospectus delivery requirements in connection with a secondary resale transaction.

Book-Entry Transfer

The exchange agent will make a request to establish an account with respect to the original notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution participating in DTC’s system may make book-entry delivery of original notes by causing DTC to transfer such original notes into the exchange agent’s account at DTC in accordance with DTC’s procedures for transfer. If you are unable to deliver confirmation of the book-entry tender of your original notes into the exchange agent’s account at DTC or all other documents required by the letter of transmittal to the exchange agent on or prior to the expiration date, you must tender your original notes according to the guaranteed delivery procedures described below.

Guaranteed Delivery Procedures

If you wish to tender your original notes but they are not immediately available or if you cannot deliver your original notes, the letter of transmittal or any other required documents to the exchange agent, or comply with the applicable procedures under DTC’s automated tender offer program prior to the expiration date, you may tender if:

• the tender is made through a member firm of a registered national securities exchange, a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution;

• prior to the expiration date, the exchange agent receives from such member firm of a registered national securities exchange, commercial bank or trust company having an office or correspondent in the United States, or eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery:

• stating your name and address, the registered number(s) of your original notes and the principal amount of original notes tendered,

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• stating that the tender is being made thereby, and

• guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal or facsimile thereof or agent’s message in lieu thereof, together with the original notes or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent; and

• the exchange agent receives such properly completed and executed letter of transmittal or facsimile or agent’s message, as well as all tendered original notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after the expiration date.

Upon request to the exchange agent, the exchange agent will send a notice of guaranteed delivery to you if you wish to tender your original notes according to the guaranteed delivery procedures described above.

Withdrawal of Tenders

Except as otherwise provided in this prospectus, you may withdraw your tender at any time prior to 5:00 p.m., New York City time, on the expiration date.

For a withdrawal to be effective:

• the exchange agent must receive a written notice of withdrawal at one of the addresses listed above under “Prospectus Summary—The Exchange Agent,” and

• the withdrawing holder must comply with the appropriate procedures of DTC’s automated tender offer program.

Any notice of withdrawal must:

• specify the name of the person who tendered the original notes to be withdrawn,

• identify the original notes to be withdrawn, including the registration number or numbers and the principal amount of such original notes,

• be signed by the person who tendered the original notes in the same manner as the original signature on the letter of transmittal used to deposit those original notes or be accompanied by documents of transfer sufficient to permit the trustee to register the transfer in the name of the person withdrawing the tender, and

• specify the name in which such original notes are to be registered, if different from that of the person who tendered the original notes.

If original notes have been tendered under the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn original notes and otherwise comply with the procedures of DTC.

We will determine all questions as to the validity, form, eligibility and time of receipt of notice of withdrawal, and our determination shall be final and binding on all parties. We will deem any original notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer.

Any original notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder without cost to the holder, or, in the case of original notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described above, such original notes will be credited to an account maintained with DTC for the original notes. This return or crediting will take place as soon as

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practicable after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn original notes by following one of the procedures described under “The Exchange Offer—Procedures for Tendering” at any time on or prior to 5:00 p.m., New York City time, on the expiration date.

Fees and Expenses

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitation by facsimile, email, telephone or in person by our officers and regular employees and those of our affiliates.

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the original notes and in handling or forwarding tenders for exchange.

We will pay the cash expenses to be incurred in connection with the exchange offer. They include:

• SEC registration fees for the exchange notes,

• fees and expenses of the exchange agent and the trustee,

• accounting and legal fees,

• printing costs, and

• related fees and expenses.

Transfer Taxes

If you tender your original notes for exchange, you will not be required to pay any transfer taxes. We will pay all transfer taxes, if any, applicable to the exchange of original notes in the exchange offer. The tendering holder will, however, be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

• certificates representing exchange notes or original notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the original notes tendered,

• tendered original notes are registered in the name of any person other than the person signing the letter of transmittal, or

• a transfer tax is imposed for any reason other than the exchange of original notes for exchange notes in the exchange offer.

If satisfactory evidence of payment of any transfer taxes payable by a tendering holder is not submitted with the letter of transmittal, the amount of the transfer taxes will be billed directly to that tendering holder. The exchange agent will retain possession of exchange notes with a face amount equal to the amount of the transfer taxes due until it receives payment of the taxes.

Accounting Treatment

We will record the exchange notes at the same carrying value as the old notes as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon completion of the exchange offer.

Consequences of Failure to Exchange

If you do not exchange your original notes for exchange notes in the exchange offer, you will remain subject to the existing restrictions on transfer of the original notes. In general, you may not offer or sell the original notes

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unless either they are registered under the Securities Act or the offer or sale is exempt from or not subject to registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the original notes under the Securities Act. We have no obligation to re-offer to exchange the exchange notes for original notes following the expiration of the exchange offer.

The tender of original notes in the exchange offer will reduce the outstanding principal amount of the original notes. Due to the corresponding reduction in liquidity, this may have an adverse effect on, and increase the volatility of, the market price of any original notes that you continue to hold.

Other

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your decision on what action to take. In the future, we may at our discretion seek to acquire untendered original notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plan to acquire any original notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered original notes, except as required by the registration rights agreement.

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USE OF PROCEEDS

We are making the exchange offer to satisfy our obligations under the original notes, the indenture and the registration rights agreement. We will not receive any cash proceeds from the exchange offer. In consideration of issuing the exchange notes in the exchange offer, we will receive an equal principal amount of original notes. Any original notes that are properly tendered and accepted in the exchange offer will be canceled.

RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth our ratios of earnings to fixed charges for the respective periods. For purposes of computing these ratios, earnings represent income from continuing operations before extraordinary items and cumulative effect of changes in accounting principles plus applicable income taxes and fixed charges. Fixed charges include all interest expense and the proportion deemed representative of the interest factor of rent expense.

	Period from January 1, 2009 through February 5,		Period from February 6, 2009 through December 31,		Twelve Months Ended September 30,			Years Ended December 31,
	2009		2009		2010			2005		2006		2007		2008
Ratio of earnings to fixed charges		2.16x		1.87x		1.13x	(1)		2.19x		2.17x		2.07x		1.94x

(1) Ratio is 0.90x when including $77.7 million of unrealized losses on derivative instruments for the period.

CAPITALIZATION

The following table presents our consolidated cash and cash equivalents and capitalization as of September 30, 2010 on an actual basis and on an as adjusted basis after giving effect to the sale of the Notes and the use of proceeds therefrom as described under “Use of Proceeds.” This table should be read in conjunction with the information contained in “Use of Proceeds” and our consolidated financial statements and related notes included elsewhere in this prospectus.

	As of September 30, 2010
	Actual		As Adjusted
	(in millions)
Cash and equivalents	$	86	$	86
Short-term debt	$	77	$	77
PSE long-term debt including current maturities (1)		3,464		3,464
Puget Energy long-term debt (2)
Capital expenditure credit facility		258		258
Term loan		1,225		792
6.500% Senior Secured Notes due 2020		—		450
Equity		3,224		3,224
Total Capitalization	$	8,248	$	8,265

(1) Includes PSE’s current maturities of long-term debt of $260 million plus its long-term debt of $3.204 billion.

(2) Excludes fair value accounting treatment from our financial statements where our long-term debt, comprised of our senior secured credit facility and term loan, is valued at $1.162 billion at September 30, 2010.

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SELECTED FINANCIAL INFORMATION

The following tables show selected financial data. This information should be read in conjunction with the Management’s Discussion and Analysis and the audited consolidated financial statements and the related notes included in this prospectus.

SUCCESSOR (2)			PREDECESSOR (2)
PUGET ENERGY SUMMARY OF OPERATIONS (DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	FEBRUARY 6, 2009 TO DECEMBER 31, 2009		JANUARY 1, 2009 TO FEBRUARY 5, 2009		2008		2007		2006		2005
Operating revenue	$	2,925,148	$	403,713	$	3,357,773	$	3,220,147	$	2,907,063	$	2,578,008
Operating income		474,863		35,410		382,748		441,034		420,851		390,297
Income from continuing operations		174,015		12,756		154,929		184,676		167,224		146,283
Net income		174,015		12,756		154,929		184,464		219,216		155,726
Basic earnings per common share from continuing operations		N/A		N/A		1.20		1.57		1.44		1.43
Basic earnings per common share		N/A		N/A		1.20		1.57		1.89		1.52
Diluted earnings per common share from continuing operations		N/A		N/A		1.19		1.56		1.44		1.42
Diluted earnings per common share		N/A		N/A		1.19		1.56		1.88		1.51
Dividends per common share		N/A		N/A	$	1.00	$	1.00	$	1.00	$	1.00
Book value per common share		N/A		N/A		17.53		19.45		18.15		17.52
Total assets at year end	$	11,900,140	$	8,594,836	$	8,434,102	$	7,598,736	$	7,066,039	$	6,609,951
Long-term debt		3,790,698		2,520,860		2,270,860		2,428,860		2,608,360		2,183,360
Preferred stock subject to mandatory redemption (1)		—		—		1,889		1,889		1,889		1,889
Junior subordinated notes		250,000		250,000		250,000		250,000		—		—
Junior subordinated debentures of the corporation payable to a subsidiary trust holding mandatorily redeemable preferred securities		—		—		—		—		37,750		237,750
Capital lease obligations		134,229		68,293		68,586		22,910		23,043		—

(1) All outstanding shares of preferred stock of PSE were defeased on February 5, 2009, and redeemed on March 13, 2009. In connection with the merger, Puget Energy and PSE amended in their entirety their respective Articles of Incorporation and preferred stock is no longer authorized.

(2) All of the operations of Puget Energy are conducted through its subsidiary PSE. “Predecessor” refers to the operations of Puget Energy and PSE prior to the consummation of the merger. “Successor” refers to the operations of Puget Energy and PSE subsequent to the merger. The merger was accounted for in accordance with Financial Accounting Standards Board (FASB) ASC 805. See Note 3 of the notes to the consolidated financial statements for a description of this transaction.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements that involve risks and uncertainties, such as Puget Energy and PSE objectives, expectations and intentions. Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “projects,” “will likely result,” “will continue” and similar expressions are intended to identify certain of these 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Puget Energy’s and PSE’s actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this report. Except as required by law, neither Puget Energy nor PSE undertakes an obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in Puget Energy’s and PSE’s other reports filed with the United States Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect Puget Energy’s and PSE’s business, prospects and results of operations.

Overview

Puget Energy is an energy services holding company and all of its operations are conducted through its subsidiary PSE, a regulated electric and natural gas utility company. PSE is the largest electric and natural gas utility in the state of Washington, primarily engaged in the business of electric transmission, distribution, generation and natural gas distribution. Puget Energy’s business strategy is to generate stable cash flows by offering reliable electric and natural gas service in a cost-effective manner through PSE. On February 6, 2009, Puget Holdings LLC (Puget Holdings) completed its merger with Puget Energy. Puget Holdings is a consortium of long-term infrastructure investors including Macquarie Infrastructure Partners I, Macquarie Infrastructure Partners II, Macquarie Capital Group Limited, Macquarie-FSS Infrastructure Trust, the Canada Pension Plan Investment Board, the British Columbia Investment Management Corporation, and the Alberta Investment Management Corporation. As a result of the merger, Puget Energy is a direct wholly owned subsidiary of Puget Equico LLC (Puget Equico), which is an indirect wholly owned subsidiary of Puget Holdings. In connection with the merger transaction, Puget Energy applied Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805). PSE’s basis of accounting will continue to be on a historical basis and PSE’s financial statements do not include any ASC 805 purchase accounting adjustments. Puget Energy and PSE are collectively referred to herein as “the Company.”

PSE generates revenue and cash flow primarily from the sale of electric and natural gas services to residential and commercial customers within a service territory covering approximately 6,000 square miles, principally in the Puget Sound region of the state of Washington. To meet customer growth, to replace expiring power contracts and to meet Washington state’s renewable energy portfolio standards, PSE is increasing its energy efficiency programs to reduce the demand for additional energy generation and is pursuing additional renewable energy production resources (primarily wind) and base load natural gas-fired generation. The Company’s external financing requirements principally reflect the cash needs of its construction program, its schedule of maturing debt and certain operational needs. PSE requires access to bank and capital markets to meet its financing needs.

For the three and nine months ended September 30, 2010, PSE’s net income was affected primarily by the following three factors: (1) the impact of falling natural gas prices on energy derivative contracts; (2) a decline in electric and natural gas sales due largely to weather and weak economic conditions; (3) the effect of higher power costs resulting from below average hydroelectric and wind conditions; and (4) the general tariff increases approved in April 2010 were insufficient to recover capital and operating costs incurred and are anticipated to incur in the future until sufficient rate recoveries are approved. Further detail on each of these primary drivers, as well as other factors affecting PSE’s performance, are set forth below in this “Overview” section as well as in other sections of the Management’s Discussion & Analysis.

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Energy derivatives had a significant negative impact on net income for the three and nine months ended September 30, 2010 due to continued declines in forward wholesale energy prices. As of July 1, 2009, PSE no longer designates energy derivatives as cash flow hedges, resulting in all of the mark-to-market changes being recorded in the income statement. Over the tenor of PSE’s outstanding derivative contracts, the forward wholesale prices of electricity and natural gas declined 13.1% and 14.5%, respectively, from June 30, 2010 to September 30, 2010 and declined 24.2% and 27.5%, respectively, from December 31, 2009 to September 30, 2010. These declines have caused significant unrealized losses on derivative instruments for the three and nine months ended September 30, 2010. PSE enters into energy derivative instruments to balance its energy portfolio, reduce costs where feasible and reduce volatility in costs and margins in the energy portfolio.

The number of PSE’s electric and natural gas customers continued to increase in 2010, but at a significantly slower rate. Electric retail kilowatt sales and gas therm sales for the nine months ended September 30, 2010 declined 4.9% and 8.7%, respectively, as compared to the same period in 2009. The decline in sales volumes in 2010 is due primarily to warmer temperatures in the first quarter of 2010 which is one of its highest revenue quarters for the year, and to a lesser extent, the impact of PSE’s residential and commercial customer conservation programs, as well as continued effects of weak economic conditions in the Pacific Northwest. The average temperature in PSE’s service territory during the first quarter of 2010 was 46.8 degrees, or 6.2 degrees warmer than the same period in 2009 which was 40.6 degrees which caused significant lost of revenue. Normal temperature for the same period is 43.5 degrees.

The Pacific Northwest also experienced below normal hydroelectric and wind conditions that adversely impacted PSE’s power costs in the first quarter of 2010. In total, hydroelectric and wind generation for the nine months ended September 30, 2010 decreased by 468,673 megawatt hours (MWhs), or 9.0% as compared to 2009. As a result, PSE’s power costs increased due to purchasing or generating higher cost electricity to replace the decrease in generation from hydroelectric and wind generating projects.

As a result of the Washington Utilities and Transportation Commission’s (Washington Commission) order of May 20, 2010, PSE adjusted the carrying value of its California wholesale energy sales regulatory asset in the second quarter of 2010 by $17.8 million (from $21.1 million to $3.3 million), with the $3.3 million then offset against the Company’s renewable energy credits regulatory liability as provided in the order. The Company’s California wholesale energy sales regulatory asset represented unpaid bills for power sold into the markets maintained by the California Independent System Operator during the California Energy Crisis, the claims of which were settled along with all counterclaims against PSE in a settlement agreement approved by the Federal Energy Regulatory Commission (FERC) on July 1, 2009. PSE’s settlement with the California parties was expressly conditioned upon two other actions: (1) the California Energy Commission approval of PSE’s Wild Horse and Hopkins Ridge wind farms as qualifying facilities under California renewable energy rules; and (2) the approval by the California Public Utilities Commission of a renewable power agreement between PSE and Southern California Edison (SCE), under which PSE sold qualifying renewable power to SCE in 2009 and 2010. PSE had sought approval for the use of $21.1 million of such proceeds be used as an offset against its California wholesale energy sales regulatory asset.

Factors and Trends Affecting PSE’s Performance. PSE’s regulatory requirements and operational needs require the investment of substantial capital in 2010 and future years. Because PSE intends to seek recovery of such investments through the regulatory process, its financial results depend heavily upon positive outcomes from that process. Further, PSE’s financial performance is heavily influenced by general economic conditions in its service territory, which affect customer growth and use-per-customer and thus utility sales, as well as the effects of its customers’ conservation investments, which also tend to reduce energy sales. The principal business, economic and other factors that affect PSE’s operations and financial performance include:

• The rates PSE is allowed to charge for its services;

• Weather conditions, including snow-pack affecting hydrological conditions;

• Demand for electricity and natural gas among customers in PSE’s service territory;

• Regulatory decisions allowing PSE to recover costs, including purchased power and fuel costs, on a timely basis;

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• PSE’s ability to supply electricity and natural gas, either through company-owned generation, purchase power contracts or by procuring natural gas or electricity in wholesale markets;

• Availability and access to capital and the cost of capital;

• Regulatory compliance costs, including those related to new and developing federal regulations of electric system reliability, state regulations of natural gas pipelines and federal and state environmental standards;

• The impact of energy efficiency programs on sales and margins; and

• Wholesale commodity prices of electricity and natural gas.

Regulation of PSE Rates and Recovery of PSE Costs. The rates that PSE is allowed to charge for its services is an important item influencing its financial condition, results of operations and liquidity. PSE is highly regulated and the rates that it charges its retail customers are determined by the Washington Commission. The Washington Commission determines these rates based, to a large extent, on historic test year costs plus weather normalized assumptions about hydroelectric conditions and power costs in the relevant rate year. Incremental customer growth and sales typically do not provide sufficient revenue to cover year-to-year cost growth, thus rate increases are required. If, in a particular rate year, PSE’s costs are higher than what is allowed to be recovered in rates, revenue may not be sufficient to permit PSE to earn its allowed return. In addition, the Washington Commission determines whether expenses and investments are reasonable and prudent in providing electric and natural gas service. If the Washington Commission determines that part of PSE’s costs do not meet the standard applied, those costs may be disallowed partially or entirely and not recovered in rates.

Weather Conditions. Weather conditions in PSE’s service territory have a significant impact on customer energy usage, affecting PSE’s revenue and energy supply expenses. PSE’s operating revenue and associated energy supply expenses are not generated evenly throughout the year. While both PSE’s electric and natural gas sales are generally greatest during winter months, variations in energy usage by customers occur from season to season and from month to month within a season, primarily as a result of weather conditions. PSE normally experiences its highest retail energy sales and, subsequently, higher power costs during the winter heating season in the first and fourth quarters of the year and its lowest sales in the third quarter of the year. Varying wholesale electric prices and the amount of hydroelectric energy supplies available to PSE also make quarter-to-quarter comparisons difficult. PSE reported higher customer usage in the three months ended September 30, 2010 primarily due to Pacific Northwest temperatures averaging 2.5 degrees cooler than the same period in 2009 tempered by lower customer usage when weather adjusted, reflecting a weak Pacific Northwest economy and PSE’s conservation programs. PSE reported lower customer usage for the nine months ended September 30, 2010 primarily due to warmer temperatures in the Pacific Northwest during the first quarter of 2010 than the same period in 2009. The average temperature during the first quarter of 2010 was 46.8 degrees, or 6.2 degrees warmer than the same period in 2009. The warmer than average temperatures for the first quarter was partially mitigated by cooler than average temperatures for the second and third quarters of 2010 by 3.0 and 2.5 degrees, respectively, compared to the same periods in 2009.

Customer Demand. PSE expects the number of natural gas customers to grow at rates slightly above electric customers. Both residential electric and natural gas customers are expected to continue a long-term trend of slow decline of energy usage based on continued energy efficiency improvements and the effect of higher retail rates. The effects of the current recession on Washington’s economy have exacerbated a decline in customer usage throughout 2010.

Access to Debt Capital. PSE relies on access to bank borrowings and short-term money markets as sources of liquidity and longer-term debt markets to fund its utility construction program, to meet maturing debt obligations and other capital expenditure requirements not satisfied by cash flow from its operations or equity investment from its parent, Puget Energy. Neither Puget Energy nor PSE have any debt outstanding whose maturity would accelerate upon a credit rating downgrade. However, a ratings downgrade could adversely affect the ability to renew existing, or obtain access to new credit facilities and could increase the cost of such facilities. For example, under Puget Energy’s and PSE’s credit facilities, both of which expire in 2014, the borrowing costs and commitment fees increase as their respective credit ratings decline. If PSE is unable to access debt capital on reasonable terms, its ability to pursue improvements or acquisitions, including generating capacity, which may be relied on for future growth and to otherwise implement its strategy, could be adversely affected. PSE monitors the credit environment and expects to continue to be able to access the capital markets to meet its short-term and long-term borrowing needs.

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Regulatory Compliance Costs and Expenditures. PSE’s operations are subject to extensive federal, state and local laws and regulations. Such regulations cover electric system reliability, gas pipeline system safety and energy market transparency, among other areas. Environmental regulations of air and water quality, generation by-products disposal and endangered species protection also impact the Company’s operations, as would possible climate change legislation or the regulation of generation by-products, such as coal ash. PSE must spend significant amounts funding regulatory agencies, many of which have greatly expanded mandates, and on measures including resource planning, remediation, monitoring, pollution control equipment and emissions-related abatement and fees in order to comply with these regulatory requirements.

Compliance with these or other future regulations, such as those pertaining to climate change and generation by-products could require significant capital expenditures by PSE and may adversely affect PSE’s financial position, results of operations, cash flows and liquidity.

OTHER CHALLENGES AND STRATEGIES

Energy Supply. As noted in PSE’s Integrated Resource Plan (IRP) filed with the Washington Commission, PSE projects that future energy needs will exceed current resources from long-term power purchase agreements and Company-controlled power resources. The IRP identifies reductions in contractual supplies of energy and capacity available under certain long-term power purchase agreements, requiring replacement of supplies to meet projected demands. Therefore, PSE’s IRP sets forth a multi-part strategy of implementing energy efficiency programs and pursuing additional renewable resources (primarily wind) and the additional base load natural gas-fired generation to meet the growing needs of its customers. If PSE cannot acquire needed energy supply resources at a reasonable cost, it may be required to purchase additional power in the open market at a cost that could, in the absence of regulatory relief, significantly increase its expenses and reduce earnings and cash flows.

Infrastructure Investment. PSE is investing in its utility infrastructure and customer service functions in order to meet regulatory requirements, serve customers’ energy needs and replace aging infrastructure. These investments and operating requirements give rise to significant growth in depreciation expense and operating expense, which are not recovered through the ratemaking process in a timely manner. This “regulatory lag” is expected to continue for the foreseeable future.

Operational Risks Associated With Generating Facilities. PSE owns and operates coal, natural gas-fired, hydroelectric, wind-powered and oil-fired generating facilities. Operation of electric generating facilities involves risks that can adversely affect energy output and efficiency levels, including facility shutdowns due to equipment and process failures or fuel supply interruptions. PSE does not have business interruption insurance coverage to cover replacement power costs.

Energy Efficiency Related Lost Sales Margin. PSE’s sales, margins, earnings and cash flow are adversely affected by its energy efficiency programs, many of which are mandated by law. The Company is evaluating strategies and other means to reduce or eliminate these adverse financial effects.

Markets For Intangible Power Attributes. The Company is actively engaged in monitoring the development of the commercial markets for such intangible power attributes as renewable energy credits and carbon financial instruments. The Company supports the development of regional and national markets for such products that are free, open, transparent and liquid.

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Results of Operations

All the operations of Puget Energy are conducted through its subsidiary PSE. “Predecessor” refers to the operations of Puget Energy and PSE prior to the consummation of the merger on February 6, 2009. “Successor” refers to the operations of Puget Energy and PSE subsequent to the merger.

Puget Energy’s net income (loss) for the three months ended September 30, 2010 and 2009 was as follows:

	THREE MONTHS ENDED SEPTEMBER 30,
BENEFIT/(EXPENSE) (DOLLARS IN THOUSANDS)	2010			2009			PERCENT CHANGE
PSE net income (loss)	$	(29,559	)	$	7,842			*	%
Purchased electricity		144			144			—
Net unrealized gain on derivative instruments		15,284			47,687			(67.9	)
Non-utility expense and other		(1,019	)		(2,260	)		54.9
Depreciation and amortization		—			46			*
Interest income/expense (1)		(22,771	)		(19,964	)		(14.1	)
Income tax benefit (expense)		22			(8,988	)		*
Puget Energy net income (loss)	$	(37,899	)	$	24,507			*	%

* Not meaningful

(1) Puget Energy’s interest expense includes elimination adjustments of intercompany interest on short-term debt.

Puget Energy’s net income (loss) for the nine months ended September 30, 2010 and 2009 was as follows:

	SUCCESSOR						PREDECESSOR
BENEFIT/(EXPENSE) (DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009			2009 COMBINED			PERCENT CHANGE
PSE net income (loss)	$	(67,326	)	$	104,986		$	31,611		$	136,597			(149.3	)%
Other operating revenue		—			358			—			358			*
Purchased electricity		433			385			—			385			12.5
Net unrealized gain on derivative instruments		91,519			86,565			—			86,565			5.7
Non-utility expense and other		(4,223	)		(5,763	)		(4	)		(5,767	)		26.8
Merger and related costs		—			(2,731	)		(20,416	)		(23,147	)		*
Depreciation and amortization		—			122			—			122			*
Charitable contribution expense		—			(5,000	)		—			(5,000	)		*
Interest income/expense (1)		(66,323	)		(50,663	)		25			(50,638	)		(31.0	)
Income tax benefit (expense)		(7,507	)		(8,122	)		1,540			(6,582	)		(14.1	)
Puget Energy net income (loss)	$	(53,427	)	$	120,137		$	12,756		$	132,893			(140.2	)%

* Not meaningful

(1) Puget Energy’s interest expense includes elimination adjustments of intercompany interest on short-term debt.

Puget Energy’s net loss for the three months ended September 30, 2010 was $(37.9) million with operating revenue of $622.8 million as compared to net income of $24.5 million with operating revenue of $592.6 million for the same period in 2009. Puget Energy’s net loss for the nine months ended September 30, 2010 was $(53.4) million with operating revenue of $2.2 billion as compared to net income of $132.9 million with operating revenue of $2.4 billion for the same period in 2009.

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The following are significant factors impacting Puget Energy’s net loss:

• Puget Energy’s net income for the three months ended September 30, 2010 was negatively impacted by $32.4 million change in net unrealized gain on derivative instruments as a result of the required recognition of all contracts at fair value as part of purchase accounting, including derivative contracts previously designated as Normal Purchase Normal Sale (NPNS). Certain of these contracts were subsequently redesignated as NPNS. The unrealized gain represents amortization of the fair value recorded. Also Puget Energy’s net loss was favorably impacted by a $9.0 million change in income tax.

• Puget Energy’s net loss for the nine months ended September 30, 2010, as compared to net income for the same period in 2009, was positively impacted by a $5.0 million change in net unrealized gain on derivative instruments as a result of the required recognition of all contracts at fair value as part of purchase accounting, including derivative contracts previously designated as NPNS. Certain of these contracts were subsequently redesignated as NPNS. The unrealized gain represents amortization of the fair value recorded. Puget Energy’s net income for the same period was negatively impacted by $15.7 million of interest income/expense due to the long-term debt at Puget Energy, business combination fair value amortization of PSE’s debt and PSE’s deferred debt costs.

2010 COMPARED TO 2009

OPERATING EXPENSES

Net unrealized gain on derivative instruments decreased $32.4 million for the three months ended September 30, 2010 as compared to the same period in 2009, and increased by $5.0 million for the nine months ended September 30, 2010 as compared to the same period in 2009 due to the fair value amortization of the derivative contracts.

Merger and related costs decreased $23.1 million for the nine months ended September 30, 2010 as compared to the same period in 2009, due to one-time merger cost of compensation triggered by Puget Energy’s change of control, excise taxes associated with the transaction and financial advisor fees.

OTHER INCOME AND EXPENSE, INTEREST EXPENSE AND INCOME TAX EXPENSE

Charitable contribution expense decreased $5.0 million for the nine months ended September 30, 2010 as compared to the same period in 2009, due to a charitable contribution to the PSE Foundation in 2009.

Interest expense increased $2.8 million for the three months ended September 30, 2010 as compared to the same period in 2009 due to the $2.0 million increase in business combination fair value amortization adjustments related to PSE’s long-term debt and deferred debt costs and $0.6 million increase of interest rate swap expense. Interest expense increased $15.7 million for the nine months ended September 30, 2010 as compared to the same period in 2009 due to the difference in the length of time the term loan and the capital expenditures loan were outstanding and the business combination fair value adjustment amortization. During the nine months ended September 30, 2010, there were nine months of interest on the term and capital expenditure loans and nine months of business combination fair value adjustments amortization related to PSE’s long-term debt and deferred debt costs, as compared to eight months for the same period in 2009. The interest expense for the term and capital expenditure loans contributed $8.8 million and the business combination fair value amortization contributed $6.7 million.

Income tax expense decreased $9.0 million for the three months ended September 30, 2010 as compared to the same periods in 2009. The decrease for the three months ended September 30, 2010 is primarily related to lower pre-tax income.

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CAPITAL REQUIREMENTS

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following are PSE’s and Puget Energy’s aggregate contractual obligations and commercial commitments as of December 31:

	PAYMENTS DUE PER PERIOD
CONTRACTUAL OBLIGATIONS (DOLLARS IN MILLIONS)	TOTAL			2010			2011 – 2012		2013 – 2014		2015 & THEREAFTER
Energy purchase obligations (1)	$	6,187.5		$	1,232.7		$	1,643.5	$	1,174.3	$	2,137.0
Long-term debt including interest (2)		4,141.0			421.5			595.0		345.1		2,779.4
Short-term debt including interest		127.9			127.9			—		—		—
Service contract obligations (3)		474.1			73.5			135.8		118.7		146.1
Non-cancelable operating leases (4)		142.4			9.8			24.3		25.3		83.0
Capital leases (4)		54.3			54.3			—		—		—
Pension and other benefits funding and payments (5)		61.2			16.5			8.2		9.8		26.7
Total PSE contractual cash obligations	$	11,188.4		$	1,936.2		$	2,406.8	$	1,673.2	$	5,172.2
Long-term debt, including interest (6)		1,778.4			71.6			143.4		1,563.4		—
Puget Energy capital leases (4)		80.0			37.4			42.6		—		—
Less: Inter-company short-term debt and interest elimination (8)		(22.9	)		(22.9	)		—		—		—
Total Puget Energy contractual cash obligations	$	13,023.9		$	2,022.3		$	2,592.8	$	3,236.6	$	5,172.2

The following are PSE’s and Puget Energy’s aggregate availability under commercial commitments as of December 31:

	AMOUNT OF AVAILABLE COMMITMENTS EXPIRATION PER PERIOD
COMMERCIAL COMMITMENTS (DOLLARS IN MILLIONS)	TOTAL			2010			2011 – 2012		2013 – 2014		2015 & THEREAFTER
PSE working capital facility (7)	$	400.0		$	—		$	—	$	400.0	$	—
PSE capital expenditures facility (7)		295.0			—			—		295.0		—
PSE energy hedging facility (7)		343.0			—			—		343.0		—
Inter-company short term interest and debt (8)		7.1			7.1			—		—		—
Total PSE commercial commitments	$	1,045.1		$	7.1		$	—	$	1,038.0	$	—
Puget Energy capital expenditures facility (6)		742.0			—			—		742.0		—
Less: Inter-company short term interest and debt elimination (8)		(7.1	)		(7.1	)		—		—		—
Total Puget Energy commercial commitments	$	1,780.0		$	—		$	—	$	1,780.0	$	—

(1) Energy purchase contracts were entered into as part of PSE’s obligation to serve retail electric and natural gas customers’ energy requirements. As a result, costs are generally recovered either through base retail rates or adjustments to retail rates as part of the power and natural gas cost adjustment mechanisms.

(2) See Note 9 “Long-Term Debt,” of the notes to the consolidated financial statements for individual long-term debt maturities. For Puget Energy the amount above excludes the fair value adjustments related to the merger.

(3) Represents operational agreements, settlements and other contractual obligations with respect to generation, transmission and distribution facilities. These costs are generally recovered through base retail rates.

(4) See Note 13 “Leases,” of the notes to the consolidated financial statements for additional information.

(5) Pension and other benefit expected contributions represent PSE’s estimated cash contributions to the pension plan through 2015.

(6) As of December 31, 2009, Puget Energy had fully drawn on a five-year term loan of $1.2 billion and incurred a $258.0 million draw under its $1.0 billion Puget Energy capital expenditure facility. This balance excludes a purchase price adjustment from the merger.

(7) As of December 31, 2009, PSE had credit facilities totaling $1.15 billion of which $105.0 million had been drawn. These consisted of $400.0 million to fund operating expenses, $400.0 million to fund capital expenditures and $350.0 million to support energy and natural gas hedging. In addition, a $7.0 million letter of credit was outstanding under the $350.0 million hedging facility.

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(8) As of December 31, 2009, PSE has a revolving credit facility with Puget Energy in the form of a promissory note to borrow up to $30.0 million of which $22.9 million was drawn.

CAPITAL RESOURCES

CASH FROM OPERATIONS

PUGET ENERGY

Cash generated from operations for the nine months ended September 30, 2010 was $767.9 million, a decrease of $17.0 million from the $784.9 million generated during the first nine months of 2009. The decrease included $42.4 million from the cash provided by the operating activities of PSE, discussed above. In addition, the decrease was the result of the following:

• As a result of the merger, $279.1 million in derivative settlement payments were reclassified to financing activities during the first nine months of 2010 compared to $349.7 million during the same period in 2009, resulting in a decrease in operating cash flows of $70.6 million. These contracts represent proceeds received from derivative instruments that included financing elements at the merger date.

The decrease in cash generated from operating activities in 2010 was partially offset by the following:

• Puget Energy made $88.6 million less net payments on accounts payable during the first nine months of 2010 compared to the same period in 2009, causing an increase in cash from operations.

FINANCING PROGRAM

The Company’s external financing requirements principally reflect the cash needs of its construction program, its schedule of maturing debt and certain operational needs. PSE anticipates refinancing the redemption of bonds with its credit facilities and/or the issuance of new long-term debt. Access to funds depends upon factors such as Puget Energy’s and PSE’s credit ratings, prevailing interest rates and investor receptivity to investing in the utility industry and PSE.

CREDIT FACILITIES AND COMMERCIAL PAPER

Proceeds from PSE’s short-term borrowings and sales of commercial paper are used to provide working capital and the interim funding of utility construction programs. Puget Energy and PSE continue to have reasonable access to the capital and credit markets.

PUGET ENERGY CREDIT FACILITIES

Puget Energy has entered into a $1.225 billion five-year term loan and a $1.0 billion credit facility for funding capital expenditures. Such loan and facility mature in February 2014. These credit agreements contain usual and customary affirmative and negative covenants which are similar to PSE’s credit facilities. Puget Energy’s credit agreements contain financial covenants based on the following three ratios: cash flow interest coverage, cash flow to net debt outstanding and debt service coverage (cash available for debt service to borrower interest), each as specified in the facilities. Puget Energy certifies its compliance with such covenants each quarter. As of September 30, 2010, Puget Energy was in compliance with all applicable covenants.

In May 2010, Puget Energy’s credit facilities were amended, in part, to include a provision for the sharing of collateral with future note holders when notes are issued to repay and reduce the size of the bank facilities.

These facilities contain similar terms and conditions and are syndicated among numerous committed lenders. The agreements provide Puget Energy with the ability to borrow at different interest rate options and include variable fee levels. Borrowings may be at the bank’s prime rate or at floating rates based on LIBOR plus a spread that is based upon Puget Energy’s credit rating. Puget Energy must also pay a commitment fee on the unused portion of the $1.0 billion facility. The spreads and the commitment fee depend on Puget Energy’s credit ratings. As of the date of this report, the spread over prime rate is 1.25%, the spread to the LIBOR is 2.25% and the commitment fee is 0.84%. As of September 30, 2010, the term loan was fully drawn and $258.0 million was outstanding under the $1.0 billion facility.

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New Legislation on Derivative Contracts. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. The new legislation established a framework for the regulation of certain over-the-counter derivative contracts which are used for hedging and trading. The legislation could expand collateral requirements of derivative contracts which may make it more costly for companies. The Company is evaluating the new legislation to determine its impact, if any, on the Company’s hedging program, results of operations and liquidity. The Company will not know the full impact of the new legislation until the regulations are finalized.

DIVIDEND PAYMENT RESTRICTIONS

The payment of dividends by PSE to Puget Energy is restricted by provisions of certain covenants applicable to long-term debt contained in PSE’s electric and natural gas mortgage indentures. At September 30, 2010, approximately $365.9 million of unrestricted retained earnings were available for the payment of dividends under the most restrictive mortgage indenture covenant.

In addition, beginning February 6, 2009, pursuant to the terms of the Washington Commission merger order, dividends may not be declared or paid if PSE’s common equity ratio, calculated on a regulatory basis, is 44.0% or below except to the extent a lower equity ratio is ordered by the Washington Commission. Also, pursuant to the merger order, PSE may not declare or make any distribution unless on the date of distribution PSE’s corporate credit/issuer rating is investment grade, or, if its credit rating is below investment grade, PSE’s ratio of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) to interest for the most recently ended four fiscal quarter periods prior to such date is equal to or greater than three to one.

PSE’s ability to pay dividends is also limited by the terms of its credit facilities. Under the credit facilities, PSE is not permitted to pay dividends during any Event of Default (as defined in the facilities), such as failure to comply with certain financial covenants.

Puget Energy’s ability to pay dividends to its shareholder is also limited by the merger order issued by the Washington Commission as well as by the terms of its credit facilities. Pursuant to the merger order, Puget Energy may not declare or make a distribution unless on such date Puget Energy’s ratio of consolidated EBITDA to consolidated interest expense for the four most recently ended fiscal quarters prior to such date is equal to or greater than two to one. In accordance with terms of the Puget Energy credit facilities, Puget Energy is limited to paying a dividend within an eight-day period that begins seven days following the delivery of quarterly or annual financial statements to the Facility Agent. Puget Energy is not permitted to pay dividends during any Event of Default (as defined in the facilities), such as failure to comply with certain financial covenants. In addition, in order to declare or pay unrestricted dividends, Puget Energy’s interest coverage ratio may not be less than 1.5 to one and its cash flow to net debt outstanding ratio may not be less than 8.25% for the 12 months ending each quarter-end. Puget Energy is also subject to other restrictions, such as a “lock up” provision that, in certain circumstances, such as failure to meet certain cash flow tests, may further restrict Puget Energy’s ability to pay dividends.

At September 30, 2010, the Company was in compliance with all applicable covenants, including those pertaining to the payment of dividends.

DEBT RESTRICTIVE COVENANTS

The type and amount of future long-term financing for Puget Energy and PSE are limited by provisions in their credit agreements and restated articles of incorporation as well as PSE’s mortgage indentures. Under its credit agreements, Puget Energy is generally limited to permitted refinancings and borrowings under its credit facilities and by restrictions placed upon its subsidiaries. One such restriction limits PSE’s long-term debt issuances to not exceed $500.0 million per year, plus any amount needed to refinance maturing bonds. Unused amounts under this limitation may be carried forward into future years. Puget Energy’s facilities contain a provision whereby additional capital expenditure loans up to $750.0 million may, under certain conditions, be made available after the $1.0 billion capital expenditure commitment has been fully borrowed.

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PSE’s ability to issue additional secured debt may be limited by certain restrictions contained in its electric and natural gas mortgage indentures. Under the most restrictive tests, at September 30, 2010, PSE could issue:

• approximately $1.4 billion of additional first mortgage bonds under PSE’s electric mortgage indenture based on approximately $2.3 billion of electric bondable property available for issuance, subject to an interest coverage ratio limitation of 2.0 times net earnings available for interest (as defined in the electric utility mortgage), which PSE exceeded at September 30, 2010; and

• no additional first mortgage bonds under PSE’s natural gas mortgage indenture until it meets the required net earnings available for interest coverage test. Although PSE had approximately $384.2 million of gas bondable property available for issuance, the Company is subject to a combined gas and electric interest coverage test of 1.75 times net earnings available for interest and a gas interest coverage test of 2.0 times net earnings available for interest (as defined in the natural gas utility mortgage). At September 30, 2010, PSE exceeded the gas 2.0 times net earnings test, but did not meet the combined 1.75 times test primarily as a result of lower energy sales and higher net power costs due to warmer than normal temperatures and lower than normal hydroelectric and wind generation. The company expects to meet this test by December 2010 as it collects additional revenue from the April 8, 2010 rate increase for electric and natural gas customers.

At September 30, 2010, PSE had approximately $5.6 billion in electric and natural gas ratebase to support the interest coverage ratio limitation test for net earnings available for interest.

DESCRIPTION OF BUSINESS

GENERAL

Puget Energy, Inc. (Puget Energy) is an energy services holding company incorporated in the state of Washington in 1999. All of its operations are conducted through its subsidiary, Puget Sound Energy, Inc. (PSE), a utility company.

Puget Energy has no significant assets other than the stock of PSE.

On February 6, 2009, Puget Holdings LLC (Puget Holdings) completed its merger with Puget Energy. Puget Holdings is a consortium of long-term infrastructure investors including Macquarie Infrastructure Partners I, Macquarie Infrastructure Partners II, Macquarie Capital Group Limited, Macquarie-FSS Infrastructure Trust, the Canada Pension Plan Investment Board, the British Columbia Investment Management Corporation and the Alberta Investment Management Corporation (collectively, the Consortium). As a result of the merger, Puget Energy is the direct wholly owned subsidiary of Puget Equico LLC (Puget Equico), which is an indirect wholly owned subsidiary of Puget Holdings. Puget Energy and PSE are collectively referred to herein as “the Company.”

CORPORATE STRATEGY

Puget Energy is the direct parent company of PSE, the oldest and largest electric and natural gas utility headquartered in the state of Washington, primarily engaged in the business of electric transmission, distribution, generation and natural gas distribution. Puget Energy’s business strategy is to generate stable earnings and cash flow by offering reliable electric and natural gas service in a cost-effective manner through PSE.

PUGET SOUND ENERGY, INC.

PSE is a public utility incorporated in the state of Washington in 1960. PSE furnishes electric and natural gas service in a territory covering approximately 6,000 square miles, principally in the Puget Sound region of the state of Washington.

PSE is affected by various seasonal weather patterns and therefore, utility revenues and associated expenses are not generated evenly during the year. Energy usage varies seasonally and monthly, primarily as a result of weather conditions. PSE experiences its highest retail energy sales in the first and fourth quarters of the year. Sales of electricity to wholesale customers also vary by quarter and year depending principally upon fundamental market

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factors and weather conditions. PSE has a Purchased Gas Adjustment (PGA) mechanism in retail natural gas rates to recover variations in natural gas supply and transportation costs. PSE also has a Power Cost Adjustment (PCA) mechanism in retail electric rates to recover variations in electricity costs on a shared basis with customers.

EMPLOYEES

At December 31, 2009, Puget Energy had no employees and PSE had approximately 3,000 full-time employees. Approximately 1,325 PSE employees are represented by the International Brotherhood of Electrical Workers Union (IBEW) and the United Association of Plumbers and Pipefitters (UA). The United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry (UA) and PSE reached an agreement on a new contract, which took effect October 1, 2010 upon UA vote approving the contract. The contract is for three years and will expire September 30, 2013.

CORPORATE LOCATION

Puget Energy’s and PSE’s principal executive offices are located at 10885 NE 4th Street, Suite 1200, Bellevue, Washington 98004 and the telephone number is (425) 454-6363.

REGULATION AND RATES

PSE is subject to the regulatory authority of: (1) the Federal Energy Regulatory Commission (FERC) with respect to the transmission of electric energy, the sale of electric energy at wholesale, accounting and certain other matters; and (2) the Washington Utilities and Transportation Commission (Washington Commission) as to retail rates, accounting, the issuance of securities and certain other matters. PSE also must comply with mandatory electric system reliability standards developed by the North American Electric Reliability Corporation (NERC), the Electric Reliability Organization certified by FERC, which standards are enforced by the Western Electricity Coordinating Council in PSE’s operating territory.

ENVIRONMENT

PSE’s operations are subject to environmental laws and regulation by federal, state and local authorities. Due to the inherent uncertainties surrounding the development of federal and state environmental and energy laws and regulations, PSE may not determine the impact, if any, that changes in such laws may have on its existing and future facilities and operations.

GREENHOUSE GAS POLICY

PSE recognizes the growing concern that increased atmospheric concentrations of greenhouse gases (GHG) contribute to climate change. PSE believes that climate change is an important issue that requires careful analysis and considered responses. PSE’s policy is to encourage the use of cost-effective market mechanisms to mitigate and/or offset GHG emissions from its energy activities. PSE advocates for market and regulatory mechanisms that will ensure price discovery and facilitate planning in a way that will help maintain a dependable, cost-effective and diverse energy portfolio mix that will sustain customers’ needs now and into the future. However, PSE believes market mechanisms are not enough and governments must formulate active strategies to invent and demonstrate new large-scale, low-emissions technologies and energy systems. Properly designed market mechanisms can be useful in leveraging ways that will accelerate the adoption of new technologies through research, development and deployment, preferential treatment and appropriate price signaling, but they cannot be the only mechanisms. PSE also believes the United States cannot do this alone. Industrialized nations must find ways to engage emerging countries in carbon reduction. In the meantime, PSE continues to take appropriate steps to meet the goal of providing cost-effective and reliable energy. The complete PSE Greenhouse Gas Policy is available at www.pse.com.

REGULATION OF EMISSIONS

PSE facilities, including PSE’s interest in a coal-fired, steam-electric generating plant at Colstrip, Montana and its gas-fired combustion turbine units, are subject to regulation of emissions. Future environmental laws and regulations affecting emissions, including sulfur dioxide, carbon monoxide, particulate matter, mercury or nitrogen

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oxide emissions, may be more restrictive, and new restrictions on GHG emissions, such as carbon dioxide, and coal combustion wastes, may be imposed at the federal or state level. Future legislation and regulation may have a significant impact on the cost of carbon-intensive coal generation, in particular.

In June 2008, the Washington Department of Ecology adopted regulations implementing an Emissions Performance Standard of 1,100 lbs/MWh. Under these regulations, utility companies that enter into long-term financial commitments to purchase all, or an interest in, new facilities or enter into power purchase agreements, among other things, must comply with this standard. Facilities owned by PSE on or before July 1, 2008 are not subject to this standard. A PSE evaluation of facilities that were acquired after July 1, 2008, including Mint Farm, showed that it was compliant with the standard in its current operating configurations and no additional modifications are required. Future resource planning and resource acquisition decisions will take this regulation into account.

Climate policy continues to evolve at the state and federal levels. PSE remains involved in state, regional and federal policymaking activities that involve emissions and climate change. PSE is also monitoring the development of the commercial marketplace for the exchange of carbon attributes. PSE anticipates that additional proposals will come from state and federal legislators in 2010 and beyond. In 2009, PSE made multiple submittals to the Western Climate Initiative (WCI) to provide its recommendations on the WCI design proposals, and it has participated in stakeholder committee groups and will continue this effort. PSE will also factor the impact of any future legislation on the cost of generation through its Integrated Resource Plan process.

On June 26, 2009, the House of Representatives passed H.R. 2454, the American Clean Energy and Security Act (ACES), a bill that would implement a cap-and-trade system of allowances to reduce GHG emissions 17.0% below 2005 levels by 2020, reaching an eventual target of 83.0% below 2005 levels by 2050. The Senate may also take climate change legislation back up in the first half of 2010.

The EPA issued two key “endangerment findings” under the Clean Air Act in December 2009. These two findings are: 1) the current and projected atmospheric concentrations of six GHGs endanger the public health and welfare of current and future generations; and 2) the combined emissions of these GHGs from new motor vehicles in the United States contribute to global climate change. These findings appear to set the agency on course for regulating GHG emissions throughout 2010.

Establishing GHGs as a pollutant means the six gases will become subject to regulation that triggers the Prevention of Significant Deterioration (PSD) program, under which new or modified “major emitting facilities” must obtain certain permits and install “Best Available Control Technology.” The impacts of this development are still unclear. Under current Clean Air Act protocols, new and modified sources of emissions must be fitted with air emission controls that are commercially (and readily) available however such controls for GHGs do not exist today.

In December 2009, signatories of the Kyoto Protocol met in Copenhagen to discuss next steps after that treaty expires at the end of 2012. The results from those negotiations include first-time emission reduction commitments from major developing countries, terms for financial assistance for least-developed countries and significant progress to develop policies to reduce emissions from deforestation and degradation. However, these terms are not binding, and it remains to be seen how they may be implemented in United States law.

There is significant uncertainty about when and how GHG emissions will ultimately be regulated at the federal, state or regional level. Nevertheless, it appears possible that some form of regulation will be adopted in the future, and such regulation is likely to make carbon-intensive electric generation, such as coal-fired generation, more expensive. Until more is known about future regulation, it is impossible to predict how it will affect PSE’s future cost of doing business.

FEDERAL ENDANGERED SPECIES ACT

Since 1991, a total of 17 species of Northwest and Columbia River Basin salmon and steelhead have been listed as threatened or endangered species under the Endangered Species Act, which influences hydroelectric operations. While the most significant impacts have affected the Mid-Columbia PUDs, certain Endangered Species Act impacts may affect PSE operations, potentially representing cost exposure and operational constraints. PSE is actively engaged with federal agencies to address Endangered Species Act issues for PSE’s generating facilities.

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DESCRIPTION OF PROPERTY

PSE, Puget Energy’s wholly owned subsidiary, owns certain electric generating plants and underground natural gas storage facilities as well as its transmission and distribution facilities and various other properties. PSE and Puget Energy’s corporate headquarters is housed in a leased building located in Bellevue, Washington.

LEGAL PROCEEDINGS

PROCEEDINGS RELATING TO THE BONNEVILLE POWER ADMINISTRATION

PSE has been a party to certain agreements with the BPA that provide payments under its REP to PSE, which PSE passes through to its residential and small farm electric customers. PSE has agreements with the BPA for REP payments until 2011 and for the period 2011 to 2028. PSE and other parties have sought United States Court of Appeals for the Ninth Circuit review regarding BPA’s agreements for REP payments during these periods. The amounts of REP payments under these agreements and the methods utilized in setting them are subject to FERC review or judicial review, or both, and are subject to adjustment, which may affect the amount of REP payments made or to be made by BPA to PSE. It is not clear what impact, if any, these reviews or other REP-related litigation may ultimately have on PSE.

PROCEEDINGS RELATING TO EQUILON

On April 21, 2010, Equilon Enterprises (dba Shell Oil Products), the owner of an oil refinery in Skagit County, Washington, filed suit against PSE in the United States District Court for the Western District of Washington in Seattle. PSE and Equilon resolved the dispute in October 2010 and dismissal of the court action will follow.

PROCEEDINGS RELATING TO SNOQUALMIE FALLS

On July 7, 2010, a lawsuit was filed by the Snoqualmie Valley Preservation Alliance against the United States Army Corps of Engineers (Corps) challenging permits issued by the Corps in connection with the redevelopment of the Snoqualmie Falls Hydroelectric Project. PSE sought and was granted permission to intervene in the proceeding. Motions for summary judgment have been filed by the plaintiff and the Corps. PSE joined the Corps’ motion and filed a motion for summary judgment arguing the plaintiff’s claims are barred as untimely and improper. The court has set a schedule for summary judgment motions to be heard in November 2010. The ultimate impact of the suit, if any, on PSE or the work currently underway on the project cannot be determined at this time.

OTHER

IBEW Union Contract. The International Brotherhood of Electrical Workers (IBEW) Local 77 union and PSE reached an agreement on a new contract, which took effect September 1, 2010 upon the IBEW vote approving the provisions. The contract is for four years and will expire March 31, 2014.

UA Union Contract. The United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry (UA) and PSE reached an agreement on a new contact, which took effect October 1, 2010 upon UA vote approving the contract. The contract is for three years and will expire September 30, 2013.

COLSTRIP MATTERS

In May 2003, approximately 50 plaintiffs initiated an action against the owners of Colstrip, including PSE, alleging that: (1) seepage from two different wastewater pond areas caused groundwater contamination and threatened to contaminate domestic water wells and the Colstrip water supply pond; and (2) seepage from the Colstrip water supply pond caused structural damage to buildings and toxic mold. The defendants reached agreement on a global settlement with all plaintiffs on April 29, 2008 and PSE paid its share of the settlement in July 2008.

On March 29, 2007, a second complaint related to pond seepage was filed on behalf of two ranch owners alleging damage due to the Colstrip Units 3 & 4 effluent holding pond. A mediation between plaintiffs and PPL Montana, LLC, the operator of Units 3 & 4, took place on July 14, 2010 and parties are working toward a final settlement.

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The federal Clean Air Mercury Rule, enacted by the Environmental Protection Agency (EPA) in May 2005, was vacated by the D.C. Circuit Court in February 2008. Final resolution of this matter is still pending. However the Montana Board of Environmental Review approved a Montana mercury control rule to limit mercury emissions from coal-fired plants on October 16, 2006 (with a limit of 0.9 lbs/Trillion British thermal units for plants burning coal like that used at Colstrip) which remains in effect. In 2008, the Colstrip owners, based on testing performed in 2006, 2007 and 2008, ordered mercury control equipment intended to achieve the new limit. The equipment has been fully installed and is in regular operation. The Colstrip mercury control equipment is operating at a level that meets the current Montana limit, which is based on a rolling 12 month average so compliance cannot be fully confirmed until January 1, 2011. Optimization of the feed rates of calcium bromide and activated carbon is underway. An evaluation will be conducted to determine whether additional controls, if any, are necessary, depending on actual long-term performance.

On June 15, 2005, the EPA issued the Clean Air Visibility rule to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines Best Available Retrofit Technology (BART) requirements for electric generating units, including presumptive limits for sulfur dioxide, particulate matter and nitrogen oxide controls for larger units. In February 2007, Colstrip was notified by the EPA that Colstrip Units 1 & 2 were determined to be subject to the EPA’s BART requirements. PSE submitted a BART engineering analysis for Colstrip Units 1 & 2 in August 2007 and responded to an EPA request for additional analyses with an addendum in June 2008. PSE cannot yet determine the outcome.

On June 21, 2010, the EPA issued a Proposed Rulemaking for the “Identification and Listing of Special Wastes: Disposal of Coal Combustion Residuals from Electric Utilities” which proposes different regulatory mechanisms to regulate coal combustion residuals, generally referred to as “coal ash,” and requests information from industry on these respective proposals. PSE has joined other Colstrip owners in requesting an extension to the 120 day comment period, and the owners are currently evaluating the potential impact of these regulations on operations at Colstrip. PSE’s potential increased cost of operating Colstrip is unknown at this time and dependent on the outcome of this rulemaking.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ENERGY PORTFOLIO MANAGEMENT

PSE maintains energy risk policies and procedures to manage commodity and volatility risks and the related effects on credit, tax accounting, financing and liquidity. PSE’s Energy Management Committee establishes PSE’s risk management policies and procedures and monitors compliance. The Energy Management Committee is comprised of certain PSE officers and is overseen by the PSE Board of Directors.

PSE is focused on the commodity price exposure and risks associated with volumetric variability in the natural gas and electric portfolios and related effects noted above. It is not engaged in the business of assuming risk for the purpose of speculative trading. PSE hedges open gas and electric positions to reduce both the portfolio risk and the volatility risk in prices. The exposure position is determined by using a probabilistic risk system that models 250 simulations of how PSE’s natural gas and power portfolios will perform under various weather, hydroelectric and unit performance conditions. The objectives of the hedging strategy are to:

• Ensure physical energy supplies are available to reliably and cost-effectively serve retail load;

• Manage the energy portfolio prudently to serve retail load at overall least cost and limit undesired impacts on PSE’s customers and shareholders;

• Reduce power costs by extracting the value of PSE’s assets; and

• Meet the credit, liquidity, financing, tax and accounting requirements of PSE.

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ASC 815, “Derivatives and Hedging” (ASC 815) requires a significant amount of disclosure regarding PSE’s derivative activities and the nature of such derivatives impact on PSE’s financial position, financial performance and cash flows. Such detail should serve as an accompaniment to Management’s Discussion and Analysis (MD&A), which is located under Item 2 of this report. Further, and as a result of ASC 815 disclosures, summary metrics that may be included in this MD&A discussion may be further expanded upon in the footnotes preceding the MD&A.

PSE employs various portfolio optimization strategies but is not in the business of assuming risk for the purpose of realizing speculative trading revenue. PSE’s portfolio of owned and contracted electric generation resources exposes PSE and its retail electric customers to volumetric and commodity price risks within the sharing mechanism of the PCA. PSE’s natural gas retail customers are served by natural gas purchase contracts which expose PSE’s customers to commodity price risks through the PGA mechanism. All purchased natural gas costs are recovered through customer rates with no direct impact on PSE. Therefore, wholesale market transactions are focused on balancing PSE’s energy portfolio, reducing costs and risks where feasible and reducing volatility. PSE’s energy risk portfolio management function monitors and manages these risks. In order to manage risks effectively, PSE enters into forward physical electricity and natural gas purchase and sale agreements, and floating for fixed swap contracts that are related to its regulated electric and natural gas portfolios. The forward physical electricity contracts are both fixed and variable (at index) while the physical natural gas contracts are variable with investment grade counterparties that do not require collateral calls on the contracts. To fix the price of natural gas, PSE may enter into natural gas floating for fixed swap (financial) contracts with various counterparties.

On July 1, 2009, Puget Energy and PSE elected to de-designate all energy related derivative contracts that previously had been recorded as cash flow hedges for the purpose of simplifying its financial reporting. The contracts that were de-designated related to physical electric supply contracts and natural gas swap contracts to fix the price of natural gas for electric generation. For these contracts and contracts initiated after this date, all mark-to-market adjustments are recognized through earnings. The amount previously recorded in accumulated OCI is transferred to earnings in the same period or periods during which the hedged transaction affected earnings or sooner if management determines that the forecasted transaction is probable of not occurring. As a result, the Company will continue to experience the earnings impact of these reversals from OCI in future periods.

The following tables present the Company’s energy derivatives instruments that do not meet the NPNS exception at September 30, 2010 and December 31, 2009:

	ENERGY DERIVATIVES
PUGET ENERGY DERIVATIVE PORTFOLIO (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
	ASSETS		LIABILITIES		ASSETS		LIABILITIES
Electric portfolio:
Current	$	3,504	$	146,407	$	4,137	$	79,732
Long-term		1,598		140,923		1,003		70,367
Total electric derivatives	$	5,102	$	287,330	$	5,140	$	150,099
Gas portfolio:
Current	$	4,578	$	135,377	$	10,811	$	62,207
Long-term		2,952		76,041		3,602		19,350
Total gas derivatives	$	7,530	$	211,418	$	14,413	$	81,557
Total derivatives	$	12,632	$	498,748	$	19,553	$	231,656

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	ENERGY DERIVATIVES
PUGET SOUND ENERGY DERIVATIVE PORTFOLIO (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
	ASSETS		LIABILITIES		ASSETS		LIABILITIES
Electric portfolio:
Current	$	3,504	$	146,407	$	4,137	$	75,323
Long-term		1,598		140,923		1,003		70,367
Total electric derivatives	$	5,102	$	287,330	$	5,140	$	145,690
Gas portfolio:
Current	$	4,578	$	135,377	$	10,811	$	62,207
Long-term		2,952		76,041		3,602		19,350
Total gas derivatives	$	7,530	$	211,418	$	14,413	$	81,557
Total derivatives	$	12,632	$	498,748	$	19,553	$	227,247

For further details regarding both the fair value of derivative instruments and the impacts such instruments have on current period earnings and OCI (for cash flow hedges), please see Note 3 and Note 4 of the notes to the consolidated financial statements.

At September 30, 2010, the Company had total assets of $7.5 million and total liabilities of $211.4 million related to financial contracts used to economically hedge the cost of physical natural gas purchased to serve natural gas customers. All fair value adjustments of derivatives relating to the natural gas business have been reclassified to a deferred account in accordance with ASC 980, “Regulated Operations,” (ASC 980) due to the PGA mechanism. All increases and decreases in the cost of natural gas supply are passed on to customers with the PGA mechanism. As the gains and losses on the hedges are realized in future periods, they will be recorded as natural gas costs under the PGA mechanism.

A hypothetical 10.0% increase or decrease in market prices of natural gas and electricity would change the fair value of the Company derivative contracts by $113.4 million and would impact the fair value of those contracts marked-to-market in earnings by $73.7 million after-tax related to derivatives not designated as hedges.

CONTINGENT FEATURES AND COUNTERPARTY CREDIT RISK

PSE is exposed to credit risk primarily through buying and selling electricity and natural gas to serve customers. Credit risk is the potential loss resulting from a counterparty’s non-performance under an agreement. PSE manages credit risk with policies and procedures for, among other things, counterparty analysis and measurement, monitoring and mitigation of exposure.

Where deemed appropriate, PSE may request collateral or other security from its counterparties to mitigate the potential credit default losses. Criteria employed in this decision include, among other things, the perceived creditworthiness of the counterparty and the expected credit exposure. As of September 30, 2010, PSE held approximately $1.1 million worth of standby letters of credit in support of various electricity and renewable energy credit transactions.

It is possible that volatility in energy commodity prices could cause PSE to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, PSE could suffer a material financial loss. However, as of September 30, 2010, approximately 92.2% of PSE’s energy and natural gas portfolio exposure, including NPNS transactions, is with counterparties that are rated at least investment grade by the major rating agencies, and 7.8% of PSE’s portfolio are either rated below investment grade or are not rated by rating agencies. PSE assesses credit risk internally for counterparties that are not rated.

PSE has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. PSE generally enters into the following master arrangements: (1) WSPP, Inc. (WSPP) agreements – standardized power sales contracts in the electric industry; (2) International Swaps and Derivatives Association (ISDA) agreements – standardized financial gas and electric contracts; and (3) North American Energy Standards Board (NAESB) agreements– standardized physical gas contracts. PSE believes that entering into such agreements reduces the risk of default by allowing a counterparty the ability to make only one net payment.

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PSE monitors counterparties that are experiencing financial problems, have significant swings in credit default swap rates, have credit rating changes by external rating agencies or have changes in ownership. Counterparty credit risk impacts PSE’s decisions on derivative accounting treatment. A counterparty may have a deterioration of credit below investment grade, potentially indicating that it is no longer probable that it will fulfill its obligations under a contract (e.g., make a physical delivery upon the contract’s maturity). ASC 815 specifies the requirements for derivative contracts to qualify for the NPNS scope exception. When performance is no longer probable, based on the deterioration of counterparty’s credit, PSE records the fair value of the contract on the balance sheet with the corresponding amount recorded in the statements of income.

The locked accumulated OCI of the cash flow hedge is impacted by a counterparty’s deterioration of credit under ASC 815 guidelines. If a forecasted transaction associated with cash flow hedge is no longer probable of occurring, based on deterioration of credit, PSE will record in earnings the locked accumulated OCI.

Should a counterparty file for bankruptcy, which would be considered a default under master arrangements, PSE may terminate related contracts. Derivative accounting entries previously recorded would be reversed in the financial statements. PSE would compute any terminations receivable or payable, based on the terms of existing master agreements.

The Company computes credit reserves at a master agreement level by counterparty (i.e., WSPP, ISDA or NAESB). The Company considers external credit ratings and market factors, such as credit default swaps and bond spreads, in determination of reserves. The Company recognizes that external ratings may not always reflect how a market participant perceives a counterparty’s risk of default. The Company uses both default factors published by Standard & Poor’s and factors derived through analysis of market risk, which reflect the application of an industry standard recovery rate. The Company selects a default factor by counterparty at an aggregate master agreement level based on a weighted average default tenor for that counterparty’s deals. The default tenor is used by weighting the fair value and contract tenors for all deals for each counterparty and coming up with an average value. The default factor used is dependent upon whether the counterparty is in a net asset or a net liability position after applying the master agreement levels.

The Company applies the counterparty’s default factor to compute credit reserves for counterparties that are in a net asset position. Moreover, the Company calculates a non-performance risk on its derivative liabilities by using its estimated incremental borrowing rate over the risk-free rate. The fair value of derivatives includes the impact of taking into account credit and non-performance reserves. As of September 30, 2010, the Company was in a net liability position with the majority of its counterparties so the default factors of counterparties did not have a significant impact on reserves for the year. Despite its net liability position, PSE was not required to post any additional collateral with any of its counterparties. Additionally, PSE did not trigger any collateral requirements with any of its counterparties, nor were any of PSE’s counterparties required to post additional collateral resulting from credit rating downgrades.

INTEREST RATE RISK

The Company believes its interest rate risk primarily relates to the use of short-term debt instruments and leases and anticipated long-term debt financing needed to fund capital requirements. The Company manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. The Company utilizes internal cash from operations, commercial paper and credit facilities to meet short-term funding needs. 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 or other financial hedge instruments to manage the interest rate risk associated with these debts. As of September 30, 2010, Puget Energy had seven interest rate swap contracts outstanding, and PSE did not have any outstanding interest rate swap instruments.

In February 2009, Puget Energy entered into interest rate swap transactions to hedge the risk associated with one-month LIBOR floating rate debt. As of September 30, 2010, the fair value of the interest rate swaps designated as cash flow hedges was a $77.9 million pre-tax loss. This fair value considers the risk of Puget Energy’s non-performance by using Puget Energy’s incremental borrowing rate on unsecured debt over the risk-free rate in the valuation estimate. The ending balance in OCI includes a loss of $50.6 million after tax related to the interest rate swaps designated as cash flow hedges during the current reporting period.

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A hypothetical 10.0% increase or decrease in interest rates would change the fair value of interest rate swaps by $4.4 million, with a corresponding after-tax increase in unrealized loss recorded in accumulated OCI of $2.9 million.

The following table presents Puget Energy’s interest rate derivative instruments designated as cash flow hedges at September 30, 2010 and December 31, 2009:

PUGET ENERGY DERIVATIVE PORTFOLIO (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
INTEREST RATE SWAPS	ASSETS		LIABILITIES		ASSETS		LIABILITIES
Current	$	—	$	30,441	$	—	$	26,844
Long-term		—		47,472		20,854		—
Total	$	—	$	77,913	$	20,854	$	26,844

From time to time PSE may enter into treasury locks or forward starting swap contracts to hedge interest rate exposure related to an anticipated debt issuance. The ending balance in OCI related to the forward starting swaps and previously settled treasury lock contracts at September 30, 2010 is a net loss of $7.4 million after tax and accumulated amortization. This compares to a loss of $7.6 million in OCI after tax as of December 31, 2009. All financial hedge contracts of this type are reviewed by an officer, presented to the Asset Management Committee or the Board of Directors, as applicable, and are approved prior to execution. PSE had no treasury locks or forward starting swap contracts outstanding at September 30, 2010.

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DESCRIPTION OF NOTES

General

We will issue the exchange notes under the Indenture dated as of December 6, 2010, between us and Wells Fargo Bank, N.A., as trustee, and the Supplemental Indenture, dated as of December 6, 2010, also between us and Wells Fargo Bank, N.A., as trustee. We refer to the indenture and the supplemental indenture as the “Indenture.” The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the “Trust Indenture Act”).

The following description is only a summary of the material provisions of the Indenture and the Collateral Documents relating to the Notes, does not purport to be complete and is qualified in its entirety by reference to the provisions of the Indenture and such Collateral Documents, including the definitions therein of certain terms used below. Because this is a summary, it may not contain all the information that is important to you. We urge you to read the Indenture and such Collateral Documents because they, and not this description, will define your rights as holders of the Notes. You may request copies of the proposed form of the Indenture and the Collateral Documents as described under “Where You Can Find More Information.”

The Notes will:

• be our senior, secured and unsubordinated obligations;

• rank pari passu with all of our other existing and future senior, secured and unsubordinated obligations;

• be senior in right of payment to all of our existing and future subordinated debt; and

• be structurally subordinated to all indebtedness and other liabilities of our subsidiaries, including PSE.

Except as described below under “—Certain Covenants—Limitation on Liens,” the Indenture does not limit our ability to incur other indebtedness or to issue other securities, including other series of debt securities.

The Notes will be denominated in U.S. dollars and principal and interest will be paid in U.S. dollars. We will issue the Notes in denominations of $2,000 and integral multiples of $1,000 in excess thereof. The Notes will not be subject to any conversion, amortization or sinking fund. You will not have the right to require us to redeem or repurchase the Notes at your option.

The Notes will not be guaranteed by, or otherwise be obligations of, our parent company, any of its direct or indirect subsidiaries other than us, or the members of the consortium that own our parent company, and will not be guaranteed by any of our affiliates.

Because we are a holding company, our rights and the rights of our creditors, including holders of the Notes, in respect of claims on the assets of our subsidiary, PSE, upon any liquidation or administration are structurally subordinated to, and therefore will be subject to the prior claims of PSE’s creditors (including trade creditors of and holders of debt issued by PSE). At September 30, 2010, PSE had total long-term debt and current liabilities of approximately $4.3 billion, all of which would be effectively senior to the Notes.

Our ability to pay interest on the Notes is dependent upon the receipt of dividends and other distributions from PSE. The availability of distributions from PSE is subject to the satisfaction of various covenants and conditions contained in PSE’s existing and future financing documents.

In the discussion that follows, “Puget Energy,” “the Company,” “we,” “us” and “our” refer only to Puget Energy, Inc., and any successor obligor on the Notes, and not to PSE or any other subsidiary of ours. References to paying principal on the Notes are to payment at maturity or redemption. Definitions of certain defined terms used in this “Description of Notes” but not defined below have the meanings assigned to them under “—Definitions.”

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Principal, Maturity and Interest

The Notes initially will be issued in an aggregate principal amount of $450 million. The Notes will bear interest at the rate of 6.500% per year and will mature on December 15, 2020. Interest will be payable on the Notes semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011, until the principal is paid or made available for payment. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance. Payment of interest on the Notes will be made to the person in whose name such Notes are registered at the close of business on the June 1 and December 1 immediately preceding the relevant interest payment date. Interest will be computed based on a 360-day year consisting of twelve 30-day months. If any date on which interest is payable on the Notes is not a business day, then payment of the interest payable on that date will be made on the next succeeding day which is a business day (and without any additional interest or other payment in respect of any delay), with the same force and effect as if made on such date. If there has been a default in the payment of interest on any Note, such defaulted interest may be payable to the holder of such Note as of the close of business on a date selected by the trustee which is not more than 30 days and not less than 10 days before the date proposed by the Company for payment of such defaulted interest or in any other lawful manner, if the trustee deems such manner of payment practicable.

Payment of principal of the Notes will be made against surrender of such Notes at the corporate trust office of the trustee in New York, New York, as paying agent for us. We may change the paying agent at our discretion. For so long as the Notes are issued in book-entry form, payments of principal and interest shall be made in immediately available funds by wire transfer to The Depository Trust Company, or DTC, or its nominee.

All amounts paid by us for the payment of principal, premium (if any) or interest on any Notes that remain unclaimed at the end of two years after such payment has become due and payable will be repaid to us and the holders of such Notes will thereafter look only to us for payment thereof.

Form and Denomination; Registration and Transfer

The Notes will be issued in fully registered form only in denominations of $2,000 and integral multiples of $1,000 in excess thereof. We will initially issue the Notes in global book-entry form. So long as the Notes are in book-entry form, transfers and exchanges will be registered on the records of the depositary or its participants. If the Notes are issued in certificated form, holders of Notes may register the transfer of Notes, and may exchange Notes for other Notes of the same series and tranche, of authorized denominations and having the same terms and aggregate principal amount, at the corporate trust office of Wells Fargo Bank, N.A., as security registrar for the Notes. We may change the place for registration of transfer and exchange of the Notes, may appoint one or more additional security registrars (including us) and may remove any security registrar, all at our discretion. No service charge will be made for any transfer or exchange of the Notes, but we may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of the Notes. We will not be required to execute or provide for the registration of transfer of or the exchange of (a) any Note during a period of 15 days before giving any notice of redemption or (b) any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. See “—Book-Entry; Delivery and Form.”

Further Issuances

The Notes initially will be limited to $450 million in aggregate principal amount. We may, from time to time, without notice to or the consent of the holders of the Notes, create and issue additional debt securities under the Indenture having the same terms as, and ranking equally with, the Notes in all respects (except for the offering price and issue date), provided that such debt securities are fungible with the previously issued and outstanding debt securities for U.S. federal income tax purposes. The Notes offered hereby and any such further Notes subsequently issued under the Indenture will be treated as a single class for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase.

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Ranking

The Notes will be:

• our senior secured obligations;

• pari passu in right of payment, to the extent of the value of the Collateral securing the Notes, with all of our existing and future senior secured indebtedness (as of the date hereof, our obligations under our Senior Credit Facility constitutes our only other senior secured indebtedness);

• senior in right of payment to any of our future subordinated indebtedness; and

• structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of our subsidiaries, including PSE.

Because we are a holding company and substantially all of our operations are conducted by our subsidiaries (principally PSE), holders of our debt securities, including holders of the Notes, will have a junior position to claims of creditors and certain security holders of our subsidiaries, including trade creditors, debt holders, secured creditors, taxing authorities and guarantee holders. To the extent that we may be a creditor with recognized claims against any of our subsidiaries, our claims would also be effectively subordinated to any security interest in, or mortgages or other liens on, the assets of our subsidiaries and would be subordinated to any indebtedness or other liabilities of our subsidiaries senior to our interest. Certain of our operating subsidiaries, principally PSE, have ongoing corporate debt programs used to finance their business activities. As of September 30, 2010, PSE had approximately $3.6 billion of outstanding debt. We and PSE retain the ability to incur substantial additional indebtedness and other liabilities. Moreover, our ability to pay principal and interest on the Notes is dependent upon the earnings of our subsidiaries and the distribution or other payments from our subsidiaries to us in the form of dividends, loans, advances or the repayment of loans and advances from us. The Indenture does not contain any limitation on our ability to incur additional debt or on our subsidiaries’ ability to incur additional debt to us or to third parties. In addition, we lend funds to our subsidiary PSE from time to time through a demand promissory note.

No Guarantees

The Notes will not be guaranteed by any of our subsidiaries or other affiliates. Because the Notes will not be guaranteed by our subsidiaries, the Notes will be structurally subordinated to all existing and future liabilities of our subsidiaries. See “—Ranking” above.

Security

General

The Notes will be secured by liens (subject to Permitted Liens) on the same assets that secure our other Secured Obligations, including our Credit Agreement Obligations (other than the Lock-Up Account), which assets currently consist of: (i) subject to certain exceptions, substantially all of our tangible and intangible assets, other than real property, including 100% of the equity interests of PSE (the “Pledged PSE Stock”) and (ii) 100% of the equity interests of Puget Energy, Inc., which are owned by our parent, Puget Equico LLC (the “Pledged Puget Energy Stock” and, collectively with the Pledged PSE Stock, the “Pledged Stock”).

The Collateral will exclude certain of our assets as more specifically set forth in the Collateral Documents, including without limitation, (a) any lease, license, contract or agreement to which we are a party, and any of its rights or interest thereunder, if and to the extent that a security interest is prohibited by or in violation of (i) any law, rule or regulation applicable to us, or (ii) a term, provision or condition of any such lease, license, contract, property right or agreement (unless such law, rule, regulation, term, provision or condition would be rendered ineffective with respect to the creation of the security interest hereunder pursuant to the Uniform Commercial Code as in effect from time to time in the state of New York (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the U.S. Bankruptcy Code) or principles of equity) and (b) any proceeds of Collateral or amounts required to be deposited in the Lock-Up Account pursuant to our senior secured credit facility and the Security Agreement.

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Under the terms of the Collateral Agency Agreement, the Collateral securing the Notes will be shared equally and ratably (subject to Permitted Liens) with the liens securing other Secured Obligations, which includes the Credit Agreement Obligations and any future Additional Secured Obligations. As of the date hereof, obligations under our Senior Credit Facility constitute our only other Secured Obligations.

Pursuant to the Indenture and the Collateral Documents relating to the Notes, substantial additional Indebtedness may, without the consent of holders, constitute Secured Obligations. So long as any Credit Agreement Obligations remain outstanding and a Majority Non-Controlling Voting Party Enforcement Date has not occurred, the Authorized Representative for our Senior Credit Facility will have the right to control the remedies with respect to the Collateral. See “—Collateral Agency Agreement.” Such rights, if exercised, could adversely affect the value of the Collateral on behalf of the holders of the Notes. We will also be able to incur additional Secured Obligations and other Indebtedness and obligations secured by Permitted Liens. The amount of such obligations could be significant. The existence of any Permitted Liens could adversely affect the value of the Collateral securing the Notes as well as the ability of the collateral agent to realize or foreclose on such Collateral. Your rights to the Collateral would be diluted by any increase in the obligations secured by such Collateral.

Sufficiency of Collateral

The Collateral has not been appraised in connection with this offering. The value of the Collateral and the amount to be received upon a sale of the Collateral will depend upon many factors including, among others, the condition of the Collateral and the energy industry, the ability to sell the Collateral in an orderly sale, the condition of the international, national and local economies, the availability of buyers and similar factors. The book value of the Collateral should not be relied on as a measure of realizable value for these assets. By their nature, portions of the Collateral are illiquid and may have no readily ascertainable market value. In addition, a significant portion of the Collateral includes assets that may only be usable, and thus retain value, as part of our existing business operations. Accordingly, any sale of such assets separate from the sale of our business operations may not be feasible or of significant value. We and Puget Equico have limited obligations to perfect the security interest of the holders in certain specified Collateral. For example, the collateral agent and the other Authorized Representatives under the Collateral Agency Agreement may not have control over, and hence will not have a perfected security interest in, any of our deposit accounts.

After-acquired Collateral

From and after the issue date and subject to certain limitations and exceptions, if we or Puget Equico acquires any property or asset that would constitute Collateral, pursuant to the terms of the Collateral Documents relating to the Notes, holders of the Notes will obtain a lien (subject to Permitted Liens) upon such property or asset as security for the Notes. However, there can be no assurance that the trustee or the collateral agent will monitor, or that we or Puget Equico will inform the trustee or the collateral agent of, the future acquisition of property and rights that constitute Collateral, and that the necessary actions will be taken to properly perfect the security interest in such after-acquired property.

Foreclosure

Upon the occurrence and during the continuance of an Event of Default, the Collateral Agency Agreement provides for (among other available remedies) the foreclosure upon and sale of the applicable Collateral by the collateral agent, subject to any requirement that the Washington Commission and FERC consent to or approve the exercise of remedies by the collateral agent as described below, at the direction of the Controlling Authorized Representative as set forth in the Collateral Agency Agreement, and the distribution of the net proceeds of any such sale to the holders of Secured Obligations, including the holders on a pro rata basis, subject to the Collateral Agency Agreement. In the event of foreclosure on the Collateral, the proceeds from the sale of the Collateral may not be sufficient to satisfy in full our obligations under the Notes. Pursuant to the Collateral Agency Agreement, only the collateral agent, acting at the direction of the Controlling Authorized Representative may exercise remedies with respect to the Liens securing Secured Obligations. The Authorized Representative for our Senior Credit Facility will be the Controlling Authorized Representative for so long as any Credit Agreement Obligations are secured by the Collateral and thereafter the Authorized Representative for the holders of the largest class of outstanding Secured Obligations. Accordingly, holders may not ever have the right to control the remedies and the taking of other actions related to the Collateral.

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Regulatory considerations may affect the ability of the collateral agent to exercise certain rights with respect to the Pledged Stock upon the occurrence of an Event of Default. Because PSE is a regulated public utility, such foreclosure proceedings, the enforcement of the Collateral Documents and the right to take other actions with respect to the Pledged PSE Stock and Pledged Puget Energy Stock may be limited and subject to regulatory approval. PSE is subject to regulation at the state level by the Washington Commission. At the federal level, it is subject to regulation by FERC. See “Business–Regulation and Rates” in our Annual Report. Regulation by the Washington Commission and FERC includes regulation with respect to the change of control, transfer or ownership of utility property. In particular, such foreclosure proceedings, the enforcement of the pledge agreement and the right to take other actions or exercise other remedies with respect to the pledged shares of PSE and Puget Energy stock could require approval by FERC and/or the Washington Commission. There can be no assurance that any such regulatory approval can be obtained on a timely basis, or at all.

Certain bankruptcy limitations

The right and ability of the collateral agent to repossess and dispose of the Collateral upon the occurrence of an Event of Default would be significantly impaired by applicable bankruptcy law in the event that a bankruptcy case were to be commenced by or against us or Puget Equico prior to the collateral agent having repossessed and disposed of the Collateral. Upon the commencement of a case for relief under the Bankruptcy Code, a secured creditor such as the collateral agent is prohibited from repossessing Collateral from a debtor in a bankruptcy case, or from disposing of Collateral repossessed from a debtor, without bankruptcy court approval.

In view of the broad equitable powers of a U.S. bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the collateral agent could repossess or dispose of the Collateral, the value of the Collateral at the time of the bankruptcy petition or whether or to what extent holders would be compensated for any delay in payment or loss of value of the Collateral. The U.S. Bankruptcy Code permits only the payment and/or accrual of post-petition interest, costs and attorneys’ fees to a secured creditor during a debtor’s bankruptcy case to the extent the value of the Collateral is determined by the bankruptcy court to exceed the aggregate outstanding principal amount of the obligations secured by the Collateral.

Furthermore, in the event a bankruptcy court determines that the value of the Collateral is not sufficient to repay all amounts due on the Notes, the holders would hold secured claims only to the extent of the value of the Collateral, and unsecured claims with respect to any shortfall.

Any future pledge of Collateral in favor of the collateral agent, including pursuant to Collateral Documents relating to the Notes delivered after the date of the Indenture, might be voidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of the Notes to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period.

See “Risk Factors—Risks Relating to the Notes—Rights of Holders in the Collateral may be adversely affected by bankruptcy proceedings” and “Risk Factors—Risks Relating to the Notes—Any future pledge of Collateral might be voidable in bankruptcy.”

Certain covenants with respect to the Collateral

The Collateral will be pledged pursuant to the Collateral Documents, which contain provisions relating to identification of the Collateral and the maintenance of perfected Liens securing obligations under the Notes. The following is a summary of some of the covenants and provisions set forth in the Collateral Documents relating to the Notes and the Indenture as they relate to the Collateral.

The Collateral Documents will provide that we and Puget Equico shall, at our and Puget Equico’s sole expense, do all acts which may be reasonably necessary, if requested by the collateral agent, to confirm that the collateral agent holds, for the benefit of the holders, duly created, enforceable and perfected Liens in the Collateral (subject to Permitted Liens) to the extent required by the Indenture, and such Collateral Documents.

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As necessary, or upon reasonable request of the collateral agent, we and Puget Equico shall, at our and Puget Equico’s sole expense, execute, acknowledge and deliver such documents and instruments and take such other actions, which may be necessary, or as the collateral agent may reasonably request, to assure, perfect, transfer and confirm the property and rights conveyed by the Collateral Documents, including with respect to after acquired Collateral, to the extent required thereunder.

The Collateral Documents will require us to agree that it will (i) cause PSE not to issue any equity interests in addition to or in substitution for the equity interests issued by PSE, except to us, and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional equity interests issued to it by PSE.

Collateral Agency Agreement

The trustee, as Authorized Representative for the holders, shall sign a joinder to the Collateral Agency Agreement. The Collateral Agency Agreement shall govern the rights of the holders of Secured Obligations, including the holders, with respect to the Collateral, and may be amended from time to time without the consent of the trustee or the holders to add other parties holding Additional Secured Obligations permitted to be incurred under the Indenture, our Senior Credit Facility, any other Security Documents and the Collateral Agency Agreement.

Under the Collateral Agency Agreement, only the Controlling Authorized Representative has the right to instruct the collateral agent to commence any judicial or nonjudicial foreclosure proceedings with respect to, seek to have a trustee, receiver, liquidator or similar official appointed for or over, attempt any action to take possession of, exercise any right, remedy or power with respect to, or otherwise take any action to enforce its security interest in or realize upon, or take any other action available to it in respect of, any Collateral, whether under any Security Document, applicable Law or otherwise. Only the collateral agent, acting on the instructions of the Controlling Authorized Representative or the Required Voting Parties and in accordance with the applicable Security Documents, shall be entitled to take any such actions or exercise any such remedies with respect to the Collateral and the Authorized Representatives of all other classes of Secured Obligations have no right to instruct the collateral agent or otherwise take actions with respect to the Collateral except as described below, even though all holders of Secured Obligations will share equally and ratably in the proceeds. The Controlling Authorized Representative will initially be the Authorized Representative for our Senior Credit Facility. The trustee, who will act as Authorized Representative in respect of the Notes, will have no rights to take any action under the Collateral Agency Agreement except as described below.

The Authorized Representative for our Senior Credit Facility will be the Controlling Authorized Representative for so long as any Credit Agreement Obligations are secured by the Collateral and thereafter the Controlling Authorized Representative will be the Authorized Representative of the class of Secured Obligations that constitutes the largest outstanding principal amount of any then-outstanding class of Secured Obligations with respect to the Collateral; provided, in each case, that if there shall occur one or more Majority Non-Controlling Voting Party Enforcement Dates, the Controlling Authorized Representative shall be the Authorized Representative representing the largest principal amount of Secured Obligations then outstanding.

The “Majority Non-Controlling Voting Party Enforcement Dates” is, with respect to any Series of Secured Obligations, the date which is 90 days (throughout which 90 day period such Series of Secured Obligations was the Series constituting the Majority Non-Controlling Voting Parties) after the occurrence of both (i) an Event of Default (under and as defined in the Credit Document applicable to such Majority Non-Controlling Voting Parties) and (ii) the collateral agent’s and each other Authorized Representative’s receipt of written notice from the Authorized Representative for the Majority Non-Controlling Voting Parties certifying that (x) the holders of such Series of Secured Obligations are the Majority Non-Controlling Voting Parties and that an Event of Default (under and as defined in the Credit Document applicable to such Majority Non-Controlling Voting Parties) has occurred and is continuing and (y) the Secured Obligations of such Series are currently due and payable in full (whether as a result of acceleration thereof or otherwise) in accordance with the terms of the applicable Credit Document governing the Series for such Majority Non-Controlling Voting Parties; provided that the 90-day period referenced above in this definition shall be stayed and the Majority Non-Controlling Voting Party Enforcement Date shall be stayed and shall not occur and shall be deemed not to have occurred with respect to any Collateral (1) at any time the collateral agent has commenced and is diligently pursuing any enforcement action with respect to such Collateral or (2) at any time any Loan Party or any grantor which has granted a security interest in such Collateral is then a debtor under or with respect to any Insolvency or Liquidation Proceeding.

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Only the collateral agent will act with respect to the Collateral. The Controlling Authorized Representative will have the sole right to instruct the collateral agent to act or refrain from acting with respect to the Collateral; the collateral agent will not follow any instructions with respect to such Collateral from any representative of any other Secured Party or other Secured Party (other than the Controlling Authorized Representative); and no representative of any other Secured Party or other Secured Party will instruct the collateral agent to commence any judicial or non-judicial foreclosure proceedings with respect to, seek to have a trustee, receiver, liquidator or similar official appointed for or over, attempt any action to take possession of, exercise any right, remedy or power with respect to, or otherwise take any action to enforce its security interest in or realize upon, or take any other action available to it in respect of, the Collateral.

The collateral agent, acting at the direction of the Controlling Authorized Representative, will have the right, to the extent authorized by the Collateral Documents, to adjust or settle any insurance policy or claim covering or constituting Collateral in the event of any loss thereunder and to approve any award granted in any condemnation or similar proceeding affecting the Collateral.

Notwithstanding the equal priority of the Liens, the collateral agent, acting on the instructions of the Controlling Authorized Representative, may deal with the Collateral as if the Controlling Authorized Representative had a senior Lien on such Collateral. No representative of any non-controlling secured party may contest, protest or object to any foreclosure proceeding or action brought by the collateral agent or any other exercise by the collateral agent of any rights and remedies relating to the Collateral or cause the collateral agent to do so. The foregoing shall not be construed to limit the rights and priorities of any Secured Party or Authorized Representative with respect to any collateral not constituting Collateral. Neither the collateral agent nor any other Authorized Representative will accept any Lien on any Collateral for the benefit of the holders of the Notes (other than funds deposited for the discharge or defeasance of the Notes) other than pursuant to the Collateral Documents.

If an event of default has occurred and is continuing under any Credit Document and the collateral agent is taking action to enforce rights in respect of any Collateral, or any distribution is made with respect to any Collateral in any bankruptcy proceeding of us or Puget Equico or any Secured Party receives any payment pursuant to any Security Documents (other than the Collateral Agency Agreement) with respect to any Collateral, the proceeds of any sale, collection or other liquidation of any such Collateral by any Secured Party or received by the collateral agent or any other Secured Party pursuant to any such Credit Document with respect to such Collateral and proceeds of any such distribution (subject, in the case of any such distribution, to the paragraph immediately following) to which the Secured Obligations are entitled under any agreement (other than the Collateral Agency Agreement) shall be applied pursuant to the Collateral Agency Agreement in the following order of priority:

• First, to the payment of the costs and expenses of such exercise of remedies, including reasonable out-of-pocket costs and expenses of the Agents, the reasonable fees and expenses of their agents and counsel and all other reasonable expenses incurred and advances made by the Agents in that connection;

• Next, to the payment in full of the remaining Secured Obligations equally and ratably in accordance with their respective amounts then due and owing in respect of the Credit Documents, or as the Secured Parties holding the same may otherwise unanimously agree; and

• Finally, subject to the rights of any other holder or holders of any Lien on the relevant Collateral, to the payment to us, or our respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining.

Holders of Secured Obligations of each class (and not the Secured Parties of any other class) bear the risk of any determination by a court of competent jurisdiction that (x) any of the Secured Obligations of such class are unenforceable under applicable law or are subordinated to any other obligations (other than another class of Secured Obligations) and (y) any of the Secured Obligations of such class do not have an enforceable security interest in any of the Collateral securing any other class of Secured Obligations.

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In any Insolvency or Liquidation Proceeding and prior to the Discharge of Secured Obligations, the collateral agent (acting at the direction of the Required Voting Parties) on behalf of all Secured Parties and Authorized Representatives, may consent to any order: (i) for use of cash Collateral; (ii) approving a debtor-in-possession financing secured by a Lien upon any property of the estate in such Insolvency or Liquidation Proceeding; (iii) granting any relief on account of Secured Obligations as adequate protection (or its equivalent) for the benefit of the Secured Parties in the Collateral subject to Liens granted to the collateral agent, for the benefit of the Secured Parties; or (iv) relating to a sale of assets of any Loan Party that provides, to the extent the Collateral sold is to be free and clear of Liens, that all Liens granted to the collateral agent, for the benefit of the Secured Parties will attach to the proceeds of the sale; provided, however, that any Secured Party shall retain the right to object to any cash Collateral, debtor-in-possession financing or adequate protection order to the extent such order provides for priming of Liens over any Collateral if the terms thereof, including the terms of adequate protection (if any) granted to the Secured Parties in connection therewith, do not provide for materially equal treatment to all Secured Parties.

Unless at the direction of, or as consented to by, the Required Voting Parties, the Secured Parties will not file or prosecute in any Insolvency or Liquidation Proceeding any motion for adequate protection (or any comparable request for relief) based upon their interest in the Collateral under the Liens granted to the collateral agent, for the benefit of the Secured Parties, except that, without any action by the Required Voting Parties, they may vote their claims in respect of the Series of Secured Obligations owed to them in connection with, and have their right to object to, the confirmation of any plan of reorganization or similar dispositive restructuring plan to the extent any such action is not inconsistent with their obligations under the Collateral Agency Agreement.

If any Secured Party is required in any Insolvency or Liquidation Proceeding or otherwise to turn over or otherwise pay to the estate of the borrower or any Loan Party for any reason, including without limitation, because it was found to be a fraudulent or preferential transfer, any amount paid in respect of the Secured Obligations, whether received as proceeds of security, enforcement of any right of set-off or otherwise, then such Secured Party shall be entitled to a reinstatement of the Secured Obligations with respect to all such recovered amounts. In such event, (i) the Discharge of Secured Obligations or Discharge of Credit Agreement Obligations, as applicable, shall be deemed not to have occurred, and (ii) if the Collateral Agency Agreement shall have been terminated prior to such recovery or avoidance action, the Collateral Agency Agreement shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair or otherwise affect the obligations of the parties hereto from such date of reinstatement.

Each Secured Party, including the holders and the trustee, agrees that (i) it will not challenge or question in any proceeding the validity or enforceability of any Secured Obligations of any Series or any Credit Document or the validity, attachment, perfection or priority of any Lien under any Security Document or the validity or enforceability of the priorities, rights or duties established by or other provisions of the Collateral Agency Agreement; (ii) it will not take or cause to be taken any action the purpose or intent of which is, or could be, to interfere, hinder or delay, in any manner, whether by judicial proceedings or otherwise, any sale, transfer or other disposition of the Collateral by the collateral agent, (iii) except in accordance with the Collateral Agency Agreement, it shall have no right to direct the collateral agent or any other Secured Party to exercise any right, remedy or power with respect to any Collateral unless such Secured Party is the Controlling Authorized Representative, (iv) it will not institute any suit or assert in any suit, bankruptcy, insolvency or other proceeding any claim against the collateral agent or any other Secured Party seeking damages from or other relief by way of specific performance, instructions or otherwise with respect to any Collateral, and none of the collateral agent, any Controlling Authorized Representative or any other Secured Party shall be liable for any action taken or omitted to be taken by the collateral agent, such Controlling Authorized Representative or other Secured Party with respect to any Collateral in accordance with the provisions of the Collateral Agency Agreement, (v) it will not seek, and hereby waives any right, to have any Collateral or any part thereof marshalled upon any foreclosure or other disposition of such Collateral, (vi) it will not attempt, directly or indirectly, whether by judicial proceedings or otherwise, to challenge the enforceability of any provision of the Collateral Agency Agreement, and (vii) it will not (and hereby waives any right to) contest or support any other Person in contesting, in any proceeding (including any Insolvency or Liquidation Proceeding), the perfection, priority, validity or enforceability of a Lien held by the collateral agent on behalf of any of the Secured Parties in all or any part of the Collateral, or the provisions of the Collateral Agency Agreement.

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Notwithstanding the foregoing, a Secured Party will not be prohibited from taking the following actions: (i) in any Insolvency or Liquidation Proceeding commenced by or against us or Puget Equico, each Secured Party may file a claim or statement of interest with respect to its Series of Secured Obligations, as applicable, (ii) each Authorized Representative may take and may direct the collateral agent to take any action (not adverse to the Liens of the collateral agent securing the Secured Parties) in order to preserve or protect its interest in and Liens created by the Security Documents on the Collateral, (iii) the Secured Parties shall be entitled to file any necessary responsive or defensive pleadings in opposition to any motion, claim, adversary proceeding or other pleading made by any Person objecting to or otherwise seeking the disallowance of their claims, including any claims secured by the Collateral, if any, (iv) in any Insolvency or Liquidation Proceeding, the Secured Parties shall be entitled to file any pleadings, objections, motions or agreements which assert rights or interests available to unsecured creditors of the Loan Parties arising under either Debtor Relief Laws or applicable non-bankruptcy law, in each case not in contravention of the terms of the Collateral Agency Agreement, (v) in any Insolvency or Liquidation Proceeding, the Secured Parties shall be entitled to vote on any plan of reorganization, and (vi) both before and during an Insolvency or Liquidation Proceeding, any Secured Party may take any actions and exercise any and all rights that would be available to a holder of unsecured claims, including, without limitation, the commencement of an Insolvency or Liquidation Proceeding against us or Puget Equico in accordance with applicable Law and the termination of any agreement by the holder of any such obligation in accordance with the terms thereof.

The collateral agent will hold any Collateral in its possession or control (or in the possession or control of its agents or bailees) (“Possessory Collateral”) as gratuitous bailee for the benefit of and on behalf of the other Secured Parties and any assignee solely for the purpose of perfecting the security interest granted in such Possessory Collateral, if any, pursuant to the applicable Collateral Documents, in each case, subject to the terms and conditions of this paragraph. Pending delivery to the collateral agent, each Authorized Representative will hold any Collateral constituting Possessory Collateral, from time to time in its possession, as gratuitous bailee for the benefit of and on behalf of each other Secured Party and any assignee, solely for the purpose of perfecting the security interest granted in such Possessory Collateral, if any, pursuant to the applicable Collateral Documents, in each case, subject to the terms and conditions of this paragraph. The duties or responsibilities of the collateral agent and each Authorized Representative under this paragraph will be limited solely to holding any Collateral constituting Possessory Collateral as gratuitous bailee for the benefit of and on behalf of each other Secured Party for purposes of perfecting the Lien held by such Secured Parties therein. All such Possessory Collateral in the possession of any Authorized Representative shall be delivered to the collateral agent as soon as practicable.

Each Secured Party will agree that if it obtains possession of any Collateral or realizes any proceeds or payment in respect of any such Collateral pursuant to any Collateral Document or by the exercise of any rights available to it under applicable law or in any insolvency or liquidation proceeding or through any other exercise of remedies at any time prior to the Discharge of each of the Secured Obligations (determined, solely for this purpose, as if the Secured Obligations owing to such Secured Party did not exist), then it will hold such Collateral, proceeds or payment in trust for the other Secured Parties and promptly transfer such Collateral, proceeds or payment, as the case may be, to the collateral agent, to be distributed in accordance with the Collateral Agency Agreement.

The collateral agent, on behalf of the holders of the Notes, and each other Secured Party will acknowledge that the Secured Obligations of any class may, subject to the limitations set forth in the other Credit Documents outstanding at such time, be increased, extended, renewed, replaced, restated, supplemented, restructured, repaid, refunded, refinanced or otherwise amended or modified from time to time, all without affecting the priorities set forth in the Collateral Agency Agreement defining the relative rights of the Secured Parties of any class.

Collateral Agent

Pursuant to the Collateral Agency Agreement, we have appointed Barclays Bank PLC to serve as the collateral agent for the benefit of the Secured Parties.

Additional debt

To the extent, but only to the extent, permitted by the provisions of the then-extant Credit Documents, we may incur or issue and sell one or more classes of additional Indebtedness. The obligations in respect of any such additional Indebtedness may be secured by a Lien on the Collateral on a pari passu basis, in each case under and pursuant to the Collateral Documents, if and subject to the condition that the representative of any such additional class or series of Indebtedness, acting on behalf of the holders of such Indebtedness, becomes a party to the Collateral Agency Agreement by satisfying the conditions set forth therein.

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Release of Collateral

The Collateral Documents relating to the Notes and the Indenture will provide that the Liens on the Collateral may be released:

(a) in whole, upon the Discharge of the Secured Obligations;

(b) as to any Collateral that is released, sold, transferred or otherwise disposed of by us or Puget Equico to a Person that is not (either before or after such release, sale, transfer or disposition) us or Puget Equico in a transaction or other circumstance that complies with the terms of the then-extant Credit Documents (for so long as any Credit Document is in effect) and is permitted by all of the then-extant Credit Documents, at the time of such release, sale, transfer or other disposition or to the extent of the interest released, sold, transferred or otherwise disposed of;

(c) as to a release of less than a material portion of the Collateral, at any time prior to the Discharge of Secured Obligations, if consent to the release of all Liens on such Collateral has been given by the Required Voting Parties; and

(d) as to a release of all or any material portion of the Collateral (other than upon the Discharge of Secured Obligations), if consent to release of that Collateral has been given by the Unanimous Voting Parties.

Upon request by the collateral agent at any time, the Secured Parties will confirm in writing the collateral agent’s authority to release its interest in particular types or items of property pursuant to the Collateral Agency Agreement. In each case as specified in the Collateral Agency Agreement, the collateral agent will (and each Secured Party irrevocably authorizes the collateral agent to), at our expense, execute and deliver to us or Puget Equico, as applicable, such documents as such Person may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Security Documents, in accordance with the terms of the Collateral Agency Agreement or any other Credit Document.

Under the Collateral Agency Agreement, if at any time the collateral agent forecloses upon or otherwise exercises remedies against any Collateral, then (whether or not any insolvency or liquidation proceeding is pending at the time) the Liens in favor of the collateral agent for the benefit of the holders and the Liens upon such Collateral securing all other Secured Obligations will automatically be released and discharged pursuant to the Collateral Agency Agreement and the Collateral Documents. However, any proceeds of any Collateral realized therefrom will be applied as described under “—Collateral Agency Agreement.”

Amendments

The collateral agent may, without obtaining the consent of the Required Voting Parties or any other secured Party other than as set forth in the Collateral Agency Agreement, modify any Security Document to which it is a party or the Collateral Agency Agreement to (i) cure any ambiguity or to cure, correct or supplement any provision contained therein which is inconsistent with any other provisions contained therein, (ii) make, complete or confirm any grant of Collateral permitted or required by the Collateral Agency Agreement or the Security Documents or any release of any Collateral permitted under the Collateral Agency Agreement, or (iii) to make changes that would provide additional benefits or rights to the Secured Parties.

Subject to certain exceptions, the Collateral Agency Agreement may be amended with the consent of the Required Voting Parties provided that if any amendment adversely affects us or any class of Secured Obligations, consent of the Authorized Representative for such class or of us, as applicable, is required.

Authorization of actions to be taken

Each holder of Notes, by its acceptance thereof, will be deemed to have consented and agreed to the terms of each Collateral Document, as originally in effect and as amended, supplemented or replaced from time to time in accordance with its terms or the terms of the Indenture, to have authorized and directed the trustee to enter into a joinder agreement to the Collateral Agency Agreement, and to have authorized and empowered the trustee and

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(through the Collateral Agency Agreement) the collateral agent to bind the holders of Notes as set forth in the Collateral Documents to which they are a party and to perform its respective obligations and exercise its respective rights and powers thereunder.

Optional Redemption

We may, at our option, redeem the Notes, in whole at any time or in part from time to time, upon notice by mail not less than 30 nor more than 60 days before the date fixed for redemption, at a redemption price equal to the greater of:

(1) 100% of the principal amount of the Notes then outstanding to be redeemed, and

(2) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (not including any portion of such interest payments accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, as calculated by an Independent Investment Banker;

plus, in either of the above cases, accrued and unpaid interest, including additional interest, if any, thereon to the date of redemption.

If less than all the Notes are to be redeemed, the particular Notes to be redeemed will be selected by the security registrar from the outstanding Notes not previously called for redemption by lot or by such method as Wells Fargo Bank, N.A., as trustee for the Notes, deems fair and appropriate.

Any notice of redemption at our option may state that such redemption will be conditional upon receipt by the paying agent or agents, on or before the date fixed for such redemption, of money sufficient to pay the principal of and premium, if any, and interest, if any, on such Notes and that if such money has not been so received, such notice will be of no force or effect and we will not be required to redeem such Notes.

Unless we default in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption.

Purchase of Notes Upon Change of Control Repurchase Event

In the event of any Change of Control Repurchase Event (the effective date of such Change of Control Repurchase Event being the “Change of Control Date”) each holder of a Note will have the right, at such holder’s option, subject to the terms and conditions of the Indenture, to require us to repurchase all or any part (equal to $2,000 or an integral multiple of $1,000 in excess thereof) of that holder’s Notes on a date selected by us that is no earlier than 60 days nor later than 90 days (the “Purchase Date”) after the mailing of written notice by us of the occurrence of such Change of Control Repurchase Event, at a repurchase price payable in cash equal to 101% of the principal amount of such Notes plus accrued interest, including additional interest, if any, thereon to the Purchase Date (the “Change of Control Purchase Price”).

Within 30 days after the Change of Control Date, we are obligated to mail to each holder of a Note a notice regarding the Change of Control Repurchase Event, which notice shall state, among other things:

(i) that a Change of Control Repurchase Event has occurred and that each such holder has the right to require us to repurchase all or any part of such holder’s Notes at the Change of Control Purchase Price;

(ii) the Change of Control Purchase Price;

(iii) the Purchase Date;

(iv) the name and address of the paying agent; and

(v) the procedures that holders must follow to cause the Notes to be repurchased.

To exercise this right, a holder must deliver a written notice (the “Change of Control Purchase Notice”) to the paying agent (initially the trustee) at its corporate trust office in New York, New York, or any other office of the paying agent maintained for such purposes, not later than 30 days prior to the Purchase Date. The Change of Control Purchase Notice shall state:

(i) the portion of the principal amount of any Notes to be repurchased, which must be a minimum of $2,000 and in integral multiples of $1,000 in excess thereof;

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(ii) that such Notes are to be repurchased by us pursuant to the applicable Change of Control provisions of the Indenture; and

(iii) unless the Notes are represented by one or more global Notes, the certificate numbers of the Notes to be repurchased.

Any Change of Control Purchase Notice may be withdrawn by the holder by a written notice of withdrawal delivered to the paying agent not later than three business days prior to the Purchase Date. The notice of withdrawal shall state the principal amount and, if applicable, the certificate numbers of the Notes as to which the withdrawal notice relates and the principal amount, if any, that remains subject to a Change of Control Purchase Notice.

If a Note is represented by a global Note, DTC or its nominee will be the holder of such Note and therefore will be the only entity that can require us to repurchase Notes upon a Change of Control Repurchase Event. To obtain repayment with respect to such Note upon a Change of Control Repurchase Event, the beneficial owner of such Note must provide to the broker or other entity through which it holds the beneficial interest in such Note (i) the Change of Control Purchase Notice signed by such beneficial owner, and such signature must be guaranteed by a member firm of a registered national securities exchange or of the Financial Industry Regulatory Authority, Inc. or a commercial bank or trust company having an office or correspondent in the United States, and (ii) instructions to such broker or other entity to notify DTC of such beneficial owner’s desire to cause us to repurchase such Notes. Such broker or other entity will provide to the paying agent (1) a Change of Control Purchase Notice received from such beneficial owner and (2) a certificate satisfactory to the paying agent from such broker or other entity that it represents such beneficial owner. Such broker or other entity will be responsible for disbursing any payments it receives upon the repurchase of such Notes by us.

Payment of the Change of Control Purchase Price for a Note in registered, certificated form (a “Certificated Note”) for which a Change of Control Purchase Notice has been delivered and not withdrawn is conditioned upon delivery of such Certificated Note (together with necessary endorsements) to the trustee, as our paying agent, at its corporate trust office in New York, New York, or any other office of the paying agent maintained for such purpose, at any time (whether prior to, on or after the Purchase Date) after the delivery of such Change of Control Purchase Notice. We may change the paying agent at our discretion. Payment of the Change of Control Purchase Price for such Certificated Note will be made promptly following the later of the Purchase Date or the time of delivery of such Certificated Note.

If the paying agent holds, in accordance with the terms of the Indenture, money sufficient to pay the Change of Control Purchase Price of a Note on the business day following the Purchase Date for such Note, then, on and after such date, interest on such Note will cease to accrue, whether or not such Note is delivered to the paying agent, and all other rights of the holder shall terminate (other than the right to receive the Change of Control Purchase Price upon delivery of the Note).

The definition of Change of Control set forth in the Indenture with respect to the Notes differs from the definition of change of control in our Senior Credit Facility. Depending on the circumstances, it is possible that a change of control may occur for purposes of our Senior Credit Facility without constituting a Change of Control for purposes of the Indenture.

The definition of Change of Control includes a phrase relating to the direct or indirect sale, transfer, assignment, lease, conveyance or other disposition of “all or substantially all” of the assets of us and our subsidiaries, considered as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require us to repurchase the Notes as a result of a sale, transfer, assignment, lease, conveyance or other disposition of less than all of the assets of us and our subsidiaries, considered as a whole, may be uncertain.

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Under clause (iii) of the definition of Change of Control below, a Change of Control will occur when a majority of our Board of Directors (for so long as the Bylaws are in effect, together with any replacement or new directors appointed to such Board of Directors in accordance with the terms of the Bylaws, and to the extent the terms of the Bylaws are no longer in effect, together with any new directors whose election or appointment by such Board of Directors or whose nomination for election by our shareholders was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), during any period, cease to constitute a majority of our Board of Directors then in office. In San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc. et al. (May 2009), the Delaware Court of Chancery held that the occurrence of a change of control under a similar indenture provision may nevertheless be avoided if the existing directors were to approve the slate of new director nominees, provided the incumbent directors gave their approval in the good faith exercise of their fiduciary duties owed to the corporation and its shareholders. Therefore, in certain circumstances involving a significant change in the composition of our Board of Directors, holders of the Notes may not be entitled to require us to repurchase the Notes as described above.

The Indenture requires us to comply with the provisions of Regulation 14E and any other tender offer rules under the Exchange Act of 1934, as amended (the “Exchange Act”) that may then be applicable in connection with any offer by us to purchase Notes at the option of holders upon a Change of Control Repurchase Event. The Change of Control Repurchase Event purchase feature of the Notes may in certain circumstances make more difficult or discourage a takeover and, thus, the removal of incumbent management. The Change of Control Repurchase Event purchase feature, however, is not the result of management’s knowledge of any specific effort to accumulate shares of its common stock or to obtain control of us by means of a merger, tender offer, solicitation or otherwise, or part of a plan by management to adopt a series of anti-takeover provisions. Instead, the Change of Control Repurchase Event purchase feature is a term contained in many similar debt offerings and the terms of such feature result from negotiations between us and the initial purchasers. Our management has no present intention to propose any anti-takeover measures although it is possible that we could decide to do so in the future.

No Note may be repurchased by us as a result of a Change of Control Repurchase Event if there has occurred and is continuing an event of default described under “—Events of Default” below (other than a default in the payment of the Change of Control Purchase Price with respect to the Notes). In addition, our ability to purchase Notes may be limited by our financial resources and our inability to raise the required funds because of restrictions on issuance of securities contained in other contractual arrangements.

Certain Covenants

Merger, Consolidation, Sale, Lease or Conveyance

The Indenture will provide that we may not, directly or indirectly (i) consolidate or merge with or into another person, whether or not we are the surviving corporation, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of our or our subsidiaries’ properties or assets taken as a whole, in one or more related transactions, to another person, unless:

(1) either (a) we are the surviving corporation or (b) the person formed by or surviving any such consolidation or merger (if other than us) or to which such sale, assignment, transfer, conveyance or other disposition has been made is a corporation, partnership or limited liability company organized or existing under the laws of the United States, any state of the United States or the District of Columbia; provided that if the person is a partnership or limited liability company, then a corporation that (i) is wholly owned by such person, (ii) is organized or existing under the laws of the United States, any state of the United States or the District of Columbia, and (iii) does not and will not have any material assets or operations, shall become a co-issuer of the Notes pursuant to a supplemental indenture duly executed by the trustee;

(2) the person formed by or surviving any such consolidation or merger (if other than us) or the person to which such sale, assignment, transfer, conveyance or other disposition has been made assumes all of our obligations under the Notes and the Indenture pursuant to a supplemental indenture or other documents and agreements reasonably satisfactory to the trustee; and

(3) immediately after such consolidation or merger, no Event of Default exists.

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In addition, we may not, directly or indirectly, lease all or substantially all of our properties or assets, in one or more related transactions, to any other person.

Limitations on Liens

So long as the Notes are outstanding, we will not pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage, pledge, security interest or other lien upon, the Collateral, other than Permitted Liens. For purposes of this covenant, “Indebtedness” means all indebtedness, whether or not represented by bonds, debentures, notes or other securities, created or assumed by us for the repayment of money borrowed.

Limitation on Sale-Leaseback Transactions

We will not enter into any sale-leaseback transaction involving any of our properties whether now owned or hereafter acquired, whereby we sell or transfer such properties and then or thereafter lease such properties or any part thereof or any other properties which we intend to use for substantially the same purpose or purposes as the properties sold or transferred.

Reports and Other Information

Whether or not required by the SEC’s rules and regulations, so long as any Notes are outstanding, we will furnish to the holders of Notes or cause the trustee to furnish to the holders of Notes:

(1) within 90 days of the end of each fiscal year and within 60 days of the end of each fiscal quarter, all annual and quarterly reports that would be required to be filed with the Commission on Forms 10-K and 10-Q if we were required to file such reports; and

(2) within the time periods specified in the SEC’s rules and regulations that would be applicable if we were subject to such rules and regulations, all current reports that would be required to be filed with the SEC on Form 8-K if we were required to file such reports.

All such reports will be prepared, within the time periods specified above, in all material respects in accordance with all of the rules and regulations applicable to such reports. Each annual report on Form 10-K will include a report on our consolidated financial statements by our independent registered public accounting firm or independent auditors. In addition, we will file a copy of each of the reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in clauses (1) and (2) above (unless the SEC will not accept such a filing). We agree that we will not take any action for the purpose of causing the SEC not to accept any such filings. If, notwithstanding the foregoing, the SEC will not accept our filings for any reason, we will use our reasonable best efforts to post the reports referred to in the preceding paragraph on our website within the time periods specified above. To the extent such filings are made, the reports will be deemed to be furnished to the trustee and holders of Notes on the date filed.

In addition, for so long as any Notes remain outstanding, we will furnish to prospective purchasers of Notes, upon their request, the information described above as well as any other information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act for compliance with Rule 144A.

Information Regarding Collateral

We will furnish to the collateral agent prompt written notice of any change in our (i) legal name, (ii) jurisdiction of incorporation, or (iii) identity or corporate structure. We will agree not to effect or permit any change referred to in the preceding sentence unless all filings have been made or will have been made within any applicable statutory period under the Uniform Commercial Code or otherwise that are required in order for the collateral agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. We also agree promptly to notify the collateral agent if any material portion of the Collateral is damaged, destroyed or condemned.

In addition, each year, at the time of delivery of the annual financial statements with respect to the preceding fiscal year, we will deliver to the trustee a certificate of a financial officer setting forth the information required pursuant to the schedules required by the Security Documents or confirming that there has been no change in such information since the date of the prior annual financial statements.

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No Liability of Directors, Officers, Employees, Incorporators and Shareholders

None of our directors, officers, employees, incorporators, members or shareholders, as such, will have any liability for any of our obligations under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. This waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.

Events of Default

Any one or more of the following events with respect to the Notes that has occurred and is continuing will constitute an “Event of Default” with respect to the Notes under the Indenture:

(i) failure to pay interest within 30 days after the same becomes due and payable;

(ii) failure to pay the principal of, or any premium on, the Notes at maturity, upon redemption, upon required purchase, upon acceleration or otherwise;

(iii) failure to perform or breach of any covenant, representation, warranty or other agreement contained in the Indenture, the Notes or the Security Documents (other than a default referred to in clauses (i) and (ii) above) for 60 days after written notice to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the Notes as provided in the Indenture unless the trustee, or the trustee and the holders of a principal amount of the Notes not less than the principal amount of Notes the holders of which gave such notice, as the case may be, agree in writing to an extension of such period before its expiration; provided, however, that the trustee, or the trustee and the holders of such principal amount of Notes, as the case may be, will be deemed to have agreed to an extension of such period if corrective action is initiated by us within such period and is being diligently pursued;

(iv) the occurrence of a matured event of default, as defined in any of our instruments or any significant subsidiary’s instruments under which there is or by which there is evidenced any Indebtedness of us or any significant subsidiary, that has resulted in the acceleration of such Indebtedness in excess of $100 million, or any default in payment of Indebtedness in excess of $100 million at final maturity, after the expiration of any applicable grace or cure periods; provided, however, that the waiver or cure of any such default under any such instrument or Indebtedness shall constitute a waiver and cure of the corresponding Event of Default under the Indenture and the rescission and annulment of the consequences thereof shall constitute a rescission and annulment of the corresponding consequences under the Indenture;

(v) certain events of bankruptcy or insolvency described in the Indenture with respect to us or any significant subsidiary thereof;

(vi) our repudiation of any of our obligations under any of the Security Documents or the unenforceability of any of the Security Documents against us for any reason if such unenforceability shall be applicable to (x) Collateral having an aggregate Fair Market Value of $100 million or more or (y) the Pledged Stock and any such unenforceability has not been cured within 60 days after written notice to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the Notes as provided in the Indenture;

(vii) any Security Document or any lien purported to be granted thereby on (x) the Pledged Stock or (y) assets having a Fair Market Value in excess of $100 million is held in any judicial proceeding to be unenforceable or invalid, in whole or in part, or ceases for any reason (other than pursuant to a release that is delivered or becomes effective as set forth in the Indenture) to be fully enforceable and perfected and any such unenforceability or lack of perfection has not been cured within 60 days after written notice to us by the trustee or to us and the trustee by the holders of at least 25% in principal amount of the Notes as provided in the Indenture; and

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(viii) the failure by us to pay final judgments aggregating in excess of $100 million, which judgments are not paid, discharged or stayed for a period of 60 days.

As used herein, “Fair Market Value” means the value that would be paid by a willing buyer to a willing seller in a transaction not involving distress or necessity of either party, determined in good faith by our chief financial officer or our Board of Directors.

Remedies

Acceleration of Maturity

In the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to us or any Significant Subsidiary, then the principal, premium, if any, and accrued interest on the Notes shall be immediately due and payable, without any declaration or other act on the part of the trustee or any holder. If any other Event of Default occurs and is continuing, then either the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the principal amount of all of the outstanding Notes to be due and payable immediately by written notice to us (and to the trustee if given by holders); provided, however, that if an Event of Default occurs and is continuing with respect to more than one series of securities outstanding under the Indenture, including the Notes, the trustee or the holders of not less than 25% in aggregate principal amount of such securities, considered as one class, may make such declaration of acceleration and not the holders of any one series of such securities.

At any time after such a declaration of acceleration with respect to any series of securities outstanding under the Indenture has been made, but before a judgment or decree for payment of the money due has been obtained, such declaration and its consequences will, without further act, be deemed to have been rescinded and annulled, if

(1) we have paid or deposited with the trustee a sum sufficient to pay:

(a) all overdue interest, if any, on all securities of such series;

(b) the principal of and premium, if any, on any securities of such series which have become due otherwise than by such declaration of acceleration and interest, if any, thereon at the rate or rates prescribed therefor in such securities;

(c) interest, if any, upon overdue interest, if any, at the rate or rates prescribed therefor in the securities, to the extent that payment of such interest is lawful; and

(d) all amounts due to the trustee under the Indenture in respect of compensation and reimbursement of expenses; and

(2) all Events of Default with respect to the securities of such series, other than the nonpayment of the principal of the securities of such series which has become due solely by such declaration of acceleration, have been cured or waived as provided in the Indenture.

Right to Direct Proceedings

If an Event of Default with respect to any series of securities outstanding under the Indenture occurs and is continuing, the holders of a majority in principal amount of such securities will have the right to direct the time, method and place of conducting any proceedings for any remedy available to the trustee or exercising any trust or power conferred on the trustee; provided, however, that if an Event of Default occurs and is continuing with respect to more than one series of securities outstanding under the Indenture, the holders of a majority in aggregate principal amount of the outstanding securities of all such series, considered as one class, will have the right to make such direction, and not the holders of the securities of any one of such series; and provided, further, that (a) such direction does not conflict with any rule of law or with the Indenture, and could not involve the trustee in personal liability in circumstances where indemnity would not, in the trustee’s sole discretion, be adequate, (b) the trustee does not determine that the action so directed would be unjustly prejudicial to the holders of such series of securities not taking part in such direction and (c) the trustee may take any other action deemed proper by the trustee which is not inconsistent with such direction.

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Limitation on Right to Institute Proceedings

No holder of any Note will have any right to institute any proceeding, judicial or otherwise, with respect to the Indenture or for the appointment of a receiver or for any other remedy thereunder unless:

(i) such holder has previously given to the trustee written notice of a continuing Event of Default with respect to the Notes;

(ii) the holders of at least 25% in aggregate principal amount of securities of all series outstanding under the Indenture in respect of which such Event of Default has occurred, considered as one class, have made written request to the trustee to institute proceedings in respect of such Event of Default and have offered the trustee reasonable indemnity against costs and liabilities to be incurred in complying with such request; and

(iii) for 60 days after receipt of such notice, the trustee has failed to institute any such proceeding and no direction inconsistent with such request has been given to the trustee during such 60-day period by the holders of a majority in aggregate principal amount of securities then outstanding under the Indenture.

Furthermore, no holder of Notes will be entitled to institute any such action if and to the extent that such action would disturb or prejudice the rights of other holders of Notes.

No Impairment of Right to Receive Payment

Notwithstanding that the right of a holder of Notes to institute a proceeding with respect to the Indenture is subject to certain conditions precedent, each holder of a Note will have the right, which is absolute and unconditional, to receive payment of the principal of and premium, if any, and interest, if any, on such Note when due and to institute suit for the enforcement of any such payment, and such rights may not be impaired or affected without the consent of such holder.

Notice of Default

The trustee is required to give the holders of securities outstanding under the Indenture notice of any default under the Indenture to the extent required by the Trust Indenture Act, unless such default shall have been cured or waived, except that no such notice to holders of a default of the character described in clause (iii) under “—Events of Default” may be given until at least 75 days after the occurrence thereof. For purposes of the preceding sentence, the term “default” means any event which is, or after notice or lapse of time, or both, would become, an Event of Default. The Trust Indenture Act currently permits the trustee to withhold notices of default (except for certain payment defaults) if the trustee in good faith determines the withholding of such notice to be in the interests of the holders.

Reporting

The Indenture requires that certain of our officers certify, on or before a date not more than 120 days after the end of each fiscal year, that to the best of those officers’ knowledge, we have fulfilled all our obligations under the Indenture. We are also obligated to notify the trustee of any default or defaults in the performance of any covenants or agreements under the Indenture, but a failure by us to deliver such notice of a default will not constitute a default under the Indenture if we have remedied such default within any applicable cure period.

Modification of Indenture

Modifications Without Consent

We and the trustee may enter into one or more supplemental indentures without the consent of any holders of the Notes, for any of the following purposes:

(i) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of such party;

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(ii) to add one or more covenants of the Company or other provisions for the benefit of holders of the Notes, or to surrender any right or power conferred upon us by the Indenture;

(iii) to change or eliminate any provision of the Indenture or to add any new provision to the Indenture, provided that if such change, elimination or addition adversely affects the interests of the holders of the Notes in any material respect, such change, elimination or addition will become effective only when no Notes are outstanding;

(iv) to comply with any requirements of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act;

(v) to make, complete or confirm any grant of Collateral permitted or required by the Security Documents or, with the consent of the collateral agent, any release of Collateral that becomes effective as set forth in the Security Documents;

(vi) to establish the form or terms of securities of any series or tranche under the Indenture as permitted by the Indenture;

(vii) provide for the authentication and delivery of bearer securities and coupons appertaining thereto representing interest, if any, thereon and for the procedures for the registration, exchange and replacement thereof and for the giving of notice to, and the solicitation of the vote or consent of, the holders thereof, and for any and all other matters incidental thereto;

(viii) to evidence and provide for the acceptance of appointment by a successor trustee;

(ix) to provide for the procedures required to permit the utilization of a non-certificated system of registration for all, or any series or tranche of, the securities under the Indenture;

(x) to change any place or places where—

(a) the principal of and premium, if any, and interest, if any, on all or any series of securities under the Indenture, or any tranche thereof, will be payable,

(b) all or any series of securities under the Indenture, or any tranche thereof, may be surrendered for registration of transfer,

(c) all or any series of securities under the Indenture, or any tranche thereof, may be surrendered for exchange, and

(d) notices and demands to or upon us in respect of all or any series of securities under the Indenture, or any tranche thereof, and the Indenture may be served;

(xi) to cure any ambiguity, to correct or supplement any provision therein which may be defective or inconsistent with any other provision therein, or to make any other changes to the provisions thereof or to add other provisions with respect to matters and questions arising under the Indenture, so long as such other changes or additions do not adversely affect the interests of the holders of any series or tranche of securities under the Indenture in any material respect; or

(xii) to waive the rights of other secured debt holders.

In addition, if the Trust Indenture Act is amended after the date of the original Indenture in such a way as to require changes to the Indenture or the incorporation therein of additional provisions or so as to permit changes to, or the elimination of, provisions which, at the date of the original Indenture or at any time thereafter, were required by the Trust Indenture Act to be contained in the Indenture, the Indenture will be deemed to have been amended so as to conform to such amendment or to effect such changes or elimination, and we and the trustee may, without the consent of any holders of securities outstanding under the Indenture, enter into one or more supplemental indentures to evidence such amendment.

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Modifications Requiring Consent

Except as provided above, the consent of the holders of a majority in aggregate principal amount of all series of securities then outstanding under the Indenture, considered as one class, is required for the purpose of adding any provisions to, or changing in any manner, or eliminating any of the provisions of, the Indenture pursuant to one or more supplemental indentures; provided, however, that if less than all of the series of securities outstanding under the Indenture are directly affected by a proposed supplemental indenture, then the consent only of the holders of a majority in aggregate principal amount of outstanding securities of all series so directly affected, considered as one class, will be required; and provided, further, that if the securities of any series have been issued in more than one tranche and if the proposed supplemental indenture directly affects the rights of the holders of one or more, but less than all, of such tranches, then the consent only of the holders of a majority in aggregate principal amount of the outstanding securities of all tranches so directly affected, considered as one class, will be required; and provided, further, that no such supplemental indenture may:

(1) reduce the principal amount of or change the stated maturity of any installment of principal of the Notes;

(2) reduce the rate of or change the stated maturity of any interest payment on the Notes;

(3) reduce the amount payable upon the redemption of the Notes, in respect of an optional redemption, change the times at which the Notes may be redeemed or, once notice of redemption has been given, the time at which they must thereupon be redeemed;

(4) waive an Event of Default in the payment of principal of, or premium, if any, or interest on the Notes (except a rescission of acceleration of such Notes by the holders of at least a majority in aggregate principal amount of such Notes and a waiver of the payment default that resulted from such acceleration);

(5) make the Notes payable in money other than that stated in the Notes;

(6) impair the right of any holder of Notes to receive any principal payment or interest payment on such holder’s Notes, on or after the stated maturity thereof, or to institute suit for the enforcement of any such payment;

(7) make any change in the percentage of the principal amount of the Notes required for amendments or waivers; or

(8) modify or change any provision of the Indenture affecting the ranking of the Notes in a manner adverse to the holders of the Notes.

It is not necessary for holders to approve the particular form of any proposed amendment, supplement or waiver, but it is sufficient if their consent approves the substance thereof.

Neither we nor any of our subsidiaries or affiliates may, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or agreed to be paid to all holders of the Notes that consent, waive or agree to amend such term or provision within the time period set forth in the solicitation documents relating to the consent, waiver or amendment.

A supplemental indenture which changes or eliminates any covenant or other provision of the Indenture which has expressly been included solely for the benefit of the holders of, or which is to remain in effect only so long as there shall be outstanding, securities of one or more specified series outstanding under the Indenture, or one or more tranches thereof, or modifies the rights of the holders of securities of such series or tranches with respect to such covenant or other provision, will be deemed not to affect the rights under the Indenture of the holders of the securities of any other series or tranche.

If the supplemental indenture or other document establishing any series or tranche of securities under the Indenture so provides, and as specified in the applicable prospectus supplement and/or pricing supplement, the holders of such securities will be deemed to have consented, by virtue of their purchase of such securities, to a supplemental indenture containing the additions, changes or eliminations to or from the Indenture which are specified in such supplemental indenture or other document, no act of such holders will be required to evidence such consent and such consent may be counted in the determination of whether the holders of the requisite principal amount of securities have consented to such supplemental indenture.

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Satisfaction and Discharge

The Notes, or any portion of the principal amount thereof, will be deemed to have been paid for purposes of the Indenture and, at our election, our entire indebtedness in respect thereof will be deemed to have been satisfied and discharged, if there shall have been irrevocably deposited with the trustee, in trust:

(i) money in an amount which will be sufficient,

(ii) in the case of a deposit made before the maturity of such Notes, Eligible Obligations (as described below), which do not contain provisions permitting the redemption or other prepayment thereof at the option of the issuer thereof, the principal of and the interest on which when due, without any regard to reinvestment thereof, will provide moneys which, together with the money, if any, deposited with or held by the trustee, will be sufficient, or

(iii) a combination of (i) and (ii) which will be sufficient,

to pay when due the principal of and premium, if any, and interest, if any, due and to become due on such Indenture Securities. For this purpose, Eligible Obligations include direct obligations of, or obligations unconditionally guaranteed by, the United States, entitled to the benefit of the full faith and credit thereof and certificates, depositary receipts or other instruments which evidence a direct ownership interest in such obligations or in any specific interest or principal payments due in respect thereof, and such other obligations or instruments as shall be specified in an accompanying prospectus supplement.

The Indenture will be deemed to have been satisfied and discharged when no Indenture Securities remain outstanding thereunder and we have paid or caused to be paid all other sums payable by us under the Indenture.

Our right to cause our entire indebtedness in respect of any Notes to be deemed to be satisfied and discharged as described above will be subject to the delivery to the trustee of an opinion of counsel to the effect that in connection with any such deposit above, the holders of such Notes will not recognize income, gain or loss for United States federal income tax purposes as a result of the satisfaction and discharge of our indebtedness in respect thereof and will be subject to United States federal income tax on the same amounts, at the same times and in the same manner as if such satisfaction and discharge had not been effected.

Concerning the Trustee

Wells Fargo Bank, N.A. is the trustee under the Indenture.

Except during the continuance of an Event of Default, the trustee need perform only those duties that are specifically set forth in the Indenture and no others, and no implied covenants or obligations will be read into the Indenture against the trustee. In case an Event of Default has occurred and is continuing, the trustee shall exercise those rights and powers vested in it by the Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of the Indenture will require the trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties thereunder, or in the exercise of its rights or powers, unless it receives indemnity satisfactory to it against any loss, liability or expense.

The Indenture and provisions of the Trust Indenture Act incorporated by reference therein contain limitations on the rights of the trustee, should it become a creditor of us, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee is permitted to engage in other transactions with us and our affiliates; provided that if it acquires any conflicting interest it must either eliminate the conflict within 90 days, apply to the SEC for permission to continue or resign.

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Registration Rights; Additional Interest

We entered into a registration rights agreement with the initial purchasers pursuant to which we agreed, for the benefit of the holders of notes, at our cost, to use best efforts:

• to file with the SEC this registration statement pursuant to which we will offer, in exchange for the original notes, the exchange notes, identical in all material respects to, and evidencing the same indebtedness as, the original notes (but which will not contain terms with respect to transfer restrictions or provide for the additional interest described below);

• to cause the exchange offer registration statement to be declared effective under the Securities Act by March 7, 2011; and

• to cause the exchange offer to be consummated by the April 5, 2011. If we effect the exchange offer, we will be entitled to close the exchange offer 30 business days after its commencement.

Under the registration rights agreement, in the event that:

(a) we are not permitted to consummate the exchange offer due to a change in law or SEC policy; or

(b) for any reason, we do not consummate the exchange offer by April 5, 2011; or

(c) any holder notifies us prior to the 30^th business day following the consummation of the exchange offer that:

• it is not permitted under law or SEC policy to participate in the exchange offer;

• it cannot publicly resell new notes that it acquires in the exchange offer without delivering a prospectus, and the prospectus contained in the exchange offer registration statement is not appropriate or available for resales by that holder; or

• it is a broker-dealer and holds original notes that it acquired directly from us or one of our affiliates;

then we shall use our best efforts to file a shelf registration statement with the SEC to cover resales of the Notesand maintain the effectiveness of the registration statement for two years or such lesser period after which all the notes registered therein have been sold or can be resold without limitation under the Securities Act.

In addition, we agreed to pay additional interest if one of the following “registration defaults” occurs:

• the exchange offer registration or the shelf registration statement is not declared effective by the dates required in the registration rights agreement;

• we do not consummate an initial exchange offer by April 5, 2011; or

• the shelf registration statement is declared effective, but thereafter, subject to certain exceptions, ceases to be effective or usable in connection with resales of any notes registered under the shelf registration statement during the periods specified in the registration rights agreement.

If one of these registration defaults occurs, the annual interest rate on the Notes will increase by 0.25% per year. The amount of additional interest will increase by an additional 0.25% per year for any subsequent 90-day period until all registration defaults are cured, up to a maximum additional interest rate of 1.00% per year. When we have cured all of the registration defaults, the interest rate on the Notes will revert immediately to the original level.

Under current SEC interpretations, the Exchange Notes will generally be freely transferable after the exchange offer, except that any broker-dealer that participates in the exchange offer must deliver a prospectus meeting the requirements of the Securities Act when it resells any Exchange Notes. A broker-dealer that delivers a prospectus is subject to the civil liability provisions of the Securities Act and will also be bound by the registration rights agreement, including indemnification obligations.

Holders of original notes must make certain representations (as described in the registration rights agreement) to participate in the exchange offer, notably that they are not an affiliate of us and that they are acquiring the exchange notes in the ordinary course of business and without any arrangement or intention to make a distribution of the exchange notes. Holders original notes must also deliver certain information that is required for a shelf registration statement and provide comments on the shelf registration statement within the time periods specified in the registration rights agreement in order to have their original notes and/or exchange notes included in the shelf registration statement and to receive the liquidated damages described above. A broker-dealer that receives exchange notes in the exchange offer or as part of its market-making or other trading activities must acknowledge that it will deliver a prospectus when it resells the exchange notes.

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This summary of the provisions of the registration rights agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the registration rights agreement, a copy of which is available upon request.

Book-Entry; Delivery and Form

The original notes are, and the exchange notes will be, issued in the form of one or more global certificates, known as “Global Notes.” The Global Notes will be deposited on the date of the acceptance fro exchange of the original notes and the issuance of the exchange notes with, or on behalf of DTC and registered in the name of Cede & co., as DTC’s nominee.

Beneficial interests in the Global Notes may not be exchanged for Notes in certificated form except in the limited circumstances described below. See “—Exchange of Global Notes for Certificated Notes.” Except in the limited circumstances described below, owners of beneficial interests in the Global Notes will not be entitled to receive physical delivery of Notes in certificated form. Persons holding interests in the global securities may hold their interests directly through DTC or indirectly through organizations that are participants in DTC (such as Euroclear and Clearstream).

Exchange of Global Notes for Certificated Notes

A Global Note is exchangeable for Notes in registered certificated form (“Certificated Notes”) if:

(1) DTC (a) notifies the Company that it is unwilling or unable to continue as depositary for the Global Notes or (b) has ceased to be a clearing agency registered under the Exchange Act, and the Company fails to appoint a successor depositary within 90 days;

(2) we, in our sole discretion, determine that the Notes shall no longer be represented by such Global Notes;

(3) there shall have occurred a Default or Event of Default with respect to the Notes.

In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the indenture governing the Notes. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend unless that legend is not required by applicable law.

Book-Entry Procedures for the Global Notes

The description of the operations and procedures of DTC, Euroclear and Clearstream set forth below are provided solely as a matter of convenience and are not intended to serve as a representation or warranty of any kind. These operations and procedures are solely within the control of these settlement systems and are subject to change by term from time to time. Neither we nor the initial purchasers take any responsibility for these operations or procedures, and investors are urged to contact the relevant system and its participants directly to discuss these matters.

The following is based upon information furnished by DTC:

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-

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entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com.

Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC’s records. The ownership interest of each actual purchaser of each Note (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct Participants and Indirect Participants acting on behalf of Beneficial Owners. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued.

To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Notes with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Beneficial Owners of Notes may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Notes, such as redemptions, tenders, defaults and proposed amendments to the Security Documents. For example, Beneficial Owners of Notes may wish to ascertain that the nominee holding the Notes for their benefit has agreed to obtain and transmit notices to Beneficial Owners; in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as possible after the record date. The omnibus proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the omnibus proxy).

Redemption proceeds, distributions and interest payments on the Notes will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and corresponding detailed information from the issuer or agent, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Direct or Indirect Participants to Beneficial Owners will be governed by standing instructions and customary

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practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Direct or Indirect Participant and not of DTC or its nominee, agent or issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the issuer or agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

Cross-market transfers between DTC, on the one hand, and directly or indirectly through Euroclear or Clearstream participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (Brussels time). Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the global securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositaries for Euroclear or Clearstream.

Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in the global securities from a DTC participant will be credited during the securities settlement processing day (which must be a business day for Euroclear or Clearstream, as the case may be) immediately following the DTC settlement date, and such credit of any transactions in the global securities settled during such processing day will be reported to the relevant Euroclear or Clearstream participant on such day. Cash received by Euroclear or Clearstream as a result of sales of interests in the global securities by or through a Euroclear or Clearstream participant to a DTC participant will be received with value on the DTC settlement date, but will be available in the relevant Euroclear or Clearstream cash account only as of the business day following settlement in DTC.

If DTC at any time is unwilling or unable to continue as a depositary, defaults in the performance of its duties as depositary or ceases to be a clearing agency registered under the Exchange Act or other applicable statute or regulation, and a successor depositary is not appointed by us within ninety (90) days, we will issue Notes in definitive form in exchange for the global securities relating to the Notes. In addition, we may at any time and in our sole discretion, subject to the procedures of the depositary and DTC, determine not to have the Notes or portions of the Notes represented by one or more global securities and, in that event, will issue individual Notes in exchange for the global security or securities representing the Notes. Further, if we so specify with respect to any Notes, an owner of a beneficial interest in a global security representing the Notes may, on terms acceptable to us and the depositary for the global security, receive individual Notes in exchange for the beneficial interest, subject to DTC’s procedures. In any such instance, an owner of a beneficial interest in a global security will be entitled to physical delivery in definitive form of Notes represented by the global security equal in principal amount to the beneficial interest, and to have the Notes registered in its name. Notes so issued in definitive form will be issued as registered Notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof, unless otherwise specified by us. Such Notes will be subject to certain restrictions on registration of transfers as described under “Notice to Investors” and will bear the legend set forth thereunder. The Notes may not be resold or transferred except as permitted under the Securities Act and the applicable state securities laws pursuant to registration or exemption therefrom. We will have no obligation to register the Notes offered hereby for resale under United States securities laws, and have no plans to do so. Furthermore, we have not registered the Notes under any other country’s securities laws.

Governing Law

The Indenture and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York.

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Definitions

“Additional Credit Document” means any designated agreement by which the Issuer intends to incur additional obligations which shall constitute Additional Secured Obligations.

“Additional Secured Obligations” shall mean any indebtedness and obligations of the Issuer arising under any Additional Credit Document that the Issuer designates as Additional Secured Obligations in accordance with the terms of the Collateral Agency Agreement, in each case to the extent permitted (if addressed therein, or, otherwise, not prohibited) under the Credit Agreement and the other Credit Documents as of the date of such designation; provided that the holder of such indebtedness or other obligations (or the agent, trustee or representative acting on behalf of the holder of such indebtedness or other obligation) shall either be a party hereto or shall have executed and delivered to the collateral agent a Joinder Agreement pursuant to which such holder (or such agent, trustee or representative acting on behalf of such holder) has become a party to the Collateral Agency Agreement and has agreed to be bound by the obligations of a “Secured Party” under the terms of the Collateral Agency Agreement. Subject to meeting the requirements of the preceding sentence, Additional Secured Obligations shall include (a) advances to, and debts, liabilities, obligations, covenants and duties of the Issuer arising under any Additional Credit Documents, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Issuer, of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding, (b) the obligation to pay principal, interest, reimbursement obligations, charges, expenses, fees, attorney fees and expenses, indemnities and other amounts payable by the Issuer under any Additional Credit Document, and (c) the obligation of the Issuer to reimburse any amount in respect of any of the foregoing that any Additional Secured Party, in its sole discretion, may elect to pay or advance on behalf of the Issuer.

“Additional Secured Parties” means any holders of any Additional Secured Obligations and any Authorized Representative with respect thereto.

“Affiliate” of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, “control,” when used with respect to any specified person, means the power to direct generally the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Agents” means, collectively, the Credit Agreement Facility Agent and the collateral agent.

“Attributable Indebtedness” means, on any date, in respect of any Capitalized Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP.

“Authorized Representative” shall mean (a) in the case of any Credit Agreement Obligations or the Credit Agreement Lenders under the Credit Agreement, the Credit Agreement Facility Agent, (b) in the case of any Secured Hedge Obligations and the Interest Rate Hedge Banks, such Interest Rate Hedge Bank or any Person appointed by such Interest Rate Hedge Bank to act as its agent or representative, (c) in the case of the Indenture and the Notes, the trustee, and (d) in the case of any Series of Additional Secured Obligations or Additional Secured Parties that become subject to the Collateral Agency Agreement after the date hereof, the Authorized Representative named for such Series in the applicable Joinder Agreement.

“Business Day” means any day, other than a Saturday or Sunday, that is not a day on which banking institutions or trust companies in the place of payment are generally authorized or required by law, regulation or executive order to remain closed.

“Capitalized Lease” means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases; provided that for all purposes hereunder the amount of obligations under any Capitalized Lease shall be the amount thereof accounted for as a liability in accordance with GAAP.

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“Change of Control” means the occurrence of any of the following events:

(i) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successor provisions to either of the foregoing), other than the Permitted Holders, becomes the “beneficial owners” (as used in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group will be deemed to have “beneficial ownership” of all shares that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the total voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company or otherwise;

(ii) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and its subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a wholly-owned subsidiary) to any person other than the Permitted Holders shall have occurred, or the Company merges, consolidates or amalgamates with or into any other person or any other person merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Stock of the Company is reclassified into or exchanged for other Voting Stock of the Company or for Voting Stock of the surviving corporation and (b) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, a majority of the Voting Stock of the Company or the surviving corporation immediately after such transaction;

(iii) during any period, individuals who at the beginning of such period constituted the Board of Directors of the Company (for so long as the Amended and Restated Bylaws of the Company, dated February 6, 2009 (as amended from time to time, the “Bylaws”) are in effect, together with any replacement or new directors appointed to such Board of Directors in accordance with the terms of the Bylaws, and to the extent the terms of the Bylaws are no longer in effect, together with any new directors whose election or appointment by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or

(iv) our shareholders shall have approved any plan of liquidation or dissolution of the Company.

“Change of Control Repurchase Event” means the occurrence of both a Change of Control and a Ratings Event.

“Collateral” shall mean all the “Collateral,” as defined in each of the Security Documents.

“Collateral Agency Agreement” means the Amended and Restated Collateral Agency Agreement, dated as of February 6, 2009, as amended and restated as of March 31, 2010, among Puget Energy Inc., Puget Merger Sub Inc., Puget Equico LLC, Barclays Bank PLC, each Interest Rate Hedge Bank and each additional Authorized Representative.

“Collateral Documents” means the Collateral Agency Agreement, the Pledge Agreement and the Security Agreement.

“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes to be redeemed that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes.

“Comparable Treasury Price” means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated “Composite 3:30 p.m. Quotations for

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U.S. Government Securities” or (2) if such release (or any successor release) is not published or does not contain such prices on such third Business Day, (A) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations or (B) if the Independent Investment Banker obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations.

“Controlling Authorized Representative” shall mean (a) until the earlier to occur of (i) the Discharge of Credit Agreement Obligations and (ii) the occurrence of the Majority Non-Controlling Voting Party Enforcement Date (if any), the Credit Agreement Facility Agent and (b) from and after the earlier to occur of (i) Discharge of Credit Agreement Obligations and (ii) the occurrence of the Majority Non-Controlling Voting Party Enforcement Date, the Authorized Representative for the Majority Non-Controlling Voting Parties at such time.

“Credit Agreement Facility Agent” means Barclays Bank PLC, together with any successor Credit Agreement Facility Agent appointed pursuant to the Credit Agreement.

“Credit Agreement Lender” means, any party to the Credit Agreement as a “Lender.”

“Credit Agreement Obligations” means all Obligations as such term is defined under the Credit Agreement.

“Credit Documents” shall mean, collectively (without duplication), each Financing Document and any Additional Credit Document providing for or evidencing any Additional Secured Obligations.

“Debtor Relief Laws” means the U.S. Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Discharge of Credit Agreement Obligations” shall mean, except as expressly set forth in the Financing Documents, the payment in full in cash of all outstanding principal amount of Loans under the Credit Agreement, all interest due (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and any post-petition interest) on all “Obligations” outstanding under the Credit Agreement and all fees payable or otherwise accrued under the Financing Documents (other than any contingent indemnity obligations that expressly survive the termination of the Financing Documents).

“Discharge of Secured Obligations” shall mean, except as otherwise provided in the Financing Documents, the payment in full in cash of all (a) outstanding Secured Obligations under any Credit Document, (b) interest (including, without limitation, interest accruing at the then applicable rate provided in the applicable Credit Document after the maturity of the Loans or other indebtedness or other relevant Secured Obligations and postpetition interest) on all Secured Obligations outstanding under any Credit Document, and (c) all fees and other Secured Obligations outstanding under each Credit Document (other than any contingent indemnity obligations that expressly survive the termination of the Credit Documents).

“Equity Interests” means, with respect to any Person, all of the shares, membership interests, rights, participations or other equivalents (however designated) of capital stock of (or other ownership or profit interests or units in) such Person and all of the warrants, options or other rights for the purchase, acquisition or exchange from such Person of any of the foregoing (including through convertible securities).

“Event of Default” shall mean (a) an “event of default” under and as defined in the Credit Agreement or any Additional Credit Document or (b) any event leading to an “early termination date” or an “early termination event” under any Interest Rate Hedging Agreement with respect to which the Issuer or any Loan Party is the defaulting party or affected party, as the case may be.

“Financing Documents” means the Credit Agreement, the Collateral Agency Agreement, the Security Agreement and the Pledge Agreement.

“GAAP” means generally accepted accounting principles in the United States of America, as in effect from time to time, consistently applied.

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“Governmental Authority” means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

(a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments, including, without limitation, hybrid debt securities;

(b) letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties and similar instruments issued or created by or for the account of such Person;

(c) net obligations of such Person under any Interest Hedging Agreement (the amount of any such net obligation to be the amount that is or would be payable upon settlement, liquidation, termination or acceleration thereof at the time of calculation);

(d) all obligations of such Person to pay the deferred purchase price of property or services (other than (i) trade accounts payable in the ordinary course of business, (ii) accrued expenses in the ordinary course of business, (iii) any earn-out obligation until such obligation becomes a liability on the balance sheet of such Person in accordance with GAAP, and (iv) obligations with respect to commodity purchase contracts);

(e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements and mortgage, industrial revenue bond, industrial development bond and similar financings), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

(f) all Attributable Indebtedness;

(g) all Obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Redeemable Equity Interests in such Person or any other or any warrants, rights or options to acquire such Equity Interests, valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

(h) all guarantees of such Person in respect of Indebtedness referred to in any of the foregoing clauses (a) through (g).

“Indenture Securities” means all debt securities outstanding under the Indenture.

“Independent Investment Banker” means Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and J.P. Morgan Securities LLC, or their respective successors, or if any such firm is unwilling or unable to serve as such, an independent investment banking institution of national standing appointed by us.

“Insolvency or Liquidation Proceeding” means (a) any voluntary or involuntary case or proceeding under Debtor Relief Laws with respect to any Loan Party, (b) any other voluntary or involuntary insolvency, reorganization or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding with respect to any Loan Party or with respect to a material portion of their respective assets, (c) any liquidation, dissolution, reorganization or winding up of any Loan Party whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (d) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of any Loan Party.

“Intercreditor Vote” shall mean a vote conducted in accordance with the procedures set forth in Article 3 of the Collateral Agency Agreement among the Voting Parties for the Series entitled to vote with respect to the particular decision at issue.

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“Interest Hedging Agreements” means any rate swap, cap or collar agreement or similar arrangement between the Issuer and one or more interest rate hedge providers designed to protect such Person against fluctuations in interest rates. For purposes of the Collateral Agency Agreement, the indebtedness at any time of the Issuer under an Interest Hedging Agreement shall be determined at such time in accordance with the methodology set forth in such Interest Hedging Agreement.

“Interest Rate Hedge Banks” shall mean (a) any Person that is a Credit Agreement Lender or an Affiliate of a Credit Agreement Lender at the time it enters into an Interest Hedging Agreement or (b) Macquarie Bank Limited to the extent it enters into an Interest Hedging Agreement, in each case, in its capacity as a party to such Interest Hedging Agreement and only for so long as any obligations of the Issuer remain outstanding under the Interest Hedging Agreement to which such Interest Rate Hedge Bank is a party; provided that such Interest Rate Hedge Bank executes a Joinder Agreement pursuant to the terms of the Collateral Agency Agreement; and provided, further, that no Affiliate of the Issuer other than Macquarie Bank Limited and its successors shall become an Interest Rate Hedge Bank.

“Investment Grade” means BBB- or higher by S&P and Baa3 or higher by Moody’s, or the equivalent of such ratings by S&P or Moody’s or, if either S&P or Moody’s shall not make a rating on the Notes publicly available, another Rating Agency.

“Investors” means (i) Macquarie Infrastructure Partners I, (ii) Macquarie Infrastructure Partners II, (iii) Macquarie Capital Group Limited, (iv) Macquarie-FSS Infrastructure Trust, (v) the Canada Pension Plan Investment Board, (vi) the British Columbia Investment Management Corporation, (vii) the Alberta Investment Management Corporation and (viii) each of their respective Affiliates (not including, however, any portfolio companies of any of the Investors). For purposes of the preceding sentence, the term “portfolio companies” does not include, without limitation, (i) any investment fund or investment vehicle managed or co-managed by any Investor or by any of such investment funds’ or investment vehicles’ Affiliates or (ii) any direct or indirect non-operating subsidiary of any Investor.

“Issuer” means the Puget Energy Inc. and Puget Merger Sub Inc.

“Joinder Agreement” shall mean a Joinder Agreement executed by the collateral agent and each Authorized Representative for the Secured Obligations subject thereto in accordance with the terms of the Collateral Agency Agreement.

“Law” shall mean, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement, of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any Capitalized Lease having substantially the same economic effect as any of the foregoing).

“Loan” means a loan made pursuant to the Credit Agreement.

“Loan Parties” means Puget Equico and the Issuer.

“Lock-Up Account” means that certain account maintained by the Issuer pursuant to the Credit Agreement.

“Majority Non-Controlling Voting Parties” shall mean, at any time, the Secured Parties owed or holding Secured Obligations that constitute the largest total outstanding amount of any then outstanding Series of Secured Obligations.

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“Majority Non-Controlling Voting Party Enforcement Date” shall mean with respect to any Series of Secured Obligations, the date which is 90 days (throughout which 90 day period such Series of Secured Obligations was the Series constituting the Majority Non-Controlling Voting Parties) after the occurrence of both (i) an Event of Default (under and as defined in the Credit Document applicable to such Majority Non-Controlling Voting Parties) and (ii) the collateral agent’s and each other Authorized Representative’s receipt of written notice from the Authorized Representative for the Majority Non-Controlling Voting Parties certifying that (x) the holders of such Series of Secured Obligations are the Majority Non-Controlling Voting Parties and that an Event of Default (under and as defined in the Credit Document applicable to such Majority Non-Controlling Voting Parties) has occurred and is continuing and (y) the Secured Obligations of such Series are currently due and payable in full (whether as a result of acceleration thereof or otherwise) in accordance with the terms of the applicable Credit Document governing the Series for such Majority Non-Controlling Voting Parties; provided that the 90-day period referenced above in this definition shall be stayed and the Majority Non-Controlling Voting Party Enforcement Date shall be stayed and shall not occur and shall be deemed not to have occurred with respect to any Collateral (1) at any time the collateral agent has commenced and is diligently pursuing any enforcement action with respect to such Collateral or (2) at any time any Loan Party or any grantor which has granted a security interest in such Collateral is then a debtor under or with respect to any Insolvency or Liquidation Proceeding.

“Permitted Holders” means each of the Investors and members of management of the Company (or its direct or indirect parent) who are holders of Voting Stock of the Company (or any of its direct or indirect parent companies) on the issue date of the Notes and any “group” (as such term is used in Section 13(d) and 14(d) of the Exchange Act or any successor provision) of which any of the foregoing are members; provided, that, in the case of such group and without giving effect to the existence of such group or any other group, such Investors and members of management, collectively, have beneficial ownership of a majority of the total voting power of the Voting Stock of the Company.

“Permitted Liens” means liens securing Indebtedness of the Company and liens permitted by the Company’s senior secured credit facility (and any amendments, refinancings and replacements thereof).

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Pledge Agreement” means the Amended and Restated Pledge Agreement dated as of February 6, 2009, as amended and restated as of March 31, 2010, made by Puget Equico LLC to Barclays Bank PLC.

“Rating Agency” means each of Standard & Poor’s and Moody’s or, if Standard & Poor’s or Moody’s or both shall not make a rating on the Notes publicly available, a nationally recognized statistical rating organization or organizations, as the case may be, selected by the Company (as certified by a resolution of the Company’s Board of Directors), which shall be substituted for Standard & Poor’s or Moody’s, or both, as the case may be.

“Ratings Event” means a decrease in the ratings of the Notes by one or more gradations (including gradations within categories as well as between rating categories) by each of the Rating Agencies on any date from the date of the public notice of an arrangement that could result in a Change of Control until the end of the 30-day period following public notice of the occurrence of the Change of Control (which 30-day period shall be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by either of the Rating Agencies and the other Rating Agency has either downgraded, or publicly announced that it is considering downgrading, the Notes). Notwithstanding the foregoing, if the rating of the Notes by each of the Rating Agencies is Investment Grade, then “Ratings Event” means a decrease in the ratings of the Notes by one or more gradations (including gradations within categories as well as between rating categories) by each of the Rating Agencies such that the rating of the Notes by each of the Rating Agencies falls below Investment Grade on any date from the date of the public notice of an arrangement that could result in a Change of Control until the end of the 30-day period following public notice of the occurrence of the Change of Control (which 30-day period shall be extended so long as the rating of the Notes is under publicly announced consideration for possible downgrade by either of the Rating Agencies and the other Rating Agency has either downgraded, or publicly announced that it is considering downgrading, the Notes).

“Reference Treasury Dealer” means (i) Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and J.P. Morgan Securities LLC or their respective successors, and if any of these parties ceases to be a primary U.S. Government Securities Dealer in New York City, we will substitute another primary U.S. Government Securities Dealer selected by us, and (ii) any other primary U.S. Government Securities Dealer selected by us.

79

“Reference Treasury Dealer Quotation” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Treasury Dealer at or before 5:00 p.m., New York City time, on the third Business Day preceding such redemption date.

“Required Voting Parties” shall mean, with respect to any proposed decision or action hereunder, the Secured Parties owed or holding more than 50% of the Total Outstandings at such time under (i) until the earlier to occur of (x) the Discharge of Credit Agreement Obligations and (y) the occurrence of the Majority Non-Controlling Voting Party Enforcement Date (if any), the Credit Agreement and (ii) from and after the earlier to occur of the (x) Discharge of Credit Agreement Obligations and (y) the occurrence of the Majority Non-Controlling Voting Party Enforcement Date, the applicable Credit Document governing the Series of Secured Obligations of the Majority Non-Controlling Voting Parties at such time.

“Secured Hedge Obligations” shall mean all amounts payable to any Interest Rate Hedge Bank under any Interest Hedging Agreement.

“Secured Obligations” shall mean, (a) all Credit Agreement Obligations, (b) all Secured Hedge Obligations, and (c) any Additional Secured Obligations, in each case, whether fixed or contingent, matured or unmatured, whether or not allowed or allowable in an Insolvency and Liquidation Proceeding.

“Secured Parties” shall mean, collectively, the Agents, the Credit Agreement Lenders, the Interest Rate Hedge Banks, any Additional Secured Parties and each co-agent or sub-agent appointed by any Agent or from time to time pursuant to any Credit Document or the Collateral Agency Agreement.

“Security Agreement” means the Amended and Restated Borrower Security Agreement, dated as of February 6, 2009, as amended and restated as of March 31, 2010 made by Puget Energy Inc., to Barclays Bank PLC.

“Security Documents” shall mean, collectively, the Security Agreement, the Pledge Agreement and any other security agreements, pledge agreements or other similar agreements delivered to the Agents, the Credit Agreement Lenders, the Interest Rate Hedge Banks and the Additional Secured Parties, and any other agreements, instruments or documents that create or purport to create a Lien in favor of the collateral agent for the benefit of the Secured Parties.

“Senior Credit Facility” means the Credit Agreement, entered into as of May 16, 2008, as amended as of March 31, 2010, among Puget Merger Sub Inc., Barclays Bank PLC and Credit Agreement Lenders.

“Series” shall mean each of (i) the Credit Agreement Obligations, (ii) any Additional Obligations incurred pursuant to any Additional Credit Document which, pursuant to any Joinder Agreement, are represented hereunder by a common Authorized Representative (in its capacity as such for such Secured Obligations) and (iii) the Secured Hedge Obligations.

“Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned or controlled by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Issuer.

“Total Outstandings” shall mean, with respect to any Credit Document (other than any Interest Rate Hedging Agreement), at any time, an amount equal to the sum of, without duplication, the aggregate unpaid principal amount of Loans or other indebtedness outstanding under such Credit Document at such time after giving effect to any borrowings, advances and prepayments or repayments of any Loans or indebtedness under the Credit Agreement or such other Credit Document, as the case may be, on such date, plus the amount of any unfunded commitments under the Credit Agreement or such other Credit Document, as the case may be, on such date.

80

“Treasury Rate” means, with respect to any redemption date, the rate per year equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

“Unanimous Voting Parties” shall mean, with respect to any Intercreditor Vote, each of the Credit Agreement Facility Agent, each of the Authorized Representatives appointed under each Additional Credit Document and each Interest Rate Hedge Bank, in each case casting votes representing 100% of the Voting Party Percentage applicable to each such Series of Secured Obligations.

“Voting Parties” means the Credit Agreement Lenders, any Additional Secured Party and, subject to the terms of the Collateral Agency Agreement, each Interest Rate Hedge Bank.

“Voting Party Percentage” shall mean, in connection with any proposed decision or action hereunder, the actual percentage, as determined pursuant to the terms of the Collateral Agency Agreement, of allotted votes cast in favor of such decision or action by the Secured Parties entitled to vote with respect to such decision or action.

“Voting Stock” means securities of any class or classes the holders of which are ordinarily, in the absence of contingencies, entitled to vote for corporate directors (or persons performing similar functions).

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes the material United States federal income tax consequences relevant to the exchange of original notes for exchange notes pursuant to the exchange offer. The following discussion is based on the provisions of the United States Internal Revenue Code of 1986, as amended, or the Code, and related United States Treasury regulations, administrative rulings and judicial decisions now in effect, changes to which subsequent to the date hereof may affect the tax consequences described below.

We encourage holders to consult their own tax advisors regarding the United States federal tax consequences of the exchange offer and being a holder of the notes in light of their particular circumstances, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

An exchange of original notes for exchange notes pursuant to the exchange offer will not be a taxable event for United States federal income tax purposes. Consequently, holders will not recognize any taxable gain or loss as a result of exchanging original notes for exchange notes pursuant to the exchange offer. The holding period of the exchange notes will include the holding period of the original notes, and the tax basis in the exchange notes will be the same as the tax basis in the original notes immediately before the exchange.

PLAN OF DISTRIBUTION

Based on interpretations of the SEC staff in no-action letters issued to third parties, we believe that you may resell or otherwise transfer exchange notes issued in the exchange offer without further compliance with the registration and prospectus delivery requirements of the Securities Act if:

• you are not our affiliate within the meaning of Rule 405 under the Securities Act;

• you are acquiring such exchange notes in the ordinary course of your business;

• you do not intend to participate in the distribution of exchange notes; and

• you are not a broker-dealer and are not engaged in, and do not intend to engage in, the distribution of the exchange notes.

81

We believe that you may not transfer exchange notes issued in the exchange offer without further compliance with such requirements or an exemption from such requirements if you are:

• our affiliate within the meaning of Rule 405 under the Securities Act, or

• a broker-dealer that acquired original notes as a result of market-making or other trading activities.

The information described above concerning interpretations of and positions taken by the SEC staff is not intended to constitute legal advice. Broker-dealers should consult their own legal advisors with respect to these matters.

If you wish to exchange your original notes for exchange notes in the exchange offer, you will be required to make representations to us as described in “The Exchange Offer—Procedures for Tendering” and “—Your Representations to Us” of this prospectus and in the letter of transmittal. In addition, if a broker-dealer acquired original notes as a result of market-making activities or other trading activities, it may exchange them for exchange notes, however, such broker-dealer may be deemed to be an “underwriter” within the meaning of the Securities Act and must, therefore, deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the exchange notes received by such broker-dealer and such broker-dealer will be required to acknowledge the same. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. A broker-dealer may use this prospectus, as amended or supplemented, in connection with these resales, and all dealers effecting transactions in the exchange notes may be required to deliver a prospectus, as amended or supplemented for 180 days following consummation of the exchange offer or until such time that the broker-dealer is no longer required to deliver a prospectus in connection with market-making or other trading activities. We will provide copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents during such 180-day (or shorter, if no longer required to deliver a prospectus) period in order to facilitate such resales. We have agreed to pay all expenses incident to the exchange offer (including certain expenses of counsel for the initial purchasers) other than dealers’ and brokers’ discounts, commissions and counsel fees and will indemnify the holders of the exchange notes (including any broker-dealer) against certain liabilities, including liabilities under the Securities Act.

We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-dealers for their own account in the exchange offer may be sold from time to time in one or more transactions:

• in the over-the-counter market

• in negotiated transactions

• through the writing of options on the exchange notes, or

• a combination of such methods of resale.

The prices at which these sales occur may be:

• at market prices prevailing at the time of resale,

• at prices related to such prevailing market prices, or

• at negotiated prices.

Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any exchange notes. Any profit on any resale of exchange notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation.

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LEGAL MATTERS

Certain legal matters in connection with the offering and sale of the Notes will be passed upon for us by Perkins Coie LLP, Seattle, Washington.

EXPERTS

The financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal Control over Financial Reporting) as of December 31, 2009 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We and our subsidiary PSE each file reports and information statements and other information with the SEC. You can inspect and copy reports and other information filed by us and PSE at the public reference facilities maintained by the SEC at Headquarters Office, 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Such material may also be accessed electronically by means of the SEC’s website on the Internet at http://www.sec.gov.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm – Puget Energy (Successor)	F-1
Report of Independent Registered Public Accounting Firm – Puget Energy (Predecessor)	F-2
Audited Consolidated Financial Statements of Puget Energy
Consolidated Statements of Income for the periods ended February 6, 2009 to  December 31, 2009 (Successor) and January 1, 2009 to February 5, 2009 and for the years ended December 31, 2008 and 2007 (Predecessor)	F-3
Consolidated Balance Sheets, December 31, 2009 (Successor) and 2008 (Predecessor)	F-4
Consolidated Statements of Common Shareholders’ Equity for the periods ended February  6, 2009 to December 31, 2009 (Successor) and January 1, 2009 to February 5, 2009 and for the years ended December 31, 2008 and 2007 (Predecessor)	F-6
Consolidated Statements of Comprehensive Income for the periods ended February 6, 2009  to December 31, 2009 (Successor) and January 1, 2009 to February 5, 2009 and for the years ended December 31, 2008 and 2007 (Predecessor)	F-7
Consolidated Statements of Cash Flows for the periods ended February 6, 2009 to  December 31, 2009 (Successor) and January 1, 2009 to February 5, 2009 and for the years ended December 31, 2008 and 2007 (Predecessor)	F-8
Notes to Consolidated Financial Statements	F-9
Unaudited Consolidated Financial Statements of Puget Energy
Consolidated Statements of Income – Three Months Ended September 30, 2010 and 2009	F-78
Consolidated Statements of Income – Nine Months Ended September 30, 2010, February  6, 2009 to September 30, 2009 (Successor) and January 1, 2009 to February 5, 2009 (Predecessor)	F-79
Consolidated Statements of Comprehensive Income – Three Months Ended September  30, 2010 and 2009	F-80
Consolidated Statements of Comprehensive Income – Nine Months Ended September 30, 2010,  February 6, 2009 to September 30, 2009 (Successor) and January 1, 2009 to February 5, 2009 (Predecessor)	F-80
Consolidated Balance Sheets – September 30, 2010 and December 31, 2009	F-81
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2010,  February 6, 2009 to September 30, 2009 (Successor) and January 1, 2009 to February 5, 2009 (Predecessor)	F-83
Notes to Consolidated Financial Statements	F-84

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Puget Energy, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Puget Energy, Inc. and its subsidiaries at December 31, 2009 (Successor Company), and the results of their operations and their cash flows for the period from February 6, 2009 to December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Seattle, Washington

February 25, 2010

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Puget Energy, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Puget Energy, Inc. and its subsidiaries at December 31, 2008 (Predecessor Company), and the results of their operations and their cash flows for the period from January 1, 2009 to February 5, 2009 and for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations in 2009 and the manner in which it accounts for fair value measurements in 2008.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Seattle, Washington

February 25, 2010

F-2

Puget Energy Consolidated Statements of

INCOME

	SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	FEBRUARY 6, 2009 – DECEMBER 31, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009			2008			2007
Operating revenues:
Electric	$	1,885,118		$	213,618		$	2,129,463		$	1,997,829
Gas		1,034,744			190,001			1,216,868			1,208,029
Other		5,286			94			11,442			14,289
Total operating revenues		2,925,148			403,713			3,357,773			3,220,147
Operating expenses:
Energy costs:
Purchased electricity		796,040			90,737			903,317			895,592
Electric generation fuel		196,483			11,961			212,333			143,406
Residential exchange		(83,962	)		(12,542	)		(40,664	)		(52,439	)
Purchased gas		597,935			120,925			737,851			762,112
Net unrealized (gain) loss on derivative instruments		(156,601	)		3,867			7,538			(2,687	)
Utility operations and maintenance		449,745			37,650			461,632			403,681
Non-utility expense and other		16,672			112			12,785			13,636
Merger and related costs		2,731			44,324			9,252			8,143
Depreciation and amortization		305,943			26,742			312,128			279,222
Conservation amortization		58,875			7,592			61,650			39,955
Taxes other than income taxes		266,424			36,935			297,203			288,492
Total operating expenses		2,450,285			368,303			2,975,025			2,779,113
Operating income		474,863			35,410			382,748			441,034
Other income (deductions):
Other income		49,158			3,653			33,274			28,942
Other expense		(6,154	)		(369	)		(7,215	)		(7,509	)
Charitable contributions		(5,000	)		—			—			—
Interest charges:
AFUDC		8,864			350			8,610			12,614
Interest expense		(265,675	)		(17,291	)		(202,582	)		(217,823	)
Income from continuing operations before income taxes		256,056			21,753			214,835			257,258
Income tax expense		82,041			8,997			59,906			72,582
Income from continuing operations		174,015			12,756			154,929			184,676
Loss from discontinued segment (net of tax)		—			—			—			(212	)
Net income	$	174,015		$	12,756		$	154,929		$	184,464

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

F-3

Puget Energy Consolidated Balance Sheets

ASSETS

	SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS) AT DECEMBER 31	2009			2008
Utility plant:
Electric plant	$	4,705,900		$	6,596,359
Gas plant		1,995,219			2,500,236
Common plant		284,758			550,368
Less: Accumulated depreciation and amortization		(185,474	)		(3,358,816	)
Net utility plant		6,800,403			6,288,147
Other property and investments:
Goodwill		1,656,513			—
Investment in Bonneville Exchange Power contract		26,450			29,976
Other property and investments		127,073			118,039
Total other property and investments		1,810,036			148,015
Current assets:
Cash and cash equivalents		78,527			38,526
Restricted cash		19,844			18,889
Accounts receivable, net of allowance for doubtful accounts		320,016			203,563
Secured pledged accounts receivable		—			158,000
Unbilled revenues		208,948			248,649
Materials and supplies, at average cost		75,035			62,024
Fuel and gas inventory, at average cost		96,483			120,205
Unrealized gain on derivative instruments		14,948			15,618
Income taxes		134,617			19,121
Prepaid expense and other		13,117			14,964
Power contract acquisition adjustment gain		169,171			—
Deferred income taxes		39,977			75,135
Total current assets		1,170,683			974,694
Other long-term and regulatory assets:
Regulatory asset for deferred income taxes		89,303			95,417
Regulatory asset for PURPA buyout costs		78,162			110,838
Power cost adjustment mechanism		8,529			3,126
Regulatory assets related to power contracts		210,340			—
Other regulatory assets		751,999			766,732
Unrealized gain on derivative instruments		25,459			6,712
Power contract acquisition adjustment gain		865,020			—
Other		90,206			40,421
Total other long-term and regulatory assets		2,119,018			1,023,246
Total assets	$	11,900,140		$	8,434,102

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

F-4

Puget Energy Consolidated Balance Sheets

CAPITALIZATION AND LIABILITIES

	SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS) AT DECEMBER 31	2009			2008
Capitalization:
Common shareholders’ equity:
Common stock $0.01 par value, 250,000,000 shares authorized, 129,678,489 shares outstanding	$	—		$	1,297
Common stock $0.01 par value, 1,000 share authorized, 200 shares outstanding		—			—
Additional paid-in capital		3,308,957			2,275,225
Earnings reinvested in the business		91,024			259,483
Accumulated other comprehensive income (loss) – net of tax		23,487			(262,804	)
Total common shareholders’ equity		3,423,468			2,273,201
Redeemable securities and long-term debt:
Preferred stock subject to mandatory redemption – cumulative – $100 par value:
4.84% series –150,000 shares authorized, 14,583 shares outstanding		—			1,458
4.70% series –150,000 shares authorized, 4,311 shares outstanding		—			431
Total preferred stock subject to mandatory redemption		—			1,889
Long-term debt:
PSE first mortgage bonds and senior notes		2,709,000			2,267,000
PSE pollution control revenue bonds:
Revenue refunding 2003 series, due 2031		161,860			161,860
PSE junior subordinated notes		250,000			250,000
Puget Energy long-term debt		1,483,000			—
PSE long-term debt due within one year		(232,000	)		(158,000	)
Debt discount and other		(331,162	)		—
Total redeemable securities and long-term debt		4,040,698			2,522,749
Total capitalization		7,464,166			4,795,950
Current liabilities:
Accounts payable		321,287			342,254
Short-term debt		105,000			964,700
Current maturities of long-term debt		232,000			158,000
Accrued expenses:
Purchased gas liability		49,587			8,892
Taxes		77,302			85,068
Salaries and wages		30,654			35,280
Interest		52,540			36,074
Unrealized loss on derivative instruments		168,783			236,866
Power contract acquisition adjustment loss		94,223			—
Other		194,786			117,222
Total current liabilities		1,326,162			1,984,356
Long-term and regulatory liabilities:
Deferred income taxes		1,147,667			815,462
Unrealized loss on derivative instruments		89,717			158,423
Regulatory liabilities		261,990			219,221
Regulatory liabilities related to power contracts		1,034,192			—
Power contract acquisition adjustment loss		117,272			—
Other deferred credits		458,974			460,690
Total long-term and regulatory liabilities		3,109,812			1,653,796
Commitments and contingencies (Note 23)
Total capitalization and liabilities	$	11,900,140		$	8,434,102

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

F-5

Puget Energy Consolidated Statements of

COMMON SHAREHOLDERS’ EQUITY

	COMMON STOCK
(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31, 2009, 2008 & 2007	SHARES		AMOUNT		ADDITIONAL PAID-IN CAPITAL			EARNINGS REINVESTED IN THE BUSINESS			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			TOTAL AMOUNT
PREDECESSOR
Balance at December 31, 2006		116,576,636	$	1,166	$	1,969,032		$	172,529		$	(26,698	)	$	2,116,029
Net income		—		—		—			184,464			—			184,464
Common stock dividend declared		—		—		—			(116,914	)		—			(116,914	)
Common stock issued:
New issuance		12,500,000		125		293,070			—			—			293,195
Dividend reinvestment plan		399,993		4		9,777			—			—			9,781
Employee plans		201,860		2		6,621			—			—			6,623
Other comprehensive income		—		—		—			—			28,776			28,776
Balance at December 31, 2007		129,678,489	$	1,297	$	2,278,500		$	240,079		$	2,078		$	2,521,954
Net income		—		—		—			154,929			—			154,929
Common stock dividend declared		—		—		—			(129,677	)		—			(129,677	)
Adjustment to initially apply ASC 820, Fair Value Measurements		—		—		—			(5,848	)		—			(5,848	)
Common stock issued:
Employee plans		—		—		(3,275	)		—			—			(3,275	)
Other comprehensive loss		—		—		—			—			(264,882	)		(264,882	)
Balance at December 31, 2008		129,678,489	$	1,297	$	2,275,225		$	259,483		$	(262,804	)	$	2,273,201
Net income		—		—		—			12,756			—			12,756
Common stock dividend declared		—		—		—			(38,188	)		—			(38,188	)
Common stock expense		—		—		(455	)		—			—			(455	)
Vesting of employee common stock		—		—		1,531			—			—			1,531
Other comprehensive loss		—		—		—			—			(19,312	)		(19,312	)
Balance at February 5, 2009		129,678,489	$	1,297	$	2,276,301		$	234,051		$	(282,116	)	$	2,229,533
SUCCESSOR
Capitalization at merger		200	$	—	$	3,308,529		$	—		$	—		$	3,308,529
Net income		—		—		—			174,015			—			174,015
Common stock dividend declared		—		—		—			(82,991	)		—			(82,991	)
Employee stock plan tax windfall		—		—		428			—			—			428
Other comprehensive income		—		—		—			—			23,487			23,487
Balance at December 31, 2009		200	$	—	$	3,308,957		$	91,024		$	23,487		$	3,423,468

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

F-6

Puget Energy Consolidated Statements of

COMPREHENSIVE INCOME

	SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	FEBRUARY 6, 2009 – DECEMBER 31, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009			2008			2007
Net income	$	174,015		$	12,756		$	154,929		$	184,464
Other comprehensive income (loss):
Net unrealized loss on interest rate swaps during the period, net of tax of $(12,264), $0, $0 and $0, respectively		(22,777	)		—			—			—
Reclassification of net unrealized loss on interest rate swaps during the period, net of tax of $10,168, $0, $0 and $0, respectively		18,884			—			—			—
Net unrealized gain (loss) from pension and postretirement plans, net of tax of $18,554, $ 170, $(80,769) and $16,083, respectively		34,458			315			(149,999	)		29,869
Net unrealized loss on energy derivative instruments during the period, net of tax of $(14,120), $(13,010), $(73,621) and $(6,776), respectively		(26,222	)		(24,162	)		(136,725	)		(12,584	)
Reclassification of net unrealized loss on energy derivative instruments settled during the period, net of tax of $10,309, $2,428, $11,590 and $6,017, respectively		19,144			4,509			21,525			11,174
Amortization of financing cash flow hedge contracts to earnings, net of tax of $0, $15, $171 and $171, respectively		—			26			317			317
Other comprehensive income (loss)		23,487			(19,312	)		(264,882	)		28,776
Comprehensive income (loss)	$	197,502		$	(6,556	)	$	(109,953	)	$	213,240

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

F-7

Puget Energy Consolidated Statements of

CASH FLOWS

	SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	FEBRUARY 6, 2009 – DECEMBER 31, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009			2008			2007
Operating activities:
Net income	$	174,015		$	12,756		$	154, 929		$	184,464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		305,943			26,742			312,128			279,222
Conservation amortization		58,875			7,592			61,650			39,955
Deferred income taxes and tax credits, net		243,381			(512	)		80,596			66,820
Power cost adjustment mechanism		—			—			(12	)		3,243
Amortization of gas pipeline capacity assignment		(8,620	)		(791	)		(9,346	)		(10,943	)
Non cash return on regulatory assets		(8,786	)		(800	)		(9,860	)		(10,194	)
Net unrealized loss (gain) on derivative instruments		(156,601	)		3,867			7,538			(2,687	)
Deferred regulatory costs for generation facilities		(18,369	)		(3,443	)		(288	)		(11,505	)
Pension funding		(18,400	)		—			(24,900	)		—
Change in residential exchange program		(2,667	)		1,927			37,811			(28,133	)
Derivative contracts classified as financing activities due to merger		524,397			—			—			—
Cash receipt from lease purchase option settlement		—			—			—			18,859
Storm damage deferred costs		—			—			—			(29,274	)
Other		26,618			5,230			3,999			16,117
Change in certain current assets and liabilities:
Accounts receivable and unbilled revenue		91,515			(31,332	)		(29,405	)		(4,652	)
Materials and supplies		4,077			(3,388	)		89			(18,613	)
Fuel and gas inventory		(11,444	)		7,605			(20,433	)		15,981
Income taxes		(133,773	)		18,277			25,182			(44,303	)
Prepayments and other		5,744			(3,295	)		(3,055	)		(2,681	)
Purchased gas receivable/payable		38,984			1,711			(68,972	)		117,685
Accounts payable		(85,073	)		(40,203	)		21,420			(52,678	)
Taxes payable		12,227			(3,340	)		313			29,779
Accrued expenses and other		(31,473	)		59,172			(2,802	)		7,539
Net cash provided by operating activities		1,010,570			57,775			536,582			564,001
Investing activities:
Construction expenditures – excluding equity AFUDC		(726,157	)		(49,531	)		(846,001	)		(737,258	)
Energy efficiency expenditures		(82,258	)		(4,918	)		(66,126	)		(43,398	)
Restricted cash		(945	)		(10	)		(14,096	)		(141	)
Cash proceeds from property sales		28,152			—			2,248			6,468
Other		(1,868	)		959			(7,880	)		17,330
Net cash used in investing activities		(783,076	)		(53,500	)		(931,855	)		(756,999	)
Financing activities:
Change in short-term debt and leases, net		38,807			(151,800	)		704,214			(67,569	)
Dividends paid		(121,179	)		—			(129,677	)		(108,434	)
Issuance of common stock		—			—			—			300,544
Long-term notes and bonds issued		400,211			250,000			—			250,000
Redemption of preferred stock		—			(1,889	)		—			(37,750	)
Redemption of bonds and notes		(158,000	)		—			(179,500	)		(125,000	)
Derivative contracts classified as financing activities due to merger		(524,397	)		—			—			—
Issuance costs of bonds and other		(16,372	)		7,133			(2,035	)		(6,113	)
Net cash (used in) provided by financing activities		(380,930	)		103,444			393,002			205,678
Net increase (decrease) in cash and cash equivalents		(153,436	)		107,719			(2,271	)		12,680
Cash and cash equivalents at beginning of year		231,963			38,526			40,797			28,117
Cash and cash equivalents at end of year	$	78,527		$	146,245		$	38,526		$	40,797
Supplemental cash flow information:
Cash payments for interest (net of capitalized interest)	$	247,247		$	1,239		$	204,837		$	196,180
Cash payments (refunds) for income taxes		(47,740	)		—			(42,338	)		26,897

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

F-8

NOTES

To Consolidated Financial Statements of Puget Energy and Puget Sound Energy

NOTE 1. Summary of Significant Accounting Policies

BASIS OF PRESENTATION

Puget Energy, Inc. (Puget Energy) is an energy services holding company that owns Puget Sound Energy, Inc. (PSE). PSE is a public utility incorporated in the state of Washington that furnishes electric and natural gas services in a territory covering 6,000 square miles, primarily in the Puget Sound region. On February 6, 2009, Puget Holdings LLC (Puget Holdings), a consortium of long-term infrastructure investors, completed its merger with Puget Energy. As a result of the merger, Puget Energy is a direct wholly owned subsidiary of Puget Equico LLC (Puget Equico), which is an indirect wholly owned subsidiary of Puget Holdings. Puget Energy’s basis of accounting incorporates the application of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805) as of the date of the merger. ASC 805 requires the acquirer to recognize and measure identifiable assets acquired and liabilities assumed at fair value as of the merger date. Puget Energy consolidated financial statements and accompanying footnotes have been segregated to present pre-merger activity as the “Predecessor” Company and post-merger activity as the “Successor” Company.

The 2009 consolidated financial statements of Puget Energy reflect the accounts of Puget Energy and its subsidiary, PSE. 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. PSE’s basis of accounting will continue to be on a historical basis and PSE’s financial statements do not include any ASC 805 purchase accounting adjustments.

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the presentation adopted in the current fiscal year.

UTILITY PLANT

For PSE, the cost of additions to utility plant, including renewals and betterments, are capitalized at original cost. Costs include indirect costs such as engineering, supervision, certain taxes, pension and other employee benefits and an allowance for funds used during construction. Replacements of minor items of property and major maintenance are included in maintenance expense. The original cost of operating property is charged to accumulated depreciation and costs associated with removal of property, less salvage, are charged to the cost of removal regulatory liability when the property is retired and removed from service.

For Puget Energy, the carrying amount of utility plant was remeasured to fair value on February 6, 2009, as a result of purchase accounting adjustments. After February 6, 2009, utility plant additions are capitalized at original cost.

NON-UTILITY PROPERTY, PLANT AND EQUIPMENT

For PSE, the costs of other property, plant and equipment are stated at historical cost. Expenditures for refurbishment and improvements that significantly add to productive capacity or extend useful life of an asset are capitalized. Replacement of minor items is expensed on a current basis. Gains and losses on assets sold or retired are reflected in earnings.

F-9

For Puget Energy, the carrying amount of non-utility property, plant and equipment was remeasured to fair value on February 6, 2009, as a result of purchase accounting adjustments. After February 6, 2009, non-utility property, plant and equipment are capitalized at original costs.

DEPRECIATION AND AMORTIZATION

For financial statement purposes, the Company provides for depreciation and amortization on a straight-line basis. Amortization is comprised of intangibles such as computer software and franchises. The depreciation of automobiles, trucks, power-operated equipment, tools and office equipment is allocated to asset and expense accounts based on usage. The annual depreciation provision stated as a percent of a depreciable electric utility plant was 2.6%, 2.8% and 2.9% in 2009, 2008 and 2007, respectively; depreciable gas utility plant was 3.6%, 3.4% and 3.4% in 2009, 2008 and 2007, respectively; and depreciable common utility plant was 9.6%, 5.8% and 5.1% in 2009, 2008 and 2007, respectively. Depreciation on other property, plant and equipment is calculated primarily on a straight-line basis over the useful lives of the assets. The cost of removal is collected from PSE’s customers through depreciation expense and any excess is recorded as a regulatory liability.

GOODWILL

On February 6, 2009, Puget Holdings completed its merger with Puget Energy. Puget Energy remeasured the carrying amount of all its assets and liabilities to fair value, which resulted in recognition of approximately $1.7 billion in goodwill. ASC 350, “Intangibles- Goodwill and Other,” (ASC 350) requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting unit, assignment of assets and liabilities to reporting unit, assignment of goodwill to reporting unit, and determination of the fair value of the reporting unit.

The goodwill represents the potential long-term return of Puget Energy to their investors. Goodwill is tested for impairment annually using a two-step process. The first step compares the carrying amount of the reporting unit with its fair value, with a carrying value higher than fair value indicating potential impairment. If the first step test fails, the second step is performed. This entails a full valuation of Puget Energy’s assets and liabilities and comparing the valuation to the carrying amount, with the difference indicating the amount of impairment. Goodwill of a reporting unit will be tested for impairment on an interim basis if an event occurs or circumstances change that would cause the fair value of a reporting unit to fall below its carrying amount.

Puget Energy conducted its annual impairment tests as of October 1, 2009. The fair value of Puget Energy’s reporting unit is estimated using both discounted cash flow and market approach. Such approaches are considered methodology that market participants would use. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for Puget Energy business, estimation of the useful life over which cash flows will occur and determination of our weighted average cost of capital. The market approach estimates the fair value of the business based on market prices of stocks of companies engaged in the same or similar lines of business. In addition, indications of market value are estimated by deriving multiples of equity or invested capital to various measures of revenue, earnings or cash flow. Changes in these estimates and or assumptions could materially affect the determination of fair value and goodwill impairment of the reporting unit. Based on the test performed, Management has determined that there is no impairment as of October 1, 2009. There were no events or circumstances from the date of the assessment through December 31, 2009 that would impact management’s conclusion.

F-10

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand bank deposits and short-term highly liquid investments with original maturities of three months or less at the time of purchase. Cash equivalents are reported at cost, which approximates fair value, and were $44.3 million and $26.1 million as of December 31, 2009 and 2008, respectively.

RESTRICTED CASH

Restricted cash represents cash to be used for specific purposes. The restricted cash balance was $19.8 million and $18.9 million at December 31, 2009 and 2008, respectively. The restricted cash balance in both 2009 and 2008 includes $0.8 million which represents funds held by Puget Western, Inc., a PSE subsidiary, for a real estate development project. As of December 31, 2009, other restricted cash includes $13.5 million at Bonneville Power Administration (BPA), $3.2 million in a Benefit Protection Trust, $2.1 million PSE received for the benefit of low-income customers from the Enron settlement and $0.2 million in other restricted cash accounts.

MATERIALS AND SUPPLIES

Materials and supplies consists primarily of materials and supplies used in the operation and maintenance of electric and natural gas distribution and transmission systems as well as spare parts for combustion turbines used for the generation of electricity. For PSE, these items are recorded at weighted-average cost method.

For Puget Energy, the carrying amount of materials and supplies was remeasured to fair value on February 6, 2009, as a result of purchase accounting adjustments. Additionally, materials and supplies included emission allowances, renewable energy credits and carbon financials instruments. After February 6, 2009, additional items are recorded at weighted-average cost method.

FUEL AND GAS INVENTORY

Fuel and gas inventory is used in the generation of electricity and for future sales to the Company’s natural gas customers. Fuel inventory consists of coal, diesel and natural gas used for generation. Gas inventory consists of natural gas and liquefied natural gas (LNG) held in storage for future sales. For PSE, these items are recorded at the lower of cost or market value using the weighted-average cost method.

For Puget Energy, the carrying amount of fuel and gas inventory was remeasured to fair value on February 6, 2009, as a result of purchase accounting adjustments. After February 6, 2009, additional inventory are recorded at the lower of cost or market value using the weighted-average cost method.

REGULATORY ASSETS AND LIABILITIES

PSE accounts for its regulated operations in accordance with ASC 980 “Regulated Operations” (ASC 980). ASC 980 requires PSE to defer certain costs that would otherwise be charged to expense, if it were probable that future rates will permit recovery of such costs. Accounting under ASC 980 is appropriate as long as rates are established by or subject to approval by independent third-party regulators; rates are designed to recover the specific enterprise’s cost of service; and in view of demand for service, it is reasonable to assume that rates set at levels that will recover costs can be charged to and collected from customers. In most cases, PSE classifies regulatory assets and liabilities as long-term assets or liabilities. The exception is the Purchased Gas Adjustment (PGA) payable which is a current liability.

PSE was allowed a return on the net regulatory assets and liabilities of 8.4%, or 7.01% after-tax, for the period March 4, 2005 through January 12, 2007. Effective January 13, 2007, based on the 2006 general rate case, PSE is allowed a return on the net regulatory assets and liabilities of 8.4%, or 7.06% after tax. Effective November 1, 2008, PSE was allowed 8.25%, or 7.00% after tax.

F-11

The net regulatory assets and liabilities at December 31, 2009 and 2008 included the following:

PUGET SOUND ENERGY (DOLLARS IN MILLIONS)	REMAINING AMORTIZATION PERIOD		2009			2008
Chelan PUD contract initiation 1		Varies	$	124.4		$	114.8
Storm damage costs electric		3 to 9 years		105.7			120.1
Deferred income taxes 1		Varies		89.3			95.4
PURPA electric energy supply contract buyout costs		2 years		78.1			110.8
Baker Dam licensing operating and maintenance costs		50 years		70.0			73.9
PGA deferral of unrealized losses on derivative instruments 1		Varies		67.1			187.2
Environmental remediation 1		Varies		59.0			54.5
Deferred Washington Commission allowance for funds used during construction (AFUDC)		27.3 years		51.8			42.8
Energy conservation costs 1		Varies		41.7			17.5
White River relicensing and other costs 1		Varies		34.2			71.0
Investment in Bonneville Exchange power contract		7.5 years		26.5			30.0
California ISO/PX Receivable 3		Varies		21.1			—
Mint Farm ownership and operating costs 1		Varies		20.8			3.0
Unamortized loss on reacquired debt		2 to 26.5 years		19.5			20.8
Various other regulatory assets		Varies		15.8			17.7
Colstrip common property		14.5 years		10.3			11.1
Snoqualmie licensing operating and maintenance costs 1		Varies		9.0			9.6
Power cost adjustment (PCA) mechanism 1		Varies		8.5			3.1
Goldendale ownership and operating costs		2 years		7.6			11.8
Tree watch costs		5.3 years		7.4			11.0
Total PSE regulatory assets			$	867.8		$	1,006.1
Cost of removal 2		Varies	$	(173.4	)	$	(156.7	)
Purchased gas adjustment (PGA) payable 1		Varies		(49.6	)		(8.9	)
Renewable energy credits 1		Varies		(34.7	)		(5.8	)
Summit purchase option buy-out		11 years		(17.0	)		(18.6	)
Deferred credit on gas pipeline capacity		1 to 7.5 years		(14.7	)		(24.1	)
Deferred gains on property sales		Less than 1 year		(8.7	)		(11.9	)
Various other regulatory liabilities		Less than 1 year to 7.5 years		(2.1	)		(2.1	)
Total PSE regulatory liabilities			$	(300.2	)	$	(228.1	)
PSE net regulatory assets and liabilities			$	567.6		$	778.0

PUGET ENERGY (DOLLARS IN MILLIONS)	REMAINING AMORTIZATION PERIOD		SUCCESSOR  3 2009			PREDECESSOR 2008
Total PSE regulatory assets		N/A	$	867.8		$	1,006.1
Puget Energy acquisition adjustments:
Regulatory assets related to power contracts		1 year to 28 years		210.3			—
Service provider contracts		2 to 4 years		29.6			—
Various other regulatory assets		Varies		57.2			—
Total Puget Energy regulatory assets			$	1,164.9		$	1,006.1
Total PSE regulatory liabilities		N/A	$	(300.2	)	$	(228.1	)
Puget Energy acquisition adjustments:
Regulatory liabilities related to power contracts		2 to 43 years		(1,034.2	)		—
Various other regulatory liabilities 1		Varies		(11.4	)		—
Total Puget Energy regulatory liabilities			$	(1,345.8	)	$	(228.1	)
Puget Energy net regulatory asset and liabilities			$	(180.9	)	$	778.0

¹ Amortization period varies depending on timing of underlying transactions, or awaiting regulatory approval in a future Washington Commission rate proceeding.

² The balance is dependent upon the cost of removal of underlying assets and the life of utility plant.

³ Puget Energy’s regulatory assets and liabilities include purchase accounting adjustments as a result of the merger. See Note 3.

F-12

If the Company, at some point in the future, determines that all or a portion of the utility operations no longer meets the criteria for continued application of ASC 980, the Company would be required to write off the regulatory assets and liabilities related to those operations not meeting ASC 980 requirements. Discontinuation of ASC 980 could have a material impact on the Company’s financial statements.

In accordance with guidance provided by ASC 410, “Asset Retirement and Environmental Obligations,” PSE reclassified from accumulated depreciation to a regulatory liability $173.4 million and $156.7 million in 2009 and 2008, respectively, for cost of removal for utility plant. These amounts are collected from PSE’s customers through depreciation rates.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION

The Allowance for Funds Used During Construction (AFUDC) represents the cost of both the debt and equity funds used to finance utility plant additions during the construction period. The amount of AFUDC recorded in each accounting period varies depending principally upon the level of construction work in progress and the AFUDC rate used. AFUDC is capitalized as a part of the cost of utility plant and is credited to interest expense and as a non-cash item to other income. Cash inflow related to AFUDC does not occur until these charges are reflected in rates. AFUDC interest credited to expense were $9.3 million, $8.6 million and $12.6 million for 2009, 2008 and 2007, respectively.

The AFUDC rate allowed by the Washington Utilities and Transportation Commission (Washington Commission) for natural gas utility plant additions was 8.4% beginning March 4, 2005 and 8.76% for the period September 1, 2002 through March 3, 2005. The allowed AFUDC rate on electric utility plant was 8.4% beginning March 4, 2005 and 8.76% for the period July 1, 2002 through March 3, 2005. To the extent amounts calculated using this rate exceed the AFUDC calculated rate using the Federal Energy Regulatory Commission (FERC) formula, PSE capitalizes the excess as a deferred asset, crediting other income. The amounts included in other income were $10.7 million, $8.1 million and $4.4 million for 2009, 2008 and 2007, respectively. The deferred asset is being amortized over the average useful life of PSE’s non-project electric utility plant which is approximately 30 years.

REVENUE RECOGNITION

Operating utility revenues are recorded on the basis of services rendered which include estimated unbilled revenue. Sales to other utilities are recorded on a net revenue rendered basis in accordance with ASC 605 “Revenue Recognition” (ASC 605). Non-utility subsidiaries recognize revenue when services are performed or upon the sale of assets. Revenue from retail sales is billed based on tariff rates approved by the Washington Commission. Sales of Renewable Energy Credits are deferred in regulatory liability until a ruling by the Washington Commission on the accounting petition.

PSE collected Washington state excise taxes (which are a component of general retail rates) and municipal taxes of $247.8 million, $240.5 million and $229.0 million for 2009, 2008 and 2007, respectively. The Company’s policy is to report such taxes on a gross basis in operating revenues and taxes other than income taxes in the accompanying statements of income.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

An allowance for doubtful accounts is provided for energy customer accounts based upon a historical experience rate of write-offs of energy accounts receivable as compared to operating revenues. The allowance account is adjusted monthly for this experience rate. Other non-energy receivable balances are reserved for in the allowance account based on facts and circumstances surrounding the receivable, indicating some or all of the balance is uncollectible. Once exhaustive efforts have been made to collect these other receivables, the allowance account and corresponding receivable balance are written off.

F-13

For Puget Energy, the carrying amount of accounts receivable was remeasured to fair value on February 6, 2009, as a result of purchase accounting adjustments. Accordingly the allowance for doubtful accounts was reset to zero on February 6, 2009. The Company’s allowance for doubtful accounts at December 31, 2009 and 2008 was $8.1 million and $6.4 million, respectively.

SELF-INSURANCE

PSE currently has no insurance coverage for storm damage and environmental contamination that would occur in a current year on PSE-owned property. PSE is self-insured for a portion of the risk associated with comprehensive liability, workers’ compensation claims and catastrophic property losses other than those which are storm related. The Washington Commission has approved the deferral of certain uninsured storm damage costs that exceed $7.0 million for the years ending 2006 through 2008 and $8.0 million for subsequent years of qualifying storm damage costs for collection in future rates if the outage meets the Institute of Electrical and Electronics Engineers (IEEE) outage criteria for system average interruption duration index.

FEDERAL INCOME TAXES

Prior to the merger on of Puget Energy on February 6, 2009, Puget Energy and its subsidiaries filed a consolidated federal income tax return. Income taxes were allocated to the subsidiaries on the basis of separate company computations of tax. After February 6, 2009, the results of Puget Energy and PSE are included in the consolidated tax return of Puget Holdings. Under the tax sharing agreement with Puget Holdings, income taxes are allocated to each subsidiary on the basis of separate company computations of tax. Federal income taxes payable/receivable are settled with Puget Holdings as provided in the tax sharing agreement.

Puget Energy and PSE provide for deferred taxes on certain assets and liabilities that are reported differently for income tax purposes than for financial reporting purposes, as required by ASC 740 “Income Taxes” (ASC 740). Uncertain tax positions are also accounted for under ASC 740. The company classifies interest as interest expense and penalties as other expense in the financial statements.

RATE ADJUSTMENT MECHANISMS

PSE has a Power Cost Adjustment (PCA) mechanism that provides for a rate adjustment process if PSE’s costs to provide customers’ electricity varies from a baseline power cost rate established in a rate proceeding. All significant variable power supply cost drivers are included in the PCA 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 PCA mechanism apportions increases or decreases in power costs, on a graduated scale, between PSE and its customers. Any unrealized gains and losses from derivative instruments accounted for under ASC 815, are deferred in proportion to the cost-sharing arrangement under the PCA mechanism. On January 10, 2007, the Washington Commission approved the PCA mechanism with the same annual graduated scale but without a cap on excess power costs.

The graduated scale is as follows:

ANNUAL POWER COST VARIABILITY	CUSTOMERS’ SHARE			COMPANY’S SHARE
+/- $20 million		0	%		100	%
+/- $20 million - $40 million		50	%		50	%
+/- $40 million - $120 million		90	%		10	%
+/- $120 + million		95	%		5	%

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For the year ended December 31, 2009, PSE’s accumulated power costs were between $20.0 million and $40.0 million. Accordingly, PSE and the customer share the costs in excess of $20.0 million in equal proportion.

The differences between the actual cost of PSE’s natural gas supplies and natural gas transportation contracts and costs currently allowed by the Washington Commission are deferred and recovered or repaid through the PGA mechanism. The PGA mechanism allows PSE to recover expected gas costs, and defer, as a receivable or liability, any gas costs that exceed or fall short of this expected gas cost amount in the PGA mechanism rates, including interest.

NATURAL GAS OFF-SYSTEM SALES AND CAPACITY RELEASE

PSE contracts for firm natural gas supplies and holds firm transportation and storage capacity sufficient to meet the expected peak winter demand for natural gas by its firm customers. Due to the variability in weather, winter peaking consumption of natural gas by most of its customers and other factors, PSE holds contractual rights to natural gas supplies and transportation and storage capacity in excess of its average annual requirements to serve firm customers on its distribution system. For much of the year, there is excess capacity available for third-party natural gas sales, exchanges and capacity releases. PSE sells excess natural gas supplies, enters into natural gas supply exchanges with third parties outside of its distribution area and releases to third parties excess interstate natural gas pipeline capacity and natural gas storage rights on a short-term basis to mitigate the costs of firm transportation and storage capacity for its core natural gas customers. The proceeds from such activities, net of transactional costs, are accounted for as reductions in the cost of purchased natural gas and passed on to customers through the PGA mechanism, with no direct impact on net income. As a result, PSE nets the sales revenue and associated cost of sales for these transactions in purchased natural gas.

ACCOUNTING FOR DERIVATIVES

ASC 815, “Derivatives and Hedging,” (ASC 815) requires that all contracts considered to be derivative instruments be recorded on the balance sheet at their fair value unless the contracts qualify for a specific exception provided in ASC 815. PSE enters into contracts to manage its energy resource portfolio and interest rate exposure including forward physical and financial contracts and swaps. The majority of PSE’s physical contracts qualify for the Normal Purchase Normal Sale (NPNS) exception to derivative accounting rules. PSE may enter into financial fixed contracts to economically hedge the variability of certain index-based contracts. Those contracts that do not meet the NPNS exception are marked-to-market to current earnings in the statements of income, subject to deferral under ASC 980, for energy related derivatives due to the PCA mechanism and PGA mechanism.

On July 1, 2009, PSE elected to de-designate all energy related derivative contracts that previously had been recorded as cash flow hedges for the purpose of simplifying its financial reporting. The contracts that were de-designated related to physical electric supply contracts and natural gas swap contracts to fix the price of natural gas for electric generation. For these contracts, all future mark-to-market accounting will be recognized through earnings. The amount in accumulated OCI is transferred to earnings in the same period or periods during which the hedged transaction affected earnings or sooner if management determines that the forecasted transaction is probable of not occurring. As a result, the Company will likely continue to experience earnings volatility in future periods.

The Company may enter into swap instruments on other financial derivative instruments to manage the interest rate risk associated with its long-term debt financing and debt instruments. As of December 31, 2009, Puget Energy has interest rate swap contracts outstanding related to its long-term debt. See Note 9.

FAIR VALUE MEASUREMENTS OF DERIVATIVES

ASC 820, “ Fair Value Measurements and Disclosures” (ASC 820), defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). However, as permitted under ASC 820, the Company utilizes a mid-market pricing

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convention (the mid-point price between bid and ask prices) as a practical expedient for valuing the majority of its assets and liabilities measured and reported at fair value. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements as it believes that this is the approach used by market participants for these types of assets and liabilities. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company values derivative instruments based on daily quoted prices from an independent external pricing service. When external quoted market prices are not available for derivative contracts, the Company uses a valuation model that uses volatility assumptions relating to future energy prices based on specific energy markets and utilizes externally available forward market price curves. All derivative instruments are sensitive to market price fluctuations that can occur on a daily basis.

STOCK-BASED COMPENSATION

The Company applies the fair value approach to stock compensation and estimates fair value in accordance with provisions of ASC 718, “Compensation – Stock Compensation.” Effective February 6, 2009, as a result of the merger, all outstanding shares of the Company were accelerated and vested, the stock compensation plan was terminated and there was no stock-based compensation. The Company recognized $14.5 million of stock compensation expense which was recorded in merger and related costs.

DEBT RELATED COSTS

Debt premiums, discounts, expenses and amounts received or incurred to settle hedges are amortized over the life of the related debt for the Company. The premiums and costs associated with reacquired debt are deferred and amortized over the life of the related new issuance, in accordance with ratemaking treatment for PSE.

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ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

In December 2005, PSE entered into a five-year Receivable Sales Agreement with PSE Funding, Inc. (PSE Funding), a wholly owned, bankruptcy-remote subsidiary of PSE formed for the purpose of purchasing customers’ accounts receivable, both billed and unbilled. The results of PSE Funding are consolidated in the financial statements of PSE. The accounts receivable are sold at estimated fair value, based on the present value of discounted cash flows taking into account anticipated credit losses, the speed of payments and the discount rate commensurate with the uncertainty involved. In addition, PSE Funding entered into a Loan and Servicing Agreement with PSE and two banks. The Loan and Servicing Agreement allowed PSE Funding to use the receivables as collateral to secure short-term loans, not exceeding the lesser of $200.0 million or the borrowing base of eligible receivables which fluctuate with the seasonality of energy sales to customers. The PSE Funding receivables securitization facility was terminated upon the closing of the merger on February 6, 2009 and the outstanding balance was paid in full. PSE Funding had $158.0 million of loans secured by accounts receivable pledged as collateral at December 31, 2008.

STATEMENTS OF CASH FLOWS

PSE funds cash dividends paid to the shareholders of Puget Energy. These funds are reflected in the Statement of Cash Flows of Puget Energy as if Puget Energy received the cash from PSE and paid the dividends directly to the shareholders.

The following non-cash investing and financing activities have occurred at the Company:

• PSE incurred capital lease obligations of $15.9 million for vehicles and $44.5 million for energy generation turbines for the years ended December 31, 2009 and 2008, respectively.

• In connection with the February 6, 2009 merger, Puget Energy assumed $779.3 million of long-term debt in order to pay down PSE short-term debt. Also in connection with the merger, Puget Energy assumed $587.8 million of long-term debt to pay off the previous shareholders. This amount was included as part of the purchase price consideration.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the components of the Company’s accumulated other comprehensive income (loss) at December 31:

PUGET ENERGY (DOLLARS IN THOUSANDS)	SUCCESSOR 2009			PREDECESSOR 2008
Net unrealized loss on energy derivatives during the period	$	(26,222	)	$	(139,723	)
Reclassification of net unrealized loss on energy derivatives during the period		19,144			28,007
Net unrealized losses on interest rate swaps		(22,777	)		—
Reclassification of net unrealized loss on interest rate swaps during the period		18,884			—
Settlement of cash flow hedge contract		—			13,443
Amortization of cash flow hedge contracts		—			(21,335	)
Net unrealized gain(loss) and prior service cost on pension plans		34,458			(143,196	)
Total Puget Energy, net of tax	$	23,487		$	(262,804	)

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PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	2009			2008
Net unrealized loss on energy derivatives during the period	$	(159,438	)	$	(139,723	)
Reclassification of net unrealized loss on energy derivatives during the period		76,280			28,007
Settlement of cash flow hedge contract		13,443			13,443
Amortization of cash flow hedge contracts		(21,017	)		(21,335	)
Net unrealized (loss) and prior service cost on pension plans		(119,388	)		(143,196	)
Total PSE, net of tax	$	(210,120	)	$	(262,804	)

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NOTE 2. New Accounting Pronouncements

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Business Combinations. On January 1, 2009, Puget Energy adopted ASC 805, “Business Combinations.” The objective of the standard is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, the standard establishes principles and requirements for how the acquirer: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. See Note 3.

Fair Value Measurements and Disclosures. In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-12, “Fair Value Measurements and Disclosures: Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” The standard allows the reporting entity, as a practical expedient, to measure the fair value of investments that do not have readily determinable fair values on the basis of the net asset value per share of the investment if the net asset value of the investment is calculated in a matter consistent with Topic 946, “Financial Services – Investment Companies.” The standard requires disclosures about the nature and risk of the investments and whether the investments are probable of being sold at amounts different from the net asset value per share. The standard is effective for the first reporting period ending after December 15, 2009, which is December 31, 2009 for the Company. See Note 17.

On January 1, 2008, the Company adopted ASC 820 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.

The Company adopted ASC 820 on January 1, 2008, prospectively, as required by the Statement for financial and nonfinancial instruments measured on a recurring basis, with certain exceptions, including the initial impact of changes in fair value measurements of existing derivative financial instruments measured initially using the transaction price under ASC 815. The difference between the carrying amounts and the fair values of those instruments originally recorded under guidance in ASC 815 was recognized as a cumulative-effect adjustment to the opening balance of retained earnings of $9.0 million before tax as a result of recording a deferred loss on net derivative assets and liabilities.

In October 2008, the FASB issued new guidance permitting the deferral until fiscal years beginning after November 15, 2008 of applying previously issued fair value measurement guidance to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The application of the fair value measurement guidance to nonrecurring nonfinancial assets and nonrecurring nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis as of January 1, 2009 did not impact the Company’s consolidated financial statements.

On February 6, 2009, Puget Holdings completed its merger with Puget Energy. Puget Energy remeasured the carrying amount of all its assets and liabilities to fair value, which resulted in the recognition of approximately $1.7 billion in goodwill. See Note 3.

Accounting Standards Codification. In June 2009, FASB issued ASU No. 2009-01, Topic 105, “Generally Accepted Accounting Principles amendments based on the Statement of Financial Standards No. 168 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” With this ASU, the FASB Codification became the authoritative source of GAAP. The FASB Codification

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was effective for interim and annual reporting periods ending after September 15, 2009, which was September 30, 2009 for the Company. The FASB Codification is not expected to have a material impact on the financial reporting of the Company.

Derivative Instruments Disclosures. On January 1, 2009, FASB issued a new standard, which required additional disclosures about the Company’s objectives in using derivative instruments and hedging activities, and tabular disclosures of the effects of such instruments and related hedged items on the Company’s financial position, financial performance, and cash flows. See Note 14.

Retirement Benefits Disclosures. Effective December 31, 2009, ASC 715 “Compensation – Retirement Benefits” (ASC 715) directs companies to provide additional disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures are to disclose the following: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) major categories of plan assets; (3) inputs and valuation techniques used to measure the fair value of plan assets; (4) effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. The standard is effective for the fiscal year December 15, 2009, which is effective for the Company for the year ended December 31, 2009. See Note 17.

Subsequent Events. In May 2009, FASB issued ASC 855, “Subsequent Events,” a new standard on subsequent events. The standard does not require significant changes regarding recognition or disclosure of subsequent events but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition. The standard is effective for financial statements issued after June 15, 2009, which was the quarter ended June 30, 2009 for the Company. The implementation of this standard did not have a significant impact on the financial statements of the Company.

RECENT ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED

Variable Interest Entities. In December 2009, the FASB issued ASU No. 2009-17, Topic 810, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the FASB Accounting Standards Codification for the issuance of pre-codification FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). This standard replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and: (1) the obligation to absorb losses of the entity; or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative is expected to be more effective for identifying which reporting entity has a controlling financial interest in a VIE. This standard also requires additional disclosures about a reporting entity’s involvement in VIE, which will enhance the information provided to users of financial statements. The standard is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period, which will be the period ending March 31, 2010 for the Company. The Company has determined that the adoption of this standard will not have a material impact to the financial statements.

Fair Value Measurements and Disclosures. In January 2010, the FASB issued ASU 2010-6, “Improving Disclosures About Fair Value Measurements,” which requires reporting entities to make new disclosures about

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recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. As these new requirements relate solely to disclosures, the adoption of this guidance will not impact the Company's consolidated financial statements.

NOTE 3. Business Combinations (Puget Energy Only)

On February 6, 2009, Puget Holdings completed its merger with Puget Energy. As a result of the merger, Puget Energy is the direct wholly owned subsidiary of Puget Equico, which is an indirect wholly owned subsidiary of Puget Holdings. After the merger, Puget Energy has 1,000 shares authorized, of which 200 shares have been issued at a par value of $0.01 per share.

At the time of the merger, each issued and outstanding share of common stock of Puget Energy was cancelled and converted automatically into the right to receive $30.00 in cash, without interest. The fair value of consideration transferred was $3.9 billion, including funding by Puget Holdings of $3.0 billion, debt of $0.6 billion issued by Puget Energy and $0.3 billion that was the result of the stepped-up basis of the investors’ previously owned shares.

The table below is the statement of fair value of assets acquired and accrued liabilities assumed as of February 6, 2009 measured in accordance with ASC 805. There were no adjustments subsequent to the merger transaction date.

(DOLLARS IN THOUSANDS)	AMOUNT
Net utility plant	$	6,346,032
Other property and investments		151,913
Goodwill		1,656,513
Current assets		1,259,505
Long-term and regulatory assets		2,497,355
Long-term debt		2,490,544
Current liabilities		2,173,079
Long-term liabilities		3,358,000

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The following tables present the fair value adjustments to Puget Energy’s balance sheet and recognition of goodwill in accordance with ASC 805:

ASSETS

(DOLLARS IN THOUSANDS)	FEBRUARY 6, 2009 INCREASE (DECREASE)
Utility plant:
Electric plant	$	(2,367,756	)
Gas plant		(666,278	)
Common plant		(302,015	)
Less: Accumulated depreciation and amortization		3,381,095
Net utility plant		45,046
Other property and investments:
Goodwill		1,656,513
Non-utility property		4,250
Total other property and investments		1,660,763
Current assets:
Materials and supplies		13,700
Fuel and gas inventory		(27,561	)
Unrealized gain on derivative instruments		3,765
Power contract acquisition adjustment gain		123,975
Deferred income taxes		32,772
Total current assets		146,651
Other long-term and regulatory assets:
Other regulatory assets		145,711
Unrealized gain on derivative instruments		1,359
Regulatory asset related to power contracts		317,800
Power contract acquisition adjustment gain		1,016,225
Other		(17,072	)
Total other long-term and regulatory assets		1,464,023
Total assets	$	3,316,483

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CAPITALIZATION AND LIABILITIES

(DOLLARS IN THOUSANDS)	FEBRUARY 6, 2009 INCREASE (DECREASE)
Capitalization:
Common shareholders’ equity	$	1,660,160
Long-term debt		(280,315	)
Total capitalization		1,379,845
Current liabilities:
Unrealized loss on derivative instruments		84,603
Current portion of deferred income taxes		171
Power contract acquisition adjustment loss		118,167
Other		42,679
Total current liabilities		245,620
Long-term liabilities and regulatory liabilities:
Deferred income taxes		161,094
Unrealized loss on derivative instruments		50,979
Regulatory liabilities		17,417
Regulatory liabilities related to power contracts		1,140,200
Power contract acquisition adjustment loss		199,633
Other deferred credits		121,695
Total long-term liabilities and regulatory liabilities		1,691,018
Total capitalization and liabilities	$	3,316,483

The carrying values of net utility plant and the majority of regulatory assets and liabilities were determined to be stated at fair value at the acquisition date based on a conclusion that individual assets are subject to regulation by the Washington Commission and the FERC. As a result, the future cash flows associated with the assets are limited to the carrying value plus a return, and management believes that a market participant would not expect to recover any more or less than the carrying value. Furthermore, management believes that the current rate of return on plant assets is consistent with an amount that market participants would expect. ASC 805 requires that the beginning balance of fixed depreciable assets be shown net, with no accumulated amortization recorded, at the date of acquisition, consistent with fresh start accounting.

Other property and investments includes the carrying value of the investments in PSE subsidiaries and other non-utility assets adjusted to fair value based on a combination of the income approach, the market based approach and the cost approach.

The fair values of materials and supplies, which included emission allowances, renewable energy credits and carbon financial instruments, were established using a variety of approaches to estimate the market price. The carrying value of fuel inventory was adjusted to its fair value by applying market cost at the date of acquisition.

Energy derivative contracts were reassessed and revalued at the merger date based on forward market prices and forecasted energy requirements.

The fair value assigned to the power contracts was determined using an income approach comparing the contract rate to the market rate for power over the remaining period of the contracts incorporating nonperformance risk. Management also incorporated certain assumptions related to quantities and market presentation that it believes market participants would make in the valuation. The fair value of the power contracts will be amortized as the contracts settle.

Other regulatory assets include service contracts which were valued using the income approach comparing the contract rate to the market rate over the remaining period of the contract.

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The fair value of leases was determined using the income approach which calculated the favorable/unfavorable leasehold interests as the net present value of the difference between the contract lease rent and market lease rent over the remaining terms of the contracted lease obligation.

The fair value assigned to long-term debt was determined using two different methodologies. For those securities which were actively traded by a third party pricing service, the best indication of fair value was assumed to be the third party’s quoted price. For those securities for which the third party did not provide regular pricing, the fair value of the debt was estimated by forecasting out all coupon and principal payments and discounting them to the present value at an approximated discount rate based on PSE’s risk of nonperformance as of the merger date.

The merger also triggered a new basis of accounting for Puget Energy for the postretirement benefit plans sponsored by PSE under ASC 805 which required remeasuring plan liabilities without the five year smoothing of market-related asset gains and losses.

For the twelve months ended December 31, 2009, Puget Energy incurred pre-tax merger expenses of $47.1 million primarily related to legal fees, transaction advisory services, new credit facility fees, change of control provisions and real estate excise tax. Puget Energy’s merger costs in 2009 will not be indicative for periods following the acquisition.

One day prior to the merger, PSE defeased its preferred stock in the amount of $1.9 million. In conjunction with the merger on February 6, 2009, Puget Energy contributed $805.3 million in capital to PSE, of which $779.3 million was used to pay off short-term debt owed by PSE, including $188.0 million in short-term debt outstanding through the PSE Funding accounts receivable securitization program that was terminated upon closing of the merger. An additional $26.0 million of the capital contribution was used to pay change in control costs associated with the merger.

NOTE 4. Discontinued Operations and Corporate Guarantees (Puget Energy Only)

In May 2006, Puget Energy sold InfrastruX to an affiliate of Tenaska Power Fund, L.P. (Tenaska) in an all-cash transaction. As a part of the transaction, Puget Energy made certain representations and warranties concerning InfrastruX and indemnified Tenaska against certain future losses not to exceed $15.0 million. At the time of the sale, Puget Energy purchased a warranty insurance policy and deposited $3.7 million into an escrow account, representing the full retention under the insurance policy. Additionally at the time of sale, Puget Energy recorded a $5.0 million loss reserve in connection with the indemnifications, which represented management’s measurement of the fair value of the corporate guarantees using a probability weighted approach. During 2007, Puget Energy paid $1.8 million from the escrow account, which included interest of $0.2 million.

In April 2008, Puget Energy and Tenaska entered into a Joint Notice of Distribution and Termination Agreement (Termination Agreement) which resulted in the extinguishment of all InfrastruX corporate guarantees made by Puget Energy which management believed involved a risk of loss in connection with the sale of InfrastruX.

In 2008, Puget Energy made the remaining payments under the terms of the Termination Agreement totaling $7.1 million bringing total cash outlays equal to the Company’s original aggregate loss reserve amounts recorded in 2006.

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NOTE 5. Regulation and Rates

ELECTRIC REGULATION AND RATES

STORM DAMAGE DEFERRAL ACCOUNTING

On February 18, 2005, the Washington Commission issued a general rate case order that defined deferrable catastrophic/extraordinary losses and provided that costs in excess of $7.0 million annually may be deferred for qualifying storm damage costs that meet the IEEE outage criteria for system average interruption duration index. PSE’s storm accounting, which allows deferral of certain storm damage costs, was subject to review by the Washington Commission at the end of a three-year period, which was December 31, 2007. In PSE’s electric general rate case, the annual threshold at which qualifying storm costs may be deferred has been modified to equal the four year average of normal storm expense as approved in rates which is currently $8.0 million and is currently effective beginning with calendar year 2009. In 2009, PSE incurred $4.7 million in storm-related electric transmission and distribution system restoration costs, of which none was deferred. In 2008, PSE incurred $11.4 million in storm-related electric transmission and distribution system restoration costs, of which $1.4 million was deferred.

ELECTRIC GENERAL RATE CASE

On May 8, 2009, PSE filed a general rate case with the Washington Commission which proposed an increase in electric rates of $148.1 million or 7.4% annually, effective April 2010. On February 19, 2010, PSE filed a brief, which lowered the requested electric rate increase to $110.3 million or 5.5%. This rate request includes a capital structure that includes 48.0% common equity and a requested rate of return on equity of 10.8%. A final order from the Washington Commission is expected in April 2010.

On October 8, 2008, the Washington Commission issued its order in PSE’s electric general rate case filed in December 2007, approving a general rate increase for electric customers of $130.2 million or 7.1% annually. The rate increase for electric gas customers was effective November 1, 2008. In its order, the Washington Commission approved a weighted cost of capital of 8.25%, or 7.00% after-tax, and a capital structure that included 46.0% common equity with a return on equity of 10.15%.

POWER COST ONLY RATE CASE

Power Cost Only Rate Case (PCORC), a limited-scope proceeding, was approved in 2002 by the Washington Commission to periodically reset power cost rates. In addition to providing the opportunity to reset all power costs, the PCORC proceeding also provides for timely review of new resource acquisition costs and inclusion of such costs in rates at the time the new resource goes into service. To achieve this objective, the Washington Commission approved an expedited six-month PCORC decision timeline rather than the statutory 11-month timeline for a general rate case. In an order issued January 15, 2009, the Washington Commission extended the expedited timeline from five to six months.

ACCOUNTING ORDERS AND PETITIONS

On April 11, 2007, the Washington Commission approved PSE’s petition for issuance of an accounting order that authorizes PSE to defer certain ownership and operating costs (and associated carrying costs) PSE incurred related to its purchase of Goldendale during the period prior to inclusion in PSE’s retail electric rates in the PCORC. The deferral is for the time period from March 15, 2007 through September 1, 2007. Recovery of these costs over a period of three years began November 2008 as allowed in the October 2008 general rate case order.

On April 13, 2007, PSE filed an accounting petition for a Washington Commission order authorizing the deferral and use of net revenues from the sale of Renewable Energy Credits (RECs) and Emission Reduction Allowances (ERA) to further the development of renewable generation resources in Washington State or to be credited to customers. The accounting petition also requests approval of amortization of the deferred REC and ERA proceeds to expense. PSE filed an amended petition on October 7, 2009.

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On May 30, 2007, PSE agreed to extend the terms of the existing leases of its Bellevue corporate office complex from ten years to 15 years. PSE’s lease agreement included a one-time right to purchase the office complex. PSE elected to monetize the value of this purchase option and negotiated for a cash payment of $18.9 million, net of transaction fees, in exchange for the termination of the purchase option. PSE received authorization for deferred accounting treatment of the net proceeds in the 2007 General Rate Case. Amortization began effective November 1, 2008 for a period of 12 years.

On May 21, 2008, PSE filed an accounting petition for a Washington Commission order that authorizes the deferral of a settlement payment of $10.7 million incurred as a result of the recent settlement of a lawsuit in the state of Montana over alleged damages caused by the operation of Colstrip. The payment was expensed pending resolution of the accounting petition. The petition is still pending approval by the Washington Commission and is currently part of the electric general rate case.

On November 5, 2008, PSE filed an accounting petition for a Washington Commission order authorizing the deferral and recovery of interest due the IRS for tax years 2001 to 2006 along with carrying costs incurred in connection with the interest due. In October 2005, the Washington Commission issued an order authorizing the deferral and recovery of costs associated with increased borrowings necessary to remit deferred taxes to the IRS. The petition is still pending approval by the Washington Commission and is currently part of the pending general rate case.

On November 6, 2008, PSE filed an accounting petition for a Washington Commission order authorizing accounting treatment and amortization related to payments received for taking assignment of Westcoast Pipeline Capacity. The accounting petition seeks deferred accounting treatment and amortization of the regulatory liability to power costs beginning in November 2009 and extending over the remaining primary term of the pipeline capacity contract through October 31, 2018. The petition is still pending approval by the Washington Commission and is currently part of the electric general rate case.

On December 30, 2008, the Washington Commission approved an order authorizing the sale of Puget Energy and PSE to Puget Holdings subject to a Settlement Stipulation which included 78 conditions. Items included in the conditions that may affect the financial statements are dividend restrictions for Puget Energy and PSE. These items are discussed in Note 7. In addition, the conditions provided for rate credits of $10.0 million per year (less certain merger savings) over a ten-year period beginning at the closing of the transaction.

On April 17, 2009, the Washington Commission issued an order approving and adopting a settlement agreement that authorized PSE to defer certain ownership and operating costs related to its purchase of the Mint Farm Generation Station (Mint Farm) that will be incurred prior to PSE recovering such costs in electric customer rates. Under Washington state law, a jurisdictional electric utility may defer the costs associated with purchasing and operating a natural gas plant that complies with the greenhouse gas (GHG) emissions performance standard until the plant is included in rates or for two years from the date of purchase, whichever occurs sooner. As of December 31, 2009, the balance of the regulatory asset is $20.8 million. The prudence of the Mint Farm acquisition, recovery of costs of Mint Farm and compliance with the GHG emissions performance standard is addressed in PSE’s general rate proceeding.

On March 13, 2009, PSE filed with the Washington Commission an application for authority to sell and transfer certain assets related to the Company’s White River Hydroelectric Project (the Project) to the Cascade Water Alliance (CWA). PSE also requested in its application that the Commission waive applicable provisions of the Revised Code of Washington and Washington Administrative Code with regard to certain surplus property related to the Project, which PSE expects to sell in the near future but which is not part of the CWA transaction. On May 14, 2009, the application for authority to transfer certain assets to CWA was approved by the Washington Commission and the application for waiver with regard to the Surplus Property was denied.

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On September 30, 2009, PSE filed an accounting petition requesting that the Washington Commission authorize PSE to normalize over 10 years any Treasury grant dollars received under Section 1603 of the American Recovery and Reinvestment Act of 2009 associated with the Wild Horse Expansion project. Treasury grants are tax free grants related to certain renewable energy infrastructure that are available in lieu of the production tax credit allowed under the Internal Revenue Code. The Washington Commission issued an order approving the accounting petition on December 10, 2009.

On October 7, 2009, PSE filed an amended accounting petition requesting that the Washington Commission authorize PSE to defer the net revenues from the sale of RECs and carbon financial instruments (collectively, REC Proceeds) and use the revenues to: (1) provide funding for low income energy efficiency and renewable energy services; (2) credit a portion of the REC Proceeds to the California Receivable (see Note 21 for further discussion); and (3) provide a credit to customers by offsetting the REC Proceeds against a regulatory asset. The accounting petition is an amended petition to the accounting petition originally filed in April 2007 that requested deferred accounting treatment for renewable energy credits. The petition is still pending approval by the Washington Commission.

On October 16, 2009, PSE filed an accounting petition requesting that the Washington Commission authorize the deferral and recovery of incremental costs associated with protecting the Company’s infrastructure, facilitating public safety, and preparing PSE’s electric and natural gas system in the Green River Valley flood plain in anticipation of release of water from the United States Army Corps of Engineers’ (Corps) Howard Hanson Dam (the Dam). In the event of actual flooding, PSE also petitioned the Washington Commission to allow the deferral of costs associated with the repair and restoration of any electric and gas system infrastructure affected by a flood.

On January 28, 2010, the Washington Commission approved PSE’s request for authorization to defer the costs associated with restoring the Company’s infrastructure, facilitating public safety, and repairing the Company’s electric and natural gas system in the Green River Valley flood plain in the event evacuation is required or flooding occurs due to operations associated with the Dam. This authorization is conditioned on PSE incurring incremental operation and maintenance costs in excess of $5.0 million per year associated with repair or restoration of the Company’s systems around the Green River. The Washington Commission’s Order will be effective until the date the Corps confirms that the Dam has been permanently repaired and that Corps’ operations will return to normal

RESIDENTIAL EXCHANGE REGULATORY ASSET

Petitioners in several actions in the Ninth Circuit against BPA asserted that BPA acted contrary to law in entering into or performing or implementing a number of agreements, including the amended settlement agreement (and the May 2004 agreement) between BPA and PSE regarding the REP. Petitioners in several actions in the Ninth Circuit against BPA also asserted that BPA acted contrary to law in adopting or implementing the rates upon which the benefits received or to be received from BPA during the October 1, 2001 through September 30, 2006 period were based. A number of parties claimed that the BPA rates proposed or adopted in the BPA rate proceeding to develop BPA rates to be used in the agreements for determining the amounts of money to be paid to PSE by BPA during the period October 1, 2006 through September 30, 2009 are contrary to law and that BPA acted contrary to law or without authority in deciding to enter into, or in entering into or performing or implementing such agreements.

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On May 3, 2007, the Ninth Circuit issued an opinion in Portland Gen. Elec. v. BPA, Case No. 01-70003, in which proceeding the actions of BPA in entering into settlement agreements regarding the REP with PSE and with other investor-owned utilities were challenged. In this opinion, the Ninth Circuit granted petitions for review and held the settlement agreements entered into between BPA and the investor-owned utilities being challenged in that proceeding to be inconsistent with statute. On May 3, 2007, the Ninth Circuit also issued an opinion in Golden Northwest Aluminum v. BPA, Case No. 03-73426, in which proceeding the petitioners sought review of BPA’s 2002-2006 power rates. In this opinion, the Ninth Circuit granted petitions for review and held that BPA unlawfully shifted onto its preference customers the costs of its settlements with the investor-owned utilities. On October 11, 2007, the Ninth Circuit remanded the May 2004 agreement to BPA in light of the Portland Gen. Elec. v. BPA opinion and dismissed the remaining three pending cases regarding settlement agreements.

In March 2008, BPA and PSE signed an agreement pursuant to which BPA made a payment to PSE related to the REP benefits for the fiscal year ended September 30, 2008, which payment is subject to true-up depending upon the amount of any REP benefits ultimately determined to be payable to PSE.

In September 2008, BPA issued its record of decision in its reopened WP-07 rate proceeding to respond to the various Ninth Circuit opinions. In this record of decision, BPA adjusted its fiscal year 2009 rates, determined the amounts of REP benefits it considered to have been improperly paid after fiscal year 2001 to PSE and the other regional investor-owned utilities, and determined that such amounts are to be recovered through reductions in REP benefit payments to be made over a number of years. The amount determined by BPA to be recovered through reductions commencing October 2007 in REP payments for PSE’s residential and small farm customers was approximately $207.2 million plus interest on unrecovered amounts to the extent that PSE receives any REP benefits for its customers in the future. However, these BPA determinations are subject to subsequent administrative and judicial review, which may alter or reverse such determinations. PSE and others, including a number of preference agency and investor-owned utility customers of BPA, in December 2008 filed petitions for review in the Ninth Circuit of various of these BPA determinations.

In September 2008, BPA and PSE signed a short-term Residential Purchase and Sale Agreement (RPSA) under which BPA is to pay REP benefits to PSE for fiscal years ending September 30, 2009–2011. In December 2008, BPA and PSE signed another, long-term RPSA under which BPA is to pay REP benefits to PSE for the period October 2011 through September 2028. PSE and other customers of BPA in December 2008 filed petitions for review in the Ninth Circuit of the short-term and long-term RPSAs signed by PSE (and similar RPSAs signed by other investor-owned utility customers of BPA) and BPA’s record of decision regarding such RPSAs. Generally, REP benefit payments under a RPSA are based on the amount, if any, by which a utility’s average system cost exceeds BPA’s Priority Firm (PF) Exchange rate for such utility. The average system cost for a utility is determined using an average system cost methodology adopted by BPA. The average system cost methodology adopted by BPA and the average system cost determinations, REP overpayment determinations, and the PF Exchange rate determinations by BPA are all subject to FERC review or judicial review or both and are subject to adjustment, which may affect the amount of REP benefits paid or to be paid by BPA to PSE. As discussed above, BPA has determined to reduce such payments based on its determination of REP benefit overpayments after fiscal year 2001.

F-28

It is not clear what impact, if any, such development or review of such BPA rates, average system cost, average system cost methodology, and BPA determination of REP overpayments, review of such agreements, and the above described Ninth Circuit litigation may ultimately have on PSE.

PRODUCTION TAX CREDIT

PSE has a tariff schedule which passes the benefits of the Production Tax Credit (PTCs) to customers based on estimated generation of the PTC credits. PSE may adjust the PTC tariff annually based on differences between the PTC credits provided to the customers and the PTC credits actually earned, plus estimated PTC credits for the following year, less interest associated with the deferred tax balance for the PTC credits. The tariff is not subject to the sharing bands in the PCA. Since customers receive the benefit of the tax credits as they are generated and the Company does not receive a credit from the IRS until the tax credits are utilized, the Company is reimbursed for its carrying costs for funds through this calculation.

On December 12, 2007, PSE revised its PTC electric tariff to decrease the revenue credit to customers from $28.8 million to $28.6 million, effective January 12, 2008. On October 30, 2009, PSE filed a revision to the PTC electric tariff to decrease the revenue credit to customers from $33.6 million to $24.7 million. The tariff is currently suspended and PSE is awaiting a pre-hearing conference to set a further procedural schedule.

TREASURY GRANT

Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603) authorizes the United States Department of the Treasury (U.S. Treasury) to make grants to corporations who place specified energy property in service provided certain conditions are met. The Wild Horse expansion facility was placed into service in November 9, 2009. The Wild Horse facility was expanded from 229 MW to 273 MW through the addition of wind turbines. On December 22, 2009, PSE filed an application with the U.S. Treasury to request a grant on the expansion in the amount $28.7 million. Section 1603 precludes a recipient from claiming PTCs on property for which a grant is claimed. On February 19, 2010, the U.S. Treasury approved the grant and payment was received in February 2010.

PCA MECHANISM

In 2002, the Washington Commission approved a PCA mechanism that triggers if PSE’s costs to provide customers’ electricity varies from a power cost baseline rate established in a rate proceeding. On January 5, 2007, the Washington Commission approved the continuation of the PCA mechanism under the same annual graduated scale without a cumulative cap for excess power costs. All significant variable power supply cost variables (hydroelectric and wind generation, market price for purchased power and surplus power, natural gas and coal fuel price, generation unit forced outage risk and transmission cost) are included in the PCA mechanism.

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The PCA mechanism apportions increases or decreases in power costs, on a calendar year basis, between PSE and its customers on a graduated scale. See Note 1 for the discussion of the accounting policy and PCA graduated scale.

GAS REGULATION AND RATES

GAS GENERAL RATE CASE

On May 8, 2009 PSE filed a general rate case with the Washington Commission which proposed an increase in natural gas rates of $27.2 million or 2.2% annually, effective April 2010. On August 3, 2009, PSE filed an addendum to the natural gas rate request which changed the rate increase to $30.4 million or 2.5%. On December 17, 2009, PSE filed rebuttal testimony, which lowered the requested natural gas rate increase to $28.4 million or 2.3% annually. This rate request includes a capital structure with an equity component of 48.0% and a requested rate of return on equity of 10.8%. A final order from the Washington Commission is expected in April 2010.

On October 8, 2008, the Washington Commission issued its order in PSE’s natural gas general rate case filed in December 2007, approving a general rate increase for natural gas rates of $49.2 million or 4.6% annually. The rate increases for natural gas customers were effective November 1, 2008. In its order, the Washington Commission approved a weighted cost of capital of 8.25%, or 7.00% after tax and a capital structure that included 46.0% common equity with a return on equity of 10.15%.

On January 5, 2007, the Washington Commission issued its order in PSE’s natural gas general rate case, granting an increase for natural gas customers of $29.5 million or 2.8% annually, effective beginning January 13, 2007 which resulted in an increase in gas margin of approximately 9.8% annually. In its order the Washington Commission approved the same weighted cost of capital of 8.4%, or 7.06% after-tax and capital structure that included 44.0% common equity with a return on equity of 10.4%, consistent with PSE’s electric operations.

PURCHASED GAS ADJUSTMENT

PSE has a PGA mechanism in retail natural gas rates to recover variations in gas supply and transportation costs. Variations in gas rates are passed through to customers and, therefore, PSE’s gas margin and net income are not affected by such variations. On September 24, 2009, the Washington Commission approved PSE’s requested revisions to its PGA tariff schedules resulting in a decrease of $198.1 million or 17.1% on an annual basis in gas sales revenues effective October 1, 2009. The rate decrease was the result of lower costs of natural gas in the forward market and an increase of the credit for the accumulated PGA payable balance. The PGA rate change will impact PSE’s revenue but will not impact its net income as the decreased revenue will be offset by decreased purchased gas costs.

On May 28, 2009, the Washington Commission approved a PGA rate decrease of $21.2 million or 1.7% annually effective June 1, 2009. PGA rate changes do not impact net income.

On September 25, 2008, the Washington Commission approved PSE’s requested revisions to its PGA tariff schedules resulting in an increase of $108.8 million or 11.1% on an annual basis in gas sales revenues effective October 1, 2008. The rate increase was the result of higher costs of natural gas in the forward market and a reduction of the credit for the accumulated PGA payable balance. The PGA rate change will increase PSE’s revenue but will not impact the Company’s net income as the increased revenue will be offset by increased purchased gas costs.

The following rate adjustments were approved by the Washington Commission in relation to the PGA mechanism during 2009, 2008 and 2007:

EFFECTIVE DATE	PERCENTAGE INCREASE (DECREASE) IN RATES			ANNUAL INCREASE (DECREASE) IN REVENUES (DOLLARS IN MILLIONS)
October 1, 2009		(17.1	)%	$	(198.1	)
June 1, 2009		(1.7	)		(21.2	)
October 1, 2008		11.1			108.8
October 1, 2007		(13.0	)		(148.1	)

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NOTE 6. Preferred Share Purchase Right

On October 23, 2000, the Board of Directors declared a dividend of one preferred share purchase right (a Right) for each outstanding common share of Puget Energy. The dividend was paid on December 29, 2000 to shareholders of record on that date. The Rights were to become exercisable only if a person or group acquired 10.0% or more of Puget Energy’s outstanding common stock or announced a tender offer which, if consummated, would have resulted in ownership by a person or group of 10.0% or more of the outstanding common stock. Each Right entitled the holder to purchase from Puget Energy one one-hundredth of a share of preferred stock with economic terms similar to that of one share of Puget Energy’s common stock at a purchase price of $65.00, subject to adjustments. The Rights were terminated on February 6, 2009 in connection with the merger transaction.

NOTE 7. Dividend Restrictions

The payment of dividends by PSE to Puget Energy is restricted by provisions of certain covenants applicable to long-term debt contained in PSE’s electric and natural gas mortgage indentures. At December 31, 2009, approximately $468.0 million of unrestricted retained earnings was available for the payment of dividends under the most restrictive mortgage indenture covenant. In addition, beginning February 6, 2009, as approved in the Washington Commission merger order, dividends may not be declared or paid if PSE’s common equity ratio, calculated on a regulatory basis, is 44.0% or below except to the extent a lower equity ratio is ordered by the Washington Commission. In addition, pursuant to the merger order, PSE may not declare or make any distribution unless on the date of distribution PSE’s corporate credit/issuer rating is investment grade (equal to or greater than BBB- with Standard & Poor’s (S&P) and Baa3 with Moody’s Investors Services (Moody’s)), or the PSE’s ratio of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) to interest for the most recently ended four fiscal quarter periods prior to such date is equal to or greater than three to one.

PSE’s ability to pay dividends is also limited by the terms of its credit facilities. Under the credit facilities, PSE is not permitted to pay dividends during any Event of Default (as defined in the facilities), such as failure to comply with certain financial covenants.

Puget Energy’s ability to pay dividends to its shareholder is also limited by the merger order as well as by the terms of its credit facilities, beginning February 6, 2009. Pursuant to the merger order, Puget Energy may not declare or make a distribution unless on such date Puget Energy’s ratio of consolidated EBITDA to consolidated interest expense for the four most recently ended fiscal quarters prior to such date is equal to or greater than two to one. In accordance with terms of the Puget Energy credit facilities, Puget Energy is not permitted to pay dividends during any Event of Default (as defined in the facilities), such as failure to comply with certain financial covenants. In addition, in order to declare or pay unrestricted dividends, Puget Energy’s FFO to Interest Coverage Ratio (as defined in the facility) may not be less than 1.5 to one and its FFO to Debt Ratio (as defined in the facility) may not be less than 8.25% for the 12 months ending each quarter-end. Puget Energy is also subject to other restrictions, such as a “lock up” provision that, in certain circumstances, such as failure to meet certain cash flow tests, may further restrict Puget Energy's ability to pay dividends.

At December 31, 2009, the Company met or exceeded all restrictive test minimums required for the payment of dividends.

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NOTE 8. Utility Plant

			PUGET ENERGY						PUGET SOUND ENERGY
UTILITY PLANT (DOLLARS IN THOUSANDS) AT DECEMBER 31	ESTIMATED USEFUL LIFE (YEARS)		SUCCESSOR1 2009			PREDECESSOR 2008			2009			2008
Electric, gas and common utility plant classified by prescribed accounts at original cost:
Distribution plant		10-55	$	3,986,453		$	5,429,830		$	5,759,617		$	5,429,830
Production plant		25-125		1,365,601			2,330,116			2,385,228			2,330,116
Transmission plant		45-65		277,038			352,042			403,657			352,042
General plant		5-35		308,065			407,367			363,739			407,367
Intangible plant (including capitalized software)		3-50		106,277			381,880			343,180			381,880
Plant acquisition adjustment		NA		211,728			228,772			251,693			228,772
Underground storage		25-60		26,338			27,602			40,052			27,602
Liquefied natural gas storage		25-45		12,440			14,310			14,310			14,310
Plant held for future use		NA		38,378			16,829			38,532			16,829
Other		NA		7,529			7,037			7,529			7,037
Plant not classified		NA		201,013			126,052			201,013			126,052
Capital leases		1-2		86,285			69,912			55,396			69,912
Less: accumulated provision for depreciation				(185,474	)		(3,358,816	)		(3,453,165	)		(3,358,816	)
Subtotal			$	6,441,671		$	6,032,933		$	6,410,781		$	6,032,933
Construction work in progress		NA		358,732			255,214			358,732			255,214
Net utility plant			$	6,800,403		$	6,288,147		$	6,769,513		$	6,288,147

Jointly owned generating plant service costs are included in utility plant service cost. The following table indicates the Company’s percentage ownership and the extent of the Company’s investment in jointly owned generating plants in service at December 31, 2009. These amounts are also included in the Utility Plant table above.

						PUGET ENERGY’S SHARE					PUGET SOUND ENERGY’S  SHARE
							SUCCESSOR 1
JOINTLY OWNED GENERATING PLANTS (DOLLARS IN THOUSANDS)	ENERGY SOURCE (FUEL)		COMPANY’S OWNERSHIP SHARE			PLANT IN SERVICE AT COST		ACCUMULATED DEPRECIATION			PLANT IN SERVICE AT COST		ACCUMULATED DEPRECIATION
Colstrip Units 1 & 2		Coal		50	%	$	108,978	$	3		$	255,732	$	(146,751	)
Colstrip Units 3 & 4		Coal		25	%		203,330		(5,349	)		491,078		(293,097	)
Colstrip Units 1 – 4 Common Facilities 2		Coal		various			83		(3	)		252		(172	)
Frederickson 1		Gas		49.85	%		61,644		4,614			70,606		(4,348	)

¹ The carrying amount was adjusted to fair value as a result of the merger. See Note 3.

² The Company’s ownership is 50% for Colstrip Units 1 & 2 and 25% for Colstrip Units 3 & 4.

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There were no valuation adjustments to asset retirement obligations (ARO) in conjunction with the merger. In 2008, the Company recognized an ARO for the decommissioning costs for Wild Horse for the 43 turbines on lands owned by two Washington state agencies. The Company did not recognize any new ARO’s in 2009.

The following table describes all changes to the Company’s ARO liability:

(DOLLARS IN THOUSANDS) AT DECEMBER 31	2009			2008
Asset retirement obligation at beginning of period	$	29,661		$	29,608
New asset retirement obligation recognized in the period		—			682
Liability settled in the period		(3,621	)		(1,819	)
Revisions in estimated cash flows		(3,483	)		(184	)
Accretion expense		1,538			1,374
Asset retirement obligation at end of period	$	24,095		$	29,661

The Company has identified the following obligations which were not recognized at December 31, 2009:

• a legal obligation under Federal Dangerous Waste Regulations to dispose of asbestos-containing material in facilities that are not scheduled for remodeling, demolition or sale. The disposal cost related to these facilities could not be measured since the retirement date is indeterminable; therefore, the liability cannot be reasonably estimated currently;

• an obligation under Washington state law to decommission the wells at the Jackson Prairie natural gas storage facility upon termination of the project. Since the project is expected to continue as long as the Northwest pipeline continues to operate, the liability cannot be reasonably estimated currently;

• an obligation to pay its share of decommissioning costs at the end of the functional life of the major transmission lines. The major transmission lines are expected to be used indefinitely, therefore the liability cannot be reasonably estimated currently; and

• a legal obligation under Washington state environmental laws to remove and properly dispose of certain under and above ground fuel storage tanks. The disposal costs related to under and above ground storage tanks could not be measured since the retirement date is indeterminable; therefore the liability cannot be reasonably estimated currently.

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NOTE 9. Long-Term Debt

PUGET SOUND ENERGY LONG-TERM DEBT (DOLLARS IN THOUSANDS) AT DECEMBER 31, 2009 FIRST MORTGAGE BONDS, POLLUTION BONDS , SENIOR NOTES AND JUNIOR SUBORDINATED NOTES
SERIES	DUE		2009		2008		SERIES			DUE		2009		2008
6.460%		2009	$	—	$	150,000		9.570	%		2020	$	25,000	$	25,000
6.610%		2009		—		3,000		7.150	%		2025		15,000		15,000
6.620%		2009		—		5,000		7.200	%		2025		2,000		2,000
7.120%		2010		7,000		7,000		7.020	%		2027		300,000		300,000
7.960%		2010		225,000		225,000		7.000	%		2029		100,000		100,000
7.690%		2011		260,000		260,000		5.000	%1		2031		138,460		138,460
6.830%		2013		3,000		3,000		5.100	%1		2031		23,400		23,400
6.900%		2013		10,000		10,000		5.483	%		2035		250,000		250,000
5.197%		2015		150,000		150,000		6.724	%		2036		250,000		250,000
7.350%		2015		10,000		10,000		6.274	%		2037		300,000		300,000
7.360%		2015		2,000		2,000		5.757	%		2039		350,000		—
6.750%		2016		250,000		—		6.974	%2		2067		250,000		250,000
6.740%		2018		200,000		200,000
Total PSE long-term debt												$	3,120,860	$	2,678,860

PUGET ENERGY LONG-TERM DEBT (DOLLARS IN THOUSANDS)
AT DECEMBER 31, 2009			SUCCESSOR			PREDECESSOR
	DUE		2009			2008
PSE long-term debt		Various	$	3,120,860		$	2,678,860
Acquisition adjustment of PSE long-term debt 3				(286,681	)		—
Term loan		2014		1,225,000			—
Capital expenditures facility		2014		258,000			—
Original discount on Puget Energy term loan and capital expenditures facility		N/A		(44,481	)		—
Total Puget Energy long-term debt			$	4,272,698		$	2,678,860

¹ Pollution Bonds

² Junior Subordinated Notes

³ See Note 3 for additional information regarding fair value adjustments.

PUGET SOUND ENERGY LONG-TERM DEBT

In connection with the closing of the merger, all shelf registration statements of Puget Energy were terminated. On March 13, 2009, PSE filed with the SEC a new shelf registration statement to provide for the offering of senior notes of PSE, secured by first mortgage bonds, and unsecured debentures of PSE. This shelf registration statement, which did not specify the amount of securities that PSE may offer, was amended on January 26, 2010 and will remain valid until March 13, 2012. Under the shelf registration, as amended, PSE may offer senior notes secured by first mortgage bonds in an aggregate amount of up to $800.0 million. The Company also remains subject to the restrictions of PSE’s indentures on the amount of first mortgage bonds that PSE may issue.

On January 23, 2009, PSE completed a $250.0 million issuance of senior secured notes. The notes have a term of seven years and an interest rate of 6.75%. Net proceeds from the issue were used to repay short-term debt incurred to fund in part the utility’s capital expenditures.

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On September 11, 2009, PSE completed a $350.0 million issuance of senior secured notes. The notes have a term of 30 years and an interest rate of 5.757%. Net proceeds from the issue were used to repay short-term debt which had been incurred primarily for earlier retirement of maturing long-term debt and to fund in part the utility’s capital expenditures. Substantially all utility properties owned by PSE are subject to the lien of the Company’s electric and natural gas mortgage indentures. To issue additional first mortgage bonds under these indentures, PSE’s earnings available for interest must be at least twice the annual interest charges on outstanding first mortgage bonds. At December 31, 2009, the earnings available for interest exceeded the required amount.

PUGET SOUND ENERGY POLLUTION CONTROL BONDS

PSE has two series of Pollution Control Bonds outstanding. On February 19, 2003, the Board of Directors approved the refinancing of all Pollution Control Bonds series, which were issued in March 2003. Amounts outstanding were borrowed from the City of Forsyth, Montana (the City). The City obtained the funds from the sale of Customized Pollution Control Refunding Bonds issued to finance pollution control facilities at Colstrip Units 3 & 4.

Each series of bonds is collateralized by a pledge of PSE’s first mortgage bonds, the terms of which match those of the Pollution Control Bonds. No payment is due with respect to the related series of first mortgage bonds so long as payment is made on the Pollution Control Bonds.

PUGET ENERGY LONG-TERM DEBT

Effective with the close of the merger on February 6, 2009, Puget Energy has a $1.225 billion five-year term loan and a $1.0 billion credit facility. The term loan was issued at a discount of $54.3 million. Puget Energy entered into the term loan agreement to assist with funding the merger transaction and to repay short-term loans under the previous PSE credit facilities. Puget Energy entered into the credit facility to provide funding for capital expenditures. Prior to the merger close, Puget Energy had no credit facilities.

The two credit facilities mature in February 2014, contain similar terms and conditions and are syndicated among numerous banks and financial institutions. Concurrent with the borrowings under these credit agreements, Puget Energy entered into a series of interest rate swaps with a group of banks to fix the interest rates at 4.76% for the term of the credit facilities on these two loans totaling $1.483 billion.

LONG-TERM DEBT MATURITIES

The principal amounts of long-term debt maturities for the next five years and thereafter are as follows:

(DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		THEREAFTER		TOTAL
Maturities of:
PSE long-term debt	$	232,000	$	260,000	$	—	$	13,000	$	—	$	2,615,860	$	3,120,860
Puget Energy long-term debt		—		—		—		—		1,483,000		—		1,483,000
Puget Energy long-term debt	$	232,000	$	260,000	$	—	$	13,000	$	1,483,000	$	2,615,860	$	4,603,860

FINANCIAL COVENANTS

The Company’s long-term debt contains financial covenants related to cash flow interest coverage, cash flow debt leverage and debt service coverage. As of December 31, 2009, the Company is in compliance with its long-term debt financial covenants.

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NOTE 10. Redeemable Securities

During 2008, the Company was required to deposit funds on comparable securities annually in a sinking fund sufficient to redeem the following number of shares of each series of preferred stock at $100.00 per share plus accrued dividends: 4.70% Series and 4.84% Series, 3,000 shares each. All previous sinking fund requirements had been satisfied. At December 31, 2008, there were 22,689 shares of the 4.70% Series and 6,471 shares of the 4.84% Series available for future sinking fund requirements. Upon involuntary liquidation, all preferred shares were entitled to their par value plus accrued dividends.

On February 5, 2009, PSE deposited with its Redemption and Paying Agent approximately $1.9 million to defease the preferred stock and issued an irrevocable notice that the shares were to be redeemed on March 13, 2009. The Redemption and Paying Agent paid shareholders their redemption price plus accrued dividends through March 13, 2009. As of December 31, 2009, there were no outstanding shares of preferred stock or other redeemable securities.

NOTE 11. Estimated Fair Value of Financial Instruments

PUGET ENERGY

The following table presents the carrying amounts and estimated fair values of Puget Energy’s financial instruments at December 31, 2009 and 2008:

	SUCCESSOR DECEMBER  31, 2009				PREDECESSOR DECEMBER 31, 2008
(DOLLARS IN THOUSANDS)	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Financial assets:
Cash and cash equivalents	$	78,527	$	78,527	$	38,526	$	38,526
Restricted cash		19,844		19,844		18,889		18,889
Notes receivable and other		74,063		74,063		71,832		71,832
Energy derivatives		19,553		19,553		22,330		22,330
Interest rate derivative instruments		20,854		20,854		—		—
Financial liabilities:
Short-term debt	$	105,000	$	105,000	$	964,700	$	964,700
Preferred stock subject to mandatory redemption		—		—		1,889		1,889
Junior subordinated notes		250,000		232,684		250,000		112,500
Current maturities of long-term debt (fixed-rate)		232,000		234,632		158,000		158,000
Long-term debt (fixed-rate)		2,638,860		2,815,048		2,270,860		1,950,995
Long-term debt (variable-rate)		1,483,000		1,478,632		—		—
Energy derivatives		231,656		231,656		395,289		395,289
Interest rate derivative instruments		26,844		26,844		—		—

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PUGET SOUND ENERGY

The following table presents the carrying amounts and estimated fair values of PSE’s financial instruments at December 31, 2009 and 2008:

	DECEMBER 31, 2009				DECEMBER 31, 2008
(DOLLARS IN THOUSANDS)	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Financial assets:
Cash and cash equivalents	$	78,407	$	78,407	$	38,470	$	38,470
Restricted cash		19,844		19,844		18,889		18,889
Notes receivable and other		74,063		74,063		71,832		71,832
Energy derivatives		19,553		19,553		22,330		22,330
Financial liabilities:
Short-term debt	$	105,000	$	105,000	$	964,700	$	964,700
Short-term debt owed by PSE to Puget Energy 1		22,898		22,898		26,053		26,053
Preferred stock subject to mandatory redemption		—		—		1,889		1,889
Junior subordinated notes		250,000		232,684		250,000		112,500
Current maturities of long-term debt (fixed-rate)		232,000		234,632		158,000		158,000
Non-current maturities of long-term debt (fixed-rate)		2,638,860		2,815,048		2,270,860		1,950,995
Energy derivatives		227,247		227,247		395,289		395,289

¹ Short-term debt owed by PSE to Puget Energy is eliminated upon consolidation of Puget Energy.

The fair value of the senior secured fixed notes and variable rate notes was estimated using U.S. Treasury yields and related current market credit spreads, interpolating to the maturity date of each issue. The fair value of the junior subordinated notes was priced on a yield to call basis using a market price from an independent financial institution.

The fair value of the preferred stock subject to mandatory redemption as of December 31, 2008 was estimated based on dealer quotes. The carrying values of short-term debt and notes receivable are considered to be a reasonable estimate of fair value. The carrying amount of cash, which includes temporary investments with original maturities of three months or less, is also considered to be a reasonable estimate of fair value. The Company values derivative instruments based on daily quoted prices from an independent external pricing service. When externally quoted market prices are not available for derivative contracts, the Company uses a valuation model that uses volatility assumptions relating to future energy prices based on specific energy markets and utilizes externally available forward market price curves.

NOTE 12. Liquidity Facilities and Other Financing Arrangements

As of December 31, 2009 and 2008, PSE had $105.0 million and $964.7 million in short-term debt outstanding, exclusive of the demand promissory note with Puget Energy, with a weighted average interest rate of 3.59% and 3.84%, respectively. As of December 31, 2008, PSE had four committed credit facilities that provided, in aggregate, $1.425 billion in short-term borrowing capability. Those included a $500.0 million unsecured revolving credit agreement, a $200.0 million accounts receivable securitization facility, a $375.0 million unsecured short-term credit facility and a $350.0 million unsecured credit agreement to support hedging activity. Effective with the merger on February 6, 2009, the existing credit agreements were replaced with three new credit facilities as described below.

Puget Sound Energy Credit Facilities

Effective February 6, 2009, with the merger of Puget Energy and Puget Holdings, PSE has three committed

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unsecured revolving credit facilities that provide, in the aggregate, $1.150 billion in short-term borrowing capability. These new facilities include a $400.0 million credit agreement for working capital needs, a $400.0 million credit facility for funding capital expenditures and a $350.0 million facility to support energy hedging activities.

PSE’s credit agreements contain usual and customary affirmative and negative covenants that, among other things, place limitations on its ability to incur additional indebtedness and liens, issue equity, pay dividends, transact with affiliates and make dispositions and investments. The credit agreements also contain financial covenants, whose measurement periods began with the third quarter 2009 financial statements, based on the following three ratios: cash flow interest coverage; cash flow debt leverage and debt service coverage. PSE certifies its compliance with such covenants each quarter with the lending banks. As of December 31, 2009, PSE exceeded each of the ratio minimums.

These facilities mature in 2014, contain similar terms and conditions and are syndicated among numerous committed lenders and financial institutions. The agreements provide PSE with the ability to borrow at different interest rate options and include variable fee levels. The bank credit agreements allow PSE to borrow at the bank’s prime rate or to make floating rate advances at LIBOR plus a spread that is based upon PSE’s credit rating. The $400.0 million working capital facility and $350.0 million credit agreement to support energy hedging allow for issuing standby letters of credit up to the entire amount of the credit agreements. The $400.0 million working capital facility also serves as a backstop for PSE’s commercial paper program.

As of December 31, 2009, PSE had $105.0 million outstanding on the $400.0 million capital expenditures facility, no outstanding balance on the $400.0 million working capital facility and had a $7.0 million letter of credit outstanding under the $350.0 million facility supporting energy hedging.

Demand Promissory Note. On June 1, 2006, PSE entered into a revolving credit facility with its parent, Puget Energy, in the form of a Demand Promissory Note (Note). Through the Note, PSE may borrow up to $30.0 million from Puget Energy, subject to approval by Puget Energy. Under the terms of the Note, PSE pays interest on the outstanding borrowings based on the lowest of the weighted-average interest rate of: (a) PSE’s outstanding commercial paper interest rate, or (b) PSE’s senior unsecured revolving credit facility; absent such borrowings, interest is charged at one month LIBOR plus 0.25%. At December 31, 2009, the outstanding balance of the Note was $22.9 million. The outstanding balance and the related interest under the Note are eliminated by Puget Energy upon consolidation of PSE’s financial statements.

Puget Energy Credit Facilities

As of December 31, 2009, Puget Energy has a $1.225 billion five-year term loan and a $1.0 billion credit facility for funding capital expenditures.

Puget Energy’s credit agreements contain usual and customary affirmative and negative covenants similar to PSE’s credit facilities. Puget Energy’s financial covenants include cash flow interest coverage and cash flow debt leverage ratios whose measurement periods began with the third quarter 2009 financial statements. Puget Energy certifies its compliance with such covenants each quarter with the lending banks. As of December 31, 2009, Puget Energy exceeded each of the ratio minimums.

These facilities mature in 2014, contain similar terms and conditions and are syndicated among numerous committed lenders and financial institutions. The agreements provide Puget Energy with the ability to borrow at different interest rate options and include variable fee levels. Borrowings may be at the bank’s prime rate or at floating rates based on LIBOR plus a spread that is based upon the Puget Energy’s credit rating. Puget Energy must also pay a commitment fee on the unused portion of the $1.0 billion facility. The spreads and the commitment fee depend on Puget Energy’s credit ratings as determined by S&P and Moody’s. Based on Puget Energy’s credit ratings as of the date of this report, the spread over prime rate is 1.25%, the spread over the LIBOR is 2.25% and the commitment fee is 0.84%. As of December 31, 2009, the term loan was fully drawn and $258.0 million was outstanding under the $1.0 billion facility.

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NOTE 13. Leases

PSE leases buildings and assets under operating leases. In January 2009, PSE entered into an agreement to purchase the Fredonia combustion turbines for $42.4 million and its fleet vehicles for $11.8 million, which purchase was completed in January 2010. These historically had been leased under an operating lease. The entry in the purchase agreement resulted in the classification of the Fredonia and fleet leases as capital leases. In accordance with ASC 980, the amortization of the leased asset has been modified so that total interest and amortization is equal to the rental expense allowed for rate-making purposes. Interest accretion for the Fredonia and fleet leases in 2009 was $0.2 million and capital lease amortization was $6.6 million for 2009. Certain leases contain purchase options and renewal and escalation provisions. Rent expense net of sublease receipts were:

(DOLLARS IN THOUSANDS) AT DECEMBER 31
2009	$	31,747
2008		29,087
2007		27,012

Payments received for the subleases of properties were approximately $0.1 million, $0.1 million and $0.1 million for 2009, 2008 and 2007, respectively.

Future minimum lease payments for non-cancelable leases net of sublease receipts are:

(DOLLARS IN THOUSANDS) AT DECEMBER 31	OPERATING		CAPITAL
2010	$	9,805	$	91,699
2011		11,390		42,603
2012		12,846		—
2013		13,175		—
2014		12,064		—
Thereafter		82,995		—
Total minimum lease payments	$	142,275	$	134,302

PSE leased a portion of its owned natural gas transmission pipeline infrastructure under a non-cancelable operating lease to a third party. The lease expired in 2009.

The capital lease schedule above includes Puget Energy estimates for leased Tenaska turbines in the amount of $37.4 million and $42.6 million for the years ended 2010 and 2011, respectively.

For Puget Energy, as a result of the merger, the Tenaska turbine lease was reclassified from a purchase power agreement to a capital lease.

NOTE 14. Accounting for Derivative Instruments and Hedging Activities

The Company manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. The Company utilizes bank borrowings, commercial paper, 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 or other financial

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hedge instruments to manage the interest rate risk associated with these debts. In February 2009, Puget Energy entered into interest rate swap transactions to hedge the risk associated with one-month LIBOR floating rate debt. As of December 31, 2009, Puget Energy had seven interest rate swap contracts outstanding, and PSE did not have any outstanding swap instruments.

As a result of the merger, Puget Energy reassessed and revalued its derivative contracts that were designated on PSE’s books as NPNS or cash flow hedges which met the criteria defined in ASC 815. The fair value of the reassessed contracts was recorded as either assets or liabilities with an offset to goodwill. Therefore, the amount recorded in accumulated OCI at the time of the merger was reflected as goodwill.

PSE pursues various portfolio optimization strategies, but is not in the business of assuming risk for the purpose of realizing speculative trading revenues. The nature of serving regulated electric customers with its wholesale portfolio of owned and contracted electric generation resources exposes PSE and its customers to some volumetric and commodity price risks within the sharing mechanism of the PCA. Therefore, wholesale market transactions are focused on balancing PSE’s energy portfolio, reducing costs and risks where feasible and reducing volatility in wholesale costs and margin in the portfolio. PSE’s energy risk portfolio management function monitors and manages these risks using analytical models and tools. In order to manage risks effectively, PSE enters into physical and financial transactions which are appropriate for the service territory of PSE and are relevant to its regulated electric and gas portfolios.

If it is determined that it is uneconomical to operate PSE’s controlled electric generating facilities in the future period, the fuel supply cash flow hedge relationship is terminated and the hedge is de-designated which results in recognition of future changes in value in the statements of income. As these contracts are settled, amounts previously deferred in OCI are recognized as energy costs and are included as part of the PCA mechanism.

On July 1, 2009, PSE elected to de-designate all energy related derivative contracts that previously had been recorded as cash flow hedges for the purpose of simplifying its financial reporting. The contracts that were de-designated related to physical electric supply contracts and natural gas swap contracts to fix the price of natural gas for electric generation. For these contracts, all future mark-to-market accounting will be recognized through earnings. The amount in accumulated OCI is transferred to earnings in the same period or periods during which the hedged transaction affected earnings or sooner if management determines that the forecasted transaction is probable of not occurring. As a result, the Company will likely continue to experience earnings volatility in future periods.

ASC 815 requires disclosures about a company’s derivative activities and how the related hedged items affect a company’s financial position, financial performance and cash flows. To meet the objectives, ASC 815 requires qualitative disclosures about the Company’s fair value amounts of gains and losses associated with derivative instruments, as well as disclosures about credit risk related contingent features in derivative agreements.

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The following tables present the fair values and locations of Puget Energy’s derivative instruments recorded on the balance sheet at December 31, 2009 and December 31, 2008:

DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
	SUCCESSOR AT DECEMBER 31, 2009				PREDECESSOR AT DECEMBER 31, 2008
PUGET ENERGY (DOLLARS IN THOUSANDS)	ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2		ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2
Interest rate swaps:
Current	$	—	$	26,844	$	—	$	—
Long-term		20,854		—		—		—
Electric portfolio:
Current		—		—		53		85,320
Long-term		—		—		416		93,091
Total derivatives	$	20,854	$	26,844	$	469	$	178,411
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
	SUCCESSOR AT DECEMBER 31, 2009				PREDECESSOR AT DECEMBER 31, 2008
PUGET ENERGY (DOLLARS IN THOUSANDS)	ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2		ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2
Electric portfolio:
Current	$	4,137	$	79,732	$	361	$	5,256
Long-term		1,003		70,367		119		3,024
Gas portfolio 3:
Current		10,811		62,207		15,204		146,290
Long-term		3,602		19,350		6,177		62,308
Total derivatives	$	19,553	$	231,656	$	21,861	$	216,878

¹ Balance sheet location: Unrealized gain on derivative instruments.

² Balance sheet location: Unrealized loss on derivative instruments.

³ Puget Energy had a derivative liability and an offsetting regulatory asset of $67.1 million at December 31, 2009 and $187.2 million at December 31, 2008 related to financial contracts used to economically hedge the cost of physical gas purchased to serve natural gas customers. All fair value adjustments on derivatives relating to the natural gas business have been reclassified to a deferred account in accordance with ASC 980 due to the PGA mechanism. All increases and decreases in the cost of natural gas supply are passed on to customers with the PGA mechanism. As the gains and losses on the hedges are realized in future periods, they will be recorded as gas costs under the PGA mechanism.

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The following tables present the fair values and locations of PSE’s derivative instruments recorded on the balance sheet at December 31, 2009 and December 31, 2008:

DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
	AT DECEMBER 31, 2009				AT DECEMBER 31, 2008
PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2		ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2
Electric portfolio:
Current	$	—	$	—	$	53	$	85,320
Long-term		—		—		416		93,091
Total derivatives	$	—	$	—	$	469	$	178,411
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
	AT DECEMBER 31, 2009				AT DECEMBER 31, 2008
PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2		ASSET DERIVATIVES 1		LIABILITY DERIVATIVES 2
Electric portfolio:
Current	$	4,137	$	75,323	$	361	$	5,256
Long-term		1,003		70,367		119		3,024
Gas portfolio: 3
Current		10,811		62,207		15,204		146,290
Long-term		3,602		19,350		6,177		62,308
Total derivatives	$	19,553	$	227,247	$	21,861	$	216,878

¹ Balance sheet location: Unrealized gain on derivative instruments.

² Balance sheet location: Unrealized loss on derivative instruments.

³ PSE had a derivative liability and an offsetting regulatory asset of $67.1 million at December 31, 2009 $187.2 million at December 31, 2008 related to financial contracts used to economically hedge the cost of physical gas purchased to serve natural gas customers. All fair value adjustments on derivatives relating to the natural gas business have been reclassified to a deferred account in accordance with ASC 980 due to the PGA mechanism. All increases and decreases in the cost of natural gas supply are passed on to customers with the PGA mechanism. As the gains and losses on the hedges are realized in future periods, they will be recorded as gas costs under the PGA mechanism.

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The following tables present the effect of hedging instruments on Puget Energy’s OCI and statements of income for the year ended December 31, 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS) SUCCESSOR FEBRUARY 6, 2009 – DECEMBER 31, 2009	AMOUNT OF LOSS RECOGNIZED IN OCI ON DERIVATIVEs 5			LOCATION OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME		AMOUNT OF  LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME		LOCATION OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES	AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	EFFECTIVE PORTION 1			EFFECTIVE PORTION 2				INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 2, 3
Interest rate contracts:	$	(22,777	)		Interest expense	$	29,052		$	—
Commodity contracts:           Electric derivatives		(19,933	)		Electric generation fuel		25,296	Net unrealized gain on derivative instruments		325
Electric derivatives		(6,289	)		Purchased electricity		4,157	Net unrealized loss on derivative instruments		(2,897	)
Total	$	(48,999	)			$	58,505		$	(2,572	)
PUGET ENERGY (DOLLARS IN THOUSANDS) PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009	AMOUNT OF LOSS RECOGNIZED IN OCI ON DERIVATIVES			LOCATION OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME		AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME		LOCATION OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES	AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	EFFECTIVE PORTION 1,4			EFFECTIVE PORTION 2				INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 2, 3
Commodity contracts:           Electric derivatives	$	(20,791	)		Electric generation fuel	$	5,003	Net unrealized loss on derivative instruments	$	—
Electric derivatives		(3,371	)		Purchased electricity		1,934	Net unrealized loss on derivative instruments		(986	)
Total	$	(24,162	)			$	6,937		$	(986	)

¹ Changes in OCI are reported in after tax dollars.

² A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

³ Ineffective portion of long-term power supply contracts that are designated as cash flow hedges.

⁴ The balances associated with the components of accumulated OCI (loss) on Predecessor basis were eliminated as a result of push-down accounting effective February 6, 2009, when the Successor period began.

⁵ On July 1, 2009 all electric and gas related cash flow hedge relationships were dedesignated, subsequent measurements of fair value are recorded through earnings, not OCI.

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The following table presents the effect of hedging instruments on PSE’s OCI and statements of income for the year ended December 31, 2009:

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31, 2009	AMOUNT OF LOSS RECOGNIZED IN OCI ON DERIVATIVES 4			LOCATION OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME	AMOUNT OF LOSS RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME		LOCATION OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES	AMOUNT OF LOSS RECOGNIZED IN INCOME ON DERIVATIVES
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	EFFECTIVE PORTION 1			EFFECTIVE PORTION 2			INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 2, 3
Interest rate contracts:	$	—		Interest expense	$	488		$	—
Commodity contracts: Electric derivatives		(49,739	)	Electric generation fuel		110,128	Net unrealized gain on derivative instruments		—
Electric derivatives		(11,538	)	Purchased electricity		28,082	Net unrealized loss on derivative instruments		(2,749	)
Total	$	(61,277	)		$	138,698		$	(2,749	)

¹ Changes in OCI are reported in after tax dollars.

² A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

³ Ineffective portion of long-term power supply contracts that are designated as cash flow hedges.

⁴ On July 1, 2009, all electric and gas related cash flow hedge relationships were dedesignated, subsequent measurements of fair value are recorded through earnings, not OCI.

For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings. PSE expects that $48.4 million of losses in OCI will be reclassified into earnings within the next twelve months. Puget Energy expects that $21.9 million of losses in OCI will be reclassified into earnings within the next twelve months. The maximum length of time over which Puget Energy and PSE are hedging their exposure to the variability in future cash flows extends to February 2015 for purchased electricity contracts and to September 2012 for electric generation fuel contracts. For Puget Energy Interest Rate Swaps, the maximum length is to February 2014.

The following tables present the effect of Puget Energy’s derivatives not designated as hedging instruments on income during the year ended December 31, 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)	LOCATION OF GAIN/(LOSS) IN INCOME ON DERIVATIVES	SUCCESSOR FEBRUARY 6, 2009 - DECEMBER 31, 2009 AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES			PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009 AMOUNT OF (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts:
Electric derivatives	Net unrealized gain (loss) on derivative instruments	$	117,023	1	$	(3,867	)
	Electric generation fuel		19,570			(863	)
	Purchased electricity		(15,325	)		(243	)
Total		$	121,268		$	(4,973	)

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¹ Differs from the amount stated in the statements of income as it does not include $42.3 million of NPNS amortization expense as well as prior year ineffectiveness of $(2.7) million measured in prior designated hedging relationships.

The following table presents the effect of PSE’s derivatives not designated as hedging instruments during the year ended December 31, 2009:

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	LOCATION OF GAIN/(LOSS) IN INCOME ON DERIVATIVES	TWELVE MONTHS ENDED DECEMBER 31, 2009 AMOUNT OF GAIN/(LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
Commodity contracts: Electric derivatives	Net unrealized gain on derivative instruments	$	4,003	1
	Electric generation fuel		26,669
	Purchased electricity		(26,142	)
Total		$	4,530

¹ Differs from the amount stated in the statements of income as it does not include ineffectiveness of $(2.7) million measured in prior designated hedging relationships.

The Company had the following outstanding commodity contracts as of December 31, 2009:

PUGET ENERGY AT DECEMBER 31, 2009	NUMBER OF UNITS
Derivatives designated as hedging instruments:
Interest rate swaps	$	1.483	billion
Derivatives not designated as hedging instruments:
Gas derivatives		262,973,517	MMBtus
Electric generation fuel		70,212,500	MMBtus
Purchased electricity		6,679,502	MWh
PUGET SOUND ENERGY AT DECEMBER 31, 2009	NUMBER OF UNITS
Derivatives not designated as hedging instruments:
Gas derivatives 1		262,973,517	MMBtus
Electric generation fuel		70,212,500	MMBtus
Purchased electricity 2		6,454,102	MWh

¹ Gas derivatives are deferred in accordance with ASC 980 due to the PGA mechanism.

² As of December 31, 2009, there were eight forward contracts in Puget Energy’s portfolio that were not in PSE’s portfolio as a result of the revaluation of NPNS contracts at the merger date.

The Company is exposed to credit risk primarily through buying and selling electricity and natural gas to serve its customers. Credit risk is the potential loss resulting from a counterparty’s non-performance under an agreement. The Company manages credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement, exposure monitoring, and exposure mitigation.

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The Company monitors counterparties that are experiencing financial problems, have significant swings in credit default swap rates, have credit rating changes by external rating agencies, or have changes in ownership. Where deemed appropriate, the Company may request collateral or other security from its counterparties to mitigate potential credit default losses. Criteria employed in this decision include, among other things, the perceived creditworthiness of the counterparty and the expected credit exposure.

It is possible that volatility in energy commodity prices could cause the Company to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the Company could suffer a material financial loss. However, as of December 31, 2009, approximately 99.9% of the Company’s energy portfolio exposure, excluding NPNS transactions, is with counterparties that are rated at least investment grade by the major rating agencies and 0.1% are either rated below investment grade or are not rated by rating agencies. The Company assesses credit risk internally for counterparties that are not rated.

The Company generally enters into the following master agreements: (1) Western Systems Power Pool agreements (WSPP) – standardized power sales contract in the electric industry; (2) International Swaps and Derivatives Association agreements (ISDA) – standardized financial gas and electric contracts; and (3) North American Energy Standards Board agreements (NAESB) – standardized physical gas contracts. The Company believes that entering into such agreements reduces credit risk exposure because such agreements provide for the netting and set-off of monthly payments and, in the event of counterparty default, termination payments.

The Company computes credit reserves at a master agreement level (i.e. WSPP, ISDA or NAESB) by counterparty. The Company considers external credit ratings and market factors, such as credit default swaps and bond spreads, in determination of reserves. The Company recognizes that external ratings may not always reflect how a market participant perceives a counterparty’s risk of default. The Company uses both default factors published by S&P and factors derived through analysis of market risk, which reflect the application of an industry standard recovery rate. The Company selects a default factor by counterparty at an aggregate master agreement level based on a weighted average default tenor for that counterparty’s deals. The default tenor is used by weighting fair values and contract tenors for all deals for each counterparty and coming up with an average value. The default factor used is dependent upon whether the counterparty is in a net asset or a net liability position after applying the master agreement levels.

The Company applies the counterparty’s default factor to compute credit reserves for counterparties that are in a net asset position. Moreover, the Company applies its own default factor to compute credit reserves for counterparties in a net liability position. Credit reserves are booked as contra accounts to unrealized gain (loss) positions. As of December 31, 2009, PSE was in a net liability position with the majority of counterparties, so the default factors of counterparties did not have a significant impact on reserves for the year. The majority of the Company’s derivative contracts are with financial institutions and other utilities operating within the Western Electricity Coordinating Council.

The Company enters into energy contracts with various credit risk related contingent features, which could result in a counterparty requesting immediate payment or demanding immediate and ongoing full overnight collateralization on derivative instruments in a net liability position.

F-46

The tables below presents the fair value of the overall contractual contingent liability positions for the Company’s derivative activity at December 31, 2009:

PUGET ENERGY CONTINGENT FEATURE (DOLLARS IN THOUSANDS)	FAIR VALUE 3 LIABILITY			POSTED COLLATERAL		CONTINGENT COLLATERAL
Credit rating 1	$	(29,906	)	$	—	$	29,906
Reasonable grounds for adequate assurance		(39,351	)		—		—
Forward value of contract 2		(19,616	)		7,000		—
Total	$	(88,873	)	$	7,000	$	29,906

PUGET SOUND ENERGY CONTINGENT FEATURE (DOLLARS IN THOUSANDS)	FAIR VALUE 3 LIABILITY			POSTED COLLATERAL		CONTINGENT COLLATERAL
Credit rating 1	$	(25,468	)	$	—	$	25,468
Reasonable grounds for adequate assurance		(39,351	)		—		—
Forward value of contract 2		(19,616	)		7,000		—
Total	$	(84,435	)	$	7,000	$	25,468

¹ PSE is required to maintain an investment grade credit rating from each of the major credit rating agencies.

² Collateral requirements may vary, based on changes in forward value of underlying transactions.

³ Represents derivative fair values of contracts with contingent features for counterparties in net derivative liability positions at December 31, 2009. Excludes NPNS, accounts payable and accounts receivable activity.

NOTE 15. Fair Value Measurements

ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities.

F-47

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards and options.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs. At each balance sheet date, the Company performs an analysis of all instruments subject to ASC 820 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. If a fair value measurement relies on inputs from different levels of the hierarchy, the entire measurement must be classified based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values incorporates various factors that not only include the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), but also the impact of the Company’s nonperformance risk on its liabilities.

As of December 31, 2009, the Company considered the markets for its electric and natural gas Level 2 derivative instruments to be actively traded. Management’s assessment is based on the trading activity volume in real-time and forward electric and natural gas markets. The Company regularly confirms the validity of pricing service quoted prices (e.g. Level 2 in the fair value hierarchy) used to value commodity contracts to the actual prices of commodity contracts entered into during the most recent quarter.

F-48

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis and the reconciliation of the changes in the fair value of derivatives classified as Level 3 in the fair value hierarchy as of December 31, 2009 and December 31, 2008:

PUGET ENERGY RECURRING FAIR VALUE MEASURES	SUCCESSOR AT FAIR VALUE AS OF DECEMBER 31, 2009								PREDECESSOR AT FAIR VALUE AS OF DECEMBER 31, 2008
(DOLLARS IN THOUSANDS)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Energy derivative instruments	$	—	$	16,767	$	2,786	$	19,553	$	—	$	21,795	$	535	$	22,330
Cash equivalents		38,835		5,465		—		44,300		24,727		—		1,392		26,119
Restricted cash		3,305		—		—		3,305		4,182		—		—		4,182
Interest rate derivative instruments		—		20,854		—		20,854		—		—		—		—
Total assets	$	42,140	$	43,086	$	2,786	$	88,012	$	28,909	$	21,795	$	1,927	$	52,631
Liabilities:
Energy derivative instruments	$	—	$	128,537	$	103,119	$	231,656	$	—	$	261,106	$	134,183	$	395,289
Interest rate derivative instruments		—		26,844		—		26,844		—		—		—		—
Total liabilities	$	—	$	155,381	$	103,119	$	258,500	$	—	$	261,106	$	134,183	$	395,289

	SUCCESSOR			PREDECESSOR
PUGET ENERGY LEVEL 3 ROLL-FORWARD NET (LIABILITY) (DOLLARS IN THOUSANDS) TWELVE MONTHS ENDED DECEMBER 31	FOR THE  PERIOD ENDED FEBRUARY 6, 2009 - DECEMBER 31, 2009 1			FOR THE PERIOD ENDED JANUARY 1, 2009 - FEBRUARY 5, 2009 1			2008
Balance at beginning of period	$	(185,813	)	$	(132,256	)	$	(6,156	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(14,832	)		(627	)		(2,935	)
- included in other comprehensive income		(17,429	)		(14,821	)		(110,439	)
- included in regulatory assets/liabilities		(4,345	)		(1,410	)		(17,311	)
Purchases, issuances, and settlements		26,374			2,154			6,677
Transferred in/out of Level 3 2		95,712			8,560			(2,092	)
Balance at end of period	$	(100,333	)	$	(138,400	)	$	(132,256	)

¹ The beginning balance for the Successor period was adjusted to reflect the impact of certain fair value adjustments from the merger transaction.

² Transferred in/out of Level 3 for the Successor includes the cash equivalents of $1.4 million. The cash equivalents became Level 2 during the second quarter 2009.

F-49

PUGET SOUND ENERGY RECURRING FAIR VALUE MEASURES	AT FAIR VALUE AS OF DECEMBER 31, 2009								AT FAIR VALUE AS OF DECEMBER 31, 2008
(DOLLARS IN THOUSANDS)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Energy derivative instruments	$	—	$	16,767	$	2,786	$	19,553	$	—	$	21,795	$	535	$	22,330
Cash equivalents		38,835		5,465		—		44,300		24,727		—		1,392		26,119
Restricted cash		3,305		—		—		3,305		4,182		—		—		4,182
Total assets	$	42,140	$	22,232	$	2,786	$	67,158	$	28,909	$	21,795	$	1,927	$	52,631
Liabilities:
Energy derivative instruments	$	—	$	124,128	$	103,119	$	227,247	$	—	$	261,106	$	134,183	$	395,289
Total liabilities	$	—	$	124,128	$	103,119	$	227,247	$	—	$	261,106	$	134,183	$	395,289

PUGET SOUND ENERGY LEVEL 3 ROLL-FORWARD NET (LIABILITY) (DOLLARS IN THOUSANDS)	2009			2008
Balance at beginning of period	$	(132,256	)	$	(6,156	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(776	)		(2,935	)
- included in other comprehensive income		(38,047	)		(110,439	)
- included in regulatory assets/liabilities		(7,824	)		(17,311	)
Purchases, issuances, and settlements		28,779			6,677
Transferred in/out of Level 3 1		49,791			(2,092	)
Balance at end of period	$	(100,333	)	$	(132,256	)

¹ The energy derivatives transferred in/out of Level 3 in 2009 includes the cash equivalents of $1.4 million. These cash equivalents became Level 2 during the second quarter 2009.

Realized gains and losses on energy derivatives are included in energy costs in the Company’s statements of income under purchased electricity, electric generation fuel or purchased natural gas when settled.

Unrealized gains and losses on energy derivatives are included in the net unrealized (gain)/loss on derivative instruments section in the Company’s statements of income and as a net unrealized gain/(loss) on derivative instruments in OCI.

Certain energy derivative instruments are classified as Level 3 in the fair value hierarchy because Level 3 inputs are significant to their fair value measurement. Energy derivatives transferred out of Level 3 represent existing assets or liabilities that were classified as Level 3 at the end of the prior reporting period for which the lowest significant input became observable during the current reporting period.

NOTE 16. Employee Investment Plans

The Company has qualified Employee Investment Plans under which employee salary deferrals and after-tax contributions are used to purchase several different investment fund options. The Company’s contributions to the Employee Investment Plans were $11.4 million, $10.0 million and $9.0 million for the years 2009, 2008 and 2007, respectively. The Employee Investment Plan eligibility requirements are set forth in the plan documents.

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NOTE 17. Retirement Benefits

PSE has a defined benefit pension plan, covering substantially all PSE employees, with a cash balance feature for all but International Brotherhood of Electrical Workers Union (IBEW) represented employees. Pension benefits earned are a function of age, salary and years of service. The Company also maintains a non-qualified SERP for certain of its senior management employees. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. These benefits are provided principally through an insurance company. The insurance premiums are based on the benefits provided during the year, and are paid primarily by retirees.

The February 6, 2009 merger of Puget Energy with Puget Holdings triggered a new basis of accounting for PSE’s retirement benefit plans in the Puget Energy consolidated financial statements. PSE did not record the remeasurement of retirement plans as all the purchase accounting adjustments are recorded at Puget Energy.

PUGET ENERGY

The following tables summarize Puget Energy’s change in benefit obligation, change in plan assets, net periodic benefit cost and other changes in OCI for the years ended December 31, 2009 and 2008:

	QUALIFIED PENSION BENEFITS						SERP PENSION BENEFITS						OTHER BENEFITS
	SUCCESSOR			PREDECESSOR			SUCCESSOR			PREDECESSOR			SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS)	2009			2009			2009			2009			2009			2009
Change in benefit obligation:
Benefit obligation at beginning of period	$	453,731		$	460,586		$	38,750		$	39,348		$	15,807		$	18,089
Service cost		12,469			1,090			951			89			114			11
Interest cost		25,912			2,302			2,178			193			894			89
Actuarial loss		33,458			—			1,433			—			770			—
Benefits paid		(20,784	)		(2,517	)		(4,160	)		(532	)		(2,050	)		(147	)
Medicare part D subsidy received		—			—			—			—			418			139
Benefit obligation at end of period	$	504,786		$	461,461		$	39,152		$	39,098		$	15,953		$	18,181
Change in plan assets:
Fair value of plan assets at beginning of period	$	373,767		$	392,900		$	—		$	—		$	7,829		$	8,435
Actual return on plan assets		114,306			3,585			—			—			2,272			37
Employer contribution		18,400			—			4,160			532			739			82
Benefits paid		(20,784	)		(2,517	)		(4,160	)		(532	)		(2,050	)		(147	)
Fair value of plan assets at end of period	$	485,689		$	393,968		$	—		$	—		$	8,790		$	8,407
Funded status at end of period	$	(19,097	)	$	(67,493	)	$	(39,152	)	$	(39,098	)	$	(7,163	)	$	(9,774	)

F-51

	QUALIFIED PENSION BENEFITS			SERP PENSION BENEFITS			OTHER BENEFITS
DECEMBER 31	SUCCESSOR			SUCCESSOR			SUCCESSOR
(DOLLARS IN THOUSANDS)	2009			2009			2009
Amounts recognized in Statement of Financial Position consist of:
Current liabilities	$	—		$	(2,978	)	$	(39	)
Noncurrent liabilities		(19,097	)		(36,174	)		(7,124	)
Total	$	(19,097	)	$	(39,152	)	$	(7,163	)
Amounts recognized in Accumulated Other Comprehensive Income consist of:
Net loss/(gain)	$	(53,265	)	$	1,434		$	(1,124	)
Total	$	(53,265	)	$	1,434		$	(1,124	)

	QUALIFIED PENSION BENEFITS						SERP PENSION BENEFITS				OTHER BENEFITS
	SUCCESSOR			PREDECESSOR			SUCCESSOR		PREDECESSOR		SUCCESSOR			PREDECESSOR
(DOLLARS IN THOUSANDS)	2009			2009			2009		2009		2009			2009
Components of net periodic benefit cost:
Service cost	$	12,469		$	1,090		$	951	$	89	$	114		$	11
Interest cost		25,912			2,302			2,178		193		894			89
Expected return on plan assets		(27,583	)		(3,585	)		—		—		(379	)		(37	)
Amortization of prior service cost		—			95			—		51		—			7
Amortization of net loss (gain)		—			269			—		74		—			(15	)
Amortization of transition obligation		—			—			—		—		—			4
Net periodic benefit cost	$	10,798		$	171		$	3,129	$	407	$	629		$	59

SUCCESSOR	QUALIFIED PENSION BENEFITS			SERP PENSION BENEFITS		OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2009			2009		2009
Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)	$	(53,265	)	$	1,434	$	(1,124	)
Total change in other comprehensive income for year	$	(53,265	)	$	1,434	$	(1,124	)

The estimated net loss (gain) and prior service cost (credit) for the pension plans that will be amortized from accumulated OCI into net periodic benefit cost in 2010 are immaterial. The estimated net loss (gain) and prior service cost (credit) for the SERP that will be amortized from accumulated OCI into net periodic benefit cost in 2010 are immaterial. The estimated net loss (gain), prior service cost (credit) and transition obligation (asset) for the other postretirement plans that will be amortized from accumulated OCI into net periodic benefit cost in 2010 are immaterial.

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PUGET SOUND ENERGY

The following tables summarize PSE’s change in benefit obligation, change in plan assets, net periodic benefit cost and other changes in OCI for the years ended December 31, 2009 and 2008:

	QUALIFIED PENSION BENEFITS						SERP PENSION BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2009			2008			2009			2008			2009			2008
Change in benefit obligation:
Benefit obligation at beginning of period	$	460,586		$	426,253		$	39,348		$	37,111		$	18,088		$	18,863
Service cost		14,141			12,750			1,068			935			125			128
Interest cost		27,734			26,685			2,315			2,211			960			1,130
Amendment		—			5,324			—			—			—			—
Actuarial loss (gain)		25,094			11,804			707			616			(1,296	)		(309	)
Benefits paid		(22,769	)		(22,230	)		(4,286	)		(1,525	)		(2,342	)		(2,123	)
Medicare part D subsidiary received		—			—			—			—			418			399
Benefit obligation at end of period	$	504,786		$	460,586		$	39,152		$	39,348		$	15,953		$	18,088
Change in plan assets:
Fair value of plan assets at beginning of period	$	392,900		$	558,529		$	—		$	—		$	8,435		$	14,700
Actual return on plan assets		97,158			(168,299	)		—			—			1,952			(4,218	)
Employer contribution		18,400			24,900			4,286			1,525			745			76
Benefits paid		(22,769	)		(22,230	)		(4,286	)		(1,525	)		(2,342	)		(2,123	)
Fair value of plan assets at end of period	$	485,689		$	392,900		$	—		$	—		$	8,790		$	8,435
Funded status at end of period	$	(19,097	)	$	(67,686	)	$	(39,152	)	$	(39,348	)	$	(7,163	)	$	(9,653	)

	QUALIFIED PENSION BENEFITS						SERP PENSION BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2009			2008			2009			2008			2009			2008
Amounts recognized in Statement of Financial Position consist of:
Current liabilities	$	—		$	—		$	(2,978	)	$	(4,027	)	$	(39	)	$	(58	)
Noncurrent liabilities		(19,097	)		(67,686	)		(36,174	)		(35,321	)		(7,124	)		(9,595	)
Total	$	(19,907	)	$	(67,686	)	$	(39,152	)	$	(39,348	)	$	(7,163	)	$	(9,653	)
Amounts recognized in Accumulated Other Comprehensive Income consist of:
Net loss (gain)	$	173,822		$	206,134		$	8,876		$	9,055		$	(5,281	)	$	(2,948	)
Prior service cost		5,170			6,304			1,430			2,046			267			350
Transition obligations		—			—			—			—			150			200
Total	$	178,992		$	212,438		$	10,306		$	11,101		$	(4,864	)	$	(2,398	)

	QUALIFIED PENSION BENEFITS									SERP PENSION BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)		2009			2008			2007			2009		2008		2007		2009			2008			2007
Components of net periodic benefit cost:
Service cost	$	14,141		$	12,750		$	12,385		$	1,068	$	935	$	926	$	125		$	128		$	269
Interest cost		27,734			26,685			24,433			2,315		2,211		2,079		960			1,130			1,250
Expected return on plan assets		(43,453	)		(41,555	)		(38,859	)		—		—		—		(455	)		(789	)		(826	)
Amortization of prior service cost		1,134			768			677			616		616		1,365		83			84			353
Amortization of net loss (gain)		3,702			945			4,193			886		732		994		(460	)		(799	)		(834	)
Amortization of transition obligation		—			—			—			—		—		—		50			50			234
Net periodic benefit cost (income)	$	3,258		$	(407	)	$	2,829		$	4,885	$	4,494	$	5,364	$	303		$	(196	)	$	446
Curtailment/settlement cost 1	$	—		$	—		$	—		$	—	$	—	$	—	$	—		$	—		$	708

¹ As part of the June 20, 2007 settlement, IBEW-represented employees with less than five years of service would no longer receive a medical subsidy at retirement and those employees with more than one year of service but less than five years of service received a one-time cash payment. Current IBEW-represented employees with five or more years of service had a one-time opportunity to elect a cash payment that varied depending on the years of employment with PSE in lieu of continuing eligibility for the retiree medical subsidy. As a result of the termination, the curtailment loss was $0.7 million.

F-53

	QUALIFIED PENSION BENEFIT						SERP PENSION  BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2009			2008			2009			2008			2009			2008
Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)	$	(28,610	)	$	221,657		$	707		$	615		$	(2,794	)	$	4,698
Amortization of net loss (gain)		(3,702	)		(945	)		(886	)		(731	)		461			799
Prior service cost (credit)		—			5,325			—			—			—			—
Amortization of prior service cost		(1,134	)		(768	)		(616	)		(616	)		(83	)		(84	)
Amortization of transition (asset) obligation		—			—			—			—			(50	)		(50	)
Total change in other comprehensive income for year	$	(33,446	)	$	225,269		$	(795	)	$	(732	)	$	(2,466	)	$	5,363

The estimated net loss (gain) and prior service cost (credit) for the pension plans that will be amortized from accumulated OCI into net periodic benefit cost in 2010 are $6.8 million and $0.7 million, respectively. The estimated net loss (gain), prior service cost (credit) and transition obligation (asset) for the other postretirement plans that will be amortized from accumulated OCI into net periodic benefit cost in 2010 total $0.6 million. The estimated net loss (gain) and prior service cost (credit) for the SERP that will be amortized from accumulated OCI into net periodic benefit cost in 2010 are $0.8 million and $0.6 million, respectively.

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ASSUMPTIONS

In accounting for pension and other benefit obligations and costs under the plans, the following weighted-average actuarial assumptions were used by the Company:

	QUALIFIED PENSION BENEFITS									SERP PENSION BENEFITS									OTHER BENEFITS
BENEFIT OBLIGATION ASSUMPTIONS	2009			2008			2007			2009			2008			2007			2009			2008			2007
Discount rate		5.75	%		6.20	%		6.30	%		5.75	%		6.20	%		6.30	%		5.75	%		6.20	%		6.30	%
Rate of compensation increase		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		—
Medical trend rate		—			—			—			—			—			—			7.50	%		8.00	%		9.00	%
BENEFIT COST ASSUMPTIONS
Discount rate		6.50	% 1		6.30	%		5.80	%		6.50	% 1		6.30	%		5.80	%		6.50	% 1		6.30	%		5.80	%
Rate of plan assets		8.25	%		8.25	%		8.25	%		—			—			—			7.60	%		—			3.9-8	%
Rate of compensation increase		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		—
Medical trend rate		—			—			—			—			—			—			9.00	%		9.00	%		10.00	%

¹ 6.50% is the benefit cost discount rate used by Puget Energy. 6.20% is the benefit cost discount rate use by PSE. The discount rates for the net periodic costs for Puget Energy and PSE were different because of the discount rates in effect as of February 5, 2009, and December 31, 2008, respectively.

The assumed medical inflation rate used to determine benefit obligations is 7.50% in 2010 grading down to 5.0% in 2011. A 1.0% change in the assumed medical inflation rate would have the following effects:

	2009				2008
(DOLLARS IN THOUSANDS)	1% INCREASE		1% DECREASE		1% INCREASE		1% DECREASE
Effect on post-retirement benefit obligation	$	131	$	119	$	184	$	(171	)
Effect on service and interest cost components		7		6		12		(11	)

The Company has selected the expected return on plan assets based on a historical analysis of rates of return and the Company’s investment mix, market conditions, inflation and other factors. The expected rate of return is reviewed annually based on these factors. The Company’s accounting policy for calculating the market-related value of assets for the Company’s retirement plan is as follows. PSE market-related value of assets is based on a five-year smoothing of asset gains/losses measured from the expected return on market-related assets. This is a calculated value that recognizes changes in fair value in a systematic and rational manner over five years. The same manner of calculating market-related value is used for all classes of assets, and is applied consistently from year to year.

Puget Energy’s pension and other postretirement benefits income or costs depend on several factors and assumptions, including plan design, timing and amount of cash contributions to the plan, earnings on plan assets, discount rate, expected long-term rate of return, mortality and health care costs trends. Changes in any of these factors or assumptions will affect the amount of income or expense that Puget Energy records in its financial statements in future years and its projected benefit obligation. Puget Energy has selected an expected return on plan assets based on a historical analysis of rates of return and Puget Energy’s investment mix, market conditions, inflation and other factors. As required by merger accounting rules, market-related value was reset to market value effective with the merger.

The discount rates were determined by using market interest rate data and the weighted-average discount rate from Citigroup Pension Liability Index Curve. The Company also takes into account in determining the discount rate the expected changes in market interest rates and anticipated changes in the duration of the plan liabilities.

The aggregate expected contributions by the Company to fund the retirement plan, SERP and the other postretirement plans for the year ending December 31, 2010 are $12.0 million, $3.0 million and $0.5 million, respectively.

F-55

PLAN BENEFITS

The expected total benefits to be paid under the qualified pension plans for the next five years and the aggregate total to be paid for the five years thereafter are as follows:

(DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015-2019
Total benefits	$	31,200	$	31,900	$	33,300	$	34,800	$	35,400	$	195,100

The expected total benefits to be paid under the SERP for the next five years and the aggregate total to be paid for the five years thereafter are as follows:

(DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015-2019
Total benefits	$	2,978	$	2,258	$	2,891	$	3,796	$	3,198	$	20,875

The expected total benefits to be paid under the other benefits for the next five years and the aggregate total to be paid for the five years thereafter are as follows:

(DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015-2019
Total benefits	$	1,555	$	1,553	$	1,493	$	1,424	$	1,354	$	5,836
Total benefits without Medicare Part D subsidy	$	1,943	$	1,942	$	1,915	$	1,868	$	1,821	$	8,146

PLAN ASSETS

Plan contributions and the actuarial present value of accumulated plan benefits are prepared based on certain assumptions pertaining to interest rates, inflation rates and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimations and assumptions process, changes in these estimates and assumptions in the near term may be material to the financial statements.

The Company has a Retirement Plan Committee that establishes investment policies, objectives and strategies designed to balance expected return with a prudent level of risk. All changes to the investment policies are reviewed and approved by the Retirement Plan Committee prior to being implemented.

The Retirement Plan Committee invests trust assets with investment managers who have historically achieved above-median long-term investment performance within the risk and asset allocation limits that have been established. Interim evaluations are routinely performed with the assistance of an outside investment consultant. To obtain the desired return needed to fund the pension benefit plans, the Retirement Plan Committee has established investment allocation percentages by asset classes as follows:

	ALLOCATION
ASSET CLASS	MINIMUM			TARGET			MAXIMUM
Domestic large cap equity		25	%		32	%		40	%
Domestic small cap equity		0	%		10	%		15	%
Non-U.S. equity		10	%		20	%		30	%
Tactical asset allocation		0	%		5	%		10	%
Fixed income		15	%		23	%		30	%
Real estate		0	%		0	%		10	%
Absolute return		5	%		10	%		15	%
Private equity funds		0	%		0	%		0	%
Cash		0	%		0	%		5	%

F-56

PLAN FAIR VALUE MEASUREMENTS

Effective December 31, 2009, ASC 715 directs companies to provide additional disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures are to disclose the following: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) major categories of plan assets; (3) inputs and valuation techniques used to measure the fair value of plan assets; (4) effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets.

In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-12, “Fair Value Measurements and Disclosures: Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” The standard allows the reporting entity, as a practical expedient, to measure the fair value of investments that do not have readily determinable fair values on the basis of the net asset value per share of the investment if the net asset value of the investment is calculated in a matter consistent with ASC 946, “Financial Services – Investment Companies.” The standard requires disclosures about the nature and risk of the investments and whether the investments are probable of being sold at amounts different from the net asset value per share.

The following table sets forth by level, within the fair value hierarchy, the qualified pension plan assets at fair value that were accounted for at fair value on a recurring basis as of December 31, 2009:

RECURRING FAIR VALUE MEASURES (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 2009
ASSETS:	LEVEL 1		LEVEL 2		LEVEL 3		FAIR VALUE
Equities:
Non-US equity 1	$	50,890	$	48,062	$	—	$	98,952
Domestic large cap equity 2		134,754		24,641		—		159,395
Domestic small cap equity 3		49,513		—		—		49,513
Total equities		235,157		72,703		—		307,860
Tactical asset allocation 4		—		25,469		—		25,469
Fixed income securities 5		43,244		51,244		—		94,488
Absolute return 6		—		—		46,226		46,226
Cash and cash equivalents 7		—		9,588		—		9,588
Subtotal	$	278,401	$	159,004	$	46,226	$	483,631
Net receivables								1,629
Accrued income								429
Total assets							$	485,689

¹ Non – US Equity investments are comprised of a (1) mutual fund; and (2) commingled fund. The investment in the mutual fund is valued using quoted market prices multiplied by the number of shares owned as of December 31, 2009. The investment in the commingled fund is valued at the net asset value per share multiplied by the number of shares held as of December 31, 2009.

² Domestic large cap equity investments are comprised of (1) common stock, and (2) commingled fund. Investments in common stock are valued using quoted market prices multiplied by the number of shares owned as of December 31, 2009. The investment in the commingled fund is valued at the net asset value per share multiplied by the number of shares held as of December 31, 2009.

³ Domestic small cap equity investments are comprised of common stock and are valued using quoted market prices multiplied by the number of shares owned as of December 31, 2009.

⁴ The tactical asset allocation investment are compromised of a commingled fund, which is valued at the net asset value per share multiplied by the number of shares held as of the measurement date.

⁵ Fixed income securities consist of a mutual fund, convertible securities, corporate bonds, and mortgage backed mortgage pools guaranteed by GNMA, FNMA and FHLMC. The investment in the mutual fund is valued using quoted market prices multiplied by the number of shares owned as of December 31, 2009. The other investments are valued using various valuation techniques and sources such as value generation models, broker quotes, benchmark yields and/or other applicable data.

⁶ Absolute return investments consist of a mutual fund and a partnership. The mutual fund is valued using the net asset value per share multiplied by the number of shares held as of December 31, 2009. The partnership is valued using the financial reports as of December 31, 2009. Both investments are a Level 3 under ASC 820 because the plan does not have the ability to redeem the investment in the near-term at the net asset value per share.

⁷ The investment consists of a money market fund, which is valued at the net asset value per share of $1.00 per unit as of December 31, 2009. The money market fund invests primarily in commercial paper, notes, repurchase agreements, and other evidences of indebtedness which are payable on demand or which have a maturity date not exceeding thirteen months from the date or purchase.

F-57

LEVEL 3 ROLL-FORWARD

The following table sets forth a reconciliation of changes in the fair value of the plan’s Level 3 assets for the year ended December, 31, 2009:

(DOLLARS IN THOUSANDS)	PARTNERSHIP		MUTUAL FUNDS		TOTAL
Balance as of December 31, 2008	$	20,514	$	19,137	$	39,651
Unrealized gains/(losses) relating to instruments still held at the reporting date		2,700		3,875		6,575
Balance as of December 31, 2009	$	23,214	$	23,012	$	46,226

The following table sets forth by level, within the fair value hierarchy, the Other Benefits plan assets at fair value as of December 31, 2009:

RECURRING FAIR VALUE MEASURES (DOLLARS IN THOUSANDS) AS OF DECEMBER 31, 2009
ASSETS:	LEVEL 1		LEVEL 2		FAIR VALUE
Mutual fund 1	$	8,321	$	—	$	8,321
Cash equivalents 2		—		469		469
Total assets	$	8,321	$	469	$	8,790

¹ This is a publicly traded balanced mutual fund that seeks regular income, conservation of principal, and an opportunity for long-term growth of principal and income. The fair value is determined by taking the number of shares owned by the plan, and multiplying by the market price as of December 31, 2009.

² This is a deposit fund. The fair value is calculated by using the financial reports available as of December 31, 2009.

NOTE 18. Stock-based Compensation Plans

The Company’s Long-Term Incentive Plan (LTI Plan), approved by the shareholders in 2005, encompasses many of the awards granted to employees. The LTI Plan applied to officers and key employees of the Company and awards granted under this plan included stock awards, performance awards, stock options and restricted stocks which were added to reduce the volatility of the plan. Any shares awarded were either purchased on the open market or were a new issuance. Certain plan participants who met or exceeded the Company’s stock ownership guidelines could elect to be paid up to 50.0% of the share award in cash. With the completion of the merger, all shares outstanding under the LTI Plan were fully vested and settled in cash to plan participants. Puget Energy paid and recognized $14.5 million merger expense in connection to the vesting of the LTI Plan shares.

PERFORMANCE SHARE GRANTS

The Company generally awarded performance share grants annually under the LTI Plan. These were granted to key employees and vested at the end of three years. The number of shares awarded and the amount of expense recorded depended on Puget Energy’s performance as compared to other companies and service quality indices for customer service. Compensation expense related to performance share grants was $9.6 million, $3.7 million and $7.9 million for 2009, 2008 and 2007, respectively. The weighted-average fair value per performance share granted for the years ended 2008 and 2007 was $26.72 and $24.75, respectively.

F-58

Performance shares activity for the periods ended February 5, 2009 and December 31, 2008 was as follows:

PREDECESSOR	NUMBER  OF SHARES			WEIGHTED-AVERAGE FAIR VALUE PER SHARE
Performance Shares Outstanding at December 31, 2007:		285,119		$	23.60
Granted		111,208			26.72
Vested		(141,406	)		22.52
Forfeited		(10,531	)		23.56
Total at December 31, 2008:		244,390		$	25.65
Granted		—			—
Vested		(244,390	)		25.65
Forfeited		—			—
Performance Shares Outstanding at February 5, 2009:		—			—

Plan participants meeting the Company’s stock ownership guidelines could elect to be paid up to 50.0% of the share award in cash. The portion of the performance share grants that could be paid in cash was classified and accounted for as a liability. As a result, the compensation expense of these liability awards was recognized over the performance period based on the fair value (i.e. cash value) of the award, and was periodically updated based on expected ultimate cash payout. Compensation cost recognized during the performance period for the liability portion of the performance grants was based on the closing price of the Company’s common stock on the date of measurement and the number of months of service rendered during the period. The equity portion was valued at the closing price of the Company’s common stock on the grant date. In connection with the completion of the merger in 2009, all shares vested and the Company paid and recognized $9.6 million recorded in merger and related costs.

STOCK OPTIONS

In 2002, Puget Energy’s Board of Directors granted 40,000 stock options under the LTI Plan and an additional 260,000 options outside the LTI Plan (for a total of 300,000 non-qualified stock options) to the President and Chief Executive Officer. These options could be exercised at the grant date market price of $22.51 per share and vested annually over four and five years. The fair value of the stock option award was estimated at $3.33 per share on the date of grant using the Black-Scholes option valuation model. The options were cancelled at the time of the merger and $2.3 million was paid in cash to the President and Chief Executive Officer based on the terms of the merger agreement.

RESTRICTED STOCK

Restricted stock activity for the twelve months ended December 31, 2009 and 2008 was as follows:

PREDECESSOR	NUMBER  OF SHARES			WEIGHTED-AVERAGE FAIR VALUE PER SHARE
Restricted Stock Outstanding at December 31, 2007:		260,382		$	22.98
Granted		91,115			26.72
Vested		(117,439	)		22.99
Forfeited		(6,415	)		23.21
Restricted Stock Outstanding at December 31, 2008:		227,643		$	24.64
Granted		—			—
Vested		(227,643	)		24.64
Forfeited		—			—
Restricted Stock Outstanding at February 5, 2009:		—		$	—

F-59

Compensation expense related to the restricted shares was $2.2 million and $2.4 million for 2009 and 2008, respectively.

RETIREMENT EQUIVALENT STOCK

The Company has a retirement equivalent stock agreement under which in lieu of participating in the Company’s executive supplemental retirement plan, the President and Chief Executive Officer was granted performance-based stock equivalents in January of each year, which were deferred under the Company’s deferred compensation plan. Retirement equivalent stock activity was as follows:

	NUMBER  OF SHARES		WEIGHTED-AVERAGE FAIR VALUE PER SHARE
Retirement Equivalent Stock Awarded:
2007		9,476	$	25.36
2008		7,574		27.43

All shares vested in May 2008. Compensation expense related to the retirement equivalent stock agreement was $0.3 million and $0.1 million in 2008 and 2007, respectively. All equivalent stock units vested prior to the merger.

NON-EMPLOYEE DIRECTOR STOCK PLAN

Prior to February 6, 2009, when it was terminated, the Company had a director stock plan for all non-employee directors of Puget Energy and PSE. An amended and restated plan was approved by shareholders in 2005. Under the plan, which had a term through December 31, 2015, non-employee directors received a portion of their quarterly retainer fees in Puget Energy stock except that 100.0% of quarterly retainers were paid in Puget Energy stock until the director held a number of shares equal in value to two years of their retainer fees. Directors could choose to continue to receive their entire retainer in Puget Energy stock. The compensation expense related to the director stock plan was $0.4 million and $0.7 million in 2009 and 2008, respectively. As of December 31, 2008, the number of shares that had been purchased for the director stock plan was 62,362 and deferred was 121,253, for a total of 183,615 shares. The director stock plan was terminated on February 6, 2009 by action of the Board of Directors upon completion of the merger and director payments were paid in cash.

NOTE 19. Colstrip Matters

In May 2003, approximately 50 plaintiffs initiated an action against the owners of Colstrip alleging that: (1) seepage from two different wastewater pond areas caused groundwater contamination and threatened to contaminate domestic water wells and the Colstrip water supply pond; and (2) seepage from the Colstrip water supply pond caused structural damage to buildings and toxic mold. The defendants reached agreement on a global settlement with all plaintiffs on April 29, 2008 and PSE paid its share of the settlement in the amount of $8.4 million, net of insurance proceeds, in July 2008. PSE had previously expensed the settlement in the first quarter 2008. PSE has also filed an accounting petition with the Washington Commission to recover such costs over five years in its current electric rate proceeding. This matter is included in PSE’s pending general rate case and an order is expected in April 2010.

On March 29, 2007, a second complaint related to pond seepage was filed on behalf of two ranch owners alleging damage due to the Colstrip Units 3 & 4 effluent holding pond. Discovery is ongoing and trial is scheduled to begin on May 16, 2011.

F-60

The federal Clean Air Mercury Rule, enacted by the Environmental Protection Agency (EPA) in May 2005, was vacated by the D.C. Circuit Court in February 2008. Final resolution of this matter is still pending. However, the Montana Board of Environmental Review approved a Montana mercury control rule to limit mercury emissions from coal-fired plants on October 16, 2006 (with a limit of 0.9 lbs/Trillion British thermal units (TBtu) for plants burning coal like that used at Colstrip) which remains in effect. In 2008 the Colstrip owners, based on testing performed in 2006, 2007 and 2008, ordered mercury control equipment intended to achieve the new limit. The equipment has been fully installed and is in regular operation. The Colstrip mercury control equipment is operating at a level that meets the current Montana limit, which is based on a rolling 12 month average so compliance cannot be fully confirmed until January 1, 2011. Optimization of the feed rates of calcium bromide and activated carbon is underway. Depending on actual long-term performance, an evaluation will be conducted to determine whether additional controls, if any, are necessary.

On June 15, 2005, EPA issued the Clean Air Visibility rule to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines Best Available Retrofit Technology (BART) requirements for electric generating units, including presumptive limits for sulfur dioxide, particulate matter and nitrogen oxide controls for large units.

In February 2007, Colstrip was notified by EPA that Colstrip Units 1 & 2 were determined to be subject to the EPA’s BART requirements. PSE submitted a BART engineering analysis for Colstrip Units 1 & 2 in August 2007 and responded to an EPA request for additional analyses with an addendum in June 2008. PSE cannot yet determine the outcome.

A lawsuit was filed in February 2009 against the Colstrip operator related to a fatality that occurred at the plant in June 2008. Discovery ends April 1, 2010 and trial is scheduled for July 12, 2010. PSE’s level of exposure in this matter is currently unknown.

NOTE 20. Income Taxes

The details of income taxes on continuing operations are as follows:

PUGET ENERGY (DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	SUCCESSOR FEBRUARY 6, 2009 – DECEMBER 31, 2009			PREDECESSOR JANUARY 1, 2009 – FEBRUARY 5, 2009			2008			2007
Charged to operating expenses:
Current:
Federal	$	(161,087	)	$	10,185		$	(16,625	)	$	3,238
State		(988	)		87			(85	)		(189	)
Deferred - federal		244,116			(1,275	)		76,616			69,533
Total income taxes from continuing operations	$	82,041		$	8,997		$	59,906		$	72,582

F-61

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	2009			2008			2007
Charged to operating expenses:
Current:
Federal	$	(126,156	)	$	(13,103	)	$	5,555
State		(901	)		(85	)		(189	)
Deferred - federal		194,701			74,070			68,815
Total income taxes from continuing operations	$	67,644		$	60,882		$	74,181

The following reconciliation compares pre-tax book income at the federal statutory rate of 35.0% to the actual income tax expense in the Statements of Income:

PUGET ENERGY (DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	SUCCESSOR FEBRUARY 6, 2009 – DECEMBER 31, 2009			PREDECESSOR JANUARY 1, 2009 – FEBRUARY 5, 2009			2008			2007
Income taxes at the statutory rate	$	89,620		$	7,613		$	75,069		$	89,966
Increase (decrease):
Production tax credit		(13,871	)		(5,870	)		(23,112	)		(20,154	)
AFUDC excluded from taxable income		(5,326	)		(1,771	)		(4,670	)		(5,055	)
Capitalized interest		5,028			914			3,653			3,649
Utility plant differences		4,323			1,472			5,882			6,032
Tenaska gas contract		3,049			1,429			3,198			2,057
Transaction costs		201			5,544			2,266			—
Other - net		(983	)		(334	)		(2,380	)		(3,913	)
Total income taxes	$	82,041		$	8,997		$	59,906		$	72,582
Effective tax rate		32.0	%		41.4	%		27.9	%		28.2	%

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	2009			2008			2007
Income taxes at the statutory rate	$	79,414		$	78,266		$	92,858
Increase (decrease):
Production tax credit		(19,741	)		(23,112	)		(20,154	)
AFUDC excluded from taxable income		(7,097	)		(4,670	)		(5,055	)
Capitalized interest		5,942			3,653			3,649
Utility plant differences		5,795			5,882			6,032
Tenaska gas contract		4,478			3,198			2,057
Other - net		(1,147	)		(2,335	)		(5,206	)
Total income taxes	$	67,644		$	60,882		$	74,181
Effective tax rate		29.8	%		27.2	%		28.0	%

The Company’s deferred tax liability at December 31, 2009 and 2008 is composed of amounts related to the following types of temporary differences:

PUGET ENERGY (DOLLARS IN THOUSANDS) AT DECEMBER 31	SUCCESSOR 2009		PREDECESSOR 2008
Utility plant and equipment	$	930,946	$	746,486
Regulatory asset for income taxes		89,303		95,417
Fair value of debt instruments		86,047		—

F-62

Pensions and other compensation		42,395			(62,837	)
Storm damage		37,002			42,037
Other deferred tax liabilities		85,797			47,963
Subtotal deferred tax liabilities		1,271,490			869,066
Fair value of derivative instruments		(75,964	)		(69,259	)
Production tax credit		(45,730	)		(25,990	)
Other deferred tax assets		(42,106	)		(33,490	)
Subtotal deferred tax assets		(163,800	)		(128,739	)
Total	$	1,107,690		$	740,327
PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) AT DECEMBER 31	2009			2008
Utility plant and equipment	$	930,946		$	746,486
Regulatory asset for income taxes		89,303			95,417
Storm damage		37,002			42,037
Other deferred tax liabilities		77,917			48,637
Subtotal deferred tax liabilities		1,135,168			932,577
Fair value of derivative instruments		(53,271	)		(69,259	)
Production tax credit		(45,730	)		(25,990	)
Pensions and other compensation		(35,290	)		(62,837	)
Other deferred tax assets		(43,082	)		(33,490	)
Subtotal deferred tax assets		(177,373	)		(191,576	)
Total	$	957,795		$	741,001

The above amounts have been classified in the Balance Sheets as follows:

PUGET ENERGY (DOLLARS IN THOUSANDS) AT DECEMBER 31	SUCCESSOR 2009			PREDECESSOR 2008
Current deferred taxes	$	(39,977	)	$	(75,135	)
Non-current deferred taxes		1,147,667			815,462
Total	$	1,107,690		$	740,327
PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) AT DECEMBER 31	2009			2008
Current deferred taxes	$	(38,781	)	$	(75,135	)
Non-current deferred taxes		996,576			816,136
Total	$	957,795		$	741,001

The Company calculates its deferred tax assets and liabilities under ASC 740. ASC 740 requires recording deferred tax balances, at the currently enacted tax rate, on assets and liabilities that are reported differently for income tax purposes than for financial reporting purposes. The utilization of deferred tax assets requires sufficient taxable income in the future years. ASC 740 requires a valuation allowance on deferred tax assets when it is more likely than not that the deferred tax asset will not be realized. The Company’s production tax credit carryforwards expire from 2026 through 2029.

For ratemaking purposes, deferred taxes are not provided for certain temporary differences. PSE has established a regulatory asset for income taxes recoverable through future rates related to those temporary differences for which no deferred taxes have been provided, based on prior and expected future ratemaking treatment.

F-63

The Company accounts for uncertain tax position under ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 requires the use of a two-step approach for recognizing and measuring tax positions taken or expected to be taken in a tax return. First, a tax position should only be recognized when it is more likely than not, based on technical merits, that the position will be sustained upon examination by the taxing authority. Second, a tax position that meets the recognition threshold should be measured at the largest amount that has a greater than 50.0% likelihood of being sustained.

As of December 31, 2009 and 2008, the Company had no material unrecognized tax benefits. As a result, no interest or penalties were accrued for unrecognized tax benefits during the year.

For ASC 740 purposes, the Company has open tax years from 2006 through 2009. The Company classifies interest as interest expense and penalties as other expense in the financial statements.

NOTE 21. Litigation

CALIFORNIA REGULATORY ASSET

PSE has held a receivable relating to unpaid bills for power sold into the markets maintained by the CAISO. At December 31, 2009, the net receivable for such sales was $21.2 million, which was reclassified to a regulatory asset. The collectability is subject to the outcome of the Washington Commission ruling on the accounting petition. On October 7, 2009, PSE filed an amended accounting petition requesting that the Washington Commission authorize PSE to defer the net revenues from the sale of renewable energy credits (RECs) and carbon financial instruments (collectively, REC Proceeds) and use the revenues to: (1) provide funding for low income energy efficiency and renewable energy services, (2) credit a portion of the REC Proceeds to the California Receivable and (3) provide a credit to customers by offsetting the REC Proceeds against a regulatory asset. The accounting petition is an amended petition to the accounting petition originally filed in April 2007 that requested deferred accounting treatment for renewable energy credits. The petition is scheduled for hearing in March 2010 and a Washington Commission order is anticipated in the first half of 2010.

PROCEEDINGS RELATING TO THE WESTERN POWER MARKET

The following discussion summarizes the status as of the date of this report of ongoing proceedings relating to the western power markets to which PSE is a party. PSE is vigorously defending the remaining claims. Litigation is subject to numerous uncertainties and PSE is unable to predict the ultimate outcome of these matters. Accordingly, there can be no guarantee that these proceedings will not materially and adversely affect PSE’s financial condition, results of operations or liquidity.

PSE Settlement of California Matters. On May 8, 2009, PSE and certain California parties filed a proposed settlement with FERC, seeking FERC’s approval to resolve all the matters and disputes pending between PSE and California parties relating to the western energy crisis. On July 1, 2009, FERC approved that settlement.

Under the settlement, PSE releases all claims to amounts held in, or presumed payable into, certain escrow accounts. In particular, the California Power Exchange and Pacific Gas & Electric delivered $59.9 million, plus up to $36.8 million in interest, from escrows they maintain to the California parties. The release of those funds fully satisfies all claims by the California parties against PSE, and the California parties assume the risk of any shortfalls or adjustments that occur in those accounts.

The settlement resolves all claims by the California parties against PSE in all proceedings and resolves all claims by PSE against California energy purchasers in all proceedings, except that PSE retains any claims or defenses that pertain to the Pacific Northwest Refund Proceedings at FERC.

In addition to the FERC approval obtained on July 1, 2009, PSE’s settlement with the California parties was expressly conditioned upon two other actions: (1) the California Energy Commission’s approval as

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qualifying facilities under California renewable energy rules of PSE’s Wild Horse and Hopkins Ridge wind farms; and (2) the approval by the California Public Utility Commission of a renewable power agreement between PSE and Southern California Edison (SCE), under which PSE will sell qualifying renewable power to SCE in 2009 and 2010. PSE entered into the SCE contract in January 2009, and all required approvals for that contract were obtained by June 18, 2009.

Use of the proceeds from the renewable power transaction, for ratemaking and accounting purposes, will be determined by the Washington Commission. PSE anticipates recovery of the net California receivable through this proceeding.

The settlement means that PSE’s exposure to western energy crisis claims is now limited to the Pacific Northwest Refund Proceeding, described previously and updated below.

Pacific Northwest Refund Proceeding. In October 2000, PSE filed a complaint at FERC (Docket No. EL01-10) against “all jurisdictional sellers” in the Pacific Northwest seeking prospective price caps consistent with any result FERC ordered for the California markets. In April 2009, the Ninth Circuit rejected the requests for rehearing filed in this matter and remanded the proceeding to FERC. FERC is now considering what response to take to the Court remand order, as petitions for review by the Supreme Court were denied on January 11, 2010. PSE intends to vigorously defend its position but is unable to predict the outcome of this matter.

PROCEEDINGS RELATED TO BONNEVILLE POWER ADMINISTRATION

Petitioners in several actions in the Ninth Circuit against BPA asserted that BPA acted contrary to law in entering into or performing or implementing a number of agreements, including the amended settlement agreement (and the May 2004 agreement) between BPA and PSE regarding the REP. Petitioners in several actions in the Ninth Circuit against BPA also asserted that BPA acted contrary to law in adopting or implementing the rates upon which the benefits received or to be received from BPA during the October 1, 2001 through September 30, 2006 period were based. A number of parties claimed that the BPA rates proposed or adopted in the BPA rate proceeding to develop BPA rates to be used in the agreements for determining the amounts of money to be paid to PSE by BPA during the period October 1, 2006 through September 30, 2009 are contrary to law and that BPA acted contrary to law or without authority in deciding to enter into, or in entering into or performing or implementing such agreements.

On May 3, 2007, the Ninth Circuit issued an opinion in Portland Gen. Elec. v. BPA, Case No. 01-70003, in which proceeding the actions of BPA in entering into settlement agreements regarding the REP with PSE and with other investor-owned utilities were challenged. In this opinion, the Ninth Circuit granted petitions for review and held the settlement agreements entered into between BPA and the investor-owned utilities being challenged in that proceeding to be inconsistent with statute. On May 3, 2007, the Ninth Circuit also issued an opinion in Golden Northwest Aluminum v. BPA, Case No. 03-73426, in which proceeding the petitioners sought review of BPA’s 2002-2006 power rates. In this opinion, the Ninth Circuit granted petitions for review and held that BPA unlawfully shifted onto its preference customers the costs of its settlements with the investor-owned utilities. On October 11, 2007, the Ninth Circuit remanded the May 2004 agreement to BPA in light of the Portland Gen. Elec. v. BPA opinion and dismissed the remaining three pending cases regarding settlement agreements.

In March 2008, BPA and PSE signed an agreement pursuant to which BPA made a payment to PSE related to the REP benefits for the fiscal year ended September 30, 2008, which payment is subject to true-up depending upon the amount of any REP benefits ultimately determined to be payable to PSE.

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In September 2008, BPA issued its record of decision in its reopened WP-07 rate proceeding to respond to the various Ninth Circuit opinions. In this record of decision, BPA adjusted its fiscal year 2009 rates, determined the amounts of REP benefits it considered to have been improperly paid after fiscal year 2001 to PSE and the other regional investor-owned utilities, and determined that such amounts are to be recovered through reductions in REP benefit payments to be made over a number of years. The amount determined by BPA to be recovered through reductions commencing October 2007 in REP payments for PSE’s residential and small farm customers was approximately $207.2 million plus interest on unrecovered amounts to the extent that PSE receives any REP benefits for its customers in the future. However, these BPA determinations are subject to subsequent administrative and judicial review, which may alter or reverse such determinations. PSE and others, including a number of preference agency and investor-owned utility customers of BPA, in December 2008 filed petitions for review in the Ninth Circuit of various of these BPA determinations.

In September 2008, BPA and PSE signed a short-term Residential Purchase and Sale Agreement (RPSA) under which BPA is to pay REP benefits to PSE for fiscal years ending September 30, 2009–2011. In December 2008, BPA and PSE signed another, long-term RPSA under which BPA is to pay REP benefits to PSE for the period October 2011 through September 2028. PSE and other customers of BPA in December 2008 filed petitions for review in the Ninth Circuit of the short-term and long-term RPSAs signed by PSE (and similar RPSAs signed by other investor-owned utility customers of BPA) and BPA’s record of decision regarding such RPSAs. Generally, REP benefit payments under a RPSA are based on the amount, if any, by which a utility's average system cost exceeds BPA’s Priority Firm (PF) Exchange rate for such utility. The average system cost for a utility is determined using an average system cost methodology adopted by BPA. The average system cost methodology adopted by BPA and the average system cost determinations, REP overpayment determinations, and the PF Exchange rate determinations by BPA are all subject to FERC review or judicial review or both and are subject to adjustment, which may affect the amount of REP benefits paid or to be paid by BPA to PSE. As discussed above, BPA has determined to reduce such payments based on its determination of REP benefit overpayments after fiscal year 2001.

It is not clear what impact, if any, such development or review of such BPA rates, average system cost, average system cost methodology, and BPA determination of REP overpayments, review of such agreements, and the above described Ninth Circuit litigation may ultimately have on PSE.

NOTE 22. Variable Interest Entities

In accordance with ASC 810, “Consolidation” (ASC 810), a variable interest entity (VIE) is an entity in which the investors as a group do not have: (1) the characteristics of a controlling financial interest in the equity of the entity; (2) sufficient equity at risk for the entity to finance its activities without additional subordinated financial support; or (3) symmetry between voting rights and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionally few voting rights. Variable interests in a VIE are contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the entity’s net assets exclusive of variable interest.

ASC 810 requires that if a business entity has a controlling financial interest in a VIE, the financial statements must be included in the consolidated financial statements of the business entity. A primary beneficiary of a VIE is the variable interest holder (e.g. a contractual counterparty or capital provider), who is deemed to have the controlling financial interest(s) and is considered to be exposed to the majority of the risks and rewards associated

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with the VIE and therefore must consolidate it. The Company enters into a variety of contracts for energy with other counterparties and evaluates all contracts for variable interests. The Company’s variable interests primarily arise through power purchase agreements where it is required to buy all or a majority of generation from a plant at rates set forth in a power purchase agreement.

The Company evaluates potential variable interest relationships based on significance. If the Company did not participate significantly in the design or redesign of an entity and the variable interest is not potentially significant to the consolidated financial statements, no further evaluation is performed. In addition, purchase power contracts with governmental organizations are outside the scope of ASC 810. When it determines a significant variable interest may exist with another party, the Company requests information necessary to determine if it is the primary beneficiary.

PSE evaluated its power purchase agreements and determined that two power purchase agreements may be considered significant variable interest. As a result, PSE submitted requests for information to the relevant entities; however, they have refused to submit the necessary information for PSE to determine whether it is the primary beneficiary. PSE will continue to submit requests for information to the counterparties annually to determine if ASC 810 is applicable. The Company’s purchased electricity expense for the years ended December 31, 2009, 2008 and 2007 with the two potential VIE entities was $181.2 million, $196.3 million, and $216.5 million, respectively. The power purchase agreements mentioned as potential VIEs for both Puget Energy & PSE are set to expire in December 2011.

The following tables present the Company’s potential VIE relationships, irrespective of significance, related to power purchase agreements as of December 31, 2009 and 2008:

(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 2009
NATURE OF VARIABLE INTEREST	LONGEST CONTRACT TENOR		NUMBER OF COUNTERPARTIES		AGGREGATE CARRYING VALUE ASSET/(LIABILITY) 2			LEVEL OF ACTIVITY –2009 EXPENSES
Electric- Combustion Turbine Co-generation plant 1		2011		2	$	(15,779	)	$	181,240
Electric- Hydro		2037		7		(789	)		10,391
Total				9	$	(16,568	)	$	191,631

(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 2008
NATURE OF VARIABLE INTEREST	LONGEST CONTRACT TENOR		NUMBER OF COUNTERPARTIES		AGGREGATE CARRYING VALUE ASSET/(LIABILITY) 2			LEVEL OF ACTIVITY – 2008 EXPENSES 2
Electric- Combustion Turbine Co-generation plant 1		2011		2	$	(17,096	)	$	196,757
Electric- Hydro		2037		8		(922	)		12,419
Total				10	$	(18,018	)	$	209,176

¹ Variable interests may be significant.

² Carrying values are classified on the balance sheet in accounts payable and expenses are classified on the statements of income in purchased electricity.

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NOTE 23. Commitments and Contingencies

For the year ended December 31, 2009, approximately 20.7% of the Company’s energy output was obtained at an average cost of approximately $0.018 per kWh through long-term contracts with three of the Washington Public Utility Districts (PUDs) that own hydroelectric projects on the Columbia River. The purchase of power from the Columbia River projects is on a pro rata share basis under which the Company pays a proportionate share of the annual debt service, operating and maintenance costs and other expenses associated with each project in proportion to the contractual shares that PSE obtains from that project. In these instances, PSE’s payments are not contingent upon the projects being operable; therefore, PSE is required to make the payments even if power is not delivered. These projects are financed through substantially level debt service payments and their annual costs should not vary significantly over the term of the contracts unless additional financing is required to meet the costs of major maintenance, repairs or replacements, or license requirements. The Company’s share of the costs and the output of the projects is subject to reduction due to various withdrawal rights of the PUDs and others over the lives of the contracts.

The following table summarizes the Company’s estimated payment obligations for power purchases from the Columbia River projects, contracts with other utilities and contracts under non-utility generators under the Public Utility Regulatory Policies Act. These contracts have varying terms and may include escalation and termination provisions.

(DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015 & THERE- AFTER		TOTAL
Columbia River projects	$	86,864	$	105,772	$	67,749	$	66,866	$	68,126	$	1,035,624	$	1,431,001
Other utilities		178,555		138,664		128,860		68,623		49,601		343,583		907,886
Non-utility generators		169,092		171,502		—		—		—		—		340,594
Total	$	434,511	$	415,938	$	196,609	$	135,489	$	117,727	$	1,379,207	$	2,679,481

Total purchased power contracts provided the Company with approximately 8.3 million, 8.7 million and 9.4 million megawatt hours (MWh) of firm energy at a cost of approximately $363.3 million, $384.0 million and $390.6 million for the years 2009, 2008 and 2007, respectively.

As part of its electric operations and in connection with the 1997 restructuring of the Tenaska Power Purchase Agreement, PSE is obligated to deliver to Tenaska up to 50,000 MMBtu (one million British thermal units, equal to one Dth) per day of natural gas for operation of Tenaska’s natural gas-fired cogeneration facility. This obligation continues for the remaining term of the agreement, through December 31, 2011, provided that no deliveries are required during the month of May. The price paid by Tenaska for this natural gas is reflective of the daily price of natural gas at the United States/Canada border near Sumas, Washington.

The Company has natural gas-fired generation facility obligations for natural gas supply amounting to an estimated $96.8 million in 2010. Two longer term agreements for natural gas supply amount to an estimated $131.2 million for 2011 through 2029.

PSE enters into short-term energy supply contracts to meet its core customer needs. These contracts are generally classified as NPNS or in some cases recorded at fair value in accordance with ASC 815. Commitments under these contracts are $128.1 million, $77.7 million and $19.6 million in 2010, 2011 and 2012, respectively.

NATURAL GAS SUPPLY

The Company has also entered into various firm supply, transportation and storage service contracts in order to ensure adequate availability of natural gas supply for its firm customers. Many of these contracts, which have

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remaining terms from less than one year to 35 years, provide that the Company must pay a fixed demand charge each month, regardless of actual usage. The Company contracts for all of its long-term natural gas supply on a firm basis, which means the Company has a 100% daily take obligation and the supplier has a 100% daily delivery obligation. The Company incurred demand charges in 2009 for firm natural gas supply, firm transportation service and firm storage and peaking service of $1.0 million, $117.0 million and $8.0 million, respectively. The Company incurred demand charges in 2009 for firm transportation service for the natural gas supply for its combustion turbines in the amount of $17.0 million, which is included in the total Company demand charges.

The following table summarizes the Company’s obligations for future demand charges through the primary terms of its existing contracts. The quantified obligations are based on current contract prices and FERC authorized rates, which are subject to change.

DEMAND CHARGE OBLIGATIONS (DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015 & THERE- AFTER		TOTAL
Firm transportation service	$	131,652	$	125,988	$	116,715	$	111,007	$	86,783	$	246,769	$	818,914
Firm storage service		9,241		8,949		7,567		2,997		1,507		8,584		38,845
Firm natural gas supply		553		—		—		—		—		—		553
Total	$	141,446	$	134,937	$	124,282	$	114,004	$	88,290	$	255,353	$	858,312

SERVICE CONTRACTS

The following table summarizes the Company’s estimated obligations for service contracts through the terms of its existing contracts.

SERVICE CONTRACT OBLIGATIONS (DOLLARS IN THOUSANDS)	2010		2011		2012		2013		2014		2015 & THERE- AFTER		TOTAL
Automated meter reading system	$	35,189	$	35,261	$	36,166	$	37,234	$	38,344	$	49,678	$	231,872
Energy production service contracts 1		14,465		12,254		5,760		14,099		14,990		96,428		157,996
Information technology service contracts		23,845		24,141		22,215		14,016		—		—		84,217
Total	$	73,499	$	71,656	$	64,141	$	65,349	$	53,334	$	146,106	$	474,085

¹ Energy production service contracts include operations and maintenance contracts on Mint Farm, Wild Horse, Goldendale, Hopkins Ridge and Sumas facilities.

SURETY BOND

The Company has a self-insurance surety bond in the amount of $5.6 million, which expires on July 1, 2010 and is renewed annually, guaranteeing compliance with the Industrial Insurance Act (workers’ compensation) and nine self-insurer’s pension bonds totaling $1.4 million.

ENVIRONMENTAL REMEDIATION

The Company is subject to environmental laws and regulations by federal, state and local authorities and has been required to undertake certain environmental investigative and remedial efforts as a result of these laws and regulations. The Company has also been named by EPA, the Washington State Department of Ecology and/or other third parties as potentially responsible at several contaminated sites and manufactured gas plant sites. PSE has implemented an ongoing program to test, replace and remediate certain underground storage tanks (UST) as required by federal and state laws. The UST replacement component of this effort is finished, but PSE continues its work remediating and/or monitoring relevant sites. During 1992, the Washington Commission issued orders regarding the treatment of costs incurred by the Company for certain sites under its environmental remediation program. The orders authorize the Company to accumulate and defer prudently incurred cleanup costs paid to third parties for recovery in rates established in future rate proceedings, subject to Washington Commission review. The Washington Commission consolidated the gas and electric methodological approaches to remediation and deferred

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accounting in an order issued October 8, 2008. The Company reviews its estimated future obligations and adjusts loss reserves quarterly as management believes necessary per the guidance of ASC 450, “Contingencies.” Management’s estimates include an assessment of the impact of the potential outcomes of disputes with certain property owners and other potentially responsible parties. The Company believes a significant portion of its past and future environmental remediation costs are recoverable from insurance companies, from third parties or from customers under a Washington Commission order. At December 31, 2009, the Company had $5.9 million and $53.1 million in deferred electric and natural gas environmental costs, respectively.

NOTE 24. Related Party Transactions

On June 1, 2006, PSE entered into a revolving credit facility with its parent, Puget Energy, in the form of a Demand Promissory Note (Note). Through the Note, PSE may borrow up to $30.0 million from Puget Energy, subject to approval by Puget Energy. Under the terms of the Note, PSE pays interest on the outstanding borrowings based on the lowest of the weighted-average interest rate of: (a) PSE’s outstanding commercial paper interest rate; (b) PSE’s senior unsecured revolving credit facility; or (c) the interest rate available under the receivable securitization facility of PSE Funding, a PSE subsidiary, which is one-month LIBOR plus 0.25%. At December 31, 2009 and December 31, 2008, the outstanding balance of the Note was $22.9 million and $26.1 million, respectively, and the interest rate was 1.2% and 1.7%, respectively. The outstanding balance and the related interest under the Note are eliminated by Puget Energy upon consolidation of PSE’s financial statements. The $30.0 million credit facility with Puget Energy was unaffected by the merger.

Effective with the close of the merger on February 6, 2009, Puget Energy has a $1.225 billion five-year term loan and a $1.0 billion credit facility for funding capital expenditures. These facilities mature in 2014, contain similar terms and conditions and are syndicated among numerous committed banks and other financial institutions. One of these banks is Macquarie Bank Limited, which has a commitment of $25.2 million to the term loan and a $20.6 million commitment to the capital expenditure credit facility. As of December 31, 2009, the term loan was fully drawn at $1.225 billion and $258.0 million was outstanding under the $1.0 billion credit facility. On February 6, 2009, Puget Energy entered into several interest rate swap instruments to hedge volatility associated with these two loans. Two of the swap instruments were entered into with Macquarie Bank Limited with a total notional amount of $444.9 million.

NOTE 25. Other

The Washington Commission issued an order on May 13, 2004 determining that PSE did not prudently manage natural gas costs for the Tenaska Power Fund, L.P. (Tenaska) electric generating plant and ordered PSE to adjust its PCA deferral account to reflect a disallowance of accumulated costs under the PCA mechanism for these excess costs. The increase in purchased electricity expense resulting from the disallowance totaled $1.0 million, $6.4 million and $7.8 million in 2009, 2008 and 2007, respectively. The order also established guidelines and a benchmark to determine PSE’s recovery on the Tenaska regulatory asset starting with the PCA 3 period (July 1, 2004) through the expiration of the Tenaska contract in the year 2011. The benchmark is defined as the original cost of the Tenaska contract adjusted to reflect the 1.2% disallowance from a 1994 Prudence Order.

In December 2003, PSE notified FERC that it rejected the 1997 license for the White River project because the 1997 license contained terms and conditions that rendered ongoing operations of the project uneconomical relative

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to alternative resources. As a result, generation of electricity ceased at the White River project on January 15, 2004. PSE sought recovery of the relicensing, other construction work in progress and dam operations and safety costs in its general rate filing of April 2004 over a 10-year amortization period. On February 18, 2005, the Washington Commission agreed to allow PSE to recover the White River net utility plant costs noted above. However, amortization of the FERC licensing and other costs will not begin until all costs and any sales proceeds are known. At December 31, 2009, the White River project net book value totaled $34.7 million, which included $10.3 million of net utility plant, $15.3 million of capitalized FERC licensing costs, $5.8 million of costs related to construction work in progress and $3.3 million related to dam operation and safety. The net utility plant amount and the dam operation and safety amount include $ 25.0 million proceeds received on December 21, 2009 from the sale of portions of the White River project and $ 9.6 million related reimbursement costs from the purchaser. This transaction was approved by the Washington Commission which allows PSE to apply the proceeds from the sale and disposition of assets as salvage against unamortized White River regulatory asset account balances.

NOTE 26. Segment Information

Puget Energy operates in one business segment referred to as the regulated utility segment. The regulated utility segment includes the account receivables securitization program which was terminated during the merger. Puget Energy’s regulated utility operation generates, purchases and sells electricity and purchases, transports and sells natural gas. The service territory of PSE covers approximately 6,000 square miles in the state of Washington.

Non-utility business segment includes two PSE subsidiaries, and Puget Energy, is described as Other. The PSE subsidiaries are a real estate investment and development company and a holding company for a small non-utility wholesale generator. Reconciling items between segments are not significant.

Effective February 6, 2009, all merger related fair value adjustments were retained in Puget Energy. Accordingly, only the financial statements of Puget Energy were adjusted to reflect the purchase accounting. Prior to the merger, the business segment financial statements for Puget Energy and PSE were the same.

	SUCCESSOR FEBRUARY 6, 2009 - DECEMBER 31, 2009					PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009
PUGET ENERGY (DOLLARS IN THOUSANDS) 2009	REGULATED UTILITY		OTHER			REGULATED UTILITY		OTHER
Revenues	$	2,921,550	$	3,598		$	403,713	$	—
Depreciation and amortization		305,904		39			26,742		—
Income tax		113,241		(31,200	)		10,537		(1,540	)
Operating income		477,082		(2,219	)		55,830		(20,420	)
Interest charges, net of AFUDC		176,858		79,953			16,966		(25	)
Net income		229,973		(55,958	)		31,611		(18,855	)
Total assets		10,117,563		1,782,577			8,507,548		87,288
Construction expenditures - excluding equity AFUDC		726,157		—			49,531		—

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PUGET SOUND ENERGY (DOLLARS IN THOUSANDS) 2009	REGULATED UTILITY		OTHER
Revenues	$	3,325,263	$	3,238
Depreciation and amortization		332,646		206
Income tax		69,890		(2,246	)
Operating income		387,652		(4,517	)
Interest charges, net of AFUDC		202,527		—
Net income		161,508		(2,256	)
Total assets		8,765,189		51,382
Construction expenditures - excluding equity AFUDC		775,688		—

PUGET SOUND ENERGY AND PUGET ENERGY (DOLLARS IN THOUSANDS) 2008	REGULATED UTILITY		OTHER			PUGET ENERGY TOTAL
Revenues	$	3,351,108	$	6,665		$	3,357,773
Depreciation and amortization		311,920		208			312,128
Income tax		59,071		835			59,906
Operating income		386,912		(4,164	)		382,748
Interest charges, net of AFUDC		193,978		(6	)		193,972
Net income		159,373		(4,444	)		154,929
Total assets		8,347,974		86,128			8,434,102
Construction expenditures - excluding equity AFUDC		846,001		—			846,001

PUGET SOUND ENERGY AND PUGET ENERGY (DOLLARS IN THOUSANDS) 2007	REGULATED UTILITY		OTHER		PUGET ENERGY TOTAL
Revenues	$	3,207,061	$	13,086	$	3,220,147
Depreciation and amortization		279,014		208		279,222
Income tax		70,794		1,788		72,582
Operating income		439,433		1,601		441,034
Interest charges, net of AFUDC		205,209		—		205,209
Net income from continuing operations		184,049		627		184,676
Total assets		7,513,884		84,852		7,598,736
Construction expenditures - excluding equity AFUDC		737,258		—		737,258

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SUPPLEMENTAL QUARTERLY FINANCIAL DATA

The following unaudited amounts, in the opinion of the Company, include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods. Quarterly amounts vary during the year due to the seasonal nature of the utility business.

PUGET ENERGY

(UNAUDITED; DOLLARS IN THOUSANDS)
2009 QUARTER	FIRST				SECOND		THIRD		FOURTH
	Successor February 6, 2009 - March 31, 2009		Predecessor January 1, 2009 - February 5, 2009
Operating revenues	$	703,842	$	403,713	$	686,637	$	592,626	$	942,043
Operating income		116,646		35,410		117,625		101,632		138,960
Net income		52,060		12,756		43,570		24,507		53,878

(UNAUDITED; DOLLARS IN THOUSANDS) 2008 QUARTER	FIRST		SECOND		THIRD			FOURTH
Operating revenues	$	1,050,932	$	712,404	$	606,162		$	988,275
Operating income		157,868		86,470		33,474			104,936
Net income (loss)		79,813		33,654		(8,225	)		49,687

PUGET SOUND ENERGY

(UNAUDITED; DOLLARS IN THOUSANDS) 2009 QUARTER	FIRST		SECOND		THIRD		FOURTH
Operating revenues	$	1,107,555	$	686,280	$	592,626	$	942,040
Operating income		161,894		94,887		56,015		70,339
Net income		84,977		43,777		7,842		22,656

(UNAUDITED; DOLLARS IN THOUSANDS) 2008 QUARTER	FIRST		SECOND		THIRD			FOURTH
Operating revenues	$	1,050,932	$	712,404	$	606,162		$	988,275
Operating income		159,586		92,148		34,770			105,882
Net income (loss)		80,904		39,110		(7,276	)		49,998

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SCHEDULE I

Condensed Financial Information of Puget Energy

Puget Energy Condensed Statements of

    INCOME

(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	SUCCESSOR FEBRUARY 6, 2009 - DECEMBER 31, 2009			PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009			2008			2007
Equity in earnings of subsidiary 1	$	231,978		$	31,611		$	162,736		$	191,127
Non-utility expense and other		(1,526	)		(4	)		(386	)		(1,206	)
Merger and related costs		(2,731	)		(20,416	)		(9,252	)		(8,143	)
Other income (deductions):
Charitable foundation contributions		(5,000	)		—			—			—
Interest income		240			25			863			1,300
Interest expense		(80,193	)		—			(8	)		—
Income taxes		31,247			1,540			976			1,598
Net income from continuing operations		174,015			12,756			154,929			184,676
Equity in earnings of discontinued subsidiary		—			—			—			(212	)
Net income	$	174,015		$	12,756		$	154,929		$	184,464

¹ Equity earnings of subsidiary for successor include earnings from PSE of $127,641 and $104,337 related to purchase accounting adjustments recorded at Puget Energy for PSE.

See accompanying notes to the consolidated financial statements.

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Puget Energy Condensed

    BALANCE SHEETS

(DOLLARS IN THOUSANDS) AT DECEMBER 31	SUCCESSOR 2009		PREDECESSOR 2008
Assets:
Investment in subsidiaries 1	$	3,147,625	$	2,249,186
Other property and investments:
Goodwill		1,656,513		—
Current assets:
Cash		119		57
Receivables from affiliates 2		22,918		26,092
Income taxes		34,670		1,804
Prepaid expense and other		—		545
Deferred income taxes		9,395		—
Total current assets		67,102		28,498
Long-term assets:
Unrealized gain on derivative instruments		20,854		—
Deferred income taxes		1,261		674
Other		930		56
Total long-term assets		23,045		730
Total assets	$	4,894,285	$	2,278,414
Capitalization and liabilities:
Common equity	$	3,423,468	$	2,273,201
Long-term debt		1,438,519		—
Total capitalization		4,861,987		2,273,201
Current liabilities:
Accounts payable		48		5,213
Interest		5,406		—
Unrealized loss on derivative instruments		26,844		—
Total current liabilities		32,298		5,213
Total capitalization and liabilities	$	4,894,285	$	2,278,414

¹ Investment in subsidiaries for successor include Puget Energy business combination accounting adjustments under ASC 805 that are recorded at Puget Energy.

² Eliminated in consolidation.

See accompanying notes to the consolidated financial statements.

F-75

Puget Energy Condensed Statements of

    CASH FLOWS

(DOLLARS IN THOUSANDS) FOR YEARS ENDED DECEMBER 31	SUCCESSOR FEBRUARY 6, 2009 - DECEMBER 31, 2009			PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009			2008			2007
Operating activities:
Net income	$	174,015		$	12,756		$	154,929		$	184,464
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes and tax credits – net		(7,886	)		—			2,548			718
Equity in earnings of subsidiary 1		(231,978	)		(31,611	)		(162,736	)		(191,127	)
Other		3,153			(14	)		(7,332	)		(1,447	)
Dividends received from subsidiaries		183,071			—			145,840			108,434
Accounts receivable		—			—			38			279
Income taxes		(21,951	)		(1,539	)		810			(2,101	)
Accounts payable		(88,912	)		—			1,946			(10	)
Affiliated payables		—			20,015			—			563
Accrued interest		5,406			—			—			(531	)
Net cash provided by (used in) operating activities		14,918			(393	)		136,043			99,242
Investing activities:
Restricted cash		—			—			3,994			(181	)
Investment in subsidiaries		(25,960	)		—			—			(297,073	)
(Increase) decrease in loan to subsidiaries		2,828			346			(10,287	)		8,537
Net cash provided by (used in) investing activities		(23,132	)		346			(6,293	)		(288,717	)
Financing activities:
Dividends paid		(121,178	)		—			(129,677	)		(108,434	)
Common stock issued		—			—			—			300,544
Proceeds from debt issuance		50,211			—			—			—
Issue costs		(6,428	)		—			(40	)		(2,636	)
Net cash provided by (used in) by financing activities		(77,395	)		—			(129,717	)		189,474
Increase (decrease) in cash		(85,609	)		(47	)		33			(1	)
Cash at beginning of year		85,728			57			24			25
Cash at end of year	$	119		$	10		$	57		$	24

¹ Equity earnings of subsidiary for successor include earnings from PSE of $127,641 and $104,337 related to purchase accounting adjustments recorded at Puget Energy for PSE.

See accompanying notes to the consolidated financial statements.

F-76

SCHEDULE II

Valuation and Qualifying Accounts and Reserves

PUGET ENERGY (DOLLARS IN THOUSANDS)	BALANCE  AT BEGINNING OF PERIOD		ADDITIONS CHARGED TO COSTS AND EXPENSES		DEDUCTIONS		BALANCE AT  END OF PERIOD
SUCCESSOR PERIOD FROM FEBRUARY 6, 2009 TO   DECEMBER 31, 2009
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	—	$	25,378	$	17,284	$	8,094
PREDECESSOR PERIOD FROM JANUARY 1, 2009 TO   FEBRUARY 5, 2009
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	6,392	$	1,285	$	7,677	$	—
YEAR ENDED DECEMBER 31, 2008
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	5,465	$	13,126	$	12,199	$	6,392
YEAR ENDED DECEMBER 31, 2007
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	2,762	$	13,019	$	10,316	$	5,465

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	BALANCE  AT BEGINNING OF PERIOD		ADDITIONS CHARGED TO COSTS AND EXPENSES		DEDUCTIONS		BALANCE AT  END OF PERIOD
YEAR ENDED DECEMBER 31, 2009
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	6,392	$	20,220	$	18,518	$	8,094
YEAR ENDED DECEMBER 31, 2008
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	5,465	$	13,126	$	12,199	$	6,392
YEAR ENDED DECEMBER 31, 2007
Accounts deducted from assets on balance sheet:
Allowance for doubtful accounts receivable	$	2,762	$	13,019	$	10,316	$	5,465

F-77

PUGET ENERGY, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands)

(Unaudited)

	THREE MONTHS ENDED SEPTEMBER 30,
	2010			2009
Operating revenue:
Electric	$	489,608		$	449,658
Gas		132,571			142,128
Other		650			840
Total operating revenue		622,829			592,626
Operating expenses:
Energy costs:
Purchased electricity		127,792			160,723
Electric generation fuel		96,712			77,164
Residential exchange		(15,173	)		(19,271	)
Purchased gas		60,284			72,463
Net unrealized (gain) loss on derivative instruments		63,275			(74,831	)
Utility operations and maintenance		117,155			116,129
Non-utility expense and other		4,207			4,542
Depreciation		73,111			66,932
Amortization		18,355			16,522
Conservation amortization		20,392			12,836
Taxes other than income taxes		58,903			57,785
Total operating expenses		625,013			490,994
Operating income (loss)		(2,184	)		101,632
Other income (deductions):
Other income		11,073			13,272
Other expense		(1,074	)		(1,299	)
Interest charges:
AFUDC		3,924			2,661
Interest expense		(84,473	)		(72,930	)
Income (loss) before income taxes		(72,734	)		43,336
Income tax (benefit) expense		(34,835	)		18,829
Net income (loss)	$	(37,899	)	$	24,507

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

F-78

PUGET ENERGY, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands)

(Unaudited)

	SUCCESSOR						PREDECESSOR
	NINE  MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009
Operating revenue:
Electric	$	1,507,549		$	1,293,024		$	213,618
Gas		664,423			685,484			190,001
Other		2,350			4,597			94
Total operating revenue		2,174,322			1,983,105			403,713
Operating expenses:
Energy costs:
Purchased electricity		556,788			518,912			90,737
Electric generation fuel		194,649			131,163			11,961
Residential exchange		(54,510	)		(60,063	)		(12,542	)
Purchased gas		343,779			403,741			120,925
Net unrealized (gain) loss on derivative instruments		109,183			(125,166	)		3,867
Utility operations and maintenance		355,569			315,479			37,650
Non-utility expense and other		11,965			11,332			112
Merger and related costs		—			2,731			44,324
Depreciation		217,765			177,269			21,773
Amortization		53,011			43,113			4,969
Conservation amortization		60,874			39,803			7,592
Taxes other than income taxes		210,304			188,889			36,935
Total operating expenses		2,059,377			1,647,203			368,303
Operating income		114,945			335,902			35,410
Other income (deductions):
Other income		32,887			31,938			3,653
Other expense		(4,147	)		(5,064	)		(369	)
Charitable foundation funding		—			(5,000	)		—
Interest charges:
AFUDC		9,832			6,210			350
Interest expense		(244,839	)		(189,458	)		(17,291	)
Income (loss) before income taxes		(91,322	)		174,528			21,753
Income tax (benefit) expense		(37,895	)		54,391			8,997
Net income (loss)	$	(53,427	)	$	120,137		$	12,756

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

F-79

PUGET ENERGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	THREE MONTHS ENDED SEPTEMBER 30,
	2010			2009
Net income (loss)	$	(37,899	)	$	24,507
Other comprehensive loss:
Net unrealized loss on interest rate swaps during the period, net of tax of $(10,640) and $(11,681), respectively		(19,761	)		(21,694	)
Reclassification of net unrealized loss on interest rate swaps during the period, net of tax of $3,024 and $2,959, respectively		5,614			5,495
Net unrealized loss from pension and postretirement plans, net of tax of $(90) and $0, respectively		(166	)		—
Net unrealized gain on energy derivative instruments during the period, net of tax of $0 and $16, respectively		—			30
Reclassification of net unrealized loss on energy derivative instruments settled during the period, net of tax of $1,276 and $6,699, respectively		2,370			12,440
Other comprehensive loss		(11,943	)		(3,729	)
Comprehensive income (loss)	$	(49,842	)	$	20,778

	SUCCESSOR						PREDECESSOR
	NINE  MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009
Net income (loss)	$	(53,427	)	$	120,137		$	12,756
Other comprehensive loss:
Net unrealized loss on interest rate swaps during the period, net of tax of $(34,105), $(12,493) and $0, respectively		(63,338	)		(23,203	)		—
Reclassification of net unrealized loss on interest rate swaps during the period, net of tax of $8,932, $7,178 and $0, respectively		16,588			13,330			—
Net unrealized gain (loss) from pension and postretirement plans, net of tax of $(91), $0 and $170, respectively		(169	)		—			315
Net unrealized loss on energy derivative instruments during the period, net of tax of $0, $(14,120) and $(13,010), respectively		—			(26,222	)		(24,162	)
Reclassification of net unrealized loss on energy derivative instruments settled during the period, net of tax of $1,952, $7,824 and $2,428, respectively		3,625			14,531			4,509
Amortization of financing cash flow hedge contracts to earnings, net of tax of $0, $0 and $15, respectively		—			—			26
Other comprehensive loss		(43,294	)		(21,564	)		(19,312	)
Comprehensive income (loss)	$	(96,721	)	$	98,573		$	(6,556	)

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

F-80

PUGET ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

ASSETS

	SEPTEMBER 30, 2010			DECEMBER 31, 2009
Utility plant (including construction work in progress of $601,366 and $358,732, respectively):
Electric plant	$	5,124,065		$	4,705,900
Gas plant		2,097,944			1,995,219
Common plant		287,505			284,758
Less: Accumulated depreciation and amortization		(375,034	)		(185,474	)
Net utility plant		7,134,480			6,800,403
Other property and investments:
Goodwill		1,656,513			1,656,513
Investment in Bonneville Exchange Power contract		23,805			26,450
Other property and investments		123,899			127,073
Total other property and investments		1,804,217			1,810,036
Current assets:
Cash and cash equivalents		86,316			78,527
Restricted cash		5,613			19,844
Accounts receivable, net of allowance for doubtful accounts of $8,057 and $8,094, respectively		230,708			320,016
Unbilled revenue		96,772			208,948
Purchased gas adjustment receivable		3,546			—
Materials and supplies, at average cost		95,710			75,035
Fuel and gas inventory, at average cost		108,043			96,483
Unrealized gain on derivative instruments		8,082			14,948
Income taxes		72,627			134,617
Prepaid expense and other		34,725			13,117
Power contract acquisition adjustment gain		173,860			169,171
Deferred income taxes		81,685			39,977
Total current assets		997,687			1,170,683
Other long-term and regulatory assets:
Regulatory assets for deferred income taxes		75,942			89,303
Regulatory asset for PURPA buyout costs		50,012			78,162
Power cost adjustment mechanism		9,489			8,529
Regulatory assets related to power contracts		137,543			210,340
Other regulatory assets		836,972			751,999
Unrealized gain on derivative instruments		4,550			25,459
Power contract acquisition adjustment gain		731,883			865,020
Other		111,347			90,206
Total other long-term and regulatory assets		1,957,738			2,119,018
Total assets	$	11,894,122		$	11,900,140

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

F-81

PUGET ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

CAPITALIZATION AND LIABILITIES

	SEPTEMBER 30, 2010			DECEMBER 31, 2009
Capitalization:
Common shareholder’s equity:
Common stock $0.01 par value, 1,000 shares authorized, 200 shares outstanding	$	—		$	—
Additional paid-in capital		3,308,957			3,308,957
Earnings (deficit) reinvested in the business		(65,609	)		91,024
Accumulated other comprehensive income (loss) – net of tax		(19,807	)		23,487
Total common shareholder’s equity		3,223,541			3,423,468
Long-term debt:
PSE first mortgage bonds and senior notes		2,953,860			2,638,860
PSE junior subordinated notes		250,000			250,000
Puget Energy long-term debt		1,161,508			1,151,838
Total long-term debt		4,365,368			4,040,698
Total capitalization		7,588,909			7,464,166
Current liabilities:
Accounts payable		303,701			321,287
Short-term debt		77,000			105,000
Current maturities of long-term debt		260,000			232,000
Accrued expenses:
Purchased gas adjustment liability		—			49,587
Taxes		57,462			77,302
Salaries and wages		29,622			30,654
Interest		55,340			52,540
Unrealized loss on derivative instruments		312,225			168,783
Power contract acquisition adjustment loss		72,816			94,223
Other		124,811			194,786
Total current liabilities		1,292,977			1,326,162
Long-term and regulatory liabilities:
Deferred income taxes		1,074,626			1,147,667
Unrealized loss on derivative instruments		264,436			89,717
Regulatory liabilities		306,878			261,990
Regulatory liabilities related to power contracts		905,743			1,034,192
Power contract acquisition adjustment loss		65,449			117,272
Other deferred credits		395,104			458,974
Total long-term and regulatory liabilities		3,012,236			3,109,812
Commitments and contingencies
Total capitalization and liabilities	$	11,894,122		$	11,900,140

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

F-82

PUGET ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	SUCCESSOR						PREDECESSOR
		NINE MONTHS ENDED SEPTEMBER  30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009
Operating activities:
Net income (loss)	$	(53,427	)	$	120,137		$	12,756
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		217,765			177,269			21,773
Amortization		53,011			43,113			4,969
Conservation amortization		60,874			39,803			7,592
Deferred income taxes and tax credits, net		(78,075	)		203,757			(512	)
Amortization of gas pipeline capacity assignment		(6,474	)		(6,236	)		(791	)
Carrying value adjustment related to California wholesale energy sale regulatory asset		17,763			—			—
Non cash return on regulatory assets		(15,122	)		(18,431	)		(2,185	)
Net unrealized loss (gain) on derivative instruments		109,183			(125,166	)		3,867
Power cost adjustment mechanism		(960	)		—			(7	)
Deferred regulatory costs for generation facilities		(3,169	)		744			(2,058	)
Renewable energy credit payments received		33,296			22,090			942
Pension funding		(12,000	)		(18,000	)		—
Change in residential exchange program		1,077			(634	)		1,927
Derivative contracts classified as financing activities due to merger		279,073			349,695			—
Other		10,061			(30,065	)		4,295
Change in certain current assets and liabilities:
Accounts receivable and unbilled revenue		201,486			309,376			(31,332	)
Materials and supplies		(20,675	)		1,522			(3,388	)
Fuel and gas inventory		(11,560	)		(14,681	)		7,605
Income taxes		61,990			(163,246	)		18,277
Prepayments and other		(22,127	)		(12,432	)		(3,295	)
Purchased gas adjustment		(53,133	)		59,748			1,711
Accounts payable		7,958			(181,082	)		(40,203	)
Taxes payable		(19,840	)		9,468			(3,340	)
Accrued expenses and other		10,881			(39,599	)		59,172
Net cash provided by operating activities		767,856			727,150			57,775
Investing activities:
Construction expenditures – excluding equity AFUDC		(667,597	)		(537,027	)		(49,531	)
Energy efficiency expenditures		(67,165	)		(55,270	)		(4,918	)
Treasury grant payment received		28,675			—			—
Restricted cash		14,231			816			(10	)
Other		2,268			14,035			959
Net cash used in investing activities		(689,588	)		(577,446	)		(53,500	)
Financing activities:
Change in short-term debt and leases, net		(28,059	)		(61,191	)		(151,800	)
Dividends paid		(103,206	)		(120,878	)		—
Long-term notes and bonds issued		575,000			400,211			250,000
Redemption of preferred stock		—			—			(1,889	)
Redemption of bonds and notes		(232,000	)		(150,000	)		—
Derivative contracts classified as financing activities due to merger		(279,073	)		(349,695	)		—
Issuance cost of bonds and other		(3,141	)		(16,577	)		7,133
Net cash provided by (used in) financing activities		(70,479	)		(298,130	)		103,444
Net increase (decrease) in cash and cash equivalents		7,789			(148,426	)		107,719
Cash and cash equivalents at beginning of period		78,527			231,963			38,526
Cash and cash equivalents at end of period	$	86,316		$	83,537		$	146,245
Supplemental cash flow information:
Cash payments for interest (net of capitalized interest)	$	208,282		$	177,839		$	1,239
Cash payments (refunds) for income taxes		(20,622	)		129			—

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

F-83

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Consolidation Policy

BASIS OF PRESENTATION

Puget Energy, Inc. (Puget Energy) is an energy services holding company that owns Puget Sound Energy, Inc. (PSE). PSE is a public utility incorporated in the state of Washington that furnishes electric and natural gas services in a territory covering 6,000 square miles, primarily in the Puget Sound region. On February 6, 2009, Puget Holdings LLC (Puget Holdings) acquired Puget Energy. The acquisition of Puget Energy was accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, “Business Combinations” (ASC 805), as of the date of the merger. ASC 805 requires the acquirer to recognize and measure identifiable assets acquired and liabilities assumed at fair value as of the merger date. Puget Energy’s consolidated financial statements and accompanying footnotes have been segregated to present pre-merger activity as the “Predecessor” Company and post-merger activity as the “Successor” Company.

The consolidated financial statements of Puget Energy reflect the accounts of Puget Energy and its subsidiary, PSE. 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. PSE’s accounting continues to be on a historical basis and PSE’s financial statements do not include any ASC 805 purchase accounting adjustments.

The consolidated financial statements contained in this Form 10-Q are unaudited. In the respective opinions of the management of Puget Energy and PSE, all adjustments necessary for a fair statement of the results for the interim periods have been reflected and were of a normal recurring nature. These consolidated 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, 2009.

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

PSE collected Washington State excise taxes (which are a component of general retail rates) and municipal taxes totaling $44.4 million and $164.0 million for the three and nine months ended September 30, 2010, respectively, and $43.0 million and $182.6 million for the three and nine months ended September 30, 2009, respectively. The Company’s policy is to report such taxes on a gross basis in operating revenue and in taxes other than income taxes in the accompanying consolidated statements of income.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the components of the Company’s accumulated other comprehensive income (loss) at September 30, 2010 and December 31, 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010			DECEMBER 31, 2009
Net unrealized loss on energy derivatives	$	(3,453	)	$	(7,078	)
Net unrealized loss on interest rate swaps		(50,643	)		(3,893	)
Net unrealized gain and prior service cost on pension plans		34,289			34,458
Total Puget Energy, net of tax	$	(19,807	)	$	23,487

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010			DECEMBER 31, 2009
Net unrealized loss on energy derivatives	$	(44,794	)	$	(83,158	)
Settlement of cash flow hedge contracts		(7,336	)		(7,574	)
Net unrealized loss and prior service cost on pension plans		(115,370	)		(119,388	)
Total PSE, net of tax	$	(167,500	)	$	(210,120	)

F-84

(2) New Accounting Pronouncements

Fair Value Measurements and Disclosures. In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-6, “Improving Disclosures About Fair Value Measurements” (ASU 2010-6), which requires new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 2 fair value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. As these new requirements relate solely to disclosures, the adoption of this guidance will not impact the Company’s consolidated financial statements.

Variable Interest Entities. In December 2009, the FASB issued ASU 2009-17, Topic 810, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the FASB ASC for the issuance of pre-codification FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R).” This standard replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (VIE). An approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and: (1) the obligation to absorb losses of the entity; or (2) the right to receive benefits from the entity. An approach that is primarily qualitative is expected to be more effective for identifying which reporting entity has a controlling financial interest in a VIE. This standard also requires additional disclosures about a reporting entity’s involvement in VIE relationships. The Company adopted the standard as of January 1, 2010, and such adoption did not have an impact on the consolidated financial statements.

(3) Accounting for Derivative Instruments and Hedging Activities

The Company manages its interest rate risk through the issuance of mostly fixed-rate debt of various maturities. The Company utilizes internal cash from operations, commercial paper, and credit facilities to meet short-term funding needs. 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 or other financial hedge instruments to manage the interest rate risk associated with these debts. In February 2009, Puget Energy entered into interest rate swap transactions to hedge the risk associated with the one-month London Interbank Offered Rate (LIBOR) floating debt rate. As of September 30, 2010, Puget Energy had interest rate swap contracts outstanding and PSE did not have any outstanding interest rate swap instruments.

On the date of the merger, Puget Energy de-designated its derivative contracts that were designated on PSE’s books as Normal Purchase Normal Sale (NPNS) or cash flow hedges and recorded such contracts at fair value as either assets or liabilities. Certain contracts meeting the criteria defined in ASC 815, “Derivatives and Hedging” (ASC 815), were subsequently re-designated as NPNS or cash flow hedges. The amount recorded in accumulated other comprehensive income (OCI) at the time of the merger was reflected as goodwill.

PSE employs various portfolio optimization strategies, but is not in the business of assuming risk for the purpose of realizing speculative trading revenue. The nature of serving regulated electric customers with its portfolio of owned and contracted electric generation resources exposes PSE and its customers to some volumetric and commodity price risks within the sharing mechanism of the Power Cost Adjustment (PCA). Therefore, wholesale market transactions are focused on balancing PSE’s energy portfolio, reducing costs and risks where feasible and reducing volatility in costs and margins in the portfolio. PSE’s energy risk portfolio management function monitors and manages these risks using analytical models and tools. In order to manage risks effectively, PSE enters into physical and financial transactions which are appropriate for the service territory of PSE and are relevant to its regulated electric and natural gas portfolios.

On July 1, 2009, Puget Energy and PSE elected to de-designate all energy related derivative contracts previously recorded as cash flow hedges for the purpose of simplifying its financial reporting. The contracts that were de-designated related to physical electric supply contracts and natural gas swap contracts used to fix the price of natural gas for electric generation. For these contracts and for contracts initiated after such date, all mark-to-market adjustments are recognized through earnings. The amount previously recorded in accumulated OCI is transferred to earnings in the same period or periods during which the hedged transaction affected earnings or sooner if management determines that the forecasted transaction is probable of not occurring. As a result, the Company will continue to experience the earnings impact of these reversals from OCI in future periods.

F-85

The following tables present the fair value and locations of Puget Energy’s derivative instruments recorded on the balance sheets at September 30, 2010 and December 31, 2009:

DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
PUGET ENERGY (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
	ASSETS 1		LIABILITIES 1		ASSETS 1		LIABILITIES 1
Interest rate swaps:
Current	$	—	$	30,441	$	—	$	26,844
Long-term		—		47,472		20,854		—
Total derivatives	$	—	$	77,913	$	20,854	$	26,844
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
PUGET ENERGY (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
	ASSETS 1		LIABILITIES 1		ASSETS 1		LIABILITIES 1
Electric portfolio:
Current	$	3,504	$	146,407	$	4,137	$	79,732
Long-term		1,598		140,923		1,003		70,367
Gas portfolio: 2
Current		4,578		135,377		10,811		62,207
Long-term		2,952		76,041		3,602		19,350
Total derivatives	$	12,632	$	498,748	$	19,553	$	231,656

1 Balance sheet location: Unrealized (gain) loss on derivative instruments.

2 Puget Energy had a derivative liability and an offsetting regulatory asset of $203.9 million at September 30, 2010 and $67.1 million at December 31, 2009 related to financial contracts used to economically hedge the cost of physical gas purchased to serve natural gas customers. All fair value adjustments on derivatives relating to the natural gas business have been reclassified to a deferred account in accordance with ASC 980, “Regulated Operations” (ASC 980), due to the Purchased Gas Adjustment (PGA) mechanism. All increases and decreases in the cost of natural gas supply are passed on to customers with the PGA mechanism and the gains and losses on the hedges in future periods will be recorded as gas costs.

The following table presents the fair value and locations of PSE’s derivative instruments recorded on the balance sheet at September 30, 2010 and December 31, 2009:

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010				DECEMBER 31, 2009
	ASSETS 1		LIABILITIES 1		ASSETS 1		LIABILITIES 1
Electric portfolio:
Current	$	3,504	$	146,407	$	4,137	$	75,323
Long-term		1,598		140,923		1,003		70,367
Gas portfolio: 2
Current		4,578		135,377		10,811		62,207
Long-term		2,952		76,041		3,602		19,350
Total derivatives	$	12,632	$	498,748	$	19,553	$	227,247

1 Balance sheet location: Unrealized (gain) loss on derivative instruments.

2 PSE had a derivative liability and an offsetting regulatory asset of $203.9 million at September 30, 2010 and $67.1 million at December 31, 2009 related to financial contracts used to economically hedge the cost of physical gas purchased to serve natural gas customers. All fair value adjustments on derivatives relating to the natural gas business have been reclassified to a deferred account in accordance with ASC 980 due to the PGA mechanism. All increases and decreases in the cost of natural gas supply are passed on to customers with the PGA mechanism and the gains and losses on the hedges in future periods will be recorded as gas costs.

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For further details regarding the fair value of derivative instruments and their Level categorization please see Note 4 of the notes to the consolidated financial statements.

The following table presents the net unrealized (gain) loss of Puget Energy’s derivative instruments recorded on the statements of income for the three months ended September 30, 2010 and 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)	THREE MONTHS ENDED SEPTEMBER 30,
	2010			2009
Gas / Power NPNS	$	(78	)	$	1,538
Gas for power generation		18,232			(62,219	)
Power exchange		(639	)		(163	)
Power		45,760			(13,987	)
Total net unrealized (gain) loss on derivative instruments	$	63,275		$	(74,831	)

The following table presents the net unrealized (gain) loss of Puget Energy’s derivative instruments recorded on the statements of income for the nine months ended September 30, 2010 and 2009:

	SUCCESSOR						PREDECESSOR
PUGET ENERGY (DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009			JANUARY 1, 2009 – FEBRUARY 5, 2009
Gas / Power NPNS	$	(33,662	)	$	(34,215	)	$	—
Gas for power generation		67,151			(70,776	)		3,696
Power exchange		(2,096	)		(1,563	)		(588	)
Power		77,790			(30,205	)		759
Credit reserve 1		—			11,593			—
Total net unrealized (gain) loss on derivative instruments	$	109,183		$	(125,166	)	$	3,867

1 Beginning in the second quarter 2009, the credit reserve was incorporated as a component of the individual derivative value and not recorded separately.

The following table presents the net unrealized (gain) loss of PSE’s derivative instruments recorded on the statements of income for the three and nine months ended September 30, 2010 and 2009:

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2010			2009			2010			2009
Gas for power generation	$	31,801		$	(21,743	)	$	109,523		$	(30,057	)
Power exchange		(639	)		(163	)		(2,096	)		(2,138	)
Power		47,397			(5,238	)		93,275			(2,621	)
Credit reserve 1		—			—			—			82
Total net unrealized (gain) loss on derivative instruments	$	78,559		$	(27,144	)	$	200,702		$	(34,734	)

1 Beginning in the second quarter 2009, the credit reserve was incorporated as a component of the individual derivative value and not recorded separately.

F-87

The following table presents the effect of hedging instruments on Puget Energy’s OCI and statements of income for the three months ended September 30, 2010 and 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)	THREE MONTHS ENDED SEPTEMBER 30,
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVES 1 (EFFECTIVE PORTION 2)						GAIN  (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)								GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 3)
	2010			2009			LOCATION		2010			2009			LOCATION		2010		2009
Interest rate contracts:	$	(19,761	)	$	(21,694	)		Interest Expense	$	(8,638	)	$	(8,454	)			$	—	$	—
Commodity contracts: Electric derivatives:		—			30			Electric generation fuel		(3,285	)		(18,361	)		Net unrealized gain on derivative instruments		—		—
Electric derivatives		—			—			Purchased electricity		(361	)		(778	)		Net unrealized loss on derivative instruments		—		—
Total	$	(19,761	)	$	(21,664	)			$	(12,284	)	$	(27,593	)			$	—	$	—

¹ On July 1, 2009 all electric and gas related cash flow hedge relationships were de-designated. Subsequent measurements of fair value are recorded through earnings, not OCI.

² Changes in OCI are reported in after-tax dollars.

³ A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

The following tables present the effect of hedging instruments on Puget Energy’s OCI and statements of income for the nine months ended September 30, 2010 and 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVES 1 (EFFECTIVE PORTION 2)			GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)					GAIN (LOSS) RECOGNIZED IN  INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT EXCLUDED  FROM EFFECTIVENESS TESTING 3)
				LOCATION					LOCATION
Interest rate contracts:	$	(63,338	)		Interest expense	$	(25,520	)			$	—
Commodity contracts: Electric derivatives		—			Electric generation fuel		(3,407	)		Net unrealized gain on derivative instruments		—
Electric derivatives		—			Purchased electricity		(2,170	)		Net unrealized loss on derivative instruments		—
Total	$	(63,338	)			$	(31,097	)			$	—

F-88

1 On July 1, 2009 all electric and gas related cash flow hedge relationships were de-designated. Subsequent measurements of fair value are recorded through earnings, not OCI.

2 Changes in OCI are reported in after-tax dollars.

3 A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

PUGET ENERGY (DOLLARS IN THOUSANDS)	SUCCESSOR FEBRUARY 6, 2009 -  SEPTEMBER 30, 2009
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVES 1 (EFFECTIVE PORTION 2)			GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)				GAIN (LOSS) RECOGNIZED IN  INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT  EXCLUDED FROM EFFECTIVENESS TESTING 3)
				LOCATION				LOCATION
Interest rate contracts:	$	(23,203	)	Interest expense	$	(20,508	)		$	—
Commodity contracts: Electric derivatives		(19,933	)	Electric generation fuel		(20,005	)	Net unrealized loss on derivative instruments		325
Electric derivatives		(6,289	)	Purchased electricity		(2,350	)	Net unrealized loss on derivative instruments		(2,897	)
Total	$	(49,425	)		$	(42,863	)		$	(2,572	)

1 On July 1, 2009 all electric and gas related cash flow hedge relationships were de-designated. Subsequent measurements of fair value are recorded through earnings, not OCI.

2 Changes in OCI are reported in after-tax dollars.

3 A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

PUGET ENERGY (DOLLARS IN THOUSANDS)	PREDECESSOR JANUARY 1, 2009 - FEBRUARY 5, 2009
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN(LOSS) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION 1,2)			GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)					GAIN(LOSS) RECOGNIZED IN  INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 3)
				LOCATION					LOCATION
Interest rate contracts:	$	—			Interest expense	$	(41	)			$	—
Commodity contracts: Electric derivatives		(20,791	)		Electric generation fuel		(5,003	)		Net unrealized loss on derivative instruments		—
Electric derivatives		(3,371	)		Purchased electricity		(1,934	)		Net unrealized loss on derivative instruments		(986	)
Total	$	(24,162	)			$	(6,978	)			$	(986	)

F-89

1 Changes in OCI are reported in after-tax dollars.

2 The balances associated with the components of accumulated other comprehensive income (loss) on the Predecessor basis were eliminated as a result of push-down accounting effective February 6, 2009, when the Successor period began.

3 Amounts are reported in pre-tax dollars.

The following table presents the effect of hedging instruments on PSE’s OCI and statements of income for the three months ended September 30, 2010 and 2009:

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	THREE MONTHS ENDED SEPTEMBER 30,
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVES 1 (EFFECTIVE PORTION 2)					GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)								GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING)
	2010		2009			LOCATION		2010			2009			LOCATION		2010		2009
Interest rate contracts:	$	—	$	—			Interest Expense	$	(122	)	$	(122	)			$	—	$	—
Commodity contracts: Electric derivatives:		—		438			Electric generation fuel		(16,855	)		(58,480	)		Net unrealized gain on derivative instruments		—		—
Electric derivatives		—		(128	)		Purchased electricity		(1,996	)		(5,851	)		Net unrealized loss on derivative instruments		—		—
Total	$	—	$	310				$	(18,973	)	$	(64,453	)			$	—	$	—

1 On July 1, 2009 all electric and gas related cash flow hedge relationships were de-designated. Subsequent measurements of fair value are recorded through earnings, not OCI.

2 Changes in OCI are reported in after-tax dollars.

3 A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

F-90

The following table presents the effect of hedging instruments on PSE’s OCI and statements of income for the nine months ended September 30, 2010 and 2009:

PUGET SOUND ENERGY (DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30,
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS	GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVES 1 (EFFECTIVE PORTION 2)					GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO INCOME (EFFECTIVE PORTION 3)								GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES (INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING 3)
	2010		2009			LOCATION		2010			2009			LOCATION		2010		2009
Interest rate contracts:	$	—	$	—			Interest Expense	$	(366	)	$	(366	)			$	—	$	—
Commodity contracts: Electric derivatives:		453		(50,864	)		Electric generation fuel		(45,081	)		(85,429	)		Net unrealized gain on derivative instruments		—		—
Electric derivatives		—		(11,429	)		Purchased electricity		(13,244	)		(13,010	)		Net unrealized loss on derivative instruments		—		(2,749	)
Total	$	453	$	(62,293	)			$	(58,691	)	$	(98,805	)			$	—	$	(2,749	)

¹ On July 1, 2009 all electric and gas related cash flow hedge relationships were de-designated. Subsequent measurements of fair value are recorded through earnings, not OCI.

² Changes in OCI are reported in after-tax dollars.

³ A reclassification of a loss in OCI increases accumulated OCI and decreases earnings. Amounts reported are in pre-tax dollars.

For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings. Puget Energy expects that $33.4 million of losses in OCI will be reclassified into earnings within the next twelve months. PSE expects that $44.2 million of losses in OCI will be reclassified into earnings within the next twelve months. The maximum length of time over which Puget Energy and PSE are hedging their exposure to the variability in future cash flows extends to February 2015 for purchased electricity contracts and to August 2013 for gas for power generation contracts. For Puget Energy interest rate swaps, the maximum length extends to February 2014.

The following tables present the effect of Puget Energy’s derivatives not designated as hedging instruments on income during the three and nine months ended September 30, 2010 and 2009:

PUGET ENERGY (DOLLARS IN THOUSANDS)		THREE MONTHS ENDED SEPTEMBER 30,
	LOCATION	2010			2009
Commodity contracts:
Electric derivatives	Net unrealized gain (loss) on derivative instruments	$	(63,353	) 1	$	76,369 2
	Electric generation fuel		(36,571	)		(45,887	)
	Purchased electricity		(9,329	)		(6,747	)
Total gain (loss) recognized in income on derivatives		$	(109,253	)	$	23,735

¹ Differs from the amount stated in the statements of income as it does not include $0.1 million of amortization expense related to contracts that were recorded at fair value at the time of the merger and subsequently designated as NPNS.

² Differs from the amount stated in the statements of income as it does not include $(1.5) million of amortization expense related to contracts that were recorded at fair value at the time of the merger and subsequently designated as NPNS.

Puget Energy (DOLLARS IN THOUSANDS)		NINE MONTHS ENDED SEPTEMBER 30,			SUCCESSOR FEBRUARY  6, 2009 – SEPTEMBER 30,			PREDECESSOR JANUARY 1, 2009 – FEBRUARY 5,
	LOCATION	2010			2009			2009
Commodity contracts:
Electric derivatives	Net unrealized gain (loss) on derivative instruments	$	(142,846	) 1	$	94,192 2		$	(2,881	) 3
	Electric generation fuel		(69,571	)		(56,891	)		(863	)
	Purchased electricity		(27,529	)		(23,042	)		(243	)
Total gain (loss) recognized in income on derivatives		$	(239,946	)	$	14,259		$	(3,987	)

¹ Differs from the amount stated in the statements of income as it does not include $33.7 million of amortization expense related to contracts that were recorded at fair value at the time of the merger and subsequently designated as NPNS.

F-91

² Differs from the amount stated in the statements of income as it does not include $33.5 million of amortization expense related to contracts that were recorded at fair value at the time of the merger and subsequently designated as NPNS and $(2.6) million related to hedge ineffectiveness.

³ Differs from the amount stated in the statements of income as it does not include $(1.0) million related to hedge ineffectiveness.

The following table presents the effect of PSE’s derivatives not designated as hedging instruments on income during the three and nine months ended September 30, 2010 and 2009:

PUGET SOUND ENERGY			THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)	LOCATION		2010			2009			2010			2009
Commodity contracts:
Electric derivatives		Net unrealized gain (loss) on derivative instruments	$	(78,559	)	$	27,144		$	(200,702	)	$	37,483 1
		Electric generation fuel		(36,571	)		(45,887	)		(69,571	)		(57,962	)
		Purchased electricity		(9,329	)		(6,747	)		(27,529	)		(7,314	)
Total gain (loss) recognized in income on derivatives			$	(124,459	)	$	(25,490	)	$	(297,802	)	$	(27,793	)

^{1 Differs from the amount stated in the statements of income as it does not include $(2.7) million related to hedge ineffectiveness.}

The Company had the following outstanding commodity contracts as of September 30, 2010:

PUGET ENERGY AT SEPTEMBER 30, 2010	NUMBER OF UNITS
Derivatives designated as hedging instruments:
Interest rate swaps	$	1.483 billion
Derivatives not designated as hedging instruments:
Gas derivatives 1		412,179,273 MMBtus
Electric generation fuel		97,230,500 MMBtus
Purchased electricity		8,941,405 MWhs
PUGET SOUND ENERGY AT SEPTEMBER 30, 2010	NUMBER OF UNITS
Derivatives not designated as hedging instruments:
Gas derivatives 1		412,179,273 MMBtus
Electric generation fuel		97,230,500 MMBtus
Purchased electricity		8,941,405 MWhs

¹ Unrealized gains (losses) on gas derivatives are offset by a regulatory asset or liability in accordance with ASC 980 due to the PGA mechanism.

The Company is exposed to credit risk primarily through buying and selling electricity and natural gas to serve its customers. Credit risk is the potential loss resulting from a counterparty’s non-performance under an agreement. The Company manages credit risk with policies and procedures for, among other things, counterparty credit analysis, exposure measurement, exposure monitoring, and exposure mitigation.

F-92

The Company monitors counterparties that have significant swings in credit default swap rates, have credit rating changes by external rating agencies, have changes in ownership or are experiencing financial problems. Where deemed appropriate, the Company may request collateral or other security from its counterparties to mitigate potential credit default losses. Criteria employed in this decision include, among other things, the perceived creditworthiness of the counterparty and the expected credit exposure.

It is possible that volatility in energy commodity prices could cause the Company to have material credit risk exposure with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the Company could suffer a material financial loss. However, as of September 30, 2010, approximately 99.9% of the Company’s energy portfolio exposure, excluding NPNS transactions, is with counterparties that are rated at least investment grade by the major rating agencies and 0.1% are either rated below investment grade or not rated by rating agencies. The Company assesses credit risk internally for counterparties that are not rated.

The Company generally enters into the following master agreements: (1) WSPP, Inc. (WSPP) agreements – standardized power sales contract in the electric industry; (2) International Swaps and Derivatives Association (ISDA) agreements – standardized financial gas and electric contracts; and (3) North American Energy Standards Board (NAESB) agreements – standardized physical gas contracts. The Company believes that such agreements reduce credit risk exposure because such agreements provide for the netting and offset of monthly payments and, in the event of counterparty default, termination payments.

The Company computes credit reserves at a master agreement level by counterparty (i.e., WSPP, ISDA, or NAESB). The Company considers external credit ratings and market factors, such as credit default swaps and bond spreads, in determination of reserves. The Company recognizes that external ratings may not always reflect how a market participant perceives a counterparty’s risk of default. The Company uses both default factors published by Standard & Poor’s and factors derived through analysis of market risk, which reflect the application of an industry standard recovery rate. The Company selects a default factor by counterparty at an aggregate master agreement level based on a weighted average default tenor for that counterparty’s deals. The default tenor is used by weighting the fair value and contract tenors for all deals for each counterparty and coming up with an average value. The default factor used is dependent upon whether the counterparty is in a net asset or a net liability position after applying the master agreement levels.

The Company applies the counterparty’s default factor to compute credit reserves for counterparties that are in a net asset position. Moreover, the Company applies its own default factor to compute credit reserves for counterparties that are in a net liability position. Credit reserves are booked as contra accounts to unrealized gain (loss) positions. As of September 30, 2010, the Company was in a net liability position with the majority of counterparties, so the default factors of counterparties did not have a significant impact on reserves for the year. The majority of the Company’s derivative contracts are with financial institutions and other utilities operating within the Western Electricity Coordinating Council. Despite its net liability position, PSE was not required to post any additional collateral with any of its counterparties. Additionally, PSE did not trigger any collateral requirements with any of its counterparties nor were any of PSE’s counterparties required to post additional collateral resulting from credit rating downgrades.

As of September 30, 2010, the Company did not have any outstanding energy supply contracts with counterparties that contained credit risk related contingent features, which could result in a counterparty requesting immediate payment or demanding immediate and ongoing full overnight collateralization on derivative instruments in a net liability position.

The table below presents the fair value of the overall contractual contingent liability positions for the Company’s derivative activity at September 30, 2010:

PUGET ENERGY AND PUGET SOUND ENERGY CONTINGENT FEATURE (DOLLARS IN THOUSANDS)	FAIR  VALUE 1 LIABILITY			POSTED COLLATERAL		CONTINGENT COLLATERAL
Credit rating 2	$	(49,684	)	$	—	$	49,684
Requested credit for adequate assurance		(99,928	)		—		—
Forward value of contract 3		(21,965	)		—		—
Total	$	(171,577	)	$	—	$	49,684

1 Represents the derivative fair value of contracts with contingent features for counterparties in net derivative liability positions at September 30, 2010. Excludes NPNS, accounts payable and accounts receivable liability.

2 Failure by PSE to maintain an investment grade credit rating from each of the major credit rating’s agencies provides counterparties a contractual right to demand collateral.

3 Collateral requirements may vary, based on changes in forward value of underlying transactions relative to contractually defined collateral thresholds.

F-93

(4) Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures” (ASC 820), established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities. Equity securities that are also classified as cash equivalents are considered Level 1 if there are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions including, quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards and options.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs. At each balance sheet date, Puget Energy and PSE perform an analysis of all instruments subject to ASC 820 and include in Level 3 all of those instruments whose fair value is based on significant unobservable inputs.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. If a fair value measurement relies on inputs from different levels of the hierarchy, the entire measurement must be placed based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. On a daily basis, the Company obtains quoted forward prices for the electric and natural gas market from an independent external pricing service. These forward price quotes are then used in addition to other various inputs to determine the reported fair value. Some of the inputs include the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), assumptions for time value, and also the impact of the Company’s nonperformance risk of its liabilities.

As of September 30, 2010, the Company considered the markets for its electric and natural gas Level 2 derivative instruments to be actively traded. Management’s assessment is based on the trading activity volume in real-time and forward electric and natural gas markets. The Company regularly confirms the validity of pricing service quoted prices (e.g., Level 2 in the fair value hierarchy) used to value commodity contracts to the actual prices of commodity contracts entered into during the most recent quarter.

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The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis and the reconciliation of the changes in the fair value of derivatives classified as Level 3 in the fair value hierarchy as of September 30, 2010 and December 31, 2009:

PUGET ENERGY	FAIR VALUE MEASUREMENT AT SEPTEMBER 30, 2010								FAIR VALUE MEASUREMENT AT DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Electric derivative instruments	$	—	$	156	$	4,946	$	5,102	$	—	$	2,469	$	2,671	$	5,140
Gas derivative instruments		—		3,091		4,439		7,530		—		14,298		115		14,413
Cash equivalents		68,602		5,327		—		73,929		38,835		5,465		—		44,300
Restricted cash		3,387		—		—		3,387		3,305		—		—		3,305
Interest rate derivative instruments		—		—		—		—		—		20,854		—		20,854
Total assets	$	71,989	$	8,574	$	9,385	$	89,948	$	42,140	$	43,086	$	2,786	$	88,012
Liabilities:
Electric derivative instruments	$	—	$	167,083	$	120,247	$	287,330	$	—	$	51,099	$	99,000	$	150,099
Gas derivative instruments		—		201,293		10,125		211,418		—		77,438		4,119		81,557
Interest rate derivative instruments		—		77,913		—		77,913		—		26,844		—		26,844
Total liabilities	$	—	$	446,289	$	130,372	$	576,661	$	—	$	155,381	$	103,119	$	258,500

PUGET ENERGY LEVEL 3 ROLL-FORWARD NET (LIABILITY)	THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)	2010			2009
Balance at beginning of period	$	(135,121	)	$	(136,677	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(46,223	)		14,987
- included in other comprehensive income		—			—
- included in regulatory assets / liabilities		(1,017	)		(962	)
Purchases, issuances and settlements		7,798			5,825
Transferred into Level 3		761			—
Transferred out of Level 3		52,815			14,543
Balance at end of period	$	(120,987	)	$	(102,284	)

	SUCCESSOR						PREDECESSOR
PUGET ENERGY LEVEL 3 ROLL-FORWARD NET (LIABILITY) (DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009 1			JANUARY 1, 2009 – FEBRUARY 5, 2009
Balance at beginning of period	$	(100,333	)	$	(185,813	)	$	(132,256	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(125,839	)		5,241			(627	)
- included in other comprehensive income		—			(17, 429	)		(14,821	)
- included in regulatory assets / liabilities		(1,856	)		(3,404	)		(1,410	)
Purchases, issuances and settlements		21,138			19,541			2,154
Transferred into Level 3		225			(8,611	)		—
Transferred out of Level 3		85,678			88,191			8,560
Balance end of period	$	(120,987	)	$	(102,284	)	$	(138,400	)

¹ The beginning balance for the Successor period was adjusted to reflect the impact of certain fair value adjustments from the merger transaction.

F-95

PUGET SOUND ENERGY	FAIR VALUE MEASUREMENT AT SEPTEMBER 30, 2010								FAIR VALUE MEASUREMENT AT DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL		LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Assets:
Electric derivative instruments	$	—	$	156	$	4,946	$	5,102	$	—	$	2,469	$	2,671	$	5,140
Gas derivative instruments		—		3,091		4,439		7,530		—		14,298		115		14,413
Cash equivalents		68,602		5,327		—		73,929		38,835		5,465		—		44,300
Restricted cash		3,387		—		—		3,387		3,305		—		—		3,305
Total assets	$	71,989	$	8,574	$	9,385	$	89,948	$	42,140	$	22,232	$	2,786	$	67,158
Liabilities:
Electric derivative instruments	$	—	$	167,083	$	120,247	$	287,330	$	—	$	46,690	$	99,000	$	145,690
Gas derivative instruments		—		201,293		10,125		211,418		—		77,438		4,119		81,557
Total liabilities	$	—	$	368,376	$	130,372	$	498,748	$	—	$	124,128	$	103,119	$	227,247

PUGET SOUND ENERGY LEVEL 3 ROLL-FORWARD NET (LIABILITY)	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS)	2010			2009			2010			2009
Balance at beginning of period	$	(135,121	)	$	(136,677	)	$	(100,333	)	$	(132,256	)
Changes during period:
Realized and unrealized energy derivatives
- included in earnings		(46,223	)		14,987			(125,839	)		19,270
- included in other comprehensive income		—			—			—			(38,047	)
- included in regulatory assets / liabilities		(1,017	)		(962	)		(1,856	)		(6,883	)
Purchases, issuances and settlements		7,798			5,825			21,138			21,973
Transferred into Level 3		761			—			225			(6,778	)
Transferred out of Level 3		52,815			14,543			85,678			40,437
Balance at end of period	$	(120,987	)	$	(102,284	)	$	(120,987	)	$	(102,284	)

Realized gains and losses on energy derivatives for Level 3 recurring items are included in energy costs in the Company’s consolidated income statement under purchased electricity, electric generation fuel or purchased natural gas when settled.

Unrealized gains and losses for Level 3 inputs on energy derivative recurring items are included in the net unrealized (gain) loss on derivative instruments section in the Company’s consolidated income statement. The Company does not believe that the fair value diverges materially from the amounts the Company currently anticipates realizing on settlement or maturity.

Certain energy derivative instruments are classified as Level 3 in the fair value hierarchy because Level 3 inputs are significant to their fair value measurement. Energy derivatives transferred out of Level 3 represent existing

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assets or liabilities that were classified as Level 3 at the start of the reporting period for which the lowest significant input became observable during the current reporting period and were transferred into Level 2. Conversely, energy derivatives transferred into Level 3 from Level 2 represent scenarios in which the lowest significant input became unobservable during the current reporting period. The Company had no transfers between Level 2 and Level 1 during the three and nine months ended September 30, 2010 or 2009.

(5) Estimated Fair Value of Financial Instruments

PUGET ENERGY

The following table presents the carrying amounts and estimated fair value of Puget Energy’s financial instruments at September 30, 2010 and December 31, 2009:

	SEPTEMBER 30, 2010				DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Financial assets:
Cash and cash equivalents	$	86,316	$	86,316	$	78,527	$	78,527
Restricted cash		5,613		5,613		19,844		19,844
Notes receivable and other		70,889		70,889		74,063		74,063
Electric derivatives		5,102		5,102		5,140		5,140
Gas derivatives		7,530		7,530		14,413		14,413
Interest rate derivatives		—		—		20,854		20,854
Financial liabilities:
Short-term debt	$	77,000	$	77,000	$	105,000	$	105,000
Junior subordinated notes		250,000		234,341		250,000		232,684
Current maturities of long-term debt (fixed-rate)		260,000		266,027		232,000		234,632
Long-term debt (fixed-rate)		2,953,860		3,394,700		2,638,860		2,815,048
Long-term debt (variable-rate)		1,483,000		1,523,639		1,483,000		1,478,632
Electric derivatives		287,330		287,330		150,099		150,099
Gas derivatives		211,418		211,418		81,557		81,557
Interest rate derivatives		77,913		77,913		26,844		26,844

PUGET SOUND ENERGY

The following table presents the carrying amounts and estimated fair value of PSE’s financial instruments at September 30, 2010 and December 31, 2009:

	SEPTEMBER 30, 2010				DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Financial assets:
Cash and cash equivalents	$	86,278	$	86,278	$	78,407	$	78,407
Restricted cash		5,613		5,613		19,844		19,844
Notes receivable and other		70,889		70,889		74,063		74,063
Electric derivatives		5,102		5,102		5,140		5,140
Gas derivatives		7,530		7,530		14,413		14,413
Financial liabilities:
Short-term debt	$	77,000	$	77,000	$	105,000	$	105,000
Short-term debt owed by PSE to Puget Energy 1		22,898		22,898		22,898		22,898
Junior subordinated notes		250,000		234,341		250,000		232,684
Current maturities of long-term debt (fixed-rate)		260,000		266,027		232,000		234,632
Non-current maturities of long-term debt (fixed-rate)		2,953,860		3,394,700		2,638,860		2,815,048
Electric derivatives		287,330		287,330		145,690		145,690
Gas derivatives		211,418		211,418		81,557		81,557

1 Short-term debt owed by PSE to Puget Energy is eliminated upon consolidation of Puget Energy.

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The fair value of the long-term notes was estimated using U.S. Treasury yields and related current market credit spreads, interpolating to the maturity date of each issue.

The carrying values of short-term debt and notes receivable are considered to be a reasonable estimate of fair value. The carrying amount of cash, which includes temporary investments with original maturities of three months or less, is also considered to be a reasonable estimate of fair value.

(6) Retirement Benefits

PSE has a defined benefit pension plan covering substantially all PSE employees. Pension benefits earned are a function of age, salary and years of service. The Company also maintains a non-qualified Supplemental Executive Retirement Plan (SERP) for its key senior management employees. In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. These benefits are provided principally through an insurance company. The insurance premiums are based on the benefits provided during the year, and are paid primarily by retirees.

The February 6, 2009 merger of Puget Energy with Puget Holdings triggered a new basis of accounting for PSE’s retirement benefit plans in the Puget Energy consolidated financial statements. Such purchase accounting adjustments associated with the remeasurement of retirement plans are recorded at Puget Energy.

PUGET ENERGY

The following table summarizes Puget Energy’s net periodic benefit cost for the three months ended September 30, 2010 and 2009:

	THREE MONTHS ENDED SEPTEMBER 30,
	QUALIFIED PENSION BENEFITS						SERP PENSION  BENEFITS				OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2010			2009			2010		2009		2010			2009
Components of net periodic benefit cost:
Service cost	$	4,009		$	3,401		$	256	$	259	$	26		$	31
Interest cost		6,965			7,067			541		594		220			244
Expected return on plan assets		(8,087	)		(7,523	)		—		—		(127	)		(103	)
Amortization of net gain		—			—			—		—		(17	)		—
Net periodic benefit cost	$	2,887		$	2,945		$	797	$	853	$	102		$	172

The following tables summarize Puget Energy’s net periodic benefit cost for the nine months ended September 30, 2010 and 2009:

QUALIFIED PENSION BENEFITS	SUCCESSOR						PREDECESSOR
(DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009 1			JANUARY 1, 2009 – FEBRUARY 5, 2009
Components of net periodic benefit cost:
Service cost	$	12,083		$	9,068		$	1,090
Interest cost		21,030			18,845			2,302
Expected return on plan assets		(24,501	)		(20,060	)		(3,585	)
Amortization of prior service cost		—			—			95
Amortization of net loss		—			—			269
Net periodic benefit cost	$	8,612		$	7,853		$	171

F-98

SERP PENSION BENEFITS	SUCCESSOR				PREDECESSOR
(DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010		FEBRUARY 6, 2009 – SEPTEMBER 30, 2009 1		JANUARY 1, 2009 – FEBRUARY 5, 2009
Components of net periodic benefit cost:
Service cost	$	768	$	692	$	89
Interest cost		1,624		1,584		193
Amortization of prior service cost		—		—		51
Amortization of net loss (gain)		—		—		74
Net periodic benefit cost	$	2,392	$	2,276	$	407

1 The disclosed information is based on an initial January 31, 2009 measurement date, and as a result, the expense numbers are shown pro-rated for the second quarter 2009.

OTHER BENEFITS	SUCCESSOR						PREDECESSOR
(DOLLARS IN THOUSANDS)	NINE MONTHS ENDED SEPTEMBER 30, 2010			FEBRUARY 6, 2009 – SEPTEMBER 30, 2009 1			JANUARY 1, 2009 – FEBRUARY 5, 2009
Components of net periodic benefit cost:
Service cost	$	79		$	83		$	11
Interest cost		660			650			88
Expected return on plan assets		(381	)		(275	)		(37	)
Amortization of prior service cost		—			—			7
Amortization of net gain		(51	)		—			(15	)
Amortization of transition obligation		—			—			4
Net periodic benefit cost	$	307		$	458		$	58

1 The disclosed information is based on an initial January 31, 2009 measurement date, and as a result, the expense numbers are shown pro-rated for the second quarter 2009.

The following table summarizes Puget Energy’s change in benefit obligation for the periods ended September 30, 2010 and December 31, 2009:

	QUALIFIED PENSION BENEFITS						SERP PENSION BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010			DECEMBER 31, 2009			SEPTEMBER 30, 2010			DECEMBER 31, 2009			SEPTEMBER 30, 2010			DECEMBER 31, 2009
Change in benefit obligation:
Benefit obligation at beginning of period	$	504,786		$	453,731		$	39,152		$	38,750		$	15,953		$	15,807
Beginning of year remeasurement		456			—			—			—			86			—
Service cost		12,083			12,469			768			951			79			114
Interest cost		21,030			25,912			1,624			2,178			660			894
Actuarial loss		—			33,458			—			1,433			—			770
Benefits paid		(26,400	)		(20,784	)		(1,262	)		(4,160	)		(1,413	)		(2,050	)
Medicare part D subsidy received		—			—			—			—			803			418
Benefit obligation at end of period	$	511,955		$	504,786		$	40,282		$	39,152		$	16,168		$	15,953

F-99

The fair value of plan assets increased from $485.7 million at December 31, 2009 to $497.8 million at September 30, 2010, which includes employer contributions of $12.0 million.

PUGET SOUND ENERGY

The following table summarizes PSE’s net periodic benefit cost for the three months ended September 30, 2010 and 2009:

	THREE MONTHS ENDED SEPTEMBER 30,
	QUALIFIED PENSION BENEFITS						SERP PENSION  BENEFITS				OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2010			2009			2010		2009		2010			2009
Components of net periodic benefit cost:
Service cost	$	4,009		$	3,535		$	256	$	267	$	26		$	31
Interest cost		6,965			6,934			541		579		220			240
Expected return on plan assets		(10,875	)		(10,863	)		—		—		(127	)		(114	)
Amortization of prior service cost		185			283			141		154		33			21
Amortization of net loss (gain)		1,781			925			192		221		(138	)		(115	)
Amortization of transition obligation		—			—			—		—		12			13
Net periodic benefit cost	$	2,065		$	814		$	1,130	$	1,221	$	26		$	76

The following table summarizes PSE’s net periodic benefit cost for the nine months ended September 30, 2010 and 2009:

	NINE MONTHS ENDED SEPTEMBER 30,
	QUALIFIED PENSION BENEFITS						SERP PENSION  BENEFITS				OTHER BENEFITS
(DOLLARS IN THOUSANDS)	2010			2009			2010		2009		2010			2009
Components of net periodic benefit cost:
Service cost	$	12,083		$	10,605		$	768	$	801	$	79		$	94
Interest cost		21,030			20,801			1,624		1,736		660			720
Expected return on plan assets		(32,864	)		(32,590	)		—		—		(381	)		(341	)
Amortization of prior service cost		555			850			422		462		99			62
Amortization of net loss (gain)		5,193			2,777			576		664		(414	)		(345	)
Amortization of transition obligation		—			—			—		—		36			37
Net periodic benefit cost	$	5,997		$	2,443		$	3,390	$	3,663	$	79		$	227

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The following table summarizes PSE’s change in benefit obligation for the periods ended September 30, 2010 and December 31, 2009:

	QUALIFIED PENSION BENEFITS						SERP PENSION  BENEFITS						OTHER BENEFITS
(DOLLARS IN THOUSANDS)	SEPTEMBER 30, 2010			DECEMBER 31, 2009			SEPTEMBER 30, 2010			DECEMBER 31, 2009			SEPTEMBER 30, 2010			DECEMBER 31, 2009
Change in benefit obligation:
Benefit obligation at beginning of period	$	504,786		$	460,586		$	39,152		$	39,348		$	15,953		$	18,088
Beginning of year remeasurement		456			—			—			—			86			—
Service cost		12,083			14,141			768			1,068			79			125
Interest cost		21,030			27,734			1,624			2,315			660			960
Actuarial loss (gain)		—			25,094			—			707			—			(1,296	)
Benefits paid		(26,400	)		(22,769	)		(1,262	)		(4,286	)		(1,413	)		(2,342	)
Medicare part D subsidiary received		—			—			—			—			803			418
Benefit obligation at end of period	$	511,955		$	504,786		$	40,282		$	39,152		$	16,168		$	15,953

The fair value of plan assets increased from $485.7 million at December 31, 2009 to $497.8 million at September 30, 2010.

The Company expects contributions to fund the qualified pension plan and to meet SERP and the other postretirement plan obligations for the year ending December 31, 2010 to be $12.0 million, $3.0 million and $0.5 million, respectively. During the three months ended September 30, 2010, the Company contributed $0.4 million to meet the SERP plan requirements. During the nine months ended September 30, 2010, the Company contributed $12.0 million to fund the qualified retirement plan and paid participants $1.3 million and $0.3 million for SERP and other postretirement obligations, respectively.

As a result of the Patient Protection and Affordable Care Act of 2010, PSE recorded a one-time tax expense of $0.8 million during the three months ended March 31, 2010, related to a Medicare D subsidy that PSE receives. These subsidies have been non-taxable in the past and will be subject to federal income taxes after 2012 as a result of the legislation.

As part of the Company’s new contract with the International Brotherhood of Electrical Workers (IBEW) Local 77 union, which took effect September 1, 2010, the benefit calculation formula has changed for Company employees covered by the contract. New IBEW represented employees and employees not vested in a plan benefit as of July 31, 2010 will participate in the cash balance formula of the retirement program, with any accrued benefit converted to a beginning cash balance account. Employees who were vested in a plan benefit as of July 31, 2010 have a choice to convert to the cash balance formula or remain on a final average earnings formula based on qualified pay and years of service. Participants in the cash balance formula receive an enhanced Company match in the Company’s 401(k) program effective December 1, 2010.

(7) Regulation and Rates

On April 2, 2010, the Washington Utilities and Transportation Commission (Washington Commission) issued its order in PSE’s consolidated electric and natural gas general rate case filed in May 2009, supplemented by an order of clarification on April 8, 2010, approving a general rate increase for electric customers of 3.7% annually or $74.1 million. The rate increase was $36.2 million, or 1.8%, less than PSE requested. The electric general rate order also created a tariff rider intended to allow PSE to collect in electric rates $52.3 million related to the recovery of certain deferred costs that were part of the general rates and will be fully amortized at the end of 2011. The natural gas rate increase approved was 0.8% annually or $10.1 million. The rate increase was $18.3 million, or 1.5%, less than PSE requested. The rate increase for electric and natural gas customers was effective April 8, 2010. In its order, the Washington Commission approved a weighted cost of capital of 8.1% and a capital structure that included 46.0% common equity with an after-tax return on equity of 10.1%.

F-101

In response to a petition filed by the Company in 2007, the Washington Commission issued an order on May 20, 2010 relating to how Renewable Energy Credit (REC) proceeds should be handled for regulatory accounting and ratemaking purposes. In its May 2010 order, the Washington Commission stated that the REC proceeds should be recorded as regulatory liabilities as proposed by the Company and that amounts recorded would accrue interest at a rate to be determined in a later filing. In its petition, PSE had sought approval for the use of $21.1 million of REC proceeds as an offset against its California wholesale energy sales regulatory asset. In its May 20, 2010 order, the Washington Commission allowed PSE to use $3.3 million of the REC proceeds to offset the regulatory asset. In response to the order, PSE adjusted the carrying value of its regulatory asset in the second quarter of 2010 by $17.8 million (from $21.1 million to $3.3 million), with the $3.3 million then offset against the Company’s renewable energy credits regulatory liability as provided in the order. The Company’s California wholesale energy sales regulatory asset represented unpaid bills for power sold into the markets maintained by the California Independent System Operator during the California Energy Crisis, the claims of which were settled along with all counterclaims against PSE in a settlement agreement approved by the Federal Energy Regulatory Commission (FERC) on July 1, 2009.

Effective July 1, 2010, the Washington Commission approved a change in PSE’s Production Tax Credit (PTC) tariff as PSE has not been able to utilize PTCs since 2007, due to insufficient taxable income caused primarily by bonus tax depreciation. The Washington Commission approved PSE suspending its PTC tariff, effective July 1, 2010. This resulted in an overall increase in PSE’s electric rates of 1.65%. PSE anticipates filing a tariff with the Washington Commission no later than November 1, 2010 which will propose that PTCs be provided to customers after PSE is able to utilize the tax credits on its tax return.

On September 22, 2010, a joint proposal and accounting petition was filed with the Washington Commission by PSE, Washington Commission Staff and Industrial Customers of Northwest Utilities which addressed how to recover PTCs provided to customers that have not been utilized and addresses REC proceeds to be returned to customers. On October 26, 2010, the Washington Commission issued an order granting the joint proposal and accounting petition. The order allows the Company to credit customers for REC revenues received and deferred through November 2009. This credit will reduce rates by $27.7 million, or 2.47%, over five months beginning November 2010 through March 2011. RECs received after November 2009 will be retained by the Company and will be used to recapture PTCs previously provided to customers. Once these recaptured PTCs are utilized by the Company on its tax return, the customers will receive the credit.

On October 1, 2010, PSE filed an electric tariff filing with the Washington Commission to implement changes to rates to pass-through a reduction in the benefits PSE expects to receive from the Bonneville Power Administration’s (BPA) Residential Exchange Program (REP). PSE is requesting a reduction in the tariff credit rate compared to the amount currently being credited to customers, resulting in a 1.0% increase to electric rates.

On October 1, 2010, PSE filed a natural gas tariff filing with the Washington Commission to implement changes to natural gas rates that would result in an overall increase in revenue of $24.4 million and a customer rate increase of 2.3%. PSE requested the new rates be made effective by February 1, 2011.

On October 1, 2010, PSE filed a PGA natural gas tariff filing with the Washington Commission to adjust the PGA rates, which cover expected natural gas costs from sales to customers. On an average annual basis, the PGA rates included in this filing reflect a 3.1% decrease in natural gas costs due to decreases in forward market prices. The PGA rates also reflect a decrease in the PGA deferred natural gas cost credit which will result in a 5.0% increase to overall natural gas rates. Collectively, the annual dollar amount of these changes, if approved, would result in an increase of $18.3 million, or 1.9%. This rate adjustment will have no impact on PSE’s net income. PSE requested the new rates be made effective November 1, 2011.

(8) Litigation

Residential Exchange. PSE is a party to certain agreements with the BPA that provide payments under its REP to PSE, which PSE passes through to its residential and small farm electric customers. PSE has agreements with the BPA for REP payments until 2011 and for the period 2011 to 2028. PSE and other parties have sought United States Court of Appeals for the Ninth Circuit review regarding BPA’s agreements for REP payments during these periods. The amounts of REP payments under these agreements and the methods utilized in setting them are subject to FERC review or judicial review, or both, and are subject to adjustment, which may affect the amount of REP payments made or to be made by BPA to PSE. It is not clear what impact, if any, these reviews or other REP-related litigation may ultimately have on PSE.

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Equilon Litigation. On April 21, 2010, Equilon Enterprises (dba Shell Oil Products), the owner of an oil refinery in Skagit County, Washington, filed suit against PSE in the United States District Court for the Western District of Washington in Seattle. PSE and Equilon resolved the dispute in October 2010 and dismissal of the court action will follow.

Colstrip Matters. In May 2003, approximately 50 plaintiffs initiated an action against the owners of Colstrip, including PSE, alleging that: (1) seepage from two different wastewater pond areas caused groundwater contamination and threatened to contaminate domestic water wells and the Colstrip water supply pond; and (2) seepage from the Colstrip water supply pond caused structural damage to buildings and toxic mold. The defendants reached agreement on a global settlement with all plaintiffs on April 29, 2008 and PSE paid its share of the settlement in July 2008.

On March 29, 2007, a second complaint related to pond seepage was filed on behalf of two ranch owners alleging damage due to the Colstrip Units 3 & 4 effluent holding pond. A mediation between plaintiffs and PPL Montana, LLC, the operator of Units 3 & 4, took place on July 14, 2010 and parties are working toward a final settlement.

The federal Clean Air Mercury Rule, enacted by the Environmental Protection Agency (EPA) in May 2005, was vacated by the D.C. Circuit Court in February 2008. Final resolution of this matter is still pending. However the Montana Board of Environmental Review approved a Montana mercury control rule to limit mercury emissions from coal-fired plants on October 16, 2006 (with a limit of 0.9 lbs/Trillion British thermal units for plants burning coal like that used at Colstrip) which remains in effect. In 2008, the Colstrip owners, based on testing performed in 2006, 2007 and 2008, ordered mercury control equipment intended to achieve the new limit. The equipment has been fully installed and is in regular operation. The Colstrip mercury control equipment is operating at a level that meets the current Montana limit, which is based on a rolling 12 month average so compliance cannot be fully confirmed until January 1, 2011. Optimization of the feed rates of calcium bromide and activated carbon is underway. An evaluation will be conducted to determine whether additional controls, if any, are necessary, depending on actual long-term performance.

On June 15, 2005, the EPA issued the Clean Air Visibility rule to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines Best Available Retrofit Technology (BART) requirements for electric generating units, including presumptive limits for sulfur dioxide, particulate matter and nitrogen oxide controls for larger units. In February 2007, Colstrip was notified by EPA that Colstrip Units 1 & 2 were determined to be subject to EPA’s BART requirements. PSE submitted a BART engineering analysis for Colstrip Units 1 & 2 in August 2007 and responded to an EPA request for additional analyses with an addendum in June 2008. PSE cannot yet determine the outcome.

On June 21, 2010, the EPA issued a Proposed Rulemaking for the “Identification and Listing of Special Wastes: Disposal of Coal Combustion Residuals from Electric Utilities” which proposes different regulatory mechanisms to regulate coal combustion residuals, generally referred to as “coal ash,” and requests information from industry on these respective proposals. PSE has joined other Colstrip owners in requesting an extension to the 120 day comment period, and the owners are currently evaluating the potential impact of these regulations on operations at Colstrip. PSE’s potential increased cost of operating Colstrip is unknown at this time and dependent on the outcome of this rulemaking.

Snoqualmie Falls. On July 7, 2010, a lawsuit was filed by the Snoqualmie Valley Preservation Alliance against the United States Army Corps of Engineers (Corps) challenging permits issued by the Corps in connection with the redevelopment of the Snoqualmie Falls Hydroelectric Project. PSE sought and was granted permission to intervene in the proceeding. Motions for summary judgment have been filed by the plaintiff and the Corps. PSE joined the Corps’ motion and filed a motion for summary judgment arguing the plaintiff’s claims are barred as untimely and improper. The court has set a schedule for summary judgment motions to be heard in November 2010. The ultimate impact of the suit, if any, on PSE or the work currently underway on the project cannot be determined at this time.

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(9) Variable Interest Entities

In accordance with ASC 810, “Consolidation” (ASC 810), a business entity that has a controlling financial interest in a VIE should consolidate the VIE in its financial statements. A primary beneficiary of a VIE is the variable interest holder that has both the power to direct matters that significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits. The Company enters into a variety of contracts for energy with other counterparties and evaluates all contracts to determine if they are variable interests. The Company’s variable interests primarily arise through power purchase agreements where it is required to buy all or a majority of generation from a plant at rates set forth in the agreement.

The Company evaluated its power purchase agreements and determined it was not the primary beneficiary of any VIEs. The Company had previously disclosed two potentially significant variable interests in prior periods; both entities are qualifying facilities contracts that expire at the end of 2011. The Company requested information from the relevant entities; however, they have refused to provide the necessary information to the Company, as they are not required to do so under their contracts. Due to the short duration of the remaining life of the contracts, if the variable interests were determined to be VIEs, the Company has concluded it is not the primary beneficiary of these entities based on available information and it has no exposure to losses on these contracts. For the three months ended September 30, 2010 and 2009, the Company’s purchased power expense for these entities was $54.0 million and $52.9 million, respectively. For the nine months ended September 30, 2010 and 2009, the Company’s purchased power expense for these entities was $141.1 million and $132.0 million, respectively.

(10) Other

Snoqualmie Falls Project. Under the Snoqualmie Falls hydroelectric facility’s federal operating license granted by FERC in 2004 and finalized in 2009, PSE is performing a major, three and a half year redevelopment project to upgrade aging energy infrastructure, enhance park and recreation amenities and preserve cultural and historical artifacts. This project will enable Snoqualmie Falls to continue to produce clean, renewable energy for decades to come.

The substantial upgrades and enhancements to its power-generating infrastructure will include new generators, water-intake structures, penstocks and flow-control systems at Plant 1 and Plant 2. The upgrades will boost the project’s authorized output (currently 44 megawatt (MW)) to 54 MW. Plant 1 and Plant 2 are now offline and are expected to return to service in March 2013. PSE has engaged a general contractor to perform this work on its behalf, pursuant to a guaranteed maximum price construction contract.

Bond Issuances. On June 29, 2010, PSE issued $250.0 million of senior notes, secured by first mortgage bonds. The notes have a term of 30 years and an interest rate of 5.764%. Net proceeds from the offering were used to repay $7.0 million of medium-term notes with a 7.12% interest rate that matured on September 13, 2010 and to repay short-term debt outstanding under the $400.0 million capital expenditure credit facility.

On March 8, 2010, PSE issued $325.0 million of senior notes, secured by first mortgage bonds. The notes have a term of 30 years and an interest rate of 5.795%. Net proceeds from the offering were used to replenish funds utilized to repay $225.0 million of senior medium-term notes which matured on February 22, 2010 and carried a 7.96% interest rate. Remaining net proceeds were used to pay down debt under PSE’s capital expenditure credit facility.

(11) Income Taxes

The Company reported income tax expense for the third quarter using the discrete period method as opposed to the estimated annual effective tax rate (ETR) method, which is the generally prescribed method for interim reporting periods. The Company employed the discrete method in lieu of the estimated annual ETR method because relatively small movements in projected income for the year could result in extreme variability in the ETR. Therefore, the Company does not believe it can reliably estimate its ETR for the full year.

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Puget Energy, Inc.

OFFER TO EXCHANGE ITS

6.500% Senior Secured Notes due 2020

that have been registered under the

Securities Act of 1933, as amended

for any and all of its outstanding

6.500% Senior Secured Notes due 2020

that were issued and sold in a transaction

exempt from registration

under the Securities Act of 1933, as amended

P R O S P E C T U S

            , 2011

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers

Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the “WBCA”) authorize a court to award, or a corporation to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended. Article 8 of Puget Energy’s amended and restated articles of incorporation and Article VII of Puget Energy’s amended and restated bylaws provide for indemnification of Puget Energy’s directors and officers to the maximum extent permitted by Washington law, except for (i) acts or omissions of such person finally adjudged to be intentional misconduct or a knowing violation of law by the person, (ii) conduct finally adjudged to be in violation of Section 23B.08.310 of the WBCA, or (iii) any transaction with respect to which it was finally adjudged that the person received a benefit in money, property, or services to which such person was not legally entitled.

Section 23B.08.320 of the WBCA authorizes a corporation to eliminate or limit a director’s personal liability to the corporation or its shareholders for monetary damages for conduct as a director, except in certain circumstances involving intentional misconduct, knowing violations of law or illegal corporate loans or distributions, or any transaction from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Article 9 of Puget Energy’s amended and restated articles of incorporation contain provisions implementing, to the fullest extent permitted by Washington law, such limitations on a director’s liability to Puget Energy and its shareholders.

Officers and directors of Puget Energy are covered by insurance (with certain exceptions and certain limitations) that indemnifies them against losses and liabilities arising from certain alleged “wrongful acts,” including alleged errors or misstatements, or certain other alleged wrongful acts or omissions constituting neglect or breach of duty.

Item 21. Exhibits and Financial Statement Schedules

(a) Exhibits

Reference is made to the Exhibit Index starting on page E-1.

Item 22. Undertakings

The undersigned Registrants hereby undertake:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

(iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be this initial bona fide offering thereof.

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(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.

(6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

(7) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

(8) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bellevue, State of Washington, on the 2nd day of February, 2011.

PUGET SOUND ENERGY, INC.
By:	/s/ DONALD E. GAINES
Name:	Donald E. Gaines
Title:	Vice President Finance and Treasurer

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Kimberly Harris, Eric M. Markell, James W. Eldredge, Donald E. Gaines and James D. Sant, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this registration statement, including any and all post-effective amendments, or any registration statements to be filed in connection with this registration statement pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below on February 2, 2011.

Signature	Title
/S/ STEPHEN P. REYNOLDS Stephen P. Reynolds	Director, Chief Executive Officer
/S/ KIMBERLY HARRIS Kimberly Harris	President (Principal Executive Officer)
/S/ ERIC M. MARKELL Eric M. Markell	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/S/ JAMES W. ELDREDGE James W. Eldredge	Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)
/S/ WILLIAM S. AYER William S. Ayer	Director
/S/ ANDREW CHAPMAN Andrew Chapman	Director

S-1

Signature	Title
/S/ BENJAMIN HAWKINS Benjamin Hawkins	Director
/S/ ALAN W. JAMES Alan W. James	Director
/S/ ALAN KADIC Alan Kadic	Director
/S/ CHRISTOPHER J. LESLIE Christopher J. Leslie	Director
/S/ CHRIS TRUMPY Chris Trumpy	Director
/S/ MARK WISEMAN Mark Wiseman	Director

S-2

EXHIBIT INDEX

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated October 25, 2007, by and among Puget Energy, Inc., Padua Holdings LLC, Padua Intermediate Holdings Inc. and Padua Merger Sub Inc. (incorporated herein by reference to Exhibit 2.1 to Puget Energy’s Current Report on Form 8-K, dated October 25, 2007, Commission File No. 1-16305).
3.1	Amended Articles of Incorporation of Puget Energy (incorporated herein by reference to Exhibit 3.1 to Puget Energy’s Current Report on Form 8-K, dated February 6, 2009, Commission File No. 1-16305).
3.2	Amended and Restated Bylaws of Puget Energy dated February 6, 2009 (incorporated herein by reference to Exhibit 3.3 to Puget Energy’s Current Report on Form 8-K, dated February 6, 2009, Commission File No. 1-16305).
4.1	Indenture dated December 6, 2010 relating to Puget Energy’s 6.500% Senior Secured Notes due 2020 (incorporated herein by reference to Exhibit 4.1 to Puget Energy’s Current Report on Form 8-K, dated December 1, 2010, Commission File No. 1-16305).
4.2	First Supplemental Indenture dated December 6, 2010 (incorporated herein by reference to Exhibit 4.2 to Puget Energy’s Current Report on Form 8-K, dated December 1, 2010, Commission File No. 1-16305).
4.3	Registration Rights Agreement, dated as of December 6, 2010, among Puget Energy, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc. and J.P. Morgan Securities LLC, as representatives of the several initial purchasers party thereto (incorporated herein by reference to Exhibit 4.3 to Puget Energy’s Current Report on Form 8-K, dated December 1, 2010, Commission File No. 1-16305).
4.4	Form of Puget Energy, Inc. 6.500% Exchange Note due 2020.
5.1	Opinion of Perkins Coie LLP as to legality of the Exchange Notes issued by Puget Energy, Inc.
12.1	Computation of ratio of earnings to fixed charges (incorporated herein by reference to Exhibit 12.1 to Puget Energy’s Quarterly Report on Form 10-Q for the period ended September 30, 2010, Commission File No. 1-16305).
21.1	List of Subsidiaries of Registrant (incorporated herein by reference Exhibit 21.1 to Puget Energy’s Annual Report on Form 10-K for the period ended December 31, 2009, Commission File No. 1-16305).
23.1	Consent of Independent Registered Public Accounting Firm.
23.2	Consent of Perkins Coie LLP (included in Exhibit 5.1).
24.1	Power of Attorney (contained on signature pages).
25.1	Form T-1 Statement of Eligibility of Wells Fargo Bank, National Association to act as Trustee under the Indenture relating to Energy’s 6.500% Senior Secured Notes due 2020.
99.1	Form Letter of Transmittal.
99.2	Form of Notice of Guaranteed Delivery.
99.3	Form of Letter to DTC Participants.
99.4	Form of Letter to Clients.

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