DEFERRED COMPENSATION PLAN

PUGET SOUND ENERGY

DEFERRED COMPENSATION PLAN

FOR KEY EMPLOYEES

As Amended and Restated

Effective January 1, 2009

TABLE OF CONTENTS

 

The growth and success of Puget Sound Energy, Inc. (the "Company") depends on its ability to attract, motivate and retain key employees of the highest competence, initiative, and ability.  The purpose of this Plan is to advance the interests of the Company and its shareholders through a deferred compensation program for a select group of management and highly compensated executive officers.  This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

This Plan was originally effective June 16, 1997.  This Plan was most recently amended and restated effective January 1, 2003 and is now amended and restated effective for all amounts deferred on or after January 1, 2005 that remain unpaid as of January 1, 2009.  All amounts earned and vested as of December 31, 2004 shall continue to be governed by the terms of the Plan in place as of December 31, 2004 in accordance with then applicable IRS guidance.  All amounts earned or vested from January 1, 2005 through December 31, 2008 shall be governed by this amendment and restatement, as modified by the operations of the Plan during such period in accordance with Code Section 409A and then applicable IRS guidance (including transition relief).  No amendment to this Plan on and after January 1, 2009 is intended to, nor shall it be deemed to, apply to other than the terms and conditions of this Plan in effect prior January 1, 2005 unless expressly provided by such amendment.

For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless a different meaning is clearly indicated by the context:

"Account Balance" shall mean a credit on the records of the Employer equal to the sum of the balances in a Participant's (i) Deferral Account, (ii) Company Contribution Account, (iii) Investment Plan Restoration Matching Account, (iv) Cash Balance Restoration Matching Account, and (v) Performance-Based Retirement Equivalent Account.  The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely for the determination of amounts due to a Participant or Beneficiary under this Plan.

"Annual Bonus" shall mean compensation under an Employer's annual bonus or cash incentive plans for services performed during any calendar year, excluding stock compensation and any Long-Term Incentive Awards, whether or not paid in such year or included on the federal income tax Form W-2 for such year.

"Annual Cash Balance Restoration Amount" shall mean, for any Plan Year, the amount determined in accordance with Section 3.4.

"Annual Deferral Amount" shall mean that portion of Base Salary, Annual Bonus and Long-Term Incentive Awards that a Participant defers in accordance with Section 3 for any Plan Year.  If a Participant dies, Retires, suffers a Disability (if deferrals cease in accordance with Section 9.1) or undergoes a Termination of Employment during a Plan Year, the Annual Deferral Amount for the year shall be the amount deferred prior to such event.

"Annual Installment Method" shall mean yearly installments payable in substantially equal number of shares as described in Sections 6 and 7.

"Annual Investment Plan Restoration Amount" for any Plan Year shall mean the amount determined in accordance with Section 3.3.

"Base Salary" shall mean cash compensation for services, excluding any Annual Bonus, any Long-Term Incentive Award and any other bonuses, commissions, overtime pay, fringe benefits, stock options, relocation expenses, incentive payments, nonmonetary awards, directors fees and other fees, and automobile and other allowances.  Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to this Plan or other qualified or nonqualified plans of any Employer and shall include amounts excluded from compensation pursuant to Code Sections 125, 402(e)(3), 402(h), and 403(b).

"Beneficiary" shall mean one or more individuals, trusts, estates or other entities, designated in accordance with Article 10 to receive benefits under this Plan upon the death of a Participant.

"Board" shall mean the board of directors of the Company.

"Cash Balance Plan" shall mean the Retirement Plan for Employees of Puget Sound Energy, Inc., originally known as the Retirement Plan for Employees of Puget Sound Power & Light Company, established by Puget Sound Power & Light Company in 1958, as amended and restated effective March 1, 1997 and since amended.

"Cash Balance Restoration Account" shall mean an account on the books of the Employer that reflects (i) the sum of the Participant's Annual Cash Balance Restoration Amounts, plus (ii) amounts credited to the Participant's Cash Balance Restoration Account in accordance with the crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from the Participant's Cash Balance Restoration Account.

"Claimant" shall have the meaning set forth in Section 14.1.

"Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

"Committee" shall mean the committee described in Article 12, and, if an Administrative Committee has been appointed pursuant to Section 12.2 shall include such Administrative Committee.

"Company" shall mean Puget Sound Energy, Inc., a Washington corporation, and any successor to all or substantially all of the Company's assets or business.

"Company Contribution Account" shall mean an account on the books of the Company that reflects (i) the sum of the Participant's Annual Company Contribution Amounts, plus (ii) amounts credited to the Participant's Company Contribution Account in accordance with the crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from the Participant's Company Contribution Account.

"Company Stock Fund" shall mean the Measurement Fund that corresponds to the fair market value of Stock.  Reallocation of a Participant's existing Account Balance to, and investment of new contributions in, the Company Stock Fund shall cease as of such date preceding the Exchange as is designated by the Committee.  Immediately following the reallocation contemplated by Section 4.2(e), the Company Stock Fund shall cease to be offered as a Measurement Fund under the Plan.

"Deferral Account" shall mean an account on the books of the Company that reflects (i) the sum of a Participant's Annual Deferral Amounts, plus (ii) amounts credited to the Participant's Deferral Account in accordance with the applicable crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from the Participant's Deferral Account.

"Disabled" shall mean a Participant who is "disabled" within the meaning of Code Section 409A and meets one of the following requirements:

"Disability Benefit" shall mean the benefit set forth in Section 9.1.

"Employee" shall mean an individual who is an employee of any Employer.

"Employer" shall mean the Company and shall include any of its affiliates that, together with the Company, is treated as a single employer under Code Section 414(b) or (c).

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.24     Exchange

"Exchange" means the exchange of shares of Puget Energy, Inc. for cash, as contemplated in that Agreement and Plan of Merger by and among Puget Energy, Inc., Padua Holdings LLC, Padua Intermediate Holdings Inc. and Padua Merger Sub Inc. dated as of October 25, 2007.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Fair Market Value" shall mean the average of the daily high and low per share trading prices for the Stock as reported daily by the New York Stock Exchange in The Wall Street Journal or similar readily available source, for a single trading day.

"Fixed Amount Installment Method" shall mean installment payments of a fixed amount selected by the Participant as prescribed in Sections 6 and 7.  The fixed payments shall be paid until the Participant's Account Balance reaches zero.

"Interim Payment" shall mean the payment described in Section 5.1.

"Investment Plan" shall mean the Investment Plan for Employees of Puget Sound Energy, Inc., formerly known as the Investment Plan for Employees of Puget Sound Power & Light Company, originally adopted effective August 1, 1970, as amended and restated, as adopted by the Company effective January 1, 2005 and since amended.

"Investment Plan Restoration Account" shall mean (i) the sum of a Participant's Annual Investment Plan Restoration Amounts, plus (ii) amounts credited to the Participant's Investment Plan Restoration Account in accordance with the applicable crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from the Participant's Investment Plan Restoration Account.

"Long-Term Incentive Award" shall mean amounts paid or payable to a Participant under the Company's 2005 Long-Term Incentive Plan or any successor plan thereto.

"Measurement Funds" shall mean the funds described in Section 4.2.

"Monthly Installment Method" shall mean a monthly installment payment over the number of months selected by the Participant in accordance with Articles 6 and 7, calculated as provided in this Section 1.33.  The monthly installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of monthly payments due the Participant.  By way of example, if the Participant elects a 120-month Monthly Installment Method, the first payment shall be 1/120 of the Account Balance, calculated as described in this definition.  The following month, the payment shall be 1/119 of the Account Balance, calculated as described in this definition.

"Participant" shall mean an Employee who is selected to participate in this Plan and who elects to participate in this Plan in accordance with Section 2.  Status as a Participant shall continue for as long as the individual has an Account Balance under this Plan, even if the Participant is no longer an Employee.  A spouse or former spouse of a Participant shall not be treated as a Participant even if such spouse has an interest in the Participant's benefits under this Plan.

"Performance-Based Retirement Equivalent Account" shall mean an account on the books of the Company that reflects (i) the sum of a Participant's Performance-Based Retirement Equivalent Amount, plus (ii) amounts credited in accordance with the applicable crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from such account.

"Performance-Based Retirement Equivalent Amount" shall mean, for any Plan Year, the amount determined in accordance with Section 3.6.

"Plan" shall mean this Deferred Compensation Plan for Key Employees, as it may be amended from time to time.

"Plan Year" shall mean, except for the first Plan Year, a period beginning on January 1 of each year and continuing through December 31 of such year.

"Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 7.

"Retirement," "Retire(s)" or "Retired" shall mean, with respect to an Employee, Termination of Employment on or after the earlier of the attainment of (a) age 62 or (b) age 55 with 5 Years of Service.

"Retirement Benefit" shall mean the benefit set forth in Article 6.

"Section 16 Insider" shall mean any participant who is, with respect to the Company, subject to Section 16 of the Exchange Act.

"SERP Rollover Account" shall mean an account on the books of the Company that reflects (i) a Participant's SERP Rollover Amounts, plus (ii) amounts credited to the Participant's SERP Rollover Account in accordance with the applicable crediting provisions of this Plan, less (iii) all distributions made to the Participant or the Participant's Beneficiary from the Participant's SERP Rollover Account.

"SERP Rollover Amount" for any Plan Year shall mean the amount determined in accordance with Section 3.5.

"Specified Amount Installment Method" means installment payments according to a schedule prepared by the Participant and in a form and amount acceptable to the Company's Executive Plans Committee.  The amounts of each installment payment need not be equal.  Installment payments shall continue until the earlier of (a) the exhaustion of the Participant's Account Balance, and (b) the period elected by the Participant.  The installment payments shall be made monthly for cash amounts and annually for stock amounts.

"Specified Employee" means a "key employee" (as defined in Code Section 416(i) without regard to Code Section 416(i)(5)) of the Employer.  For purposes of this Plan, a Participant is a key employee if he or she meets the requirements of Code Section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding Code Section 416(i)(5)) at any time during the 12-month period ending on an identification date.  If a Participant is a key employee as of an identification date, he or she is treated as a Specified Employee for the 12-month period beginning on the first day of the fourth month following the identification date.  The Committee may designate any date in a calendar year as the identification date provided that it uses the same identification date with respect to all arrangements, and any change to the identification date may not be effective for a period of 12 months.  If no identification date is designated, the identification date is December 31.  The Committee   may prospectively designate an identification date through a separately adopted document.

"Stock" shall mean the common stock of the Company's parent, Puget Energy, Inc., that is traded on the New York Stock Exchange or the common stock of any successor to Puget Energy, Inc. that is publicly traded.  All references in this Plan to "Puget Energy, Inc." shall be deemed to include its successor.  To the extent such successor's stock is traded on an exchange other than the New York Stock Exchange, all references in the Plan to "New York Stock Exchange" shall be deemed to include such other exchange.

"Stock Fund" shall mean the Measurement Fund that corresponds to the fair market value of Stock.

"Termination Benefit" shall mean the benefit set forth in Article 8.

"Termination of Employment" shall mean a "separation from service" as an Employee within the meaning of Code Section 409A, voluntarily or involuntarily, for any reason other than Disability, death or an authorized leave of absence.

"Trust" shall mean one or more trusts established pursuant to that certain Master Trust Agreement, dated as of June 16, 1997, between the Company and The Bank of New York as trustee, as amended from time to time.

"Trustee" shall mean the financial institution acting at the time as trustee of the Trust.

"Unforeseeable Financial Emergency" shall mean, as defined by Code Section 409A, a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant's spouse or dependent (as defined in Code Section 152, without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B)); loss of the Participant's property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, as a result of a natural disaster); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.  For example: (a) imminent foreclosure of or eviction from the Participant's primary residence may constitute an Unforeseeable Emergency; (b) the need to pay for medical expenses, including nonrefundable deductibles, as well as for the costs of prescription drug medication, may constitute an Unforeseeable Emergency; (c) the need to pay for the funeral expenses of a spouse, a Beneficiary, or a dependent (as defined in Code Section 152, without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B)) may also constitute an Unforeseeable Emergency; and (d) the purchase of a home and the payment of college tuition are not Unforeseeable Emergencies.

"Years of Service" shall mean the total number of years in which one or more Employers have employed a Participant.  For purposes of this definition, a year of employment shall be a 365-day period (or 366-day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on the anniversary of that hiring date.  Any partial year of employment shall not be counted.

Participation in this Plan shall be limited to a select group of management and highly compensated Employees chosen for participation by the Committee in its sole discretion.

Each Employee selected for participation in this Plan shall complete and return to the Committee an election form, a beneficiary designation form and such other material as the Committee may request, within 30 days after selection to participate.

An Employee selected to participate in this Plan shall commence participation on the first day of the month following the month in which the Employee properly completes all enrollment requirements.  An Employee who does not complete the requirements within the time required in Section 2.2 shall not be eligible to participate in this Plan until the first day of the Plan Year following delivery to and acceptance by the Committee of the required forms.

An Employee first selected to participate in this Plan may make an irrevocable election to defer all or a designated portion of Base Salary, Annual Bonus and any Long-Term Incentive Award (to the extent determined by the Committee) that may be otherwise payable for such Plan Year.  The election shall be effective only with respect to compensation paid for services performed during the Plan Year after such election.  The Participant must deliver a completed election form to the Committee within 30 days after selection, in order to participate for such Plan Year.

For each succeeding Plan Year, the Participant may make an irrevocable election to defer all or a designated portion of Base Salary, Annual Bonus and any Long-Term Incentive Award (to the extent determined by the Committee) that may be otherwise payable for such Plan Year by delivering to the Committee a new election form by December 31 of the preceding Plan Year, or such earlier deadline set by the Committee.  If no election form is timely delivered to the Committee for any Plan Year, the Participant's Annual Deferral Amount for that Plan Year shall be zero.

Base Salary, Annual Bonus and Long-Term Incentive Awards deferred under this Plan shall be withheld at the time they otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.

A Participant's Annual Investment Plan Restoration Amount for any Plan Year shall be equal to the reduction in Employee contributions to the Investment Plan that are attributable to the Participant's election to defer Base Salary or Annual Bonus under this Plan (but only if such election included a "spillover" election from the Investment Plan to this Plan pursuant to Treasury Regulation Section 1.409A-3(j)(5)), credited monthly as an employer contribution, plus an amount equal to the sum of (i) Employer matching contributions that would have been credited to the Participant's account under the Investment Plan but for the reduction in Employee contributions to that Plan or the timing and amount of the Participant's deferrals under the Investment Plan, (ii) Employer required contributions that would have been credited to the Participant's account under the Investment Plan but for the reduction in Employee compensation due to deferrals hereunder, and (iii) Employer required contributions that would have been credited to the Participant's account under the Investment Plan but for the limitations in Code Section 401(k)(3) and may have been credited monthly.  If a Participant is not an Employee as of the first and last days of a Plan Year (unless due to Retirement or death), any Annual Investment Plan Restoration Amount for such Plan Year and not previously credited shall be zero.  If a Participant Retires or dies during a Plan Year, any Annual Investment Plan Restoration Amount not previously credited shall be credited with a prorated amount, based on the Participant's contributions through the date of Retirement or death.

If a Participant is eligible to participate in the Cash Balance Plan and contributions to his or her account under such Plan, or his or her accrued benefit under such Plan, are reduced for any Plan Year in order to satisfy the limitations in Code Section 415(e), or if contributions to the Participant's account under the Cash Balance Plan are reduced in any Plan Year as a result of the Participant's election to defer Base Salary or Annual Bonus under this Plan, then in any such case the Participant's Cash Balance Restoration Account shall be credited as an employer contribution with an amount that is equal to or (as determined by the Committee in its discretion) is the actuarial equivalent of such reductions.  The amount so credited shall be the Annual Cash Balance Restoration Amount for that Participant.  If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of Retirement or death, the Annual Cash Balance Restoration Amount for such Plan Year shall be zero.  If a Participant Retires or dies during a Plan Year, the Annual Cash Balance Restoration Amount