GO2-04-012, Transmittal of 2003 Annual Financial Report

Transmittal of 2003 Annual Financial Report

ML040370785
Person / Time
Site:	Columbia
Issue date:	01/26/2004
From:	Coleman D Energy Northwest
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
GO2-04-012
Download: ML040370785 (67)

Text

ENERGY NORTHWEST PO. Box 968

• Richland, Washington 99352-0968 January 26, 2004 G02-04-012 10 CFR 50.71(b)

U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555-0001

Subject:

COLUMBIA GENERATING STATION, DOCKET NO. 50-397 2003 ANNUAL FINANCIAL REPORT

Dear Sir or Madam:

In accordance with 10 CFR 50.71(b), enclosed is a copy of the Energy Northwest 2003 annual financial report for the subject facility.

Should you have any questions, please call CL Perino at (509) 377-2075.

Respectfully, DW Coleman Manager, Regulatory Programs Mail Drop PE20

Enclosure:

As stated cc: BS Mallett - NRC RIV BJ Benney - NRC - NRR w/o NRC Sr. Resident Inspector - 988C RN Sherman - BPA/1399 w/o TC Poindexter - Winston & Strawn w/o

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03 41 99 00 7 ij ,26 03 6,975 8,260 7,996 9,262 7,738 Operating & Capital Costs,

$ in millions Cost of Power, Cents/kWh I

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Executive Board Chairman Chief Executive Officer

Another example: Columbia Generating Station has been our most important responsibility and isthe foundation upon which we built our reputation and credibility. This increased credibility is what allows us to explore and build other kinds of generating resources. In fiscal year 2003, Columbia set a new record of 369 continuous days on line. By comparison, the previous record-set in 1997-was 270 days.

Credit for such achievement rests with the people of Energy Northwest and with our 18 member utilities, and with our governing boards. Without their guidance and willingness to participate in such projects as Nine Canyon, or to endorse explorations into "green" power, many of our successes would have remained dreams.

Three years ago, Energy Northwest had 13 member utilities; today, there are 18. Pacific and Chelan public utility districts rejoined Energy Northwest during this past year. We view this renewed interest as an endorsement of the value Energy Northwest adds to public power, as well as an avenue toward strengthened leadership in public power.

This annual report highlights a number of initiatives worked on throughout the year, including completion of a Board-driven examination of the effectiveness of Energy Northwest leadership in operating Columbia Generating Station; freeing up more than $315 million in reserves for Bonneville Power Administration through the Debt Optimization Program; continuing to pursue ISO 14001 certification through an approved Environmental Management System; continuing to explore new technologies, such as biomass; and continuing to build on our greatest asset-our people-by providing training and educational opportunities and incentives.

We have built a foundation, tested it, and found it sound. It is our ongoing challenge and commitment to meet the needs of the public power community. If member utilities want more green power, we'll provide it. If they want energy services, we'll supply them. If they want innovative solutions to energy-related problems, we'll fashion them.

And, we'll actively pursue learning and improved performance. A longer than planned refueling outage at Columbia reinforced our belief that we must set ever-higher standards in order to reach our goals and meet the needs of the region.

Energy Northwest will do all this while maintaining its commitment to responsible stewardship of all its assets-financial, environmental, and social; for only through maintaining the trust we've earned over the past decade can we build a better future.

Energy Northwest was created to do the work that public utilities could not do alone. That was our beginning and is our reason for being. Together we can achieve great things. Thank you for the opportunity to serve public power and the ratepayers of the region.

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r7w mmr,1_0 Robert Graves Richard Riley Vera Claussen*

President Vice President Secretary Commissioner, Commissioner, Commissioner, Benton County PUD Wahkiakum County PUD Grant County PUD Darrel Bunch

• Assistant Secretary Bob Boyd Tom Casey*

Commissioner, Commissioner Commissioner, Okanogan County PUD Chelan County PUD Grays Harbor County PUD Mark Crisson Dan Gunkel* Ronald L. Hatfield Director of Utilities, Commissioner, Commissioner, Ta coma Public Utilities Klickitat County PUD Pacific County PUD No. 2 Jack Janda Parker Knight hi Del Lathim Commissioner, Commissioner, K_ Commissioner, Mason County PUD No. 1 Skamania County PUD I t _

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Franklin CountyPUD Judy Ridge Roger Sparks* John Whalen Commissioner, Commissioner, Commissioner, Asotin County PUD Kittitas County PUD Mason County PUD No. 3

• Also serves on the executive board not pictured -

Gregg Caudell, Commissioner, Ferry County PUD Gary Zarker Superintendent, Raymon Sieler, Seattle City Light Energy Services Director, City of Richland I'

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Vic r-nM, Chief Executive Officer Chief Nuclear Officer Rod Webring Jerry mucera Vice President IAssistant to the CEO Nuclear Generation Cheryl Whitcomb Jack Baker Vale Atcinson Chief Knowledge Officer Vice President Vice President Energy I Business Technical Services Services /PIO Expanded Membership Energy Northwest began the fiscal year with 16 completion of the White Bluffs Solar Station-and member utilities, and ended it with 18 members. Energy the ongoing operation of both the Packwood Lake Northwest's Board of Directors voted unanimously to Hydroelectric Project and Columbia Generating Station.

approve applications for membership of two PUDs. In July 2002, Pacific County PUD No. 2 rejoined Energy Environmental Management System Northwest. In April 2003, Chelan County PUD also Energy Northwest recognizes environmental rejoined Energy Northwest. Their return isan indication stewardship as a priority, and iscommitted to operating that Energy Northwest is coming to be seen as a leader in a manner that responsibly balances environmental, in the region's energy picture. financial, and social factors. We are developing and Energy Northwest was formed by member utilities implementing an environmental management system that realized there is strength in numbers. As a joint (EMS) that meets the rigorous requirements of the operating agency, Energy Northwest develops public international ISO 14001 standard. Certification to the power projects that one or two public utilities may EMS standard by an independent, accredited registrar is be unable to accomplish alone. And the value of planned for 2005.

that collective power is evident in some of Energy Through the EMS, environmental protection will be Northwest's recent accomplishments-completion of integrated into everything we do, from decision-making the Nine Canyon Wind Project and its Phase IIexpansion, to maintenance. An EMS ensures that environmental P J a i, ' j1.

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issues are systematically identified, controlled, and Northwest's Board of Directors approved expansion monitored. Moreover, an EMS provides mechanisms for of the project in April. Also in April, the Executive responding to changing environmental conditions or Board approved a $21.7 million bond sale to finance requirements, reporting on environmental performance, construction of Phase II, which will add 12 turbines and reinforces continual improvement. It includes and 15.6 megawatts, for a total of 49 turbines with a programs to prevent pollution, ensure compliance with capacity of 63.7 megawatts of renewable energy.

all requirements, and strengthen employee awareness Construction began in mid-May 2003. The same of their role in protecting the environment for current team will complete the expansion-Energy Northwest, and future generations. RES, Bonus and Benton County PUD. The first two These initiatives are in line with Energy Northwest's additional turbines were producing power by the end mission to best serve the ratepayers by providing of September 2003. Completion of Phase II is expected reliable power and other energy services to the region by the end of December.

at the least cost, while protecting the environment. Top: Nine Canyon visitors stand next to a rotor and three turbine blades, before it's lifted to the top of a wind tower.

Bottom Right: Energy Northwest employees, Dan Porter Nine Canyon Wind Project (left) and Dave Kobus at Nine Canyon.

Bottom Left: Strings of turbines, generating electricity at Nine Canyon Wind Project.

The last of the 37 turbines was erected at the end of August 2002, followed by a period of acceptance rU__ .

testing. Commercial operation of the Nine Canyon Wind Project began in September 2002. Construction of the project was completed on time and within budget.

Total generation from the project, between October 1, 2002, and the end of June 2003 was 92,414,478-kilowatt hours of electricity.

By January, the success of the project had produced sufficient interest in a Phase II addition. Energy l = . 0. b . ... ... . t.Fy

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Third, as of mid-September, the station had operated Several other key initiatives associated with long-for four years without a discharge of wastewater term plant operations and reliability were initiated or containing detectable amounts of radioactive material. continued during the fiscal year, including a corrosion Energy Northwest has a state permit that allows mitigation strategy, our 16th refueling outage, and the plant to discharge small, regulated amounts of continued work on spent fuel storage.

radioactivity to the Columbia River. But, the people at the station set a goal to take all feasible measures to avoid discharging radioactive materials. We've met that goal four years in a row.

Such achievements are important to our employees, of course, but also to the people who own Columbia Generating Station-the ratepayers of the Pacific Top: A double rainbow over Columbia Generating Station Northwest. Quality nuclear plants pay attention to following a Spring rain shower.

Bottom Right: Energy Northwest employees, (from left) everything: from driving down the cost of power to Dan Ross, Randy Crawford, and Jerry Baker at Packwood Lake Hydroelectric Project increasing the days on line, from lowering cumulative Bottom Left: Beyond the tailrace sits the Packwood Lake powerhouse.

dose to increasing thermal efficiency.

The people of Energy Northwest also have kept another promise to the region-producing much-needed electricity at the lowest cost possible. During the 2003 fiscal year, the cost of power from Columbia Generating Station was nearly half of what it was a decade before, when judged against inflation. And the projected price of power for fiscal year 2004 is lower still.

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Enhanced Security The two-year due diligence study had begun with In August, we completed construction and an examination of the feasibility of completing WNP-1.

implementation of enhanced security measures and In the course of the investigation, however, questions practices at Columbia Generating Station, which had arose as to the efficacy of third-party management or been initiated due to an NRC mandate during fiscal year sale of Columbia Generating Station. After thorough 2002. Throughout the rest of the year, we hired and study, the Executive Board concluded there would be no trained a number of additional nuclear security officers, clear net benefit to the ratepayers of the region under responded to subsequent NRC mandates related to either alternative. Additionally, Energy Northwest's access authorization and background reinvestigations, member utilities overwhelmingly opposed both as well as adjusting our security measures in keeping alternatives.

with the Office of Homeland Security's national threat Comparing the performance of Columbia with levels. similar plants was an important part of the Review of Nearly two years after the terrorist attacks of September 11, 2001, security at facilities deemed to be Top: Inside the generator core during R-16.

critical infrastructure continues to be closely scrutinized Bottom Right. Outage Management Services sta ff (from left) John Suing, Suzi Kroma, and Rolly Fuller.

by regulators, the media, and the public. Safety and Bottom Left. Turbine Building during R-16.

security have been a high priority since the station began operation nearly 20 years ago, and our commitment to keeping our community safe will not waver.

Board Review of Nuclear Programs At its regular quarterly meeting in January, the Energy Northwest Board of Directors unanimously endorsed the report Energy Northwest Executive Board Review of Nuclear Programs.

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These new bonds substitute lower-interest, Energy NoaNet Northwest bonds for higher-interest Treasury debt The Northwest Open Access Network (NoaNet) is a held by Bonneville. In addition, the Debt Optimization non-profit, open access, fiber-optic network developed Program alters the payment profile of the existing debt. to bring high-speed broadband communications While improving BPA's overall debt profile, Energy and services to rural areas of the Northwest. Energy Northwest funds also produce an immediate debt Northwest is a founding member. NoaNet offers access interest savings for ratepayers of about $20 million a to the network ring licensed from BPA and other year. broadband providers in the state of Washington.

Early in 2003, Energy Northwest and Benton and Franklin PUDs announced the formation of the Three Rivers Local InterNetwork Exchange, known as TRLINX using the NoaNet network. TRLINX has two locations in Top: One of Energy Northwest's wireless communication towers.

Bottom Right: Energy Northwest employee, Justin Homer, checks on some broadband and internet connection Zintel Canyon Wind Project equipment - part of the NoaNet network.

Bottom Left: The Hanford Generating Project, along the Originally approved as a project in April 2002, Columbia River, next to N-Reactor.

Zintel Canyon has not yet been developed. Although Zintel Canyon has the potential for approximately 50 megawatts of wind power, there has not been sufficient interest from potential power purchasers to proceed with development.

Because Energy Northwest iscommitted to continued development of renewable energy, it will maintain the lease and permits on this site until there is firm interest in developing it as a public power resource.

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the community, one at the Applied Process Engineering Today, APEL tenant companies are devising solutions Laboratory in North Richland and the other at Franklin to pressing issues affecting energy, the environment, County PUD's co-location facility at the PUD office in health and safety, and national security. Some have Pasco. The Benton County PUD broadband network is already achieved notable successes in their fields of interconnected at the Franklin County PUD facility as endeavor, including FDA approval of a new prostate well, making this a community focused solution. TRLINX cancer treatment, full-scale production of air sampler is a local internetwork exchange that serves as a central and contaminant eradication and containment methods hub to route or exchange local Internet-bound traffic, and devices, a new fuel processing unit, and production providing direct connections between local entities and and distribution of a family of dermatological skin Internet Service Providers (ISPs) that allow faster and products.

smarter network performance. APEL is good for business: In addition to being financially self-sustaining, it plays an important role in economic development across Washington and the Fuel Cell region. Continuing support from Energy Northwest and Energy Northwest, along with Bonneville Power other founding contributors to the project, including Administration (BPA) and IdaTech of Bend, Oregon, Pacific Northwest National Laboratory, the Port of was involved in a fuel cell demonstration. The fuel cell Benton, the U.S. Department of Energy, TRIDEC, the was available to member utilities for demonstrations City of Richland, and WSU Tri-Cities, has played a pivotal at energy fairs and other appropriate events until role in APEL's noteworthy achievements over the last late 2002 when BPA announced it had terminated its five years.

contract with IdaTech. BPA is currently evaluating other fuel cell products for use in the Northwest; Energy Biomass Northwest will continue to work with them to develop Energy Northwest continues its investigation into other distributed generation programs.

another renewable energy resource option called biomass. This technology converts various waste Applied Process Engineering products from the food, cattle, wood product, dairy Laboratory (APEL) or other similar industries into methane, which in turn APEL celebrated five years of service in April 2003. can be used to fuel internal combustion engines turning APEL's mission is to provide an incubator environment generators. The potential benefits of biomass power to for new technology and business development in the the environment are significant. This technology can Tri-Cities. In the five years since APEL opened its doors, reduce odor, ground and surface water contamination, 16 companies have been served. and the release of methane into the atmosphere.

APEL is unique in that it is wholly devoted to Energy Northwest's goal is to add to those benefits the science, engineering, and manufacturing enterprises, production of clean, affordable electric energy from a with an emphasis on technical infrastructure, hardware renewable fuel source.

as opposed to software, as well as health and safety.

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Ocean Wave Energy Northwest Energy Innovation Center Although Energy Northwest remains interested A challenging financial forecast and budgetary in a proposal by the AquaEnergy Group of Mercer cutbacks forced the Bonneville Power Administration to Island, Washington, to build an ocean wave energy withdraw funding for the Northwest Energy Innovation demonstration project off the Washington Coast, Center (NEIC) in October 2002. As a result, the Center the project has not moved forward due to a lack of has ceased all activities requiring financial support until funding. a new funding source has been identified.

The concept calls for buoys-similar to those used Originally, the Center was founded to support for navigational aids by the Coast Guard-that harvest renewable energy projects. As a founding member, kinetic energy from ocean swells, convert it to electrical Energy Northwest provided licensing and permitting energy and then send it to shore-side substations via expertise to the wave energy demonstration developed submerged cables. by AquaEnergy Group, Inc. It was an excellent AquaEnergy received some initial aid from the Top: Environmental Lab Services at work.

Bottom Right: Energy Northwest employee Northwest Energy Innovation Center, of which Stan Davison (left) and Farmer Steve DeRuyter at the site of the Biomass Demonstration Project in Energy Northwest is a founding participant. As part Franklin County Bottom Left: Energy Northwest is participating in a demonstration project that will turn cow of the initial steps toward an ocean wave energy manure into electricity.

demonstration project, Energy Northwest provided the entrepreneurial firm help in gaining siting permits.

Obtaining demonstration project funding is the next critical step.

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the need for the facility to be on line. Therefore, their In 2004, the PUD plans to install a gas cleanup operation did not need our support. system that should further reduce maintenance costs This 44-megawatt combustion turbine plant is and initiate contracts for an engine heat recovery located in Pasco, Washington, and owned by Franklin system that will increase station capacity by nearly a County PUD and Grays Harbor County PUD. megawatt.

The H.W. Hill Landfill Gas Power Plant is a 10.5 MW H.W. Hill Landfill Gas Power Plant facility that converts landfill methane to electricity and Since October 2001, when Energy Northwest is located near Roosevelt, Washington.

entered into an agreement with Klickitat PUD to jointly operate the station, the facility's material condition and corresponding performance have improved.

Station operators, with Energy Northwest Top: I & CTech Colin Carson works in the Calibration supervision and support, have improved the Laboratory.

Bottom Right: Energy Northwest employees, maintenance program at the station, which has reduced Don Queen (left) and Jim Emery are responsible for the Calibration Laboratory overall operating costs. Daily, monthly, and annual status Bottom Left: Energy Northwest provides operations and maintenance services to Klickitat County PUD at the reports, along with an operating plan and budget, are H.W. Landfill Gas Power Plant provided to Klickitat PUD as part of the operations and maintenance services agreement.

Since 2001, station adjusted capacity has increased from approximately 70 percent to almost 95 percent, and on-line time has increased approximately 25 percent.

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Energy Northwest remains steadfast in its commitment to being responsible stewards of all its assets, be they financial, environmental, or social.

As Energy Northwest begins fiscal year 2004, it Considering the financial situation in the region, Energy is faced with ongoing challenges, as well as some Northwest is very cost conscious, although it will never new ones. In the coming year, Energy Northwest will jeopardize safety and long-term reliability of its assets continue to focus on personnel and industrial safety based on cost considerations alone. Energy Northwest is through the implementation of a behavior-based safety aggressively moving forward in its pursuit of ISO 14001 training program that's been proven effective at other certification of its Environmental Management System.

stations throughout the industry.

Energy Northwest is already developing a detailed Top: Energy Northwest CEO, Vic Parrish, accepts the action plan for improving all areas of its performance E.F Scattergood award from Mark Crisson of Tacoma Public Utilities at the APPA conference earlier in the year.

at Columbia Generating Station-from equipment Bottom Right: Energy Northwest's Corporate Training, Leadership & Development is in the capable hands of reliability issues to the spare parts program, from (from left) Bryce Linville, Kathy Martin, Lynne Pagel, and Georgia Hammond.

raising the bar on human performance standards to Bottom Left: Information Services employees (from left)

Paul Homer, Gail Dockter, and Justin Mays keep our improving communication with peers, regulators, and computers running.

other industry organizations.

Energy Northwest is expanding the Nine Canyon Wind Project and is working with a pioneer in biomass electrical generation technology to develop a demonstration facility located in Franklin County.

It is also reaching out to members, the public power community, and other potential customers who might benefit from other expertise it has developed over the years.

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For the year ended June 30, 2003 (Dollars in Millions)

Operating Statistics Columbia Generating Station Packwood Lake Project FY2003 FY2002 FY2003 FY2002 Net Generation (1) 7,738 9,262 91 82 Plant Availability (2) 81.0% 95.4% 96.2% 81.6%

Plant Capacity (3) 78.5% 92.0% 34.7% 33.9%

Cost of Power (cents/kWh)

Production Expenses (4) 2.0 1.4 0.73 0.96 Industry Basis (5) 3.01 2.06 Investment Performance FY2003 FY2002 CHANGE (%)

Income 16 25 -36.0%

Average Balance 558 661 -15.6%

Rate of Return 2.94% 3.78% -22.2%

Bonds Outstanding FY2003 FY2002 CHANGE (%)

Nuclear Project No. 1 Fixed $1,665 $1,995 -16.5%

Weighted Average 5.6% 5.8% -3.4%

Variable $ 316 $ 125 152.8%

Average Rate 1.1% 3.6% -31.3%

Columbia Generating Station Fixed (6) $1,987 $1,954 -1.7%

Weighted Average (7) 5.5% 5.5% 0.0%

Variable $ 102 $ 114 -10.5%

Average Rate 1.2% 3.6% -25.0%

Nuclear Project No. 3 Fixed (6) $1,098 $1,462 -33.2%

Weighted Average (7) 5.6% 5.5% 1.8%

Variable $ 466 $ 178 161.8%

Average Rate 1.2% 3.6% -25.0%

Packwood Lake Project Fixed $ 4.3 $ 4.8 -10.4%

Weighted Average 3.7% 3.7% 0.0%

Nine Canyon Wind Project Fixed $ 92.4 $ 70.7 30.7%

Weighted Average 5.3% 5.7% -7.0%

(1) Expressed in millions of kWh. Columbia's generation includes BPA economic dispatch credit of: FY2003: 122; FY2002: 336.

(2) Plant availability is defined as the ratio of the sum of source hours and reserve shut down hours to total period hours.

(3) Plant capacity factor is the ratio of the actual energy production over a given period of time to the maximum energy production capability.

(4) Includes operating, maintenance, and fuel amortization costs per the EIA-412 report submitted to the Federal Energy Regulatory Commission (FERC).

(5) Industry cost of power includes expenses associated with operations and maintenance, capital additions, administrative and general, fuel-related costs and estimated costs associated with the economic dispatch credit.

(6) Excludes compound interest bonds accretion.

(7) Excludes compound interest bonds.

The management of Energy Northwest is responsi- ment of the effectiveness of internal controls, and for ble for preparing the accompanying financial statements recommendations of possible improvements thereto. In and for their integrity. The statements were prepared addition, PricewaterhouseCoopers LLP, has considered in accordance with generally accepted accounting prin- the internal control structure in order to determine ciples applied on a consistent basis, and include amounts its auditing procedures for the purpose of expressing that are based on management's best estimates and an opinion on the financial statements. Management judgments. has considered the internal control structure in order The financial statements have been audited by to determine its auditing procedures for the purpose PricewaterhouseCoopers LLP, Energy Northwest's inde- of expressing an opinion on the financial statements.

pendent accountants. Management has made available Management has considered recommendations made to PricewaterhouseCoopers LLP, all financial records and by the internal auditor and PricewaterhouseCoopers related data, and believes that all representations made LLP, concerning the control procedures and has taken to PricewaterhouseCoopers LLP, during its audit were appropriate action to respond to the recommendations.

valid and appropriate. Management believes that, as of June 30, 2003, internal Management has established and maintains inter- control procedures are adequate.

nal control procedures that provide reasonable assur-ance as to the integrity and reliability of the financial J. Vic Parrish statements, the protection of assets from unauthorized Chief Executive Officer use of disposition, and the prevention and detection of fraudulent financial reporting. These control procedures provide for appropriate division of responsibility and are A.E. Mouncer documented by written policies and procedures. Vice President, Corporate Servicesl Energy Northwest maintains an ongoing internal General Counsel/Chief Financial Officer auditing program that provides for independent assess-C-CIZ The Executive Board's Audit, Legal and Finance The Committee met regularly with Energy North-Committee iscomposed of seven independent directors. west's internal auditor and independent accountant to Members of the Committee are Margaret Allen, Chair- discuss the results of their examinations, their evalua-man; Vera Claussen, Larry Kenney, Sid Morrison, Amy tions of Energy Northwest's internal controls, and the Solomon, Roger Sparks, and John Cockburn, Ex Officio. overall quality of Energy Northwest's financial report-The Committee held 12 meetings during the fiscal year ing. The meetings were designed to facilitate any pri-ended June 30, 2003. vate communications with the Committee desired by the The Committee oversees Energy Northwest's finan- internal auditor or independent accountant.

cial reporting process on behalf of the Executive Board. In fulfilling its responsibility, the Committee discussed with Margaret Allen, the internal auditor and the independent accountants, Chairman, Audit, Legal and Finance Committee the overall scope and specific plans for their respective audits, and reviewed Energy Northwest's financial state-ments and the adequacy of Energy Northwest's internal controls.

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To the Executive Board of Energy Northwest:

We have audited the accompanying balance In our opinion, the basic financial statements sheet of Energy Northwest and the related individual referred to above present fairly, in all material respects, balance sheets of Energy Northwest's business units the financial position of Energy Northwest and Energy and internal service fund as of June 30, 2003, and the Northwest's business units and internal service fund as related statements of operations and cash flows for the of June 30, 2003, and the results of their operations and year then ended. Energy Northwest's business units their cash flows for the year then ended in conformity include the Columbia Generating Station, Packwood with accounting principles generally accepted in the Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear United States of America.

Project No. 3, the Business Development Fund, Gray's The Management's Discussion and Analysis (MD&A)

Harbor Energy Facility and the Nine Canyon Wind Project. listed in the table of contents is not a required part of These basic financial statements are the responsibility of the basic financial statements but is supplementary Energy Northwest's management. Our responsibility is information required by the Governmental Accounting to express an opinion on these basic financial statements Standards Board. The information in MD&A has not based on our audits. been subjected to the auditing procedures applied in the We conducted our audits in accordance with audit of the basic financial statements, and accordingly, auditing standards generally accepted in the United we express no opinion on it.

States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the basic 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. An audit also includes assessing the accounting principles used and Portland, Oregon significant estimates made by management, as well as September 5, 2003 evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

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F

/- 2! i.:j.j I ' ?, -1. t I ',I- j

MANAGEMENT'S DISCUSSION AND The statements of operations and fund equity report ANALYSIS information relating to all expenses, revenues and equity that reflect the results of each Business Unit and Energy Northwest is a municipal corporation and its related activities over the course of the fiscal year. This joint operating agency of the State of Washington. information aids in benchmarking activities, conducting Each Energy Northwest Business Unit is financed and comparisons to evaluate progress, and whether the accounted for separately from all other current or future Business Unit has successfully recovered its costs.

business assets. The following discussion and analysis is organized by Business Unit. The management discussion The statements of cash flow reflect cash receipts and and analysis of the financial performance and activity is disbursements and net changes resulting from operating, provided as an introduction and to aid in comparing the financing and investment activities. The statements basic financial statements for the Fiscal Year ended June provide insight into what generates cash, where the cash 30, 2003, with the basic financial statements for the Fiscal comes from, and what it was used for.

Year ended June 30, 2002. Energy Northwest has adopted accounting policies and principles that are in accordance The notes to the financial statements present disclosures with accounting principles generally accepted in the that provide for a full understanding of the material United States of America. Energy Northwest applies presented in the financial statements. This includes Generally Accepted Accounting Principles (GAAP) to the but is not limited to, accounting policies, significant extent it does not conflict with Governmental Accounting balances and activities, material risks, commitments and Standards Board (GASB) standards (see Note Bto financial obligations and subsequent events, if applicable.

statements).

The financial statements include the balance sheets, COLUMBIA GENERATING STATION statements of operations and fund equity; statements of cash flows, schedules of outstanding long-term debt The Columbia Generating Station Nuclear Power Plant and debt service requirements, and notes to the financial is owned by Energy Northwest and its Participants and statements for each of the Business Units. The balance operated by Energy Northwest. The Plant is a 1,153 sheet presents the financial position of each Business megawatt boiling water nuclear power station located Unit based on an accrual cost basis. The balance sheets on the Department of Energy's Hanford Reservation report information about construction work in progress, north of Richland, Washington. Columbia produced amount of resources and obligations, restricted accounts 7,616 GWh of electricity in Fiscal Year 2003, as compared and due to/due from balances (see Note B to financial to 8,926 GWh of electricity in Fiscal Year 2002. This statements) that reflect what is owed by each Business decline in generation is a result of three forced outages Unit. during Fiscal Year 2003 along with a scheduled refueling outage which currently occurs every two years.

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BALANCE SHEET ANALYSIS - Columbia Generating established a Columbia Construction Fund to be used for Station has just completed its first 2-year refueling and future capital project costs. The decrease of $110,140,000 maintenance outage in Fiscal Year 2003. Utility Plant in is due to the reclassification of Decommissioning and Service increased by $64,149,000 from $3,419,489,000 Site Restoration values to be presented in the Deferred in Fiscal Year 2002 to $3,483,638,000 in Fiscal Year Charges, Costs in excess of billings section of the Balance 2003. The increase includes capitalization of an asset Sheet due to SFAS 143, "Accounting for Obligations retirement cost of $31,110,000 due to the adoption of Associated with Retirement of Long-Lived Assets" (see Financial Accounting Standards Board Statement 143 Note G). The Debt Service Funds variance of $84,232,000 (see Financials Note G). The remaining $33,039,000 from Fiscal Year 2002 to 2003 is attributed to Bond Fund increase is made up of the Independent Spent Fuel Reserve free-ups. The variance of $21,443,000 in Current Storage Installation (ISFSI) Project, and upgrades to Assets is attributable to the fact that investment rates Columbia's Security and Chemical Injection Systems. were down significantly from Fiscal Year 2002 to 2003.

Construction Work in Progress decreased by $16,367,000, from $30,355,000 in Fiscal Year 2002 to $13,987,000 in STATEMENT OF OPERATIONS ANALYSIS - Columbia Fiscal Year 2003, mainly due to the ISFSI Project along Generating Station is a net-billed Project. Energy with heightened security improvements being put into Northwest recognizes revenues equal to expense for service. each period on net-billed projects. No net revenue or loss is recognized and no equity is accumulated.

Costs in Excess of Billings has increased from $120.7 The following changes from Fiscal Year 2002 for Net million in Fiscal Year 2002 to $325.8 million in Fiscal Operating Revenues are: Operating Revenues needed Year 2003. This is largely due to refunding current to cover expenditures are up $32,952,000 from maturities while extending the overall maturities on $406,995,000 in Fiscal Year 2002 to $439,947,000 in Fiscal the refunding debt. The lack of a need for funds to Year 2003. Nuclear fuel expenditures are down, from pay off current maturities results in a cost that exceed $30,311,000 in Fiscal Year 2002 to $27,061,000 in Fiscal billings. In addition, the accumulated decommisioning Year 2003, because of reduced generation in an outage and site retoration accrued costs are not currently billed year. Less generation in an outage year resulted in less to Bonneville Power Association (BPA). BPA holds Generation Taxes, down $961,000, from $3,198,000 in and manages a trust fund for the purpose of funding Fiscal Year 2002 to $2,237,000 in Fiscal Year 2003, and decommisioning and site restoration (see Note B to the Spent Fuel Disposal fees reduction of $1,234,000 from financials, Decommisioning and Site Restoration). The $8,487,000 in Fiscal Year 2002 to $7,253,000 in Fiscal balances in these external trust funds are not reflected Year 2003. Operations and Maintenance expenditures on Energy Northwest's Balance Sheet. were higher by $42,480,000, from $116,832,000 in Fiscal Year 2002 to $159,312,000 in Fiscal Year 2003. This is The Restricted Assets Special Funds decreased from Fiscal the result of a diesel generator and condenser leak Year 2002 to 2003 by $96,751,000. The variance increase unplanned outage along with the scheduled refueling of $13,389,000 is due to the fact that the 2003 Bond Issue and maintenance outage. Decommissioning expenses 26 People

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increased $10,098,000 in Fiscal Year 2003 primarily due Year 2003 versus 81.61 GWh in Fiscal Year 2002.

to the adoption of Financial Accounting Standards Board Statement 143 for Asset Retirement Obligation. This BALANCE SHEET ANALYSIS - Current Assets have statement calls for the obligation to be recorded at a increased $843,000 from $1,379,000 in Fiscal Year 2002 rate depreciated over the life of the plant. The amount to $2,222,000 in Fiscal Year 2003, due to increased sales is a combination of probable cases for accomplishing revenue from greater generation. As a result, Packwood the required retirement obligations and their associated accrued $830,000 in excess cash that is available to be probabilities. The amount will also be increased each returned to the Participants in October 2003.

year to account for the accretion value of the obligation.

Past estimates were based on the funding statement STATEMENT OF OPERATIONS ANALYSIS - The agreement methodology required under plant license. The amount with Project Participants obligates them to pay annual calculated was then being costed over the life of the costs and they receive excess revenues. Accordingly, plant (see Note B to financial statements for further Energy Northwest recognizes revenues equal to explanation). expenses for each period. No net revenue or loss is recognized and no equity is accumulated. Revenues Other Income and Expense changes are the net effects decreased because of the cost decreases detailed below.

on Columbia Debt (see Note E to financial statements). Operations and Maintenance along with Administrative Investment Income was adversely affected by historically and General expenditures decreased $282,000, from low rates of return resulting in a decline of $4,789,243 $1,368,000 in Fiscal Year 2002 to $1,086,000 in Fiscal Year from $11,540,483 in Fiscal Year 2002 to $6,751,239 2003. This was due to unusually high costs in Fiscal Year in Fiscal Year 2003. Additionally, results of the Bond 2002 caused by an extended outage and a transformer Refunding issues reduced interest expense by $2,098,215 failure.

from $115,110,462 in Fiscal Year 2002 to $113,002,247 in Fiscal Year 2003. Amortization of Bond Discount Investment Income increased due to the participants Expense and Amortization of Bond Refunding netted electing to leave $500,000 in excess cash from Fiscal Year an increased expense of $180,063 as a result of the Bond 2002 to fund future re-licensing expenditures. Fiscal Refunding issues. Year 2002 had $36,000 compared to $44,000 in Fiscal Year 2003, an $8,000 increase.

PACKWOOD LAKE HYDROELECTRIC PROJECT The Packwood Lake Hydroelectric Project is owned and operated by Energy Northwest. The Project consists of a dam at Packwood Lake and a powerhouse 1800 ft. below the dam that is located south of Packwood, Washington.

Packwood produced 91.08 GWh of electricity in Fiscal People *Vision e Solutions 27

NUCLEAR PROJECT NO. 1 is no longer responsible for any site restoration costs as they were transferred with the assets to the Satsop Nuclear Project No. 1, a 1,250 MWe plant, was placed Redevelopment Project (see Note F). The last parcel of in extended construction delay status in 1982, when land was transferred during this period. The debt service it was 65 percent complete. On May 13, 1994, Energy related activities remain and are net-billed.

Northwest's Board of Directors adopted resolutions terminating Nuclear Project No. 1. In Fiscal Year 1999, BALANCE SHEET ANALYSIS - Under the debt optimization the assets and liabilities of Hanford Generating Project program, long-term debt was decreased $55,590,000, were consolidated into Nuclear Project No. 1. The from $1,817,152,000 in Fiscal Year 2002 to $1,761,562,000 Hanford Generating Project site is being restored and in Fiscal Year 2003 due to principle payments and debt all funding requirements are net-billed obligations of restructuring to take advantage of lower interest rates.

Nuclear Project No. 1. Energy Northwest wholly owns nuclear Project No. 1. Termination expenses and debt STATEMENT OF OPERATIONS ANALYSIS - Investment service costs comprise the activity on Nuclear Project Income decreased $2,046,000 due to historically low No. 1. rates of return, from $5,682,000 in Fiscal Year 2002 to $3,636,000 in Fiscal Year 2003. In addition, Plant BALANCE SHEET ANALYSIS - Under the debt optimization Preservation and Termination costs increased $3,198,000 program, long-term debt was decreased by $124,988,000, due to an IRS arbitrage penalty in Fiscal Year 2003 as from $2,081,189,000 in Fiscal Year 2002 to $1,956,201,000 compared to Fiscal Year 2002 rebate.

in Fiscal Year 2003, due to principle payments and debt restructuring to take advantage of lower interest rates. BUSINESS DEVELOPMENT FUND STATEMENT OF OPERATIONS ANALYSIS - Investment The Business Development Fund (BDF) was created by Income decreased $4,103,000, from $6,669,000 in Fiscal Executive Board Resolution No. 1006 in April 1997, for Year 2002 to $2,566,000 in Fiscal Year 2003, because the purpose of holding, administering, disbursing, and of historically low rates of return. The average rate of accounting for Energy Northwest costs and revenues return for Fiscal Year 2002 was 3.78 percent versus the generated from engaging in new energy business Fiscal Year 2003 average rate of 2.94 percent. opportunities.

NUCLEAR PROJECT NO. 3 The BDF is managed as an enterprise fund. Three business sectors have been created within the fund:

Nuclear Project No. 3, a 1,240 MWe plant, was placed General Services, Generation, and Professional Services.

in extended construction delay status in 1983, when Each sector may have one or more programs that are it was 75 percent complete. On May 13, 1994, Energy managed as a unique business activity. A fourth business Northwest's Board of Directors adopted resolutions sector, Business Unit Support, has been created to terminating Nuclear Project No. 3. Energy Northwest capture costs associated with developing programs.

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STATEMENT OF OPERATIONS ANALYSIS - Operating represented 50 percent of all Wind Mining expenditures Revenues in Fiscal Year 2003 totaled $11,163,000 as to date. These costs are for research and investigation of compared to Fiscal Year 2002 revenues of $6,808,000, new potential wind sites and expenditures that cannot an increase of $4,355,000. Energy Northwest has be directly attributable to any single wind project.

experienced significant growth in several of its business programs. Among the major business program In addition to wind generation, Energy Northwest is contributors to this growth are: reactor outage services working with Soil Search LLC, of Kennewick, Washington, by $2,095,000, operations and maintenance services by to develop a full-scale biomass power demonstration

$1,570,000, and environmental services by $291,000. unit at a dairy farm near Pasco, Washington. This unit is expected to demonstrate a newly developed bioreactor Net Revenues for the Fiscal Year 2003 showed a $683,000 technology produced by Soil Search. This research and loss as compared to approximately a $1,740,000 loss in development effort may provide a quantum leap in Fiscal Year 2002. methane production from dairy cow manure. In Fiscal Year 2003, approximately $370,000 was expended on Two of Energy Northwest's Research and Investigation developing this project.

business projects, Zintel Canyon Wind Project and Wind Mining, accounted for $366,000 in expenditures with In Fiscal Year 2003, $201,000 was spent on sales and no revenues. Energy Northwest was created to enable marketing efforts and another additional $1,071,000 was Washington public power utilities and municipalities spent on developing the organizational infrastructure to to build and operate generation projects. With the support the growing business. Total operating revenues growing interest in renewable energy sources, Energy increased 64 percent in Fiscal Year 2003.

Northwest is seeking to meet some of this demand with new wind generation projects. The Board of Directors The Business Development Fund receives contributions approved an expansion of the Nine Canyon Wind Project from the Internal Service Fund to cover cash needs as its next wind development site. In Fiscal Year 2003, during this startup period. They are not expected to be

$161,000 was expended to begin developing the Nine paid back and are shown as contributions.

Canyon Phase II project. The Business Development Fund will be reimbursed from the project, upon commercial GRAYS HARBOR ENERGY FACILITY operation, for these development costs. In Fiscal Year 2003, Energy Northwest's Nine Canyon Wind Project Becoming the operator of the Grays Harbor Energy Phase I was completed and upon commercial operation Facility is a key component in Energy Northwest's (September 25, 2002) the development costs totaling strategic plan to eventually own and operate combined

$693,000 were reimbursed to the Business Development cycle gas turbine power plants. This contract will be the Fund. In addition, the participants of the Nine Canyon first step toward establishing a credible position in the Wind Project reimbursed the Business Development Combustion Turbine power generation market. It will Fund $209,000 for Wind Mining expenditures. This provide the basis for Energy Northwest to become a People

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major supplier of Operations and Maintenance services NINE CANYON WIND PROJECT to other public utilities in the Northwest and to become an owner of gas turbine generating facilities, as well. The Nine Canyon Wind Project is owned and operated by Energy Northwest. The Project is located in the Horse STATEMENT OF OPERATIONS ANALYSIS - Non-Operating Heaven Hills area southeast of Kennewick, Washington.

revenues were $5,259,000 and $1,479,000 for Fiscal Year Electricity generated by the Project is connected to the 2002 and Fiscal Year 2003, respectively. This decrease Bonneville Power Administration transmission grid via of $3,780,000 is due to the sale of the site in Fiscal a substation and transmission lines constructed by the Year 2002. Benton County Public Utility District. The total project will produce enough energy capacity for approximately On January 15, 2001, Energy Northwest entered into an 20,000 average homes.

agreement to sell the Grays Harbor Energy Facility site to the Duke Energy North America (DENA) affiliate, Duke Phase I of the project consists of 37 wind turbines, each Energy Grays Harbor, LLC (DEGH). Energy Northwest with a maximum generating capacity of approximately recognized a total of $5,000,000 for the sale of the site 1.3 megawatts of electricity, for a total wind farm in Fiscal Year 2002. BPA was paid $2,137,000 due under capacity of 48 megawatts. Public Utility Districts in the the Hold Period and Option Development Agreements. Northwest, whose customers have expressed an interest Revenues in Fiscal Year 2003 were recorded for in purchasing at least a portion of their electricity from reimbursable costs and services provided to DENA. green power sources, purchase the electricity from the Project. Each purchaser of Phase I has signed a 22-year The actual sale of the land and assets at the site in Grays power purchase agreement with Energy Northwest.

Harbor County near Elma, Washington, has already been concluded successfully. This was to lead to the Phase II of the Project will consist of an additional 12 construction by DEGH of a 630 megawatt combined wind turbines with an aggregate generating capacity cycle 2-on-1 gas turbine power plant at the site to be of approximately 15.6 megawatts. As were the Phase I on-line by late 2003. Energy Northwest was to become turbines, the Phase II turbines will be manufactured by the operator of the Grays Harbor Energy Facility. Due to BONUS Energy A/S, and installed by Renewable Energy current market conditions, Duke Energy North America Systems (USA), Inc. The engineer-procure-construct has temporarily suspended construction on the Grays contract (EPC Contract) became effective as of May Harbor Energy Facility. Energy Northwest and DENA 2003. The first two units of Phase II were in operation have entered into a contract for site preservation by September 30, 2003. Phase II will commence full services during this construction suspension time period. operation by December 31, 2003. Each purchaser of DENA is determining the appropriate schedule for the Phase II has signed a 20-year power purchase agreement project to resume. with Energy Northwest.

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BALANCE SHEET ANALYSIS - Long-term debt in the INTERNAL SERVICE FUND form of bonds was sold in the amount of $70,675,000 to finance Phase I and $21,720,000 for Phase II of the The Internal Service Fund (ISF) (formerly the General Project. Construction for Phase I has been completed Fund) was established in May 1957. The Internal Service and the Project was declared commercially operational Fund provides services to the other funds. This Fund on September 25, 2002. Construction work in progress accounts for the central procurement of certain common for Phase II totaled $3,965,000 for Fiscal Year 2003. goods and services for the business units on a cost reimbursement basis (see Note A and Note B to financial STATEMENT OF OPERATIONS ANALYSIS - Operating statements). This Fund accounts for the performance Revenues in Fiscal Year 2003 totaled $3,464,000. fees paid by BPA to Energy Northwest for achieving The project received revenue from the billing of the performance goals related to the operation of Columbia project purchasers at a rate of $35.00 per MWh. Other Generating Station.

contribution of funds include $230,000 from the Renewable Energy Production Incentive (REPI). REPI BALANCE SHEET ANALYSIS was created as part of the Energy Policy Act of 1992 to Restricted investments and cash and available for sale promote increases in the generation and utilization of securities decreased $24.194 million from $27.103 million electricity from renewable energy sources and to further in Fiscal Year 2002 to $2.909 million in Fiscal Year 2003, the advances of renewable energy technologies. This due to the release of the majority of the Unclaimed program, authorized under section 1212 of the Energy Bond Fund and associated liability to Bonneville Power Policy Act of 1992, provides financial incentive payments Administration (BPA). The majority of variance, $22.8 for electricity produced and sold by new qualifying million is due to the disbursement of funds as per terms renewable energy generation facilities. of the settlement and Indemnification Agreement between BPA and Energy Northwest (BPA Contract No.

Operating Costs are expended for debt service and for 03PB-11322).

operational and maintenance items. The agreement with project purchasers anticipates a loss in Fiscal Year 2004 with additional cash needs being paid from STATEMENT OF OPERATIONS ANALYSIS existing project reserve funds. The reserve funds were Net Revenues for Fiscal Year 2003 were $434,000 versus established so that participant payments could start at $5,810,000 for Fiscal Year 2002. The main contributor

$35.00 per MWh and increase at 3 percent per year over to this variance of $5,376,000 is the suspension of the 22 years. The payment stream and the REPI receipts are Performance Fee award program by BPA in 2003.

projected to cover the total costs over the entire time frame.

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BALANCE SHEETS As of June 30, 2003 (Dollars in Thousands)

COLUMBIA PACKWOOD NUCLEAR NUCLEAR BUSINESS GRAYSHARBOR NINECANYON INTERNAL 2003 GENERATING LAKE PROJECT PROJECT DEVELOPMENT ENERGY WIND SERVICE COMBINED STATION PROJECT NO. I - NO. 3 - FUND FACILITY PROJECT SUBTOTAL FUND TOTAL ASSETS UTILITY PLANT (NOTE B)

In service $3,483,638 $ 12,991 S - $ - S 823 $ - S 48,478 $3,545,930 $ 43,837 $3,589,767 Accumulated depreciation (1,874,957) (12,083) (214) (1,630) (1,888,884) (29,124) (1,918,008) 1,608,681 908 - - 609 - 46,848 1,657,046 14,713 1,671,759 Nuclear fuel, net of accumulated amortization 121,275 121,275 121,275 Construction work in progress 13,987 3,965 17,952 17,952 1,743,943 908 - - 609 - 50,813 1,796,273 14,713 1,810,986 RESTRICTED ASSETS (NOTE B)

Special funds Cash 10 21 3 23 57 1,599 1,656 Available-for-sale investments 31,541 284 19,917 13,407 18,083 83,232 1,310 84,542 Accounts and other receivables 4,178 17 4,195 4,195 Prepayments and other 25 25 274 299 Due from other business units 2,129 2,129 Debt service funds Cash 57,877 2 32,987 27,324 6,053 124,243 124,243 Available-for-sale investments 4,900 743 17,602 23,498 1,325 48,068 48,068 Due from other funds 4,099 4,324 211 8,634 Other receivables 10 10 10 98,427 1,029 81,193 64,443 - - 25,501 270,593 3,183 263,013 LONG-TERM RECEIVABLES (NOTE B) 6,591 6,591 6,591 CURRENT ASSETS Cash 1,915 4 544 239 5 3 2,710 2,710 Available-for-sale investments 1.658 1,770 16,085 5,761 895 2,209 5,734 34,112 24,604 58,716 Accounts and other receivables 989 374 8 978 561 238 3,148 123 3,271 Due from Participants 841 12 9 862 862 Due from other business units 226 708 2,095 1,542 44 342 4,957 8,813 Due from other funds 12,750 7 3,072 9,381 90 25,300 Materials and supplies 70,739 70,739 70,739 Prepayments and other 628 67 51 746 166 912 Nuclear fuel held for sale 4,345 4,345 4,345 Plant &equipment held for sale 1,409 1,409 1,409 89,746 2,222 26,183 17,485 3,466 2,819 6,407 148,328 33,706 142,964 DEFERRED CHARGES Costs in excess of billings 325,818 2,097 1,921,575 1,701,508 3,950,998 3,950,998 Unamortized debt expense 15,271 2 16,531 13,194 4,286 49,284 49,284 Other deferred charges 1 5,110 5,111 5,111 341,090 2,099 1,938,106 1,714,702 - - 9,396 4,005,393 - 4,005,393 TOTAL ASSETS $2,279,797 $ 6,258 $2,045,482 $1,796,630 $ 4,075 $ 2.819 $ 92,117 $6,227,178 S 51,602 $6,228,947

• Project recorded on a liquidation basis See notes to financial statements 32 People *Vision e Solutions

BALANCE SHEETS (continued)

As of June 30, 2003 (Dollars in Thousands)

COLUMBIA PACKWOOD NUCLEAR NUCLEAR BUSINESS GRAYS HARBOR NINE CANYON INTERNAL 2003 GENERATING LAKE PROJECT PROJECT DEVELOPMENT ENERGY WIND SERVICE COMBINED STATION PROJECT NO. I - NO. 3 - FUND FACILTY PROJECT SUBTOTAL FUND TOTAL FUND EQUITY AND LIABILITIES FUND EQUITY (DEFICIT) $ - $ - $ - $ - $ 2,776 $ 1,848 $ (2,261) $ 2,363 4,121 6,484 LONG-TERM DEBT (NOTE E)

Revenue bonds payable 2,019,765 3,939 1,980,615 1,938,515 92,395 6,035,229 6,035,229 Unamortized discount on bonds - net 32,054 (8) 50,054 (142,111) 730 (59,281) (59,281)

Unamortized gain/(loss) on bond refundings (49,023) 33 (74,468) (34,842) (158,300) (158,300) 2,002,796 3,964 1,956,201 1,761,562 - - 93,125 5,817,648 - 5,817,648 LIABILITIES - PAYABLE FROM RESTRICTED ASSETS (NOTE B)

Special funds Accounts payable and accrued expenses 48,265 36,970 467 85,702 2,295 87,997 Due to other funds 16,849 4 7,395 9,592 90 33,930 Other deferred credits 185 185 185 Debt service funds Accrued interest payable 16,451 53 42,875 23,396 147 82,922 82,922 Due to other funds 3 3 81,565 60 87,240 32,988 185 - 704 202,742 2,295 171,104 OTHER NONCURRENT LIABILITIES 30,701 30,701 30,701 CURRENT LIABILITIES Cash Overdrafts 2 2 537 539 Current maturities of long-term debt 129,030 377 129,407 129,407 Accounts payable and accrued expenses 19,746 57 368 886 17 436 21,510 41,314 62,824 Due to Participants 4,125 1,330 2,032 804 8,291 8,291 Due to other business units 11,834 470 .9 908 226 127 113 13.687 2,213 164,735 2,234 2,041 2,080 1,114 144 549 172.897 44.064 201,061 DEFERRED CREDITS Advances from Members and others 827 827 1 828 Other deferred credits 1,121 1,121

- - - - - 827 - 827 1,122 1,949 TOTAL LIABILITIES 2,279,797 6,258 2,045,482 1,796,630 1,299 971 94,378 6,224,815 47,481 6,222,463 TOTAL FUND EQUITY (DEFICIT) AND LIABILITIES $2,279,797 $ 6,258 $2,045,482 $1,796,630 $ 4,075 $ 2,819 $ 92,117 $6,227,178 $ 51,602 $6,228,947

• Project recorded on a liquidation basis See notes to financial statements People *Vision

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STATEMENTS OF OPERATIONS AND FUND EQUITY For the year ended June 30, 2003 (Dollars in Thousands)

COLUMBIA PACKWOOD NUCLEAR NUCLEAR BUSINESS GRAYSHARBOR NINE CANYON INTERNAL 2003 GENERATING LAKE PROJECT PROJECT DEVELOPMENT ENERGY WIND SERVICE COMBINED STATION PROJECT NO. I - NO. 3 ' FUND FACIUTY PROJECT SUBTOTAL FUND TOTAL OPERATING REVENUES $ 439,947 $ 1,596 S S - S 11,163 $ S 3,464 $ 456,170 $ 68,491 S 456,604 OPERATING EXPENSES Services to other business units 66,552 Nuclear fuel 27,061 27,061 27,061 Spent fuel disposal fee 7,253 7,253 7,253 Decommissioning 26,505 26,505 26,505 Depreciation and amortization 79,528 365 158 1,834 81,885 1,533 81,885 Operations and maintenance 159,312 922 1,068 161,302 161,302 Administrative & general 26,901 164 33 27,098 27,098 Generation tax 2,237 19 22 2,278 2,278 New business initiatives 11,276 11.276 11,276 Total operating expenses 328,797 1,470 - - 11,434 2,957 344,658 68,085 344,658 NET OPERATING REVENUES (EXPENSES) 111,150 126 (271) 507 111,512 406 111,946 OTHER INCOME & EXPENSE Non-operating revenues 138,301 95,718 1,479 235,498 235,498 Investment income 6,751 44 2,566 3,636 36 19 269 13,321 61 13,321 Gainl(loss) on current bond redemption 4 4 4 Interest expense and discount amortization (119.666) (174) (111.279) (96.223) (3,154) (330,496) (330,496)

Plant preservation and termination costs (4,817) (3,131) (7,948) (7,948)

Depreciation and amortization (26) (19) (45) (45)

Revaluation of Site Restoration-* (24,984) (24,984) (24,984)

Other 1,765 239 (448) (1,247) (33) 309 NET REVENUES (EXPENSES) - - - - (683) 232 (2,378) (2,829) 434 (2,395)

Distribution & Contributions - - - - 2,048 - 230 2,278 (1,436) 842 Beginning Fund Equity (DEFICIT) * - - 1,411 1,616 (113) 2,914 5,123 8,037 ENDING FUND EQUITY (DEFICIT) S - $ - $ - S - S 2.776 S 1,848 S (2,261) S 2,363 $ 4,121 S 6,484

• Project recorded on a liquidation basis

• • See Note G (SFAS 143)

See notes to financial statements 34 People

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STATEMENTS OF CASH FLOWS For the year ended June 30, 2003 (Dollars in Thousands)

COLUMBIA PACKWOOD NUCLEAR NUCLEAR BUSINESS GRAYS HARBOR NINECANYON INTERNAL 2003 GENERATING LAKE PROJECT PROJECT DEVELOPMENT ENERGY WIND SERVICE COMBINED STATION PROJECT NO.1- NO.3' FUND FAGLUTY PROJECT FUND TOTAL CASH FLOWS FROM OPERATING AND OTHER ACTIVITIES Operating revenue receipts $ 247,421 S 3,498 S - $ - $ 5,231 S - $ 3,445 $ - S 259,595 Cash payments for operating expenses (192,106) (1,599) (1,086) (194,791)

Non-operating revenue receipts 76,785 72,908 1,784 (21,352) 130,125 Cash payments for preservation, termination expense (54,453) (42,114) (96,567)

Cash payments for new business (4,580) (4,580)

Net cash provided (used) by operating and other activities 55,315 1,899 22,332 30,794 651 1,784 2,359 (21,352) 93,782 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from bond refundings 224,442 487,956 591,604 22,448 1,326,450 Refunded bond escrow requirement (179,350) (489,845) (592,889) (1,262,084)

Payment for bond issuance and financing costs (2,380) (4,149) (5,137) (898) (12,564)

Capital and nuclear fuel acquisitions (55,264) (55,264)

Interest paid on revenue bonds (82,457) (177) (151,537) (152,240) (3,940) (390,351)

Principal paid on revenue bond maturities (21,310) (532) (86,116) (5,870) (113,828)

Interest paid on Notes (1,613) (241) (418) (2,272)

Notes Payable (34,518) (34,518)

Construction Work in Progress (18,008) (18,008)

Net cash provided (used) by capital and related financing activities (152,450) (709) (243,932) (164,950) - - (398) (562,439)

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities (1,323,070) (10,384) (899,670) (624,780) (21,867) (13,304) (84,712) (256,212) (3,233,999)

Sales of investment securities 1,448,204 9,147 1,130,580 764,522 21,146 11,504 88,356 246,602 3,720,061 Interest on investments 6,275 41 15,773 6,084 36 20 472 1,203 29,904 Receipts from sales of plant assets 6 6 Net cash provided (used) by investing activities 131,409 (1,196) 246,689 145,826 (685) (1,780) 4,116 (8,407) 515,972 NET INCREASE (DECREASE) IN CASH 34,274 (6) 25,089 11,670 (34) 4 6,077 (29,759) 47,315 CASH AT JUNE 30, 2002 25,528 12 8,463 15,896 32 1 2 30,821* 80,755 CASH AT JUNE 30, 2003 (NOTE B) $ 59,802 5 6 $ 33,552 $ 27,566 $ (2) $ 5 $ 6,079 $ 1,062 $ 128,070

• Project recorded on a liquidation basis

• • Reclassification of short term investments in FY02 See notes to financiaf statements People

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STATEMENTS OF CASH FLOWS (continued)

For the year ended June 30, 2003 (Dollars in Thousands)

COLUMBIA PACKWOOD NUCLEAR NUCLEAR BUSINESS GRAYSHARBOR NINE CANYON INTERNAL 2003 GENERATING LAKE PROJECT PROJECT DEVELOPMENT ENERGY WIND SERVICE COMBINED STATION PROJECT NO. 1 ' NO. 3 - FUND FACIUTY PROJECT FUND TOTAL RECONCILIATION OF OPERATING INCOME TO NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net operating revenues S 111,150 S 126 S S - S (271) S S 507 S S 111.512 Adjustments to reconcile net operating revenues to cash provided by operating activities:

Cost/cash incurred in excess of cash/cost (199.001) (361) (199,362)

Depreciation and amortization 105,474 362 48 1,800 107,684 Decommissioning 26.505 26 26,531 Other (723) (448) (1,171)

Change in operating assets and liabilities:

Accounts receivable 4,105 281 (524) (8) 3,854 Materials and supplies 1,807 1,807 Prepaid and other assets (369) (67) (42) (478)

Due from/to other business units, funds and Participants (1,409) 1,564 (1,001) (2) (848)

Accounts payable 7,776 (6) 2,889 36 10,695 Non-operating revenue receipts 76,785 72,908 595 150,288 Cash payments for preservation, termination expense (54,453) (42,114) (96,567)

Cash payments for services 1,189 (21,352) (20,163)

Cash payments for new business Net cash provided (used) by operating and other activities 5 55,315 $ 1,899 S 22,332 $ 30.794 $ 651 S 1,784 S 2.359 S (21.352) $ 93,782

• Project recorded on a liquidation basis See notes to financial statements 36 People *Vision *Solutions

OUTSTANDING LONG-TERM DEBT As of June 30, 2003 (Dollars in Thousands)

SERIAL COUPON OR TERM SERIES RATE MATURmES AMOUNT COLUMBIA (NUCLEAR PROJECT NO. 2) REFUNDING REVENUE BONDS 1990A 7.25% 7-1-2006 S 2.115 2.115 1990C (C) 7-1-2004/2005 18.054 18.054 1991A (C) 7-1-2006/2007 10.267 10.267 1992A 5.90-6.10 7-1-2004/2006 12,415 6.30 7-1-2012 50.000 62.415 1993A 5.50-5.80 7-1-2004/2008 65.350

_65.350 1993B 5.40-5.65 7-1-2005/2008 54.725 54.725 1994A 4.80-6.00 7-1-2004/2011 495,695 (C) 7-1-2009 4,776 5.40 7-1-2012 100.200 600.671 1996A 5.50-6.00 7-1-2004/2012 195.385 195.385 1997A 5.10-5.20 7-1-2010/2012 50.355 50.355 1997B 5.00-5.50 7-1-200412011 30.000 30.000 1998A 5.00-5.75 7-1-2004/2012 181.285 181.285 2001A 5.00-5.50 7-1-2013/2017 186.600 186.600 20018 5.50 7-1-2018 48.000 48.000 2002A 5.20-5.75 7-1-2017/2018 157.260 157.260 2002B 5.35-6.00 7-1-2018 123.815 123.815 2003A 5.50 7-1-2010/2015 154.490 154.490 2003B 4.15 7-1-2009 4.530 4.530 2003F 5.00-5.25 7-1-2007/2018 41.330 41.330 1997-2A-1 Average Variable 1.2% 51.195 51.195 1997-2A-2 Average Variable 1.2% 51.190 51.190 Compound interest bonds accretion 59.763 Revenue bonds payable 2,148,795 (B)

Estimated fair value at June 30, 2003 $2,384,394 (D)

(A) Includes amounts due July 1,2003.

(B) Excludes amounts due July 1, 2003, which were paid as of June 30, 2003.

(C) Compound Interest Bonds.

(D) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at which these obligations would be settled.

(E) Auction Rate Certificates that will have a rate of 5.50 through 7/1/2009, and a variable rate thereafter until 7/112018.

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OUTSTANDING LONG-TERM DEBT (continued)

As of June 30, 2003 (Dollars in Thousands)

SERIAL COUPON OR TERM SERIES RATE MATURfIt[S AMOUNT PACKWOOD LAKE PROJECT REVENUE BOND 1962 3.625% 3-1-2012 S 3.191 3.191 1965 3.75 3-1-2012 1.125 1.125 Revenue bonds payable S 4.316 (B)

Estimated fair value at June 30, 2003 S _4533 (D)

NUCLEAR PROJECT NO,1 REFUNDING REVENUE BONDS 1989B 7.125 7-1-2016 A1.070

-41.070 1990B 7.25 7-1-2009 3.590 3.590 1992A 5.90-6.10 7-1-2004/2006 1.360 1.360 1993A 5.30-7.00 7-1-2004/2009 51.330 51.330 1993B 5.10-7.00 7-1-2004/2009 371890 37,890 1993C 4.90-5.20 7-1-2004/2008 9.015 9.015 1996A 5.50-6.00 7-1-2004/2012 337.790 337.790 1996B 5.10-7.00 7-1-2004/2005 19 950 19.950 1996C 5.00-6.00 7-1-200412015 71,690 5.50 7-1-2017 24.860 96.550 1997A 6.00 7-1-2006/2008 20400 20400 1997B 5.00-5.125 7-1-2004/2017 244375 244.3U5 1998A 5.00-5.75 7-1-2004/2017 85290 2001A 4.125-5.50 7-1.2004/2013 _8216Q 832.760 2001 B 5.50 7-1-2017 2,Q(E) 23600 (A) Includes amounts due July 1,2003.

(B) Excludes amounts due July 1,2003, which were paid as of June 30, 2003.

(C) Compound Interest Bonds.

(D) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at whkh these obligations would be settled.

(E) Auction Rate Certificates that will have a rate of 5.50 through 7/1/2009 and a variable rate thereafter until 71/12018.

38 People *Vision

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OUTSTANDING LONG-TERM DEBT (continued)

As of June 30, 2003 (Dollars in Thousands)

SERIAL COUPON OR TERM SERIES RATE MATURmES AMOUNT NUCLEAR PROJECT NO. 1 REFUNDING REVENUE BONDS (Continued) 2002A 5.5-5.75 7-1-2013/2017 S 248,485 248.485 2002B 6.00 7-1-2017 101.950 101,950 2003A 5.50 7-1-2013/2017 241.455 241.455 2003B 4.06 7-1-2009

• 18.210 18.210 1993-1A-1 Average Variable 1.1% 49.430 49.430 1993-1A-2 Average Variable 1.1% 49.430 49,430 1993-1A-3 Average Variable 1.1% 16.200 16.200 2003C Average Variable 1.1 % 200.485 200.485 Revenue bonds payable $1,980,615 (A)

Estimated fair value at June 30, 2003 $2.222.053 (D)

(A) Includes amounts due July 1, 2003.

(B) Excludes amounts due July 1, 2003, which were paid as of June 30, 2003.

(C) Compound Interest Bonds.

(D) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at which these obligations would be settled.

(E) Auction Rate Certificates that will have a rate of 5.50 through 71112008 and a variable rate thereafter until 71112017.

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OUTSTANDING LONG-TERM DEBT (continued)

As of June 30, 2003 (Dollars in Thousands)

SERIAL COUPON ORTERMI SERIES RATE MATURIIIES AMOUNT NUC1EAR PROJECT NO, 3 REFUNDINBR UE BOr Ds 1989A (C) 7-1-200412014 . 17J107

_17 107 1989B (C) 7-1-2004/2014 70,580 7.125 7-1-2016 76.145 146.a 1990B (C) 7-1-2004/2010 _ 636

_23.63-6 19938 5.10-7.00 7-1-2004/2009 _63.090 1993C 4.90-7.50 7-1-2004/2008 80,720 (C) 7-1-2013/2018 _2Z3961 1 JQ463 1996A 5.50-6.00 7-1-200412009 _30.

1997A 5.00-6.00 7-1-2004/2018 107.695

.1.0 695 1998A 5.00 7-1-2004/2DO5 16,675 5.125 7-1-2018 53325 2001A 5.00-5.50 7-1-2004/2018 170 010 170.010 2001B 5.00-5.50 7-1-2018 _25 675 (E)

_25.67 2002B 6.00 7-1-2016 75.360 75dk60 2003A 5.50 7-1-2011/2017 24t1915 241.915 2002B 4.15 7-1-2009 21.57i J2575 1993-3A-3 Average Variable 1.2% _2225

..22-255 1998-3A Average Variable 1.2% 144.

1A44,33 2003D Average Variable 1.2% 201 201.065 2003E Average Variable 1.2% 98-025 98.025 Compound interest bonds accretion 374 134 Revenue bonds payable $1,938,515 (A)

Estimated fair value at June 30, 2003 $1,989,747 (D)

(A) Includes amounts due July 1,2003.

(B) Excludes amounts due July 1,2003, which were paid as of June 30, 2003.

(C) Compound Interest Bonds.

(D) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at which these obligations would be settled.

(E) Auction Rate Certificates that will have a rate of 5.50 through 7/1712009 and a variable rate thereafter until 71112018.

40 People *Vision

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OUTSTANDING LONG-TERM DEBT (continued)

As of June 30, 2003 (Dollars in Thousands)

SERIAL COUPON OR TERM SERIES RATE MATURMES AMOUNT NINE CANYON WIND PROJECT REVENUE BONDS 2001A 4.00-6.00 7-1-2004/2023 S 50.410 50.410 2001 B 4.30-6.00 7-1 -2017 20.265 20.265 2003 3.00-5.00 7-1-2005/2023 21.720 21.720 Revenue bonds payable $ 92,395 (B)

Estimated fair value atJune 30, 2003 $ 104,319 (D)

(A) Includes amounts due July 1, 2003.

(B) Excludes amounts due July 1,2003, which were paid as of June 30, 2003 (C) Compound Interest Bonds.

(D) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at which these obligations would be settled (E) Auction Rate Certificates that will have a rate of 5.50 through 71112009 and a variable rate thereafter until 71112018.

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DEBT SERVICE REQUIREMENTS As of June 30, 2003 (Dollars in Thousands)

COLUMBIA GENERATING STATION FISCAL YEAR PRINcIPAL INTEREST TOTAL 6130/2003 Balance*: IS S 16,451 $ 16,451 2004 123,424 121,823 245,247 2005 101,885 127,770 229,655 2006 94,046 111,783 205,829 2007 151,996 101,243 253,239 2008 146,665 86,448 233.113 2009-2013 887,621 303,787 1.191,408 2014-2018 583,395 125.574 708,969 Adjustment ** 59,763 (59,763)

S 2,148,795 $935,116 $ 3,083,911

• Principal and interest due July 1, 2003.

• • Adjustment for Compound Interest Bonds accretion; Compound Interest Bonds are reflected at their face amount less discount on the balance sheet.

PACKWOOD LAKE HYDROELECTRIC PROJECT FISCAL YEAR PRINCIPAL INTEREST TOTAL 6130/2003 Balance:* $ 188 S 53 $ 241 2004 574 151 725 2005 598 130 728 2006 624 103 732 2007 648 85 733 2008 673 63 736 2009-2012 1,011 59 1,070 S 4,316 $ 649 S 4,965

• Principal and interest due July 1, 2003.

42 People *Vision *Solutions

DEBT SERVICE REQUIREMENTS (Continued)

As of June 30, 2003 (Dollars in Thousands)

NUCLEAR PROJECT NO. 1 FISCAL YEAR PRINCIPAL INTEREST TOTAL 6/30/2003 Balance:* $s $ 42,875 $ 42,875 2004 66,910 103,785 170,695 2005 56,510 100,144 156,654 2006 77,890 97,030 174,920 2007 64,575 92,625 157,200 2008 79,000 88,954 167,954 2009-2013 540,290 374,678 914,968 2014-2017 1,095,440 156,704 1,252,144 2018

$ 1,980,615 $1,056,795 $ 3.037,410

• Principal and interest due July 1, 2003.

NUCLEAR PROJECT NO.3 FISCAL YEAR PRINCOPAL INTEREST TOTAL 6130/2003 Balance:* $ $ 23,396 $ 23,396 2004 62,906 96,156 159,062 2005 64,471 94,872 159,343 2006 65,392 93,377 158,769 2007 60,176 93,845 154,021 2008 63,330 90,853 154,183 2009-2013 352,241 411,430 763,671 2014-2018 895,865 236,003 1,131,868 Adjustment ** 374,134 (374,134)

$ 1,938,515 $765,798 S 2,704,313

• Principal and interest due July 1, 2003.

• • Adjustment for Compound Interest Bonds accretion; Compound Interest Bonds are reflected at their fate amount less discount on the balance sheet.

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DEBT SERVICE REQUIREMENTS (Continued)

As of June 30, 2003 (Dollars in Thousands)

NINE CANYON WIND PROJECT FISCAL YEAR PRINCIPAL INTEREST TOTAL 6/30/2003 Balance:* $s $ 147 S 147 2004 2,060 5,066 7,126 2005 2,915 4,835 7,750 2006 3,040 4,720 7,760 2007 3,170 4,594 7,764 2008 3,315 4,457 7,772 2009-2013 19,280 19,689 38,969 2014-2018 25,175 13,999 39,174 2019-2023 33,440 5,994 39,434 S 92.395 $ 63,501 $ 155,896

• Principal and interest due July 1, 2003.

44 People

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Energy Regulatory Commission (FERC) that expires on February 28, 2010. The electric power produced by Packwood is sold to 12 utilities, which pay the costs of Packwood, including the debt service on the Packwood Hydroelectric revenue bonds. The Packwood Participants are obligated to pay annual costs of the Project including NOTE A - GENERAL debt service, whether or not the Project is operable, until the outstanding bonds are paid or provisions Organization are made for bond retirement, in accordance with the requirements of the bond resolution. The Participants Energy Northwest, a municipal corporation and joint share project revenue as well.

operating agency of the State of Washington, was organized in 1957. It is empowered to finance, acquire, Nuclear Project No. 1, a 1,250 MWe plant, was placed in construct and operate facilities for the generation and extended construction delay status in 1982, when it was transmission of electric power. On June30, 2003, its 65 percent complete. Nuclear Project No. 3, a 1,240 MWe membership consisted of 15 public utility districts and plant, was placed in extended construction delay status 3 cities, Richland, Seattle and Tacoma. All members in 1983, when it was 75 percent complete. On May 13, own and operate electric systems within the State of 1994, Energy Northwest's Board of Directors adopted Washington. Energy Northwest is exempt from federal resolutions terminating Nuclear Projects Nos. 1 and 3 income tax. Energy Northwest has no taxing authority. (see Note F - Nuclear Projects Nos. 1 and 3 Termination).

In fiscal year 1999, the assets and liabilities of Hanford Generating Project were consolidated into Nuclear Project No. 1. The Hanford Generating Project site is being Energy Northwest Business Units restored and all funding requirements are net-billed obligations of Nuclear Project No. 1. Nuclear Project No. 1 Energy Northwest operates Columbia Generating is wholly owned by Energy Northwest.

Station, a 1,153 MWe (Design Electric Rating, net) generating plant completed in 1984. Energy Northwest Each Energy Northwest Business Unit is financed and has obtained all permits and licenses required to operate accounted for separately from all other current or future Columbia, including a Nuclear Regulatory Commission Business Units.

(NRC) operating license that expires in December 2023.

All electrical energy produced by Energy Northwest net-Energy Northwest also operates the Packwood billed Business Units is ultimately delivered to electrical Lake Hydroelectric Project (Packwood), a 27.5 MWe distribution facilities owned and operated by BPA as generating plant completed in 1964. Packwood part of the Federal Columbia River Power System. BPA operates under a fifty-year license from the Federal in turn distributes the electricity to electric utility systems People

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throughoutthe Northwest, including Participants in Energy 50 MW of power generated by the facility. Due to current Northwest's Business Units, for ultimate distribution to market conditions, Duke Energy North America has consumers. Participants in Energy Northwest's net-billed temporarily suspended construction of the combustion Business Units consist of publicly owned utilities and rural turbine plant.

electric cooperatives located in the western United States that have entered into net-billing agreements with Energy The Internal Service Fund (formerly General Fund) was Northwest and BPA for participation in one or more established in May 1957. It iscurrently used to account for of Energy Northwest's Business Units. BPA is obligated the central procurement of certain common goods and by law to establish rates for electric power which will services for the Business Units on a cost reimbursement recover the cost of electric energy acquired from Energy basis. It is also used to account for the performance fees Northwest and other sources as well as BPA's other costs to Energy Northwest for achieving performance goals (See Note E). related to the operation of the projects.

Energy Northwest also manages the Business Development Fund, Nine Canyon Wind Project, and Grays NOTE B -

SUMMARY

OF SIGNIFICANT Harbor Energy Facility Project. The Business Development ACCOUNTING POLICIES Fund was established in April 1997, to pursue and develop new energy-related business opportunities. The Nine Basis of Accounting Canyon Wind Project was established in January 2001, for the purpose of exploring and establishing a wind energy Energy Northwest has adopted accounting policies Project. Phase I of the project was completed in fiscal and principles that are in accordance with accounting year 2003. Phase I of the Project consists of turbines which principles generally accepted in the United States of are rated at 48 MWe. Phase II of the project has been America. Accounts are maintained in accordance with approved and construction is expected to be complete by the uniform system of accounts of the Federal Energy December 31, 2003. Phase II of the Project will consist of Regulatory Commission (FERC). Separate funds and turbines which are rated 15.6 MWe. books of account are maintained for each Business Unit. Payment of obligations of one Business Unit with The Grays Harbor Energy Facility Project was established funds of another Business Unit is prohibited, and would in July 1990, to collect advances and contributions to constitute violation of bond resolution covenants.

pay the costs of investigating new generating Projects, including the feasibility of a combustion turbine near Energy Northwest maintains an Internal Service Fund for Satsop, Washington. The Project purpose was amended centralized control and accounting of certain fixed assets during Fiscal Year 2002 to include the operation and such as data processing equipment, and for payment maintenance of a gas fired combustion turbine placed and accounting of internal services, payrolls, benefits, on the Grays Harbor site (owned by Duke Energy Grays administrative and general expenses, and certain Harbor LLC) and included the option to purchase up to contracted services on a cost reimbursement basis. In 46 People

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addition, it is used to account for performance fees and interpretations, except for those that conflict with including those paid to Energy Northwest for achieving or contradict GASB pronouncements. Specifically, performance goals related to the operation of the Statement of Governmental Accounting Standard No. 7, Projects. Certain assets in the Internal Service Fund are "Advance Refundings Resulting in Defeasance of Debt" also owned by the Fund and operated for the benefit and No. 23, "Accounting and Financial Reporting for of other Projects. Depreciation relating to fixed assets Refundings of Debt Reported by Proprietary Activities" is charged to the appropriate Business Units based upon conflict with Statement of Financial Accounting direct labor costed to each Project. Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments Liabilities of the Internal Service Fund represent accrued of Liabilities." As such, the guidance under Statement payrolls, vacation pay, employee benefits, and common of Governmental Accounting Standard No. 7 and No. 23 accounts payable which have been charged directly or is followed. Such guidance governs the accounting for indirectly to Business Units and will be funded by the bond defeasances and refundings.

Business Units when paid. Net amounts owed to or receivable from Energy Northwest Business Units are The preparation of Energy Northwest financial statements recorded under Current Liabilities - Due to other Business in conformity with accounting principles generally Units, or Current Assets - Due from other Business Units accepted in the United States of America necessarily on the Internal Service Fund balance sheet. requires management to make estimates and assumptions that directly affect the reported amounts of assets and The Combined Total column on the financial statements liabilities and the disclosure of contingent assets and is for presentation only as each Energy Northwest liabilities at the date of the financial statements and the Business Unit is financed and accounted for separately, reported amounts of revenue and expenses during the from all other current and future Business Units. The reporting period. Actual results could differ from these FY2003 Combined Total includes eliminations for estimates. Certain incurred expenses and revenues are transactions between Business Units as required in allocated to the Business Units based on specific allocation Statement No. 34, "Basic Financial Statements and methods and management considers the allocation Management's Discussion and Analysis for State and methods to be reasonable.

Local Governments" of the Governmental Accounting Standards Board (GASB). Energy Northwest's fiscal year begins on July 1st and ends on June 30th.

Pursuant to Statement No. 20 of the Governmental Accounting Standards Board (GASB), "Accounting and Financial Reporting for Proprietary Funds and Other Utility Plant Governmental Entities That Use Proprietary Fund Accounting," Energy Northwest has elected to apply Utility plant is stated at original cost. Plant in service is all Financial Accounting Standards Board statements depreciated bythe straight-line method overthe estimated People *Vision

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useful lives of the various classes of plant, which range During the normal construction phase of a Project, Energy from five to 60 years. The Nuclear Regulatory Commission Northwest's policy is to capitalize all costs relating to now grants license extensions. Energy Northwest plans the Project, including interest expense (net of interest to file and receive extensions. This practice has been income), and related administrative and general expense.

acknowledged and accepted by utilities abroad. In prior years, Energy Northwest had calculations for certain long The utility plant and net assets of Nuclear Projects lived assets based on a 40-year useful life. As of July 1, Nos. 1 and 3 have been reduced to their estimated net 2002, Energy Northwest is changing the depreciation realizable values due to termination. A write-down of schedules to reflect a 60-year useful life. This results in Nuclear Projects Nos. 1 and 3 was recorded in fiscal year a decrease in depreciation expense of approximately $16 1995 and is included in Cost in Excess of Billings. Interest million in Fiscal Year 2003. In addition, the year to year expense, termination expenses and asset disposition costs depreciation expense effect is approximately $16 million for Nuclear Projects Nos. 1 and 3 have been charged to per year. The depreciation schedule will reflect this change operations. Utility Plant activity for the year ended June in Fiscal Year 2003 and prospectively. 30, 2003, was as follows:

UTILITY PLANT ACTIVITY (Amount in Thousands)

BEGINNING ENDING BALANCE INCREASES DECREASES BALANCE Columbia Generation $ 3,419,489 $ 33,039 S $ 3,452,528 Decommission 31,110 31,110 Construction Work in Progress 30,355 (16,368) 13,987 Accumulated Depreciation (1,786,935) (78,161) (1,865,096)

Accumulated Amortization (9.861) (9,861)

Utility Plant, net $ 1,662,909 $ (23.873) $ (16,368) $ 1,622,668 Nine Canyon Generation $ - $ 48,029 $ - $ 48,029 Decommission - 449 - 449 Construction Work in Progress 48,387 - (44,422) 3,965 Accumulated Depreciation - (1,622) - (1,622)

Accumulated Amortization - (8) - (8)

Utility Plant, net $ 48,387 S 46,848 $ (44,422) $ 50,813 Packwood Generation 5 12,855 $ 137 S - $ 12,991 Accumulated Depreciation (11,722) (362) - (12,084)

Utility Plant, net $ 1,133 $ (225) - $ 908 Business Development General $ 757 $ 66 $ - $ 823 Accumulated Depreciation (166) (48) - (214)

Utility Plant, net 591 $ 18 $ - S 609 Internal Service Fund General $ 43,547 S 290 $ - S 43,837 Accumulated Depreciation (27,591) (1,533) - (29,124)

Utility Plant, net $ 15,956 S (1,243) $ - S 14,713 48 People

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Nuclear Fuel Restricted Assets All expenditures related to the purchase of nuclear fuel In accordance with Project bond resolutions, related for Columbia, including interest, are capitalized and agreements or state law, separate restricted funds have carried at cost. When the fuel is placed in the reactor, been established for each Business Unit. The assets held the fuel cost is amortized to operating expense on the in these funds are restricted for specific uses including basis of quantity of heat produced for generation of construction, debt service, capital additions, extraordinary electric energy. Accumulated nuclear fuel amortization operations and maintenance costs, termination, (the amortization of the cost of nuclear fuel assemblies in decommissioning, and workers' compensation claims.

the reactor used in the production of energy and in the fuel pool for less than six months per FERC guidelines) is

$103 million as of June 30, 2003, for Columbia. Long-Term Receivables Energy Northwest has a contract with the Department Long-term receivables include minimum guaranteed of Energy (DOE) that requires the DOE to accept title and amounts adjusted annually pertaining to future discounts dispose of spent nuclear fuel. Although the courts have for certain goods and services to be provided to Columbia ruled that the DOE had the obligation to accept title to as the result of a litigation settlement and subsequent spent nuclear fuel by January 31, 1998, the repository is revisions.

not expected to be in operation before 2010. The current period operating expense for Columbia includes a $7.3 million charge for future spent nuclear fuel storage and Accounts and Other Receivables disposal to be provided by the DOE in accordance with the Nuclear Waste Policy Act of 1982. Accounts and other receivables for the Internal Service Fund include miscellaneous receivables outstanding from Energy Northwest has completed a Project to store the other Business Units that have not yet been collected. The spent fuel in commercially available dry storage casks on amounts due to each Business Unit are reflected in the a concrete pad at the Columbia site. Spent Fuel will be due to/frorh other Business Units account.

transferred from the Spent Fuel pool to the Independent Spent Fuel Storage Installation periodically to allow for future refuelings. Current period operating costs include Asset Retirement Obligation, SFAS

$23.5 million for nuclear fuel and $3.6 million accrued 143 dry cask storage costs. $2.1 million of the $3.6 million of accrued dry cask storage costs is related to an increase Energy Northwest adopted the Statement of Financial in the estimate of dry cask storage costs. The remaining Accounting Standards No. 143, "Accounting for

$1.5 million is directly related to amortization. Obligations Associated with the Retirement of Long-Lived Assets" (SFAS 143) on July 1, 2002. SFAS 143 People *Vision

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requires an entity to recognize the fair value of a power level of Columbia.

liability for an asset retirement obligation (ARO), such as nuclear decommissioning and site restoration liabilities, Site restoration requirements for Columbia are governed in the period in which it is incurred, rather than using by the site certification agreements between Energy a cost-accumulation approach (See Note G, Accounting Northwest and the State of Washington and regulations Change: Accounting for Asset Retirement Obligations, adopted by the Washington Energy Facility Site for discussion regarding the impact of adopting SFAS Evaluation Council (EFSEC). Energy Northwest submitted 143). a site restoration plan for Columbia that was approved by the EFSEC on June 12, 1995. Energy Northwest's current estimate of Columbia's site restoration cost is Decommissioning and Site Restoration approximately $65 million (in 2003 dollars).

Energy Northwest established decommissioning and site Both decommissioning and site restoration estimates restoration funds for Columbia and monies are being (in 2003 dollars) are used as the basis for establishing deposited each year in accordance with an established a funding plan that includes escalation and interest funding plan. earnings until decommissioning activities occur. Payments to the decommissioning and site restoration funds The NRC has issued rules to provide guidance to licensees have been made since January 1985. The fair value of of operating nuclear plants on decommissioning the cash and investment securities in the decommissioning plants at the end of each plant's operating life. In and site restoration funds as of June 30, 2003, totaled September 1998, the NRC approved and published its approximately $74.4 million and $7.6 million, respectively.

"Final Rule on Financial Assurance Requirements for Since September 1996, these amounts have been held and Decommissioning Power Reactors." As provided in this managed by BPA in external trust funds in accordance rule, each power reactor licensee is required to report to with NRC requirements and site certification agreements.

the NRC the status of its decommissioning funding for each reactor or share of a reactor it owns. This reporting requirement began on March 31, 1999, and reports are Materials and Supplies required every two years thereafter. Energy Northwest submitted its most recent report to the NRC in March, Materials and supplies are valued at cost, using a 2003. weighted-average cost method.

Energy Northwest's current estimate of Columbia's decommissioning cost is approximately $608 million (in Financing Expense, Bond Discount and 2003 dollars). This current estimate is based on the NRC Deferred Gain and Losses minimum amount required to demonstrate reasonable financial assurance for a boiling water reactor with the Financing expenses and bond discounts are amortized 50 People

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over the terms of the respective bond issues using the substation costs for Phase II and contract retainage bonds outstanding method. amounts related to construction in the amount of

$175,158.

In accordance with the Statement of Governmental Accounting Standard No. 23, losses on debt refundings Fair Value of Financial Instruments have been deferred and amortized as a component of interest expense over the shorter of the remaining life The fair value of financial instruments has been of the old or new debt. The balance sheet includes the estimated using available market information and certain original deferred amount less recognized amortization assumptions. Considerable judgment is required in expense and is included as a reduction to the new debt. interpreting market data to develop fair value estimates and such estimates are not necessarily indicative of the Current Maturities of Revenue Bonds amounts that could be realized in a current market exchange. The following methods and assumptions were Current maturities of revenue bonds payable from used to estimate the fair value of each of the following restricted assets are reflected in Long-Term Debt. Current financial instruments.

maturities of bonds for which funds have not yet been restricted are reflected in Current Liabilities. Financial instruments for which the carrying value is considered a reasonable approximation of fair value Accounts Payable and Accrued include: cash, accounts and other receivables, accounts Expenses payable and accrued expenses, advances from Members and others, other non-current liabilities and due to/from Restricted Liabilities Internal Service Fund accounts Participants, funds, and other Business Units. The fair payable and accrued expenses include $508,102 for values of investments (see Note C) and revenue bonds unclaimed bearer bonds. Columbia includes $47.8 million payable (see Outstanding Long-Term Debt Schedule) for decommissioning and site restoration. Nuclear Project have been estimated based on quoted market prices for No. 1 includes $25.9 million for decommissioning and such instruments or based on the fair value of financial site restoration. The Nine Canyon Wind Project includes instruments of a similar nature and degree of risk.

$466,989 for decommissioning and site restoration.

Revenues Current Liabilities Internal Service Fund accounts payable and accrued expenses include $645,558 for payroll and Energy Northwest accounts for expenses on an accrual related benefits, $16 million for compensated absences, basis and recovers, through various agreements, actual and $7.2 million for outstanding warrants. Columbia cash requirements for operations and debt service for includes accrued expenses of $1.4 million for arbitrage Columbia, Packwood, Nuclear Project No. 1 and Nuclear penalty (as defined by the Internal Revenue Code). The Project No. 3. For these Business Units, Energy Northwest Nine Canyon Wind Project includes $50,000 of accrued recognizes revenues equal to expenses for each period.

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No net revenue or loss is recognized, and no equity is Concentration of Credit Risk accumulated.

Financial instruments which potentially subject Energy The difference between cumulative billings received Northwest to concentrations of credit risk consist of and cumulative expenses is recorded as either billings in available-for-sale investments, accounts receivable, other excess of costs (liability) or as costs in excess of billings receivables, long-term receivables and costs in excess (asset), as appropriate. Such amounts will be settled of billings. Energy Northwest invests exclusively in U.S.

during future operating periods. Government securities and agencies. Energy Northwest's accounts receivable and costs in excess of billings are Energy Northwest accounts for revenues and expenses concentrated with Project Participants and BPA through on an accrual basis for the remaining Business Units. The the net billing agreements. See Note E,Security - Nuclear difference between cumulative revenues and cumulative Projects Nos. 1, 3, and Columbia and Security - Packwood expenses is recognized as net revenue or losses and Lake Hydroelectric Project. The long-term receivable is included in fund equity for each period. with a large and stable company which Energy Northwest considers to be of low credit risk. Other large receivables Energy Northwest has accrued as income (contribution) are secured through the use of letters of credit and other from the Department of Energy, Renewable Energy similar security mechanisms or are with large and stable Performance Incentive (REPI) that enables Nine Canyon companies which Energy Northwest considers to be of low Wind Project to receive revenue based on generation as credit risk. As a consequence, Energy Northwest considers it applies to the REPI bill. Fiscal Year 2003 resulted in an the exposure of the Business Units to concentration of approximate amount of income of $230,000. The REPI credit risk to be limited.

was created as part of the Energy Policy Act of 1992 to promote increases in the generation and utilization of electricity from renewable energy sources and to further the advances of renewable energy technologies. This Statements of Cash Flows program, authorized under section 1212 of the Energy Policy Act of 1992, provides financial incentive payments For purposes of the statements of cash flows, cash for electricity produced and sold by new qualifying includes unrestricted and restricted cash balances.

renewable energy generation facilities. Income amounts Short-term, highly liquid investments are not considered were recorded upon Energy Northwest's application for cash equivalents.

participation in the REPI program, and are based on the qualifying generation data submitted to the Department of Energy. NOTE C - CASH AND INVESTMENTS Cash and investments for each Business Unit are separately maintained. Energy Northwest's deposits are insured by 52 People *Vision *Solutions

federal depository insurance or through the Washington Investments are classified as available-for-sale and are Public Deposit Protection Commission. Energy Northwest stated at fair value with unrealized gains and losses resolutions and investment policies limit investment reported in investment income. Available-for-sale authority to obligations of the United States Treasury, investments at June 30, 2003, are categorized below to Federal National Mortgage Association and Federal Home give an indication of the types and amounts as well as Loan Banks. All investments are held for the benefit maturities of investments held by each Business Unit at of the individual Energy Northwest Business Units by year-end (See tables following).

safekeeping agents, custodians, or trustees.

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AVAILABLE-FOR-SALE-INVESTMENTS (Dollars in Thousands)

Amortized Cost =Vnrealized Gains Unrealized Losses Fair Value Columbia U.S. Government Agencies $ 38,099 $ $ $ 38,099 Total $ 38,099 $ $ 38,099 Packwood U.S. Government Securities $ 2,796 $ 1 $ $ 2,797 Total $ 2,796 $ 1 $ $ 2,797 Nuclear Project No. 1 U.S. Government Securities $ 255 $ $ $ 255 U.S. Government Agencies 53,349 $ $ 53,349 Total $ 53,604 $ $ $ 53,604 Nuclear Project No. 3 U.S. Government Agencies $ 42,666 $ $ $ 42,666 Total $ 42,666 _$ $ $ 42,666 Business Development Fund U.S. Government Agencies $ 895 $ $ $ 895 Total $ 895 $ $ 895 CT Project U.S. Government Agencies $ 2,209 $ $ $ 2,209 Total $ 2,209 =$ $ $ 2,209 Internal Service Fund U.S. Government Agencies $ 25,914 $ 3 $ 25,914 Total $ 25,914 =$ 3 $ 25,914 Nine Canyon Wind U.S. Government Securities $ 756 $ 19 $ 775 U.S. Government Agencies 24,337 30

$ 24,367 Total $ 25,093

$ $ 25,142

$ 49 54 People

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AVAILABLE-FOR-SALE-INVESTMENTS (Continued)

(Dollars in Thousands)

< 1 year 1-5 years 5-10 years > 10 years Total Columbia U.S. Government Agencies $ 38,099 $ $ $ $ 38,099 Total $ 38,099 $ $ $ $ 38,099 Packwood U.S. Government Securities $ 2,797 $ $ $ $ 2,797 Total $ 2,797 $ $ $ $ 2,797 Nuclear Project No. 1 U.S. Government Securities $ 255 $ $ $ $ 255 U.S. Government Agencies 53,349 $ $ $ 53,349 Total $ 53,604 $ $ $ $ 53,604 Nuclear Project No. 3 U.S. Government Agencies $ 42,666 $ $ $ $ 42,666 Total 42,666 $ $ $ $ 42,666 Business Development Fund U.S. Government Agencies $ 895 $ $ $ $ 895 Total $ 895 $ $ $ $ 895 CT Project U.S. Government Agencies $ 2,209 $ $ $ $ 2,209 Total $ 2,209 $ $ $ $ 2,209 Internal Service Fund U.S. Government Securities $ 25,914 $ $ $ $ 25,914 Total $ 25,914 $ $ $ $ 25,914 Nine Canyon Wind U.S. Government Securities $ 775 $ $ - $ - $ 775 U.S. Government Agencies 24,367 $ - $ - 24,367 Total $ 25,142 $ $ - $ - $ 25,142 People *Vision

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NOTE D - RETIREMENT BENEFITS including Energy Northwest. The PERS system includes three plans. Participants who joined the system by Substantially all Energy Northwest full-time and September 30, 1977, are Plan 1 members. Those joining qualifying part-time employees participate in one of the thereafter are enrolled in Plan 2, unless they exercise following statewide retirement systems administered by an option to transfer their membership to Plan 3. PERS the Washington State Department of Retirement Systems, participants joining the system on or after March 1, 2002, under cost-sharing, multiple-employer, public employee for state and higher education employees, or September defined benefit and defined contribution retirement 1, 2002, for local government employees have the option plans. The Department of Retirement Systems (DRS), a of choosing membership in either PERS Plan 2 or PERS department within the primary government of the State Plan 3. The option must be exercised within 90 days of of Washington, issues a publicly available comprehensive employment. Retirement benefits are financed from annual financial report (CAFR) that includes financial employee and employer contributions and investment statements and required supplementary information for earnings. Retirement benefits in Plan 1 and Plan 2 are each plan. The DRS CAFR may be obtained by writing vested after completion of five years of eligible service.

to: Department of Retirement Systems, Administrative PERS Plan 3 participants are vested immediately.

Services Division, RO. Box 48380, Olympia, WA 98504-8380. The following disclosures are made pursuant to GASB Statement No. 27, Accounting for Pensions by State Funding Policy and Local Government Emolovers.

Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates and Plan 2 employer and employee rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan Public Employee's Retirement System 1 are established by statute at six percent and do not (PERS) Plans 1, 2, and 3 vary from year to year. The employer and employee Plan Description contribution rates for Plan 2 and employer rate for Plan 3 are set by the director of the Department of PERS is a cost-sharing, multiple-employer, defined benefit Retirement Systems based on recommendations by the pension plan. Membership in the plan includes: elected Office of the State Actuary to continue to fully fund officials; state employees; employees of the Supreme, the plan. All employers are required to contribute at Appeals, and Superior courts (other than judges in a the level established by state law. The methods used to judicial retirement system); employees of legislative determine the contribution requirements are established committees; college and university employees not in under state statute in accordance with chapters 41.40 national higher education retirement programs; judges of and 41.45 Revised Code of Washington.

district and municipal courts; non-certificated employees of school districts; and employees of local government, The required contribution rates for the defined benefit 56 People *Vision *Solutions

plan expressed as a percentage of current year covered 401 (k) and 457 Plan Deferred payroll, as of June 30, 2003, were: Compensation Plan Energy Northwest provides a 401 (k) Deferred Compensation Plan (the 401 (k) Plan), and a 457 Deferred Compensation Plan. Both Plans are defined contribution

• The employer rates include the employer plans that were established to provide a means for administrative expense fee currently set at 0.22% investing savings by employees for retirement purposes.

• • Plan 3 defined benefits portion only.

• • • Variable from 5.0% minimum to 15.0% maximum All permanent, full-time employees are eligible to enroll based on the rate selected by PERS 3 member.

Both Energy Northwest and the employees make the in the Plans. Each participant may elect to contribute required contributions. pre-tax annual compensation, subject to current Internal Energy Northwest's required contributions for three Revenue Service limitations. For the 401(k) Plan, Energy years ended June 30, were:

I. Northwest matches 50 percent of the portion of the PERS Plan 1 PERS Plan 2 PERS Plan 3 participant's salary deferral amount, which does not 2003 * $108,239 [$1,077,106 [$95,821 exceed 5 percent of the participant's 401(k) eligible 2002 $147,307 $1,238,861 N/A earnings for the 401(k) Plan year. Participants direct 2001 $410,640 $ 3,100,152 N/A the investment of their contributions. Participants are In addition to the pension benefits available through immediately vested in their contributions plus actual PERS, Energy Northwest offers post-employment life earnings thereon. During FY 2003, Energy Northwest insurance benefits to retirees who are eligible to receive contributed $1,887,237 in employer matching funds.

pensions under PERS Plan 1, Plan 2, and Plan 3. One hundred twenty-five retirees have elected to participate in this insurance. In 1994, Energy Northwest's Executive Board approved provisions which continued the life NOTE E - LONG-TERM DEBT insurance benefitto retirees at 25 percent of the premium for employees who retire prior to January 1, 1995, and Each Energy Northwest Business Unit is financed charged the full 100 percent premium to employees separately. The resolutions of Energy Northwest who retired after December 31, 1994. The life insurance authorizing issuance of revenue bonds for each Business benefit is equal to the employee's annual rate of salary at Unit provide that such bonds are payable from the retirement for non-bargaining employees retiring prior revenues of that Business Unit. All bonds issued under to January 1, 1995. The cost of coverage for employees Resolutions Nos. 769, 775, and 640 for Nuclear Projects who retired after January 1, 1995, is $2.33 per $1,000 of Nos. 1, 3, and Columbia, respectively, have the same coverage with a maximum limit of $10,000. Employees priority of payment within the Business Unit (the "Prior who retired prior to January 1, 1995, contribute $.58 Lien Bonds"). All bonds issued under Resolutions Nos.

per $1,000 of coverage while Energy Northwest pays 835, 838, and 1042 for Nuclear Projects Nos. 1, 3, and the remainder. Premiums are paid to the insurer on a Columbia, respectively, are subordinate to the Prior current period basis.

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Lien Bonds and have the same subordinated priority of The Series 2003-C Bonds, issued for Nuclear Project No.

payment within the Business Unit (the "Electric Revenue 1, in an aggregate amount of $200.5 million, are auction Bonds"). rate Bonds with 7-day and 35-day auction periods. This transaction resulted in a net gain to Nuclear Project No.

During the year ended June 30, 2003, Energy Northwest 3 of $663,028.

issued, for Nuclear Projects 1,3, and Columbia, the Series 2003-A Bonds, Series 2003-B Bonds, Series 2003-C Bonds, The Series 2003-D Bonds, issued for Nuclear Project No.

the Series 2003-D Bonds, the Series 2003-E Bonds, and 3, in an aggregate amount of $201.1 million, are variable Series 2003-F Bonds. The Series 2003-A Bonds, issued rate demand Bonds with weekly reset periods. This for Nuclear Project No.1, Nuclear Project No. 3, and transaction resulted in a net gain to Nuclear Project No.

Columbia are fixed rate bonds with an average coupon 3 of $1,186,237.

interest rate of 5.5 percent. The Series 2003-A Bond Proceeds of $714.1 million refunded $714.1 million of The Series 2003-E Bonds, issued for Nuclear Project No.

outstanding bonds having an average coupon interest 3, in an aggregate amount of $98.0 million, are variable rate of 5.59 percent. This transaction resulted in a net rate demand Bonds with weekly reset periods. The loss for accounting purposes of $757,092 for Nuclear Series 2003-C/D/E Bonds were used to refund $499.6 Project 1, a net gain of $1,866,695 for Nuclear Project million of outstanding bonds, all of which were called 3, and a net gain of $888,458 for Columbia. According for redemption on July 1, 2003. As a result, the refunded to GASB 7 "Advance Refundings Resulting in Defeasance bonds are considered to be defeased and the liability for of Debt," the amortization of the gain and losses on the these bonds has been removed from long-term debt.

refundings are calculated based on the shorter of the life This transaction resulted in a net loss to Nuclear Project of the new debt compared to old debt. No. 3 of $203,228.

The Series 2003-B Bonds, issued for Nuclear Project No.1, The Series 2003-F Bonds, issued for Columbia, in an Nuclear Project No. 3, and Columbia, in the aggregate aggregate amount of $41.3 million, are fixed rate bonds amount of $44.3 million, are taxable fixed rate bonds with an average coupon interest rate of 5.08 percent.

with an average coupon interest rate of 4.10 percent. The Series 2003-F Bonds were issued for the purpose The 2003-B Bond Proceeds of $44.3 million were used of refunding certain short-term indebtedness, to pay to refund $32.7 million of outstanding bonds, as well as costs of other capital improvements at Columbia, and for the payment of the Cost of Issuance, Underwriter's to pay costs relating to the issuance of the Series 2003-F Discount, and Bond Insurance for all 2003 bonds. This Bonds.

transaction resulted in a net loss for nuclear project No. 1; Nuclear Project No. 2, and Columbia Generating In prior fiscal years, Energy Northwest also defeased Station of $17,881,186, $20,840,140 and $4,501,741 certain revenue bonds by placing the net proceeds from respectively. the refunding bonds in irrevocable trusts to provide for all required future debt service payments on the refunded 58 People

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bonds until their dates of redemption. Accordingly, the Security - Nuclear Projects Nos. 1, 3, trust account assets and liability for the defeased bonds and Columbia are not included in the financial statements in accordance with GASB Nos. 7 and 23. Including the Fiscal Year 2003 Project Participants have purchased all of the capability defeasements, approximately $771,210 million, $610,200 of Nuclear Projects Nos. 1, 3, and Columbia. BPA has in million, and $523,740 million of defeased bonds were not turn acquired the entire capability from the Participants called or had not matured at June 30, 2003, for Nuclear under contracts referred to as net-billing agreements.

Projects No.'s 1, 3, and Columbia, respectively. Under the net-billing agreements for each of the Business Units, Participants are obligated to pay Energy Northwest During the Fiscal Year ended June 30, 2003, Energy their pro rata share of total annual costs of the respective Northwest also issued, for the Nine Canyon Wind Projects, including debt service on bonds relating to each Project, the Series 2003 Wind Project Revenue Bonds. Business Unit, and BPA in turn is obligated to pay the The Series 2003 Bonds, in aggregate principal amount Participants identical amounts by reducing amounts due of $21.7 million, are fixed rate bonds with an average to BPA by Participants under BPA power sales agreements.

coupon interest rate of 4.51 percent. The Series 2003 The net-billing agreements provide that Participants and Bonds were issued to finance the costs of acquiring, BPA are obligated to make such payments whether or constructing and installing Phase II of the Project which not the Projects are completed, operable or operating consists of an additional 12 wind turbines. and notwithstanding the suspension, interruption, interference, reduction or curtailment of the Projects' Outstanding revenue bonds for the various Business output.

Units as of June 30, 2003, and future debt service requirements for these bonds are presented at the end On May 13, 1994, Energy Northwest's Board of Directors of the Financial Section of this report. adopted resolutions terminating Nuclear Projects Nos.

1 and 3. The Nuclear Projects Nos. 1 and 3 Project The refinancings entered into during the year have agreements and the net-billing agreements, except for resulted in fixed rate debt being defeased by variable certain sections which relate only to billing processes and rate debt. This has exposed a portion of our outstanding accrued liabilities and obligations under the net-billing debt to movements in interest rates. Our objective in agreements, ended upon termination of the Projects.

managing this interest rate exposure is to limit the Energy Northwest entered into an agreement with BPA to impact of interest rate changes on earnings and cash provide for continuation of the present budget approval, flows, and to reduce overall borrowing costs. To achieve billing and payment processes. With respect to Nuclear these objectives, we maintain a mix of medium and Project No. 3, the ownership agreement among Energy long-term fixed rate debt. Northwest and private companies was terminated in fiscal year 1999. The ownership of all real and personal property interests was transferred to Energy Northwest.

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Security - Packwood Lake Nuclear Project No. 3 Termination Hydroelectric Project In June 1994, the Nuclear Project No. 3 Owners Committee Energy Northwest, Benton County PUD, and Franklin voted unanimously to terminate the Project. During 1995, County PUD have signed Power Sales agreements which a group from Grays Harbor County, Washington, formed became effective November 4, 2002, and run through the Satsop Redevelopment Project (SRP). The Satsop October 30, 2003. A subsequent one-year extension Redevelopment Project introduced legislation with the has been executed for the period beginning November State of Washington under Senate Bill No. 6427, which 1, 2003, and extending through October 30, 2004. passed and was signed by the Governor of the State of Benton and Franklin County PUD's agree to pay Energy Washington on March 7, 1996. The legislation enables Northwest in exchange for the total output of electric local governments and Energy Northwest to negotiate an capacity and energy delivered from the Packwood arrangement allowing such local governments to assume Generation Project. The Packwood Participants are an interest in the site on which Nuclear Project No. 3 and obligated to pay annual costs of the Project including Nuclear Project No. 5 exists for economic development by debt service, whether or not the Project is operable, transferring ownership of all or a portion of the site to until the outstanding bonds are paid or provisions local government entities. This legislation also provides are made for bond retirement, in accordance with the for the local government entities to assume regulatory requirements of the bond resolution. The Participants responsibilities for site restoration requirements and share project revenue as well. control of water rights. In February 1999, Energy Northwest entered into a transfer agreement with the Satsop Redevelopment Project (SRP) to transfer the real NOTE F - COMMITMENTS AND and personal property at the site of Nuclear Project No. 3 CONTINGENCIES and Nuclear Project No. 5. The SRP also agreed to assume regulatory responsibility for site restoration. Therefore, Nuclear Project No. 1 Termination Energy Northwest is no longer responsible to the State of Washington and Washington Energy Facility Site Since the Nuclear Project No. 1 termination, Energy Evaluation Council (EFSEC) for any site restoration costs.

Northwest has been planning for the demolition of Nuclear Project No. 1 and restoration of the site, recognizing that there is no market for the sale of the Nuclear Projects Nos. 1 and 4 Site Project in its entirety and to date, no viable alternative Restoration use has been found. The final level of demolition and restoration will be in accordance with agreements Site restoration requirements for Nuclear Projects Nos.

discussed later in Note F under "Nuclear Projects Nos. 1 1 and 4 are governed by site certification agreements and 4 Site Restoration." between Energy Northwest and the State of Washington and regulations adopted by the Washington EFSEC, and 60 People *Vision

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a lease agreement with the Department of Energy purpose. The maximum principal share (with step-up)

(DOE). Energy Northwest submitted a site restoration the Business Development Fund could be required to plan for Nuclear Projects Nos. 1 and 4 to EFSEC on March pay is $2,490,800. It's important to note the Business 8, 1995, which complied with EFSEC requirements to Development Fund is not obligated to reimburse losses remove the assets and restore the sites by demolition, of NoaNet unless an assessment is made to NoaNet's burial, entombment, or other techniques such that members based on a two-thirds vote of the membership.

the sites pose minimal hazard to the public. EFSEC In Fiscal Year 2003, the Business Development Fund approved Energy Northwest's site restoration plan on contributed $119,796 to NoaNet based on an assessment June 12, 1995. In its approval, EFSEC recognized that by the NoaNet members. This equity contribution there is uncertainty associated with Energy Northwest's was reduced to zero at year-end because NoaNet had proposed plan. Accordingly, EFSEC's conditional a negative net equity position of $13.3 million as of approval provides for additional reviews once the details June 30, 2003. Future equity contributions, if any, will of the plan are finalized. A new plan with additional be treated the same until NoaNet has a positive equity details was submitted in Fiscal Year 2003. This submittal position.

was used to calculate the Asset Retirement Obligations (ARO) discussed in Note G of the financial statements.

Other Litigation and Commitments Business Development Fund Interest Energy Northwest is involved in various claims, in Northwest Open Access Network legal actions and contractual commitments and in certain claims and contracts arising in the normal The Business Development Fund is a member of the course of business. Although some suits, claims and Northwest Open Access Network ("NoaNet"). Members commitments are significant in amount, final disposition formed NoaNet pursuant to an Interlocal Cooperation is not determinable. In the opinion of management, Agreement for the development and efficient use of a the outcome of such litigation, claims or commitments communication network in conjunction with BPA for use will not have a material adverse effect on the financial by the Members and others. positions of the Business Units or Energy Northwest as a whole. The future annual cost of the Business Units, The Business Development Fund has a 7.38 percent however, may either be increased or decreased as a interest in NoaNet with an additional 25 percent step- result of the outcome of these matters.

up possible for a maximum 9.23 percent. As of June 30, 2003, NoaNet has $27 million in outstanding bonds. The members are obligated to pay the principal and interest Nuclear Licensing and Insurance on the bonds when due, in the event and to the extent that NoaNet's Gross Revenue (after payment of costs Energy Northwest is a licensee of the Nuclear Regulatory of Maintenance and Operation) is insufficient for this Commission and is subject to routine licensing and user People

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fees, to retrospective premiums for nuclear liability estimated fair value, for legal obligations related to the insurance, and to license modification, suspension, or dismantlement and restoration costs associated with the revocation, or civil penalties in the event of violations of retirement of tangible long-lived assets, such as nuclear various regulatory and license requirements. decommissioning and site restoration liabilities, in the period in which it is incurred. Upon initial recognition of The Price-Anderson Act currently provides for nuclear the AROs that are measurable, the probability weighted liability insurance of over $10.6 billion per incident, future cash flows for the associated retirement costs, which is covered by a combination of commercial nuclear discounted using a credit-adjusted, risk-free rate, are insurance and mandatory industry self-insurance. Energy recognized as both a liability and as an increase in Northwest has purchased the maximum commercial the capitalized carrying amount of the related long-insurance available of $300 million, which is the first lived assets. Capitalized asset retirement costs are layer of protection. The second layer of protection is depreciated over the life of the related asset with provided through a mandatory industry self-insurance accretion of the ARO liability classified as an operating plan wherein each licensed nuclear facility required to expense on the statement of operations and fund participate in the plan (currently 105 participants) may equity each period. Upon settlement of the liability, be assessed up to $100.6 million per incident, subject to a an entity either settles the obligation for its recorded maximum annual assessment of $10 million per year. amount or incurs a gain or loss if the actual costs differ from the recorded amount. However, with regard to Nuclear property damage and decontamination the net-billed Projects, BPA is obligated to provide for liability insurance requirements are met through a the entire cost of decommissioning and site restoration combination of commercial nuclear insurance policies therefore, any gain or loss recognized upon settlement purchased by Energy Northwest and BPA. The total of the ARO results in an adjustment to either the excess amount of insurance purchased is currently $2.25 of costs (liability) or costs in excess of billings (asset), as billion. The deductible for this coverage is $5 million per appropriate, as no net revenue or loss is recognized, and occurrence. no equity is accumulated for the net-billed projects.

Energy Northwest has identified legal obligations to NOTE G - NEW ACCOUNTING retire generating plant assets at the following business PRONOUNCEMENT units: Columbia Generating Station, Nuclear Project No.

1, and Nine Canyon Wind Project. Decommissioning and Energy Northwest adopted SFAS No. 143, "Accounting site restoration requirements for Columbia and Nuclear for Obligations Associated with the Retirement of Long- Project No. 1 are governed by the Nuclear Regulatory Lived Assets", on July 1, 2002 (see Note B, Summary of Commission (NRC) regulations and site certification Significant Accounting Policies). This Statement requires agreements between Energy Northwest and the State of an entity to recognize the fair value of a liability for Washington and regulations adopted by the Washington an asset retirement obligation (ARO), measured at Energy Facility Site Evaluation Council (EFSEC) and a 62 People *Vision *Solutions

lease agreement with the Department of Energy (DOE) the adoption date. Prior obligations recorded with regard (see Notes B and F). Under the current agreement, the to the decommissioning obligation of Columbia and Nine Canyon Wind Project has the obligation to remove Nuclear Project No. 1 were reversed as of the adoption the generation facilities upon expiration of the lease date. As a result of the net-billing arrangement, the agreement if requested by the lessors. adoption of SFAS 143 for Columbia Generating Station and Nuclear Project No. 1 did not result in a cumulative Packwood's obligation has not been calculated because effect adjustment on the statement of operations the time frame and extent of the obligation was and fund equity, rather the net impact resulted in an considered under this statement as indeterminate, as increase to costs in excess of billings in the amount of a result, no reasonable estimate of the asset retirement $24.994 million and $25.253 million, respectively. As obligation can be made. An ARO will be required to be of June 30, 2003, Columbia Generating Station has a recorded if circumstances change. Management believes net asset value of $21.249 million and an accumulated that these assets will be used in utility operations for the liability of $47.754 million. Nuclear Project No. 1 has an foreseeable future. accumulated liability of $41.354 million.

Upon adoption of SFAS 143 on July 1, 2002, Columbia During the year, Nine Canyon Wind Project recorded Generating Station recorded an ARO of $70.222 billion an ARO of $458,115 with regard to Phase I of the at its net present value of $31.110 million, and increased generation project which began commercial operations depreciable assets by $21.768 million. Nuclear Project No. in September 2002. As of June 30, 2003, the Nine Canyon 1 recorded an ARO of $49.612 million at its net present Wind Project had a recorded asset retirement cost asset value of $25.253 million, however, no asset retirement value of $449,683 with accumulated depreciation of cost was recorded as the project was terminated prior to $8,432 and an ARO asset of $466,989.

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CURRENT DEBT RATINGS (Unaudited)

NET BILLED NINE CANYON ENERGY NORTHWEST (Long-Term) RATING RATING Fitch, Inc. AA- A-Moodys Investors Service, Inc. (Moodys) Aa1 A3 Standard and Poor's Ratings Services (S & P) AA- A-VARIABLE RATE DEBT S &P FITCH MOODYS Letter of Credit Banks Bank of America Long-Term AA- Aa1 Short-Term A-1 + p-1 JPMorgan Chase Bank Long-Term AA- Aa3 Short-Term A-1+ F1 VMIG1 Bond Insurance (Long-Term)

MBIA Insurance Corporation AAA AAA Aaa FSA (Short-Term)

Credit Suisse First Boston A-1 P-'

Dexia A-1+ F1+ p-1 64 People e Vision

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