GO2-13-009, Generation Station, Independent Spent Fuel Storage Installation, Submittal of 2012 Annual Financial Report

Generation Station, Independent Spent Fuel Storage Installation, Submittal of 2012 Annual Financial Report

ML13032A144
Person / Time
Site:	Columbia
Issue date:	01/17/2013
From:	Gregoire D Energy Northwest
To:	Document Control Desk, Office of Nuclear Material Safety and Safeguards
References
GO2-13-009
Download: ML13032A144 (68)

Text

Donald W. Gregoire 2 ENERGY Manager, Regulatory Affairs P.O. Box 968, Mail Drop PE20

~ NORTHWEST Richland, WA 99352-0968 Ph. 509-377-8616 F. 509-377-4317 dwgregoire@energy-northwest.com January 17, 2013 10 CFR 50.71(b)

G02-13-009 10 CFR 72.80(b)

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

Subject:

COLUMBIA GENERATING STATION, DOCKET NO. 50-397; INDEPENDENT SPENT FUEL STORAGE INSTALLATION, DOCKET NO. 72-35; 2012 ANNUAL FINANCIAL REPORT

Dear Sir or Madam:

In accordance with 10 CFR 50.71 (b) and 10 CFR 72.80(b), enclosed is a copy of the 2012 Energy Northwest Annual Report for the subject facility.

There are no commitments contained in this letter or its enclosure. Should you have any questions, please call Zachary Dunham at (509) 377-4735.

Respectfully, DW Gregoire Manager, Regulatory Affairs

Enclosure:

As stated cc: Director, Spent Fuel Project Office - NMSS (with Enclosure)

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contents 4 A Message to Our Stakeholders 6 Executive Board 7 Board of Directors 8 Senior Leadership 10 Columbia Generating Station 13 License Renewal 16 Packwood Lake Hydroelectric Project 18 Nine Canyon Wind Project 19 White Bluffs Solar Station 20 Generation Project Development 22 Environmental Stewardship 24 Community Service 26 CEO Recognition 27 FINANCIAL DATA & INFORMATION 28 Management Report on Responsibility for Financial Reporting 28 Audit, Legal and Finance Committee Chairman's Letter 29 Report of Independent Auditors 30 Energy Northwest Management's Discussion and Analysis 42 Balance Sheets 44 Statements of Revenues, Expenses and Changes in Net Assets 45 Statements of Cash Flows 47 Notes to Financial Statements 66 Current Debt Ratings

Po ein a dearIl , I 41 to our Stakeholders iscal year 2012 was a historic period for Energy Northwest. On May 22, the Nuclear Regulatory Commission officially approved Columbia Generating Station nuclear energy facility's 20-year license renewal during a signing ceremony in Washington, D.C. This was a momentous event, and we are Sid MORRISON thrilled that Columbia will continue providing clean, baseload energy for Northwest ratepayers Chair, Executive Board through 2043.

In conjunction with the license renewal, Washington Governor Chris Gregoire also made her first visit to Columbia on May 24. The governor, along with Executive Board Chairman Sid Morrison, Bonneville Power Administration Administrator Steve Wright, as well as Senator Patty Murray and Congressman Doc Hastings (both by video), addressed employees and local elected officials and civic leaders. Each presenter offered congratulations to employees for this achievement and for their commitment to upholding the stringent standards of our industry.

We were all pleased to hear the governor publically endorse Columbia's license renewal.

"Nuclear power has its place in the current and future production of electrical power for our nation," she said. "I know that it can provide reliable and affordable baseload power over the very long term. It can produce that power without greenhouse gas emissions. That is why I endorsed the re-licensing of our plant. It is a cornerstone of power production in the Pacific Northwest."

During her visit, the governor toured Columbia and engaged with employees along the tour route. She also joined us at an executive board meeting later in the day, where she received an overview of Columbia and agency performance trends and initiatives.

One of these initiatives, Excellence in Performance, touches everything we do as an agency. We know reaching the highest levels of excellence at Columbia and our other projects won't be easy or quick, but we are encouraged by the dedicated focus of the entire team.

The team's progress in fiscal 2012 - despite some setbacks - confirms we are on the right track.

Employees across the agency are focused on the right behaviors to ensure our projects and equipment operate safely, reliably and predictably. Their efforts are firmly increasing reliability at every project, including Columbia.

And while 2011 was a challenging year for the nuclear industry following the devastating earthquake and tsunami in Japan, our commitment at Columbia as well as across the industry is steadfast. We are continuing to further strengthen nuclear performance and safety, reaching the highest levels of excellence while ensuring we remain the safest industry in the nation.

Among our other generation resources, the agency's first project, Packwood Lake Hydroelectric Project, had another Mark REDDEMANN record year. A high-water season helped Packwood increase production to 119,430 megawatt-hours of electricity, an Chief Executive Officer increase of 11 percent over last fiscal year.

Nine Canyon Wind Project achieved a 98.6 percent adjusted availability factor, the highest since Phase III of the project was added in 2008, producing 261,624 net megawatt-hours of electricity.

Keeping our existing projects operating reliably and cost effectively, while meeting members' future energy needs remains Energy Northwest's foundation. In April, Energy Northwest sent a letter to the Department of Energy, on behalf of the Pacific Northwest Utility Small Modular Reactor Working Group, expressing our support for the NuScale reactor design, and encouraging Energy Department pilot project funding. We strongly support the Mid-Columbia Energy Initiative and Tri-City Development Council efforts to locate a small modular reactor near Columbia on the Hanford Site to provide members with options for baseload power post 2025. In the near term, we're working with Veresen U.S.

Power to support the development of Kalama Energy Center. This 346-megawatt natural gas combined-cycle plant is slated for commercial operation in 2016. We also continue to look for land we can bank to build renewable projects to meet our members' post-2015 renewable portfolio standard energy requirements.

Our employees remain essential elements to achieving our mission of providing our public power members with safe, reliable and cost-effective power. The Energy Northwest team once again stayed within our long-range plan commitment, ending the year under budget by $3.7 million in operations and maintenance and $2.7 million in capital expenditures, underscoring our dedication to fiscal discipline and responsibility for the benefit of Northwest electric ratepayers.

Additionally, during the last two decades, Energy Northwest and Bonneville Power Administration, with support from Energy Northwest's boards, have collaborated to address BPA debt management challenges and develop strategies to further benefit the region's ratepayers. Through this collaboration, Energy Northwest provided the region an average of $104 million in annual rate relief during BPA's fiscal year 2012 to 2013 power rate period. These savings alone lowered BPA's proposed rate increase by 5 percent, helping to reduce an anticipated 12 to 20 percent increase to 7.8 percent.

To provide even further rate reductions to ratepayers, contracts were signed in May with the Department of Energy, the U.S. Enrichment Corporation (USEC) and Tennessee Valley Authority to initiate the process of turning depleted uranium into low-cost nuclear fuel. Under the agreement, USEC will provide Energy Northwest with 482 metric tons of uranium enriched at USEC's Paducah Gaseous Diffusion Plant in Kentucky. With the additional fuel, Columbia's fuel costs will be reduced and be predictable through 2028. Energy Northwest will also sell a portion of the enriched uranium to TVA beginning in 2015 to meet needs for their nuclear plants and offset some of Energy Northwest's cost.

This fuel purchase agreement that began in fiscal 2012 will generate more than $88 million in additional rate case savings from 2014 to 2017, and tens of millions of dollars more in savings through 2028. These significant additional savings over the life of the transaction will enable BPA to reduce current and future proposed rate increases even further. Every $20 million in savings equates to approximately a 1 percent reduction in rates.

These are only a few examples, which demonstrate the strong commitment of our employees to our stakeholders and why we are so honored to work with each and every member of the Energy Northwest team. Throughout the pages in this report, several Energy Northwest teams are featured highlighting their significant agency achievements.

We are extremely proud of their efforts that benefit not only Energy Northwest but also ratepayers and all our stakeholders.

Finally, our sincere thanks to all Energy Northwest team members who volunteered their time and talents to support those in need in our communities, through the March of Dimes, Head Start, United Way and the Red Cross.

Together we are making progress on all our initiatives, bolstering our commitment to powering a clean energy future. This requires everyone involved with our operations to have an unwavering commitment to excellence.

While we have a hard road ahead, we are confident in the Energy Northwest team's desire to be the best in all we do. Building on the progress we've made over the last year will ensure our ever rising performance and reliability goals are met and sustained.

Respectfully, Sid Morrison Mark Reddemann Chair, Executive Board Chief Executive Officer

he Energy Northwest Executive Board sets the policies that govern Executive Board the operations of the organization. It is made up of 11 members, five elected from the board of directors, three outside members appointed by the board of directors and three outside members appointed by Washington's governor.

Our Board of Directors he Energy Northwest Board of Directors includes a representative from each of its member utilities. The powers and duties of the board of directors include final authority on any decision to purchase, acquire, construct, terminate or decommission any plants and/or facilities of Energy Northwest.

Board members represent utilities with strong histories of serving the public power needs of Washington ratepayers. Their experience helps guide the agency as a continuing and effective source of powerful energy solutions.

ANN CONGDON LINDA GOTT BILLGORDON JUDY RIDGE DOUG AUBERTIN NANCY BARNES TERRY BREWER President VicePresident Secretary Assistant Secretary Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, FerryCounty PUD Clark Public Utilities Grant County PUD2 Chelan County PUD Mason County PUD3 Franklin County PUD Asotin County PUD Keller,Wash. Vancouver, Wash. Soap Lake,Wash.

Manson, Wash. Shelton, Wash. Pasco, Wash. Clarkston, Wash.

TOM CASEY LARRY DUNBAR BILLGAINES DAN GUNKEL BOB HAMMOND JACK JANDA ROBERT JUNGERS Commissioner, Deputy Director Director of Utilities, Commissioner, Energy Services Director. Commissioner, Commissioner, Grays Harbor County PUD of Power Systems, Tacoma Public Utilities Klickitat County PUD Richland Energy Services Mason County PUD1 Wahkiakum County PUD Aberdeen, Wash. Cityof Port Angeles Tacoma, Wash. Goldendale, Wash. Richland, Wash. Shelton, Wash. Cathlamet, Wash.

Sequim, Wash.

STEVE KERN BUZ KETCHAM CURT KNAPP CLYDE LEACH KEN MCMILLEN MIKE MURPHY WILL PURSER Power Supply and Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Environmental Cowlitz County PUD1 Pend Oreille County PUD Skamania County PUD Jefferson County PUD Whatcom County PUD Clallam County PUD Affairs Officer, Kalama, Wash. Newport, Wash. Underwood, Wash. Port Hadlock, Wash. Bellingham, Wash. Sequim, Wash.

Seattle City Light Seattle, Wash.

LORI SANDERS ROGER SPARKS CHUCK TENPAS DIANA THOMPSON KATHY VAUGHN ED WILLIAMS DAVE WOMACK Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Commissioner, Benton County PUD Kittitas County PUD LewisCounty PUD PacificCounty PUD2 Snohomish County PUD Centralia CityLight Okanogan Public Utilities Kennewick, Wash. Ellensburg, Wash. Randle, Wash. Oysterville, Wash. Lynnwood, Wash. Centralia, Wash. Okanogan, Wash.

Powering a clean energy futute senior leadership teami D he senior leadership team manages day-to-day operations, executes developing programs and projects, establishes long-term strategies in direct support of the Energy Northwest vision, and provides essential hands-on leadership to foster continual process improvement and to strengthen organizational core values in the workforce.

FYI?2 roject generation COLUMBIA GENERATING STATION Duin fisclya olumbia Generating Station continues to operate safely and efficiently, providing valuable electrical power to the region. Station performance improved in fiscal year 2012 without any forced shutdowns or forced outages. Columbia continues to focus on industry excellence through continuous improvement initiatives.

Refueling Outage 20 began April 6, 2011, and ended Sept. 27 with Columbia's reconnection to the Northwest power grid. The outage involved the largest scope of equipment maintenance in Columbia's history, with the most significant tasks being valve work and the installation of a new condenser. Delays in the condenser replacement project extended the outage duration from a scheduled 78 days to 174 days - into fiscal year 2012. As a result, outage duration goals were not met.

Additionally, there were replacements and repairs of multiple other major components that have been the source of long- standing equipment performance issues. The result has been increased reliability, and 22 megawatts of additional power generated, on average. Projects contributing to Columbia's increased output include maintenance on 350 valves; replacement of the plant's main generator rotor and condenser, and efficiency work on two of the facility's 6,984GWh in fiscal year 2012 six cooling towers.

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• aStaartion(y Geerti Workers also executed two planned maintenance outages to perform needed repairs. The first, in November, was to balance a rotor on one of the four main steam turbines; and the second, in May, was to replace a reactor coolant circulation pump seal. Workers completed both outages on time and under budget.

Worker performance improved following dedicated training on use of error prevention tools. Training at Columbia is maximized to ensure both new and current employees receive the necessary skills and knowledge to excel in their duties.

Columbia is committed to excellence and begins the new fiscal year with a continued focus on performance and results. M GLA PZANK Sceue InteIodso ahnto tt .

LICENSE RENEWALn May 22, a more than five-year process came to a close with the stroke of a pen. just outside of Washington, D.C., the director of Nuclear Reactor Regulation for the independent Nuclear Regulatory Commission signed documents renewing the license of Columbia Generating Station to operate an additional 20 years beyond its current license end date in 2023.

The signature culminated a comprehensive license renewal process that required thousands of hours of work to prepare the rigorous analysis and documentation needed to assure Columbia's regulator and other stakeholders that the facility will continue to operate safely through 2043.

Two days later, employees; elected officials; members of Energy Northwest's Executive Board; Board of Directors and Participants Review Board; and dignitaries gathered at Columbia Generating Station to hear Gov. Chris Gregoire, Executive Board Chair Sid Morrison, Bonneville Power Administration Administrator Steve Wright and Energy Northwest CEO Mark Reddemann hail Columbia's license renewal. U.S. Sen. Patty Murray and U.S. Rep. Doc Hastings provided pre-taped audio remarks congratulating Energy Northwest and its employees for the renewal of Columbia's license.

"This is an historic moment for Energy Northwest. License renewal means we will continue to fulfill our mission statement of providing our public power members and regional ratepayers with safe, reliable and cost-effective power for years to come.

"It's a tribute to all of our employees who commit themselves daily to excellence," CEO Mark Reddemann told the crowd of about 450.

Gov. Gregoire said she supported license renewal because she believes nuclear energy is a key power source for Washington now and into the future.

"Nuclear power has its place in the current and future production of electrical power for our nation," Gregoire said. "I know that it can provide reliable and affordable baseload power over the very long term. It can produce that power without greenhouse gas emissions.

That is why I endorsed the re-licensing of our plant. It is a cornerstone of power production in the Pacific Northwest."

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Administrator Wright highlighted the public power heritage of Energy Northwest. "The people who work here do something that is meaningful and important. The mission of this plant is focused not on producing profit, but on producing benefit that serves the public."

In pre-recorded comments, Htastings said license renewal would not have been possible without an ongoing commitment to safety by employees.

"I will continue to do everything I can to support your current operations and to encourage the further development of nuclear energy in our state," Hastings said.

Murray said in her pre-recorded remarks that she was proud to represent the only commercially operated nudear power plant in the Pacific Northwest.

"I commend you for your continued attention to keeping the community safe and the environment clean," Murray said.

It was a particularly poignant moment for Morrison, who, nearly 30 years ago as the congressman for the district that includes southeastern Washington, attended the ceremony marking Columbia's debut.

"I consider this plant an awesome symbol of Washington public power," Morrison said, encouraging employees to celebrate the achievement of license renewal. []

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The project received a continuance to operate under its existing license from the Federal Energy Regulatory Commission in March 2010. The continuance will remain in effect until the new license is issued. Packwood's license application was submitted in February 2008.

percent FERC will complete the final license renewal documentation for the project following issuance of the National Oceanic and Atmospheric Administration's biological opinion.

Packwood's 12 participant utilities assumed the responsibility to purchase their respective 90.9 shares - or re-assign their shares - of the project's output in fall 2011. The participants pay their respective share of annual costs for operation and maintenance of the project. IM availability in fiscal year 2012

NINE CANYON Eine WIND PROJECT Canyon Wind Project is one of the largest public-owned wind projects in the nation. With 63 wind turbines - 14 rated at 2.3 megawatts and 49 more at 1.3 megawatts - Nine Canyon's total installed capacity is 95.9 megawatts.

261,624 MWh in fiscal year 2012 In fiscal year 2012, Nine Canyon produced 261,624 net megawatt-hours of electricity and achieved a 98.6 percent adjusted availability factor, the highest since Phase III of the project was added in 2008.

New challenges arise for Nine Canyon as the project matures and the need to perform predictive and preventative maintenance is greatly increased. The end of warranty and maintenance agreements brings special difficulties with ordering parts. One dilemma is determining the advantages to using original equipment manufacturers while determining if there are equitable after-market parts that may be more effective. With each year that passes, new issues and challenges are identified and innovative solutions are implemented. M]

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GENERATION PROJECT DEVELOPMENT The agency works with its members to understand and anticipate their thermal and renewable resource needs, and to identify regional generation supply opportunities, to develop appropriate low-cost resources. The goal is to offer competitive generation supply options and solutions to meet member utility needs.

Major challenges to developing new generation projects in the Pacific Northwest exist. These include raising investment funding for development prior to completing power purchase agreements. Additionally, the timeline for project site selection, engineering, permitting and infrastructure interconnection ranges from two to four years and construction can range from six months to three years depending on the technology involved and complexity of the project. A typical generation project needs to anticipate market demand several years in advance of actual utility needs.

Transmission and pipeline interconnection and integration processes are becoming more complex and tend to increase resource development timelines. The high percentage of regional hydropower and its variance create market uncertainty and periodic price volatility.

The agency completed a comprehensive review and re-tooling of its development processes to more effectively collaborate with its members and align efforts with member needs. El

isoofo cmeitv gene'E tion supl opion an souion to meet mebe uilit needs key generation projects:

Kalama Energy Center: Solar: 5-megawatt Photovoltaic Grays Harbor 50-megawatt 346-megawatt Natural Gas Generation Sites Power Call Option Combined-Cycle Plant Under direction from its governing boards, A 50-megawatt power call option was part Energy Northwest secured development Energy Northwest continues to look for of the compensation package for Energy agreements and financial budgets with sites it can bank to offer member utilities Northwest selling the rights to develop Veresen U.S. Power to support development siting options for low-cost and low-risk solar the 600-megawatt Satsop Natural Gas of Kalama Energy Center in southwestern generation development, in anticipation Combined-Cycle Plant to Duke Energy in Washington. Under the agreements, Energy of Washington's 2016 and 2020 renewable 2001. A call option provides the right, but Northwest will provide development portfolio standard compliance obligations. not the obligation, to purchase power. The services to Veresen until the center is fully One potential option under consideration is current value of the option is low due to permitted and the output is subscribed. the expansion of the agency's current solar- increased hydropower production and the Once all development work is complete, photovoltaic site (White Bluffs Solar Station) resulting depressed market prices for power Energy Northwest expects Veresen to within Energy Northwest's leased property in the region. In times when the price gap exercise its option to purchase the project. north of Richland. The potential expansion between natural gas and hydropower is Depending on regional energy demand, would utilize an area that features significant, the option will create substantial project construction could start as early as graded topography and robust electrical revenues for the agency's business 2014. Kalama Energy Center continues to interconnection infrastructure. Efforts are development fund.

successfully complete significant permitting under way to further assess this option.

and engineering activities. Power marketing efforts continued through fiscal 2012 with the project's submission to multiple competitive regional resource solicitations.

ENVI RO NMENTALSTEWARDSHIP Energy Northwest's environmental stewardship policy is the foundation on which the Environmental Management System is built.

The policy commits the agency to consider the environment Energy Northwest's EMS first registered to ISO 14001:2004 in April 2005 with NSF in everything it does. It International Strategic Registrations, an accredited registrar. The registration has continued with also commits the agency to a successful surveillance by our registrar in April 2012, with no findings of non-conformance. comply with all environmental Ongoing environmental objectives to reduce hazardous and mixed waste generation at regulations; pollution Columbia Generating Station demonstrate our commitment to continual improvement. In prevention; communicate the January 2012, the agency notified the Washington Department of Ecology that Columbia had environmental programs and successfully attained medium quantity generator status. To maintain this regulatory status, performance: and continually Columbia will need to minimize waste generation to stay below the mandated generation and improve the system.

accumulation limits. One benefit of this regulatory status includes extended accumulation

time, which reduces the number of waste shipments throughout the year. The status also demonstrates the agency's environmental stewardship commitment.

Energy Northwest identified and implemented several pollution prevention opportunities during fiscal year 2012. These included participation in the state's surplus program to redistribute products - such as cleaning supplies, lubricants and caulking - that are no longer needed but are still usable by other organizations. Other opportunities included projects to reduce electricity and water consumption; and a vehicle fleet reduction program.

The agency also implemented projects to enhance the natural environment, including the installation of 18 artificial burrows to attract burrowing owls (a species of concern) at the Industrial Development Complex, adjacent to Columbia, and re-establishment of native plants on agency-leased lands. [

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COMMUNIJY SERVICE uring fiscal year 2012, Energy Northwest increased community outreach efforts to educate key audiences about energy sources and issues facing Washington state.

One of the community and educational outreach opportunities including many civic and business organizations, through the Energy Northwest undertook was a series of public service Energy Northwest Speakers Bureau.

announcements focusing on nuclear energy. The PSAs featured Additionally, Energy Northwest has been a member of the agency employees delivering messages about nuclear energy's clean local Tri-Cities business community for more than 50 years. As a and safe power generation and other benefits. major Washington employer, the agency strongly believes in the Energy Northwest also participated in several industry energy importance of supporting the communities and non-profit agencies and environmental-related events, such as the Sustainable Energy where its employees work and live.

and Environmental Expo; the Hanford Health and Safety Expo; From the CEO to the newest employee, Energy Northwest cares and Imagine Tomorrow, a Washington State University science and through direct, hands-on involvement.

energy-oriented event for high school students. The agency officially sponsors three vital community Agency employees also spoke to a wide range of audiences, organizations: United Way, Head Start and March of Dimes. IM Head Start In fiscal 2012, Energy Northwest celebrated The Head Start program is the 31 st anniversary of supporting the Benton the most successful, longest-Franklin Head Start program (since 1980). running, national school readiness Each year, Energy Northwest commits program in the U.S. It provides to adopting every Head Start child for the comprehensive education, health, holiday season. In fiscal 2012, nearly 450 nutrition and parent involvement children were sponsored by employees. services to low-income children Each child provided a wish list to Santa and their families.

and received at least one toy and one More than 25 million pre-school aged clothing item. The gifts were distributed by children have benefited from Head Start, and Energy Northwest employees, dressed as the number of children served in Benton and Santa and his elves, during the various Head Franklin counties has more than doubled in Start parties. the past two decades.

United Way Tri-Cities March for Babies event that helps Member Forum In fiscal 2012, nearly $89,000 was raised support neo-natal birth centers and local "Changing the Energy Landscape" was for United Way. Final results show that 232 families in need. the theme during Energy Northwest's Energy Northwest employees contributed 14th annual Member Forum. Headlining to the 2011 United Way campaign, with 155 the event was professional speaker Dale of those increasing their contribution from Other activities Energy Northwest Collie from Courage Builders, who helped the previous year or being new contributors. participated in include: attendees focus on success by learning to These pledges and others help provide hot embrace change, focus on the essentials meals to elderly neighbors, fund youth Earth Day Clean-Up of overcoming problems, and persevering developmental programs, provide disaster Energy Northwest and AREVA employees to achieve personal and team goals. Other relief planning for our community and build worked together for the community during presentation topics included Washington self-esteem in at-risk youth. an Earth Day clean-up project. Sixteen Energy state's energy strategy; nuclear energy in a United Way improves lives in our Northwest employees and family members post-Fukishima world; cyber security; public community through Community Solutions. participated, filling 60, 40-gallon bags with speaking; and wind power integration.

The goal is that everyone living in Benton paper, plastic, cans and other debris. Energy Northwest's Member Forum and Franklin counties has a good education; Energy Northwest is committed to is an opportunity for the public power access to healthcare; lives and works in a taking care of the environment. Energy community to openly discuss future safe environment; and is a self-sufficient, Northwest's commitment is formally challenges and changes in the utility active member of the community. certified by the International Organization industry. Nearly 80 commissioners, for Standardization, which underscores managers and other representatives from March of Dimes the agency's compliance to international the agency's 28 member utilities attended Energy Northwest's team raised $25,000 environmental standards, and provides third- the annual event. It continues to be an this year for the March of Dimes, exceeding party validation that Energy Northwest's important venue for a regional public the goal and once again demonstrating environmental stewardship and management power community that serves more than the philanthropy and generosity of its efforts are both effective and sustainable. 1.5 million ratepayers across Washington employees. About 70 walkers from Energy The clean-up activity reflects both state. Additionally, it is a chance to meet Northwest, along with their spouses, organizations' commitment to the Tri-Cities and listen to speakers on regional and children and pets, participated in the 2012 community and the environment. national energy issues.

PowernrI a, l'i , , arc f~utu CEO RECOGNITION ongratulations to Energy Northwest employees who received CEO Leadership Performance awards.

During fiscal year 2012, these employees were honored for exemplifying excellence in performance through their achievements and work practices.

Steve Ackley David Giroux Michael Praest Barbara Anderson Don Gregoire Raj Rana Cathey Anderson Jeremy Hauger Dan Ross Charles Anderson Bruce Hugo Nicholas Rullman Andrew Arroyos Tony Huiatt Duane Salsbury Frank Bailey David Jordan Richard Shaff Myron Baird Thomas Kempton Michael Shoup Douglas Beach Tim Lindsley Habib Shtaih Micky Castle Johnny Lopez Janet St. Jacques Nishant Chadha Jeffrey Lux Jackie Swift Sandra Christianson Thomas Martens James Tansy Sean Clizbe Jim Massey John Twomey Jason Davis Heather McMurdo Linda Walker Audrey Desserault Tom Morales Dennis Werlau Ryan Downing Abbas Mostala Gary Westergard Melissa Duncan Charles Nash Lisa Williams Danielle Dunigan Doran Nealon Nicholas Woehle Lisa Escalera Andrew Olsen Scott Wood Amber Flowers Lynne Pagel Janet Worthington Jeff Gardiner Jeff Person Mark Giomi Lisa Poznanski

Energy Northwest 2012 Annual Report FINANCIAL DATA & INFORMATION

28 Powering a clean energy future Management Report on Responsibility for Financial Reporting Energy Northwest management is responsible for preparing the accompanying financial statements and for their integrity. They were prepared in accordance with generally accepted accounting principles applied on a consistent basis, and include amounts that are based on management's best estimates and judgments.

The financial statements have been audited by PricewaterhouseCoopers LLP, Energy Northwest's independent auditors. Management has made available to PricewaterhouseCoopers LLP all financial records and related data, and believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate.

Management has established and maintains internal control procedures that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. These control procedures provide appropriate division of responsibility and are documented by written policies and procedures.

Energy Northwest maintains an ongoing internal auditing program that provides for independent assessment of the effectiveness of internal controls, and for recommendations of possible improvements thereto. In addition, PricewaterhouseCoopers LLP has considered the internal control structure in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements. Management has considered recommendations made by the internal auditor and PricewaterhouseCoopers LLP concerning the control procedures and has taken appropriate action to respond to the recommendations. Management believes that, as of June 30, 2012, internal control procedures are adequate.

M.E. Reddemann B.J. Ridge Chief Executive Officer Vice President, Chief Financial Officer/

Chief Risk Officer Audit, Legal and Finance Commiflee Chair's [efler The executive board's Audit, Legal and Finance Committee (committee) is composed of 11 independent directors. Members of the committee are Chair Larry Kenney, Marc Daudon, Dan Gunkel, Jack Janda, Skip Orser, Will Purser, Dave Remington, Lori Sanders, Tim Sheldon, Kathy Vaughn and Sid Morrison, ex-officio. The committee held 11 meetings during the fiscal year ending June 30, 2012.

The committee oversees Energy Northwest's financial reporting process on behalf of the executive board. In fulfilling its responsibilities, the committee discussed with the internal auditor and the independent auditors the overall scope and specific plans for their respective audits, and reviewed Energy Northwest's financial statements and the adequacy of Energy Northwest's internal controls.

The committee met regularly with Energy Northwest's internal auditor and convened periodic meetings with the independent auditors to discuss the results of their audit, their evaluations of Energy Northwest's internal controls, and the overall quality of Energy Northwest's financial reporting. The meetings were designed to facilitate any private communications with the committee desired by the internal auditor or independent auditors.

Larry Kenney Chair, Audit, Legal and Finance Committee

Energy Northwest 2012 Annual Report Report of Independent Auditors To the Executive Board of Energy Northwest:

In our opinion, the financial statements of the business-type activities of Energy Northwest (the "Company"), comprised of the Columbia Generating Station, Packwood Lake Hydroelectric Project, Nuclear Project No.1, Nuclear Project No.3, the Business Development Fund, the Nine Canyon Wind Project, and the Internal Service Fund which collectively represent the Company's balance sheets, statements of revenues, expenses and changes in net assets, and of cash flows, present fairly, in all material respects, the respective financial position the business-type activities of the Company, at June 30, 2012, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.

The accompanying Management's Discussion and Analysis listed in the table of contents is required by accounting principles generally accepted in the United States of America to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audits of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Portland, Oregon September 28, 2012

Powering a clean energy future O3nergy Northwest Management's Discussion and Analysis Energy Northwest is a municipal corporation and joint The Balance Sheets present the financial position of each operating agency of the state of Washington. Each Energy business unit on an accrual basis. The Balance Sheets report Northwest business unit is financed and accounted for financial information about construction work in progress, the separately from all other current or future business assets. The amount of resources and obligations, restricted accounts and following discussion and analysis is organized by business due to/from balances for each business unit. (See Note 1 to the unit. The management discussion and analysis of the financial Financial Statements.)

performance and activity is provided as an introduction and to The Statements of Revenues, Expenses, and Changes in Net aid in comparing the basic financial statements for the fiscal year Assets provide financial information relating to all expenses, ended June 30, 2012, with the basic financial statements for the revenues and equity that reflect the results of each business unit fiscal year ended June 30, 2011. and its related activities over the course of the fiscal year. The Energy Northwest has adopted accounting policies and financial information provided aids in benchmarking activities, principles that are in accordance with Generally Accepted conducting comparisons to evaluate progress, and determining Accounting Principles (GAAP) in the United States of America. whether the business unit has successfully recovered its costs.

Energy Northwest's records are maintained as prescribed by the The Statements of Cash Flows reflect cash receipts and Governmental Accounting Standards Board (GASB) and, when disbursements and net changes resulting from operating, not in conflict with GASB pronouncements, accounting standards financing and investing activities. The Statements of Cash Flows prescribed by the Financial Accounting Standards Board (FASB). provide insight into what generates cash, where the cash comes (See Note I to the Financial Statements.) from, and purpose of cash activity.

Because each business unit is financed and accounted for The Notes to Financial Statements present disclosures that separately, the following section on financial performance contribute to the understanding of the material presented in the is discussed by business unit to aid in analysis of assessing financial statements. This includes, but is not limited to, Schedule the financial position of each individual business unit. For of Outstanding Long-Term Debt and Debt Service Requirements comparative purposes only, the table on the following page (See Note 5 to the Financial Statements), accounting policies, represents a memorandum total only for Energy Northwest, as a significant balances and activities, material risks, commitments whole, for FY 2012 and FY 2011 in accordance with GASB No. 34, and obligations, and subsequent events, if applicable.

"Basic Financial Statements-and Management's Discussion and The basic financial statements of each business unit along with Analysis-for State and Local Governments." the notes to the financial statements and management discussion The financial statements for Energy Northwest include the and analysis should be used to provide an overview of Energy Balance Sheets; Statements of Revenues, Expenses, and Changes Northwest's financial performance. Questions concerning any of in Net Assets; and Statements of Cash Flows for each of the the information provided in this report should be addressed to business units, and Notes to Financial Statements. Energy Northwest at PO Box 968, Richland, WA, 99352.

Energy Northwest 2012 Annual Report 31 ombined Financial Information June 30, 2012 And 2011 (InThousands) 2011 2012 Change Assets CurrentAssets 225,932 $ 209,345 $ (16,587)

Restricted Assets Special Funds 118,860 51,345 (67,515)

Debt Service Funds 459,183 516,106 56,923 Net Plant 1,519,569 1,525,642 6,073 Nuclear Fuel 266,949 341,535 74,586 Long-Term Receivables Deferred Charges 4,027,612 3,658,124 (369,488)

TOTAL ASSETS $ 6,618,105 $ 6.302,097 $ (316,008)

Current Liabilities 435,218 $ 501,801 $ 66,583 Restricted Liabilities Special Funds 149,430 138,406 (11,024)

Debt Service Funds 150,832 144,557 (6,275)

Long-Term Debt 5,875,190 5,508,467 (366,723)

Other Long Term Liabilities 14,028 15,776 1,748 Deferred Credits 5,820 5,709 (111)

Net Assets (12,413) (12,619) (206)

TOTAL LIABILITIES AND NET ASSETS $ 6,618,105 $ 6,302,097 $ (316,008)

Operating Revenues $ 552,292 $ 425,695 $ (126,597)

Operating Expenses 415,020 354,860 (60,160)

Net Operating Revenues 137,272 70,835 (66,437)

Other Income and Expenses (138,790) (71,049) 67,741 (Distribution) & Contribution 1,000 (1,000)

Beginning Net Assets (11,895) (12,405) (510)

ENDING NET ASSETS $ (12,413) $ (12,619) $ (206)

32 Powering a clean energy future Eaolumbia Generating Station Columbia Generating Station (Columbia) is wholly owned outage which caused an increase in the cost of power for FY 2011.

by Energy Northwest and its participants and operated by Energy Costs were incurred in FY 2012 for the extended portion of the Northwest. The plant is a 1,170-megawatt electric (MWe, Design outage but were not at the same levels as the FY 2011 period.

Electric Rating, net) boiling water nuclear power plant located on the Department of Energy's (DOE) Hanford Site north of Richland, Wash. Columbia Generating Station Columbia produced 6,984 gigawatt-hours (GWh) of electricity COST OF POWER - Cents/kWh in FY 2012, as compared to 7,247 GWh of electricity in FY 2011, which included economic dispatch of 140 and 99 GWh FY 2012 4.73 respectively. Columbia entered its longest planned refueling cycle of 78 budgeted days on April 6, 2011. The planned refueling FY 2011 5.69 outage (R-20) extended past the 78 days and ended Sept. 27, 2011. The extended refueling outage and successful completion FY 20 3.74 of a 10-day planned maintenance outage in May of 2012 were the major factors in the decreased generation of 3.6 percent in FY200, 4.94 FY 2012.

Columbia's cost performance is measured by the cost of power FY2008 2.75 indicator. The cost of power for IN 2012 was 4.73 cents per 0 1 2 3 4 5 6 kilowatt-hour (kWh) as compared with 5.69 cents per kWh in FY 2011. The industry cost of power fluctuates year to year depending on various factors such as refueling outages and other planned Balance Sheet Analysis activities. The FY 2012 cost of power decrease of 16.9 percent was The net increase to Utility Plant (plant) and Construction due to the significant costs incurred in FY 2011 for the refueling Work In Progress (CWIP) from FY 2011 to FY 2012 (excluding nuclear fuel) was $15.0 million. The changes to plant and CWIP were comprised of additions to plant of $229.3 million with a decrease to CWIP of $125.2 million. Remaining changes were

__ __m an adjustment to the capitalized asset for retirement obligation Columbia Generating Station (ARO) due to successful relicensing of Columbia resulting in a NET GENERATION - GWhrs decrease of $18.2 million; the period effect of depreciation of

$72.6 million and the decrease to accumulated decommissioning FY2012 of $1.7 million related to the ARO and Columbia relicensing.

The accumulated decommissioning and site restoration accrued FY2011 costs related to Columbia were adjusted to reflect the change in the asset retirement obligation caused by the extension of FY2OO the Columbia license. Per ASC 410, "Asset Retirement and Environmental Obligations," the obligation was reevaluated and FY2009 adjusted to reflect the Dec. 31, 2043 end date of relicensing. The revision resulted in a decrease to the capitalized portion of the FY2008 asset of $18.2 million. (See Note 11 to the Financial Statements.)

0 2,000 4,000 6,000 8,000 10,000

Energy Northwest 2012 Annual Report 3 The additions of $229.4 million to plant in FY 2012 were Current liabilities increased $36.3 million in FY 2012 to captured in 8 major projects of at least $2.0 million: Main $123.8 million. A major component of the change was an Condenser Replacement, Cooling Tower Fill Replacement, Main increase of $61.8 million in notes payable due to the Depleted Generator Rotor Replacement, Non-Segmented Bus Hardware, Uranium Enrichment Program. The program was a multi-Asset Suite upgrade, Isolation Valve Change, Blade Monitoring agreement joint effort for processing high-assay uranium tails, System, and the capitalization of relicensing costs. These projects enrichment, and sale of fuel components. (See Note 1 (d) to the resulted in 91 percent of Plant activity. The remaining 9 percent financial statements.) Other changes included a decrease to year were made up of 24 separate projects. end obligations of $18.4 million resulting from FY 2012 being Nuclear fuel, net of accumulated amortization, increased a non-refueling cycle year, an increase to current debt of $0.3

$74.6 million from FY 2011 to $341.5 million for FY 2012. Fuel million, an increase of $1.8 million for business unit activity and amounts used for reload increased $106.1 million and increases a decreased requirement for participant amounts under the net of $22.9 million were incurred for current year amortization. billing agreement of $9.5 million.

Fuel removed for cooling decreased $53.5 million and remaining Restricted liabilities decreased $11.7 million in FY 2012 to decrease was $0.9 million for fuel loan and purchase activity. $120.4 million. The decrease was due to the asset retirement Current assets decreased $13.5 million in FY 2012 to $149.6 obligation adjustment as a result of the NRC relicense agreement million. Changes were increases to inventory of $8.1 million issued May 2012.

offset by a decrease of $4.6 million due to other business unit Long-term debt decreased $12.9 million in FY 2012 from activity and a decrease of $17.0 million due to increased outage $2.58 billion to $2.6 billion due to the FY 2012 refunding obligations from FY 2011 and the related timing of obligations issuance. Current maturing debt is not included. In FY 2012, due the next fiscal year. new debt was issued for various Columbia operational and Special funds decreased $67.4 million to $36.8 million construction projects, the extension of some maturing debt, the in FY 2012 due to the FY 2012 bond activity and schedule of early redemption of certain callable maturities, and to pay for a construction costs for these funds in FY 2012. portion of the costs of issuing debt.

The debt service funds increased $27.1 million in FY 2012 Other long-term liabilities increased $1.8 million in FY 2012 to $89.9 million. The increase is due in part to the maturity of to $15.8 million related to nuclear fuel cask activity.

outstanding debt along with restructuring and funding activities associated with the bond sale in spring of 2012. Statement of Operations Analysis Deferred charges decreased $19.2 million in FY 2012 from Columbia is a net-billed project. Energy Northwest recognizes

$854.2 million to $835.0 million. Columbia was issued a standard revenues equal to expenses for each period on net-billed projects.

40-year operating license by the Nuclear Regulatory Commission No net revenue or loss is recognized and no net assets are (NRC) in 1983. On lan. 19, 2010 Energy Northwest submitted an accumulated.

application to the NRC to renew the license for an additional 20 Operating expenses decreased $57.5 million from FY 2011 years, thus continuing operations to 2043. A renewal license for costs of $388.9 million to $331.4 million in IN 2012. The continued operation of Columbia to Dec. 31, 2043 was granted decreases in costs were due to FY 2012 being a non-refueling year.

by the NRC on May 22, 2012. Accordingly, $18.7 million of The majority of the impacts to lower operating expenses were relicensing costs were transferred from a deferred charge to plant. for Operations and Maintenance costs. These costs were $69.5 The other component of the decrease to deferred charges related to the net effect of payment of current maturities and refunding activity related to available debt and unamortized debt expenses of $0.5 million.

Powering a clean energy future million lower in FY 2012. Costs incurred to offset these decreases were increased nuclear fuel costs of $4.3 million, depreciation and decommissioning increases of $8.1 million, generation tax Columbia Generating Station increases of $0.1 million and a decrease to Administrative and TOTAL OPERATING COSTS (dollars in thousands)

General expenses of $0.5 million comprised of a decrease to Total Expenses regulatory expenses and litigation and damages of $1.2 million, FY 2012 397,881 offset by increases to staffing and related benefit programs of $0.6 million.

FY 2011 522,156 Other Income and Expenses decreased $66.8 million from FY 2011 to $66.5 million net expenses in FY 2012. The spent fuel FY 2010 448,075 litigation settlement from the Department of Energy (DOE) of

$48.7 million was the major factor in the decrease to overall r TLuuY O 519,759 other expenses and is shown as gain on DOE settlement on the Statement of Revenues, Expenses and Changes in Net Assets. (See FY2008 428,993 Note 13 to the financial statements.) The remaining net decrease in other income and expenses of $16.5 million resulted from 0 100,000 200,000 300,000 400,000 500,000 increased costs due to bond activity of $4.1 million, decrease of U Operating Expenses U Other Income / Expenses

$20.4 million mostly related to the recognition of the disposal of the condenser from R-20 in FY 2011, increases to non-generation related revenue of $1.6 million, a small increase to lease revenues of $0.5 million and a decrease to investment income of $0.3 million.

Columbia's total operating revenue decreased from $522.2 million in FY 2011 to 397.9 million in FY 2012. The decrease in costs (and conversely revenue per net billing) of $124.5 million was due to the increased costs incurred in the previous year of R-20. Although R-20 extended into FY 2012, which is an off cycle year for the two year refueling outage, costs incurred for the extended portion of the R-20 outage were not at the levels for the original planned portion of the R-20 in FY 2011.

R-20 was originally budgeted for $153.7 million and 78 days.

Actual cost and days were $193.1 million and 174 days. Costs incurred in FI 2012 for R-20 were $21.5 million. R-20 activities continued through September of FY 2012. Columbia officially synced to the grid on Sept. 27, 2011 signaling the end of R-20.

Energy Northwest 2012 Annual Report ackwood lake Hydroelectric Project The Packwood Lake Hydroelectric Project (Packwood) is wholly owned and operated by Energy Northwest. Packwood consists of Packwood Lake Hydroelectric Project a diversion structure at Packwood Lake and a powerhouse located COST OF POWER - Cents/kWh near the town of Packwood, Wash. The water is carried from the lake to the powerhouse through a five-mile long buried tunnel FY2012 1.58 and drops nearly 1,800 feet in elevation. Packwood produced 119.43 GWh of electricity in FY 2012 versus 107.92 GWh in FY FY2011 1.59 2011. The 10.7 percent increase in generation can be attributed to increased water availability compared to the previous year. FY FY2010 1.82 2012 was the fourth highest generation in the life of the plant while FY 2011 was the lth highest. FY2009 1.62 Packwood's cost performance is measured by the cost of power FY2008 3.87 indicator. The cost of power for FY 2012 was $1.58 cents per kWh as compared to $1.59 cents per kWh in FY 2011. The cost of 00 05 1.0 1.5 20 2 U0 i_5 .0 power fluctuates year-to-year depending on various factors such as outage, maintenance, generation, and other operating costs.

The FY 2012 cost of power decrease of 0.6 percent was a result of higher water availability under terms of the old license agreement Balance Sheet Analysis which was partially offset by higher transmission and scheduling Total assets increased $1.0 million from FY 2011, with the costs. drivers being an increase to cash due to operations of $1.3 million and decrease to accounts receivable of $0.3 million.

There were no major changes to Net plant or related depreciation.

The corresponding increase to total liabilities of $ 1.0 million was the increase in due to participants for the results of operations.

Packwood has incurred $3.7 million in relicensing costs through Packwood Lake Hydroelectric Project FY 2011 with no new costs incurred for FY 2012. These costs are Packwood Lake Hydroelectric Project shown as Deferred Charges on the Balance Sheet. Packwood has NET GENERATION - GWhrs been operating under a 50-year license issued by the Federal Energy Regulatory Commission (FERC), which expired on Feb. 28, 2010.

FY2012 Energy Northwest submitted the Final License Application (FLA) for renewal of the operating license to FERC on Feb. 22, 2008. On FY2011 March 4, 2010, FERC issued a one-year extension to operate under the original license which is indefinitely extended for continued FY2010 operations until formal decision is issued by FERC and a new operating license is granted. As of June 30, 2012, Packwood FY2009 continues to be relicensed under this extended agreement.

FY2008 0 20 40 60 80 100 120

Powering a clean energy future Statement of Operations Analysis The agreement with Packwood participants obligates them to From July 1, 2011 through Sept. 30, 2011, Packwood was pay annual costs and to receive excess revenues. (See Note 1 to the obligated to supply a specified amount of power hourly, known Financial Statements.) Accordingly, Energy Northwest recognizes as Priority Firm Energy (PFE). The amount varied monthly based revenues equal to expenses for each period. No net revenue or on historical average generation. If the project was not able to loss is recognized and no net assets are accumulated. deliver PFE, replacement power was purchased on the spot Operating expenses increased $156k from FY 2011 amounts. market. Electrical energy from Packwood was sold directly to Operations and Maintenance was the major reason for the Snohomish PUD through Sept. 30, 2011, who purchased all of increase due to increased transmission and scheduling costs the output directly. The power purchase agreement (PPA) with of $267k and $63k of hydraulic and electrical expenses. These Snohomish provided a predetermined rate for all firm delivery; areas were offset by decreases in miscellaneous hydro expenses per the contract schedule and the Mid-Columbia (Mid-C) based of $132k and maintenance costs of $17k. Other decreases of $8k rate for any deliveries above firm, or secondary power. Conversely, were in other minor operating areas. Power supply expenses if there was excess capacity per the PPA with Snohomish PUD, decreased $17k accounting for the remainder of the change in Energy Northwest sold the excess on the open market for operating expenses. additional revenues to be included as part of the PPA with the participants of the project. As of Oct. 1, 2011, the Packwood Participants began taking 100% of the project generation. (See Note 6 to the Financial Statements.)

Other Income and Expenses increased from a net loss of $23k Packwood Lake Hydroelectric Project TOTAL OPERATING COSTS in FY 2011 to a net gain of $4k in FY 2012. The $27k increase in (dollars in thousands) net gain is primarily due to no interest costs incurred in FY 2012 Total Expenses compared to FY 2011 costs of $26k. The residual amount is due FY2012 to slight increases in investment income.

FY2011 1,742 FY2010 1,535 FY2009 1,641 FY2008 -I-I-I- 2,962 0 500 1000 1500 2000 2500 3000 N Operating Expenses U Other Income I Expenses

Energy Northwest 2012 Annual Report uclear Project No. I uuclear Project No. a Energy Northwest wholly owns Nuclear Project No. 1. Nuclear Nuclear Project No. 3, a 1,240-MWe plant, was placed in Project No. 1, a 1,250-MWe plant, was placed in extended extended construction delay status in 1983, when it was 75 construction delay status in 1982, when it was 65 percent percent complete. On May 13, 1994, Energy Northwest's Board of complete. On May 13, 1994, Energy Northwest's Board of Directors adopted a resolution terminating Nuclear Project No. 3.

Directors adopted a resolution terminating Nuclear Project No. Energy Northwest is no longer responsible for any site restoration

1. All funding requirements are net-billed obligations of Nuclear costs as they were transferred with the assets to the Satsop Project No. 1. Termination expenses and debt service costs Redevelopment Project. The debt service related activities remain comprise the activity on Nuclear Project No. I and are net-billed. and are net-billed. (See Note 13 to the Financial Statements.)

Balance Sheet Analysis Balance Sheet Analysis Long-term debt decreased $248.6 million from $1.6 billion in Long-term debt decreased $100.0 million from $1.5 billion in FY 2011 to $1.4 billion in FY 2012 as a result of maturing debt. FY 2011 to $1.4 billion in FY 2012, as a result of maturing debt.

The decrease in long-term debt was offset by the $70.0 million Current debt per the debt maturity schedule decreased $33.9 increase in the current debt per the debt maturity schedule. million from $129.4 million in FY 2011 to $95.5 million in FY 2012.

Statement of Operations Analysis Other Income and Expenses showed a net decrease to expenses Statement of Operations Analysis of $9.2 million from $84.2 million in FY 2011 to $75.0 million Overall expenses decreased $10.6 million from FY 2011 related in FY 2012. Investment revenue stayed steady, and bond related to bond activity with investment income steady with previous expenses decreased $8.6 million; decreases of $0.6 million for year levels.

plant preservation and decommissioning costs accounted for the remaining decreases.

38 Powering a clean energy future Ousiness Development Fund Energy Northwest was created to enable Washington public Statement of Operations Analysis power utilities and municipalities to build and operate generation Operating Revenues in FY 2012 totaled $9.8 million as projects. The Business Development Fund (BDF) was created compared to FY 2011 revenues of $12.1 million, a decrease of by Executive Board Resolution No. 1006 in April 1997, for the $2.3 million. The decrease in revenues was driven by two major purpose of holding, administering, disbursing, and accounting projects: a telecommunications project that ended in FY 2011 for Energy Northwest costs and revenues generated from engaging ($0.6 million) and a decrease in the power option agreement in new energy business opportunities. revenues with Grays Harbor due to market conditions of $1.9 The BDF is managed as an enterprise fund. Four business lines million. The remaining change of $0.2 million was spread among have been created within the fund: General Services and Facilities, the remaining 20 projects of the Business Development Fund.

Generation, Professional Services, and Business Unit Support. Operating costs decreased $3.2 million due to decreases business Each line may have one or more programs that are managed as a activity resulting in the net operating loss of $0.9 million.

unique business activity. Other Income and Expenses increased $0.6 million from

$1.0 million in net revenues in FY 2011 to net revenue of Balance Sheet Analysis $1.6 million in FY 2012. Major drivers for the overall change from Total assets increased $0.5 million from $8.6 million in FY the previous year were a flat revaluation of the power sale options 2011 to $9.1 million in FY 2012. Increase was due to positive cash (see note 14) whereas FY 2011 included an expense adjustment of and investments position of $0.6. Deferred charges decreased $1.0 million and a reduction in general and administrative costs

$0.1 million due to the decrease related to power sales derivatives of $0.4 million.

(see Note 14). Prepaid activity increased $0.2 million but was The Business Development Fund receives contributions from offset by a corresponding decrease in accounts receivable and the Internal Service Fund to cover cash needs during startup other business unit activity of $0.2 million. Liabilities decreased periods. Initial startup costs are not expected to be paid back

$0.5 million from FY 2011 with deceased amount of payables and are shown as contributions. As an operating business unit, outstanding items at year end. Net Assets increased $1.0 million requests can be made to fund incurred operating expenses. In from $6.9 million in FY 2011 to $7.9 million in FY 2011 due to the FY 2012 there were no contributions (transfers) which was also aforementioned changes. the case for FY 2011.

Energy Northwest 2012 Annual Report 39 ine Canyon Wind Project The Nine Canyon Wind Project (Nine Canyon) is wholly capacity of 32.2 MW. The total Nine Canyon generating capability owned and operated by Energy Northwest. Nine Canyon is is 95.9 MW, enough energy for approximately 39,000 average located in the Horse Heaven Hills area southwest of Kennewick, homes.

Wash. Electricity generated by Nine Canyon is purchased by Nine Canyon produced 261.63 GWh of electricity in FY 2012 pacific northwest public utility districts (purchasers). Each of the versus 264.74 GWh in FY 2011. The small decrease of 2.3 percent purchasers of Phase I, Phase II, and Phase II have signed a power was due to slightly less favorable wind conditions in FY 2012 as purchase agreement which are part of the 2nd Amended and compared to FY 2011 which had record generation for history of Restated Nine Canyon Wind Project Power Purchase Agreement the project.

which now has an end date of 2030. Nine Canyon is connected Nine Canyon's cost performance is measured by the cost of to the Bonneville Power Administration transmission grid via a power indicator. The cost of power for FY 2012 was $6.69 cents substation and transmission lines constructed by Benton County per kWh as compared to $6.56 cents per kWh in FY 2011. The Public Utility District. cost of power fluctuates year to year depending on various factors Phase I of Nine Canyon, which began commercial operation such as wind totals and unplanned maintenance. The FY 2012 in September 2002, consists of 37 wind turbines, each with a cost of power increase of 2 percent was a result of the slightly maximum generating capacity of approximately 1.3 MW, for an lower generation as compared to the record generation in FY 2011 aggregate generating capacity of 48.1 MW. Phase IIof Nine Canyon, coupled with slightly higher FY 2012 maintenance costs.

which was declared operational in December 2003, includes 12 wind turbines, each with a maximum generating capacity of 1.3 Balance Sheet Analysis MW, for an aggregate generating capacity of approximately 15.6 Total assets decreased $6.9 million from $127.4 million MW. Phase Ill of Nine Canyon, which was declared operational in FY 2011 to $120.5 million in FY 2012. The major driver in May 2008, includes 14 wind turbines, each with a maximum for the change in assets was a decrease of $6.8 million due to generating capacity of 2.3 MW, for an aggregate generating accumulated depreciation and plan activity. The remaining small Nine Canyon Wind Project Nine Canyon Wind Project NET GENERATION - GWhrs COST OF POWER - Cents/kWh FY2012 261.63 FY2012 6.69 FY2011 264.74 FY2011 6.56 FY2010 226.73 FY2010 7.88 FY2009 226.27 FY2009 7.79 FY2008 237.33 FY2008 6.05 0 50 100 150 200 250 300 0 1 2 3 4 5 6 7 8

Powering a clean energy future change of $0.1 million was the net impact to cash and operations the total costs over the purchase agreement. Continued shortfalls involving prepaid expenditures and bond related expenditures. in REPI funding for the Nine Canyon project led to a revised rate There was an overall decrease to liabilities of $6.6 million with plan to incorporate the impact of this shortfall over the life of a decrease to long term debt of $5.2 million, increases to current the project. The billing rates for the Nine Canyon participants debt maturities of $0.3 million, decreases to accrued debt related increased 69 percent and 80 percent for Phase I and Phase II interest of $0.3 million, and decreases to accrued costs and participants respectively in FY 2008 in order to cover total project business activities of $0.4 million. The decrease in net assets was costs, projected out to the 2030 proposed project end date. The

$1.3 million in FY 2012 as compared to $1.2 million in FY 2011. increases for FY 2008 were a change from the previous plan where The decline experienced in previous years is continuing, though a 3 percent increase each year over the life of the project was the trend is consistent with the rate stabilization approach for projected. Going forward, the increase or decrease in rates will Nine Canyon planning. be based on cash requirements of debt repayment and the cost In previous years Energy Northwest has accrued, as income of operations. Phase III started with an initial planning rate of (contribution) from the Department of Energy, Renewable $49.82 per MWh which increased at 3 percent per year for three Energy Production Incentive (REPI) payments that enable Nine years. In year six (FY 2013) the rate will increase to a rate that Canyon to receive funds based on generation as it applies to will be stabilized over the life of the project. Possible adjustments the REPI legislation. REPI was created to promote increases in may be necessary to future rates depending on operating costs the generation and utilization of electricity from renewable and REPI funding, similar to Phase I and I1.

energy sources and to further the advances of renewable energy technologies. This program, authorized under Section 1212 of the Statement of Operations Analysis Energy Policy Act of 1992, provides financial incentive payments Operating revenues decreased $0.1 million from $16.3 million for electricity produced and sold by new qualifying renewable in FY 2011 to $16.2 million in FY 2012. The project received energy generation facilities. The payment stream from Nine revenue from the billing of the purchasers at an average rate of Canyon participants and the REPI receipts were projected to cover $61.98 per MWh for FY 2012 as compared to $60.69 per MWh for FY 2011 which is reflective of the implementation of the revised rate plan in FY 2008 to account for REPI funding shortfalls and E::::ý - costs of operations. The flat operating revenues from the previous Nine Canyon Wind Project year was due to the planned MWh budgeted rate. Operating costs TOTAL OPERATING COSTS increased from $10.9 million in FY 2011 to $11.3 million in FY (dollars in thousands)

Total Expense s 2012. Increased operating costs of $0.4 million for FY 2012 were due to small increases in maintenance items.

FY2012 Other income and expenses decreased $0.4 million from I-I-

$6.6 million in net expenses FY 2011 to $6.2 million in FY FY201 17,466 FY2010 16,506 FY2009 17,632 FY 15,484 0 3,000 6,000 9,000 12,000 15,000 N Operating Expenses N Other Income / ExpensE

Energy Northwest 2012 Annual Report 2012. Decreased interest costs of $0.3 million and decreases in years and gradually increasing the rate charged to the purchasers transmission and scheduling activity of $0.1 million accounted to avoid a large rate increase after the REPI expires. The REPI for the change. Net losses of $1.3 million for FY 2012, were incentive expires 10 years from the initial operation startup date incurred and are consistent with the expectations of a gradual for each phase. Reserves that were established are used to facilitate revenue recovery of operating costs. There was a slight increase this plan. The rate plan in FY 2008 was revised to account for the in loss of $0.1 million from FY 2011 but a declining net asset shortfall experienced in the REPI funding and to provide a new balance is expected in future years until bond principal payments rate scenario out to the 2030 project end date. Energy Northwest exceed annual depreciation requirements. did not receive REPI funding in FY 2012 and is not anticipating The original plan anticipated operating at a loss in the early future REPI incentives.

El nternal Service Fund The Internal Service Fund (ISF) (formerly the General Fund) The net decrease in net assets and liabilities is due to decreases was established in May 1957. The ISF provides services to the in accounts payable and payroll related liabilities of $4.5 million other funds. This fund accounts for the central procurement of due to year-end timing of expenses for FY 2011, which was the certain common goods and services for the business units on a outage year and a decrease of $4.6 million due to other business cost reimbursement basis. (See Note 1 to Financial Statements.) units resulting from the change in year-end activities.

Balance Sheet Analysis Statement of Operations Analysis Total assets decreased $9.0 million from $55.6 million Net revenues for FY 2012 decreased $40k from FY 2011. The in FY 2011 to $46.6 million in FY 2012. The four major items decrease was due to lower amounts of other business expenses contributing to the change were 1) decreases to net plant of $2.1 of $66k, decrease in investment returns of $23k and increases to million, 2) decrease of $8.1 million to cash to reflect FY 2011 depreciation of $35k offset by decreases in operating revenue due timing for anticipated year-end check and warrant redemption to operations of $48k.

related to R-20 versus the requirements of FY 2012 non outage year requirements, 3) a decrease of $0.2 million in restricted assets due to maturity schedule and escrow requirements processing schedule, and 4) an increase to operational activities of $1.4 million.

42 Powering a clean energy future nnn alance Sheets As of June 30, 2012 (In Thousands)

Packwood Columbia Lake Nuclear Nuclear Business Nine Canyon Internal 2012 Generating Hydroelectic Project Project Development Wind Service Combined Station Project No.1

• No.3

• Fund Project Subtotal Fund Total ASSETS CURRENT ASSETS Cash $ 35,950 $ 1,195 $ 4,569 4,903 $ 2,172 $ 1,372 $ 50,161 $ 5,595 $ 55,756 Available-for-sale investments 984 - 245 4,504 8,492 14,225 23,358 37,583 Accounts and other receivables 1,127 118 6 - 415 132 1,798 86 1,884 Due from other business units 21 290 646 - 957 1,852 -

Materials and supplies 111,203 - 111,203 - 111,203 Prepayments and other 1,311 74 - - 149 278 1,812 1,107 2,919 TOTAL CURRENT ASSETS 149,591 2,392 4,865 5,148 7,886 10,274 180,156 31,998 209,345 RESTRICTED ASSETS (NOTE 1)

Special funds Cash 6,621 - 320 1,656 - 842 9,439 475 9,914 Available-for-sale investments 30,154 3,005 5,222 - 750 39,131 2,299 41,430 Accounts and other receivables 1 - - 1 - I Debt service funds Cash 58,246 87,569 97,804 7,512 251,131 251,131 Available-for-sale investments 31,657 190,486 31,472 11,349 264,964 264,964 Accounts and other receivables 5 1 5 11 11 TOTAL RESTRICTED ASSETS 126,679 5 281,380 136,155 20,458 564,677 2,774 567,451 NONCURRENT ASSETS UTILITY PLANT (NOTE 2)

Inservice 3,805,582 13,625 - - 2,174 134,506 3,955,887 48,410 4,004,297 Not in service - - 25,253 - 25,253 - 25,253 Construction work in progress 60,553 - - 60,553 - 60,553 Accumulated depreciation (2,441,485) (12,764) (25,253), (993). (47,372), (2,527,867) (36,594) (2,564,461)

Net Utility Plant 1,424,650 861 - 1,181 87,134 1,513,826 11,816 1,525,642 Nuclear fuel, net of accumulated amortization 341,535 - - - 341,535 - 341,535 TOTAL NONCURRENT ASSETS 1,766,185 861 - - 1,181 87,134 1,855,361 11,816 1,867,177 DEFERRED CHARGES Costs in excess of billings 822,353 - 1,377,151 1,430,528 - - 3,630,032 - 3,630,032 Unamortized debt expense 12,624 - 4,955 5,159 1,617 24,355 24,355 Other deferred charges - 3,737 - - - 3,737 3,737 TOTAL DEFERRED CHARGES 834,977 3,737 1,382,106 1,435,687 - 1,617 3,658,124 3,658,124 TOTAL ASSETS $ 2,877,432 $ 6,995 $ 1,668,351 $ 1,576,990 $ 9,067 $ 119,483 $ 6,258,318 $ 46,588 $ 6,302,097

• Projectrecorded ona liquidation basis Theaccompanying notesareanintegral part of thesecombined financial statements

Energy Northwest 2012 Annual Report 43 Packwood Columbia Lake Nuclear Nuclear Business Nine Canyon Internal 2012 Generating Hydroelectic Project Project Development Wind Service Combined Station Project No.1

• No.3

• Fund Project Subtotal Fund Total LIABILITIES AND NET ASSETS CURRENT LIABILITIES Current maturities of long-term debt $ 355 $ $ 236,030 $ 95,540 $ $ 4,575 $ 336,500 $ - $ 336,500 Accounts payable and accrued expenses 94,821 126 98 15 1,095 384 96,539 39,864 136,403 Due to Participants 26,956 1,906 36 - 28,898 - 28,898 Due to other business units 1,744 2 106 1,852 957 -

TOTAL CURRENT LIABILITIES 123,876 2,032 236,164 95,557 1,095 5,065 463,789 40,821 501,801 LIABILITIES- PAYABLE FROM RESTRICTED ASSETS (NOTE 1)

Special funds Accounts payable and accrued expenses 120,357 16,405 1,236 137,998 408 138,406 Debt service funds Accrued interest payable 65,783 42,019 33,730 3,025 144,557 - 144,557 TOTAL RESTRICTED LIABILITIES 186,140 58,424 33,730 4,261 282,555 408 282,963 LONG-TERM DEBT (NOTE 5)

Revenue bonds payable 2,441,385 1,321,060 1,395,405 130,955 5,288,805 5,288,805 Unamortized (discount) /

premium on bonds - net 120,221 56,290 53,241 4,743 234,495 234,495 Unamortized loss on bond refundings (9,966) (3,614) (974) (279) (14,833) (14,833)

TOTAL LONG-TERM DEBT 2,551,640 1,373,736 1,447,672 135,419 5,508,467 5,508,467 OTHER LONG-TERM LIABILITIES 15,776 - 15,776 15,776 DEFERRED CREDITS Advances from members and others - 4,963 - 4,963 4,963 Advances from members and others - - - 574 574 Other deferred credits - 27 31 109 167 5 172 TOTAL DEFERRED CREDITS 4,963 27 31 109 5,130 579 5,709 NET ASSETS Invested in capital assets, net of related debt - - 1,181 (51,243) (50,062) 11,816 (38,246)

Restricted, net - 15,124 15,124 2,366 17,490 Unrestricted, net 6,791 10,748 17,539 (9,402) 8,137 NET ASSETS - - - - 7,972 (25,371) (17,399) 4,780 (12,619)

TOTAL LIABILITIES 2,877,432 6,995 1,668,351 1,576,990 1,095 144,854 6,275,717 41,808 6,314,716 TOTAL LIABILITIES AND $ 2,877,432 $ 6,995 $ 1,668,351 $ 1,576,990 $ 9,067 $ 119,483 $ 6,258,318 $ 46,588 $ 6,302,097 NET ASSETS Project recorded on a liquidation basis Theaccompanying notes are an integral part of these combined financial statements

44Powering a clean energy future STATEMENTS OF REVENUES, EXPENSES, AND CHANGES INNET ASSETS As of June 30, 2012 (InThousands)

Packwood Columbia Lake Nuclear Nuclear Business Nine Canyon Internal 2012 Generating Hydroelectic Project Project Development Wind Service Combined Station Project No.1

• No.3

• Fund Project Subtotal Fund Total OPERATING REVENUES $ 397,881 $ 1,872 $ $ $ 9,770 $ 16,172 $ 425,695 $ $ 425,695 OPERATING EXPENSES Nuclear fuel 35,393 35,393 35,393 Spent fuel disposal fee 6,560 6,560 6,560 Decommissioning 7,433 82 7,515 7,515 Depreciation and amortization 74,440 59 242 6,808 81,549 81,549 Operations and maintenance 177,468 1,636 10,051 4,295 193,450 193,450 Other power supply expense (1) (1) (1)

Administrative & general 26,876 156 41 27,073 27,073 Generation tax l3,239 26 b 53,321 3,32I Total operating expenses 331,409 1,876 - 10,293 11,282 354,860 354,860 OPERATING INCOME/(LOSS) 66,472 (4) - (523) 4,890 70,835 70,835 OTHER INCOME AND EXPENSE Other 8,354 1 74,995 65,770 1,537 46 150,703 70,559 150,749 Gain on DOE settlement 48,703 48,703 - 48,703 Investment income 407 3 46 65 20 46 587 15 587 Interest expense and discount amortization (123,936) - (73,421) (65,508) - (6,276) (269,141) - (269,141)

Plant preservation and (1,048) (327) (1,375) (1,375) termination costs Depreciation and amortization (6) - (6) (2,303) (6)

Decommissioning (566) (566) (566)

Services to other business units - - - - - (68,225)

TOTAL OTHER INCOME AND EXPENSE (66,472) 4 1,557 (6,184) (71,095) 46 (71,049)

Changes in net assets - 1,034 (1,294) (260) 46 (214)

(DISTRIBUTION)/CONTRIBUTION TOTAL NET ASSETS, BEGINNING OF YEAR 6,938 (24,077) (17,139) 4,734 (12,405)

TOTAL END OFNETYEARASSETS, $ $ $ - $ - $ 7,972 $ (25,371) $ (17,399) $ 4,780 $ (12,619)

Project recorded on a liquidation basis Theaccompanying notes are an integral part of these combined financial statements

Energy Northwest 2012 Annual Report TATEMENTS CASH FLOWS As of June 30, 2012 (InThousands)

Packwood Columbia Lake Nuclear Nuclear Business Nine Canyon Internal 2012 Generating Hydroelectic Project Project Development Wind Service Combined Station Project No.1

• No.3

• Fund Project Fund Total CASH FLOWS FROM OPERATING AND OTHER ACTIVITIES Operating revenue receipts $ 389,241 $ 3,214 $ - $ $ 5,645 S 16,953 $ $ 415,053 Cash payments for operating (180,180) (1,887) (4,970) (5,657) (192,694) expenses Other revenue receipts 322,569 166,796 489,365 Cash payments for preservation, (588) 40 (548) termination expense Cash payments for services - (9,020) (9,020)

Net cash provided/(used) by operating and other activities 209,061 1,327 321,981 166,836 675 11,296 (9,020) 702,156 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from bond refundings 486,849 243,281 172,037 15,090 917,257 Refunded bond escrow requirement (15,085) (15,085)

Deposit to Debt Service Fund (483,736) (241,758) (170,948) (896,442)

Payment for bond issuance and (6,288) (2,741) (1,844) (1) (242) (11,116) financing costs Payment for capital items (91,127) (11) (103) (77) 681 (90,637)

Receipts from sales of plant assets 5 Nuclear fuel acquisitions (102,960) (102,960)

Interest paid on revenue bonds (130,885) (87,682) (101,024) (6,672) (326,263)

Principal paid on revenue bond (45) (166,030) (103,514) (4,260) (273,849) maturities Escrow refund 6 6 Note 161,902 161,902 Note payment (100,133)

Interest paid on Notes (388) - - - (388)

Net cash provided/(used) by capital and related financing activities (266,811) (11) (254,919) (205,293) (104) (11,246) 681 (637,570)

CASH FLOWS FROM NON-CAPITAL FINANCE ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities (438,449) (1,593) (434,111) (257,312) (6,009) (41,927) (23,991) (1,203,392)

Sales of investment securities 512,778 600 361,748 379,827 6,204 34,058 24,076 1,319,291 Interest on investments 1,266 7 82 305 49 38 351 2,098 Net cash provided/ (used) by investing activities 75,595 (986) (72,281) 122,820 244 (7,831) 436 117,997 NET INCREASE(DECREASE) IN CASH 17,845 330 (5,219) 84,363 815 (7,781) (7,903) 82,450 CASH ATJUNE 30, 2011 82,972 861 97,677 20,000 1,357 17,507 13,973 234,347 CASH AT JUNE 30, 2012 $ 100,817 $ 1,191 $ 92,458 $ 104,363 $ 2,172 $ 9,726 $ 6,070 $ 316,797 Project recorded on a liquidation basis Theaccompanying notes are an integral part of these combined financial statements

46 Powering a clean energy future TATEMENTS CASH FLOWS Con,'d As of June 30, 2012 (inThousands)

• \\\\\\\\\\\\\\\\x*

Packwood Columbia Lake Nuclear Nuclear Business Nine Canyon Internal 2012 Generating Hydroelectic Project Project Development Wind Service Combined Station Project No.1

• No.3

• Fund Project Fund Total RECONCILIATION OF NET OPERATING REVENUES TO NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net operating revenues $ 66,473 $ (4) $ $ $ (523): $ 4,890 $ $ 70,836 Adjustments to reconcile net operating revenues to cash provided by operating activities:

Depreciation and amortization 107,739 48 145 6,780 114,712 Decommissioning 7,433 - 33 7,466 Other 57,699 1,538 84 59,328 Change in operating assets and liabilities:

Deferred charges/costs (8,721) (48) (8,769) inexcess of billings Accounts receivable (45) 354 94 63 466 Materials and supplies (8,103) (8,103)

Prepaid and other assets 334 (7) (202) 125 Due from/to other business units, funds and Participants 6,310 1,033 (256) 7,087 Accounts payable (20,058) (56) (579) (96) (20,789)

Other revenue receipts 322,569 166,796 489,365 Cash payments for preservation, (588) 40 (548) termination expense Cash payments for services (9,020) (9,020)

Receipts for grants/contributions Net cash provided (used)

$ 209,061 $ 1,327 $ 321,981 S 166,836 $ 675 $ 11,296 $ (9,020) $ 702,156 by operating and other activities

• Project recorded on a liquidation basis Theaccompanying notes are an integral part of these combined financial statements

Energy Northwest 2012 Annual Report 41 D NERGY NORTHWEST NOTES TO FINANCIAL STATEMENTS Note 1 - Summary Of Operations And Significant 2012 for continued operation of Columbia to Dec. 31, 2043.

Accounting Policies Accordingly, $18.7 million of incurred relicensing costs were transferred from deferred charges to plant.

Energy Northwest, a municipal corporation and joint Energy Northwest also operates the Packwood Lake operating agency of the state of Washington, was organized in Hydroelectric Project (Packwood), a 27.5-MWe generating plant 1957 to finance, acquire, construct and operate facilities for the completed in 1964. Packwood has been operating under a 50-generation and transmission of electric power. year license issued by the Federal Energy Regulatory Commission Membership consists of 23 public utility districts and 5 (FERC), which expired on Feb. 28, 2010. Energy Northwest municipalities. All members own and operate electric systems submitted the Final License Application (FLA) for renewal of within the state of Washington. the operating license to FERC on Feb. 22, 2008. On March 4, Energy Northwest is exempt from federal income tax and has 2010, FERC issued a one-year extension, or until the issuance of a no taxing authority. new license for the project or other disposition under the Federal Energy Northwest maintains seven business units. Each unit is Power Act, whichever comes first. FERC is awaiting issuance of financed and accounted for separately from all other current or the National Oceanic and Atmospheric Administration's (NOAA) future business units. Biological Opinion, after which FERC will complete the final All electrical energy produced by Energy Northwest's net- license renewal documentation for Packwood. Costs incurred to billed business units is ultimately delivered to electrical date for relicensing are $3.7 million included in other deferred distribution facilities owned and operated by Bonneville Power charges.

Administration (BPA) as part of the Federal Columbia River The electric power produced by Packwood is sold to 12 Power System. BPA in turn distributes the electricity to electric project participant utilities which pay the costs of Packwood.

utility systems throughout the Northwest, including participants The Packwood participants are obligated to pay annual costs of in Energy Northwest's business units, for ultimate distribution to Packwood including debt service, whether or not Packwood is consumers. Participants in Energy Northwest's net-billed business operable, until the outstanding bonds are paid or provisions are units consist of public utilities and rural electric cooperatives made for bond retirement, in accordance with the requirements of located in the western United States who have entered into bond resolution. The participants also share Packwood revenue.

net-billing agreements with Energy Northwest and BPA for (See Note 6).

participation in one or more of Energy Northwest's business Nuclear Project No. 1, a 1,250-MWe plant, was placed in units. BPA is obligated by law to establish rates for electric power extended construction delay status in 1982, when it was 65 percent which will recover the cost of electric energy acquired from complete. Nuclear Project No. 3, a 1,240-MWe plant, was placed Energy Northwest and other sources, as well as BPA's other costs in extended construction delay status in 1983, when it was 75 (see Note 6). percent complete. On May 13, 1994, Energy Northwest's Board of Energy Northwest operates the Columbia Generating Station Directors adopted resolutions terminating Nuclear Projects Nos. 1 (Columbia), a 1,170-MWe (Design Electric Rating, net) generating and 3. All funding requirements remain as net-billed obligations plant completed in 1984. Energy Northwest has obtained all of Nuclear Projects Nos. 1 and 3. Energy Northwest wholly owns permits and licenses required to operate Columbia. Columbia Nuclear Project No. 1. Energy Northwest is no longer responsible was issued a standard 40-year operating license by the Nuclear for site restoration costs for Nuclear Project No. 3. (See Note 13)

Regulatory Commission (NRC) in 1983. On Jan. 19, 2010 Energy The Business Development Fund was established in April 1997 Northwest submitted an application to the NRC to renew the to pursue and develop new energy related business opportunities.

license for an additional 20 years, thus continuing operations There are four main business lines associated with this business to 2043. A renewal license was granted by the NRC on May 22, unit: General Services and Facilities, Generation, Professional

48Powering a clean energy future Services, and Business Unit Support. Standards Board (FASB) standards except for those conflicting The Nine Canyon Wind Project (Nine Canyon) was established with or in contradiction to GASB pronouncements. The in January 2001 for the purpose of exploring and establishing accounting and reporting policies of Energy Northwest are a wind energy project. Phase I of the project was completed in regulated by the Washington State Auditor's Office and are FY 2003 and Phase II was completed in FY 2004. Phase I and based on the Uniform System of Accounts prescribed for II combined capacity is approximately 63.7 MWe. Phase III was public utilities and licensees by FERC. Energy Northwest completed in FY 2008 adding an additional 14 wind turbines uses the full accrual basis of accounting where revenues are to Nine Canyon and adding an aggregate capacity of 32.2 MWe. recognized when earned and expenses are recognized when The total number of turbines at Nine Canyon is 63 and the total incurred. Revenues and expenses related to Energy Northwest's capacity is 95.9 MWe. operations are considered to be operating revenues and The Internal Service Fund was established in May 1957. It is expenses; while revenues and expenses related to capital, currently used to account for the central procurement of certain financing and investing activities are considered to be other common goods and services for the business units on a cost income and expenses. Separate funds and book of accounts reimbursement basis. are maintained for each business unit. Payment of obligations Energy Northwest's fiscal year begins on July 1 and ends on of one business unit with funds of another business unit is June 30. In preparing these financial statements, the company prohibited, and would constitute violation of bond resolution has evaluated events and transactions for potential recognition or covenants (See Note 5).

disclosure through Oct. 30, 2012, the date the financial statements Energy Northwest maintains an Internal Service Fund for were issued. The Depleted Uranium Enrichment Program centralized control and accounting of certain capital assets (program) (Note id) were agreements signed in May 2012 to such as data processing equipment, and for payment and accept high assay uranium tails from the Department of Energy accounting of internal services, payroll, benefits, administrative (DOE) and have them enriched by United States Enrichment and general expenses, and certain contracted services on a cost Corporation (USEC) in Paducah, Ky. The agreements also reimbursement basis. Certain assets in the Internal Service contained sales and purchase arrangements with Tennessee Valley Fund are also owned by this Fund and operated for the benefit Authority (TVA). In order to fund the initial enrichment services of other projects. Depreciation relating to capital assets is and allow for the completion of a long-term financing option, a charged to the appropriate business units based upon assets short term note payable was established as a short term financing held by each project.

bridge to August 2012. On Aug. 23, 2012, Energy Northwest Liabilities of the Internal Service Fund represent accrued completed the 2012 D/E series bond transaction resulting in payroll, vacation pay, employee benefits, and common the issuance of $34.1 million and $748.5 million of Columbia accounts payable which have been charged directly or bonds, respectively, for the purpose of financing the repayment of indirectly to business units and will be funded by the business the short term note, remaining portion of the program, as well as units when paid. Net amounts owed to, or from, Energy other capital and general expenses. Northwest business units are recorded as Current Liabilities-The following is a summary of the significant accounting Due to other business units, or as Current Assets-Due from policies: other business units on the Internal Service Fund Balance Sheet.

a) Basis of Accounting and Presentation: The accounting The combined total column on the financial statements policies of Energy Northwest conform to GAAP applicable to is for presentation only as each Energy Northwest business governmental units. The Governmental Accounting Standards unit is financed and accounted for separately from all other Board (GASB) is the accepted standard-setting body for current and future business units. The FY 2012 Combined establishing governmental accounting and financial reporting Total includes eliminations for transactions between business principles. Energy Northwest has applied all applicable GASB units as required in GASB Statement No. 34, "Basic Financial pronouncements and elected to apply Financial Accounting Statements and Management's Discussion and Analysis for

Energy Northwest 2012 Annual Report 4(1 State and Local Governments." interest earnings and draws for purchase or construction Pursuant to GASB Statement No. 20, "Accounting reimbursements for the purpose of analyzing impact to the and Financial Reporting for Proprietary Funds and recording of capitalized interest. If estimated costs are more Other Governmental Entities That Use Proprietary Fund than inconsequential, an adjustment is made to allocate Accounting," Energy Northwest has elected to apply all FASB capitalized interest to the appropriate plant account. There standards, except for those that conflict with, or contradict, were no interest costs capitalized for FY 2012.

GASB pronouncements. Specifically, GASB No. 7, "Advance Refundings Resulting in Defeasance of Debt," and GASB No. d) Nuclear Fuel: Energy Northwest has various agreements for 23, "Accounting and Financial Reporting for Refundings of uranium concentrates, conversion, and enrichment to provide Debt Reported by Proprietary Activities", conflict with ASC for short-term enriched uranium product and long-term 860, "Transfers and Servicing'" As such, the guidance under enrichment services. All expenditures related to the initial GASB No. 7 and No. 23 is followed. Such guidance governs purchase of nuclear fuel for Columbia, including interest, the accounting for bond defeasances and refundings. were capitalized and carried at cost.

There are no new GASB pronouncements that had a In May 2012, Energy Northwest entered into agreements material impact on Energy Northwest in the current year. with three other parties for processing high assay uranium tails. The Program consists of several agreements between the b) Utility Plant and Depreciation: Utility plant is recorded at parties involved, entered into as a joint effort between the DOE, original cost which includes both direct costs of construction TVA, USEC and Energy Northwest to enrich approximately or acquisition and indirect costs. 9,082 metric tons (MTU) of Depleted Uranium Hexafluoride Property, plant, and equipment are depreciated using the (DUF6) with an average assay of 0.44 weight percent U235 straight-line method over the following estimated useful lives: (wt%) that will yield approximately 482 MIUI of enriched uranium product (EUP) with an average assay of 4.4 wt%.

Buildings and Improvements 20 - 60 years DOE and Energy Northwest have entered into an agreement Generation Plant 40 years for the transfer of the DUF6 to Energy Northwest. The Transportation Equipment 6 - 9 years agreement addresses delivery and transfer of title of the DUF6, General Plant and Equipment 3 - 15 years return of residual DUF6 after enrichment, storage of the EUP, and payment of DOE's costs. The costs for the handling of the Group rates are used for assets and, accordingly, no gain DUF6 and storage of the EUP are anticipated to be $5 million or loss is recorded on the disposition of an asset unless it or less. As of June 30, 2012, Energy Northwest had recorded represents a major retirement. When operating plant assets $0.2 million in charges to the DOE for delivery of the DUF6, are retired, their original cost together with removal costs, less which is capitalized as cost of the fuel being purchased.

salvage, is charged to accumulated depreciation. Energy Northwest will purchase from USEC all of the The utility plant and net assets of Nuclear Projects Nos. Separative Work Units (SWU) contained in the EUP. USEC I and 3 have been reduced to their estimated net realizable will provide the enrichment of the DUF6 during calendar values due to termination. A write-down of Nuclear Projects years 2012 and 2013 at an anticipated cost of between $695 Nos. 1 and 3 was recorded in FY 1995 and included in Cost in million and $706 million. The final price will be dependent Excess of Billings. Interest expense, termination expenses and on the total number of cylinders processed, average assay asset disposition costs for Nuclear Projects Nos. 1 and 3 have of the DUF6 cylinders, total product produced and final been charged to operations. electricity fuel cost adjustment between USEC and TVA. As of June 30, 2012, Energy Northwest had purchased a total of c) Allowance for Funds Used during Construction (AFUDC): 40.5 MTU of EUP from USEC at a cost of $61.8 million, which Energy Northwest analyzes the gross interest expense is recorded in nuclear fuel, net of accumulated amortization.

relating to the cost of the bond sale, taking into account Energy Northwest and TVA have entered into an agreement

50 Powering a clean energy future for the sale and purchase of a portion of the SWU and This standard requires Energy Northwest to recognize the fair Feed Component of the EUP. The Agreement is valued at value of a liability associated with the retirement of a long-approximately $731 million. The sales under this agreement lived asset, such as: Columbia Generating Station, Nuclear are scheduled to take place between 2015 and 2022. Project No. 1, and Nine Canyon, in the period in which it is Energy Northwest has a contract with DOE that requires incurred (see Note 11).

DOE to accept title and dispose of spent nuclear fuel (reference to the term "spent fuel" is due to DOE contract and current f) Decommissioning and Site Restoration: Energy Northwest court proceedings. "Used fuel" is the preferred term by Energy established decommissioning and site restoration funds Northwest). Although the courts have ruled that DOE had for Columbia and monies are being deposited each year in the obligation to accept title to spent nuclear fuel by Jan. 31, accordance with an established funding plan (see Note 12).

1998, currently, there is no known date established when DOE will fulfill this legal obligation and begin accepting spent g) Derivative Instruments: In June 2008, GASB issued Statement nuclear fuel. Energy Northwest was awarded Final Judgment No. 53, "Accounting and Financial Reporting for Derivative and received damages, recorded as other income, for the time Instruments." Statement No. 53 provides a comprehensive period through Aug. 31, 2006, in the amount of $48.7 million framework for the measurement, recognition and disclosure in FY 2012 (see Note 13). of derivative instrument transactions for the purpose of When the fuel is placed in the reactor the fuel cost is enhancing the usefulness and comparability of derivative amortized to operating expense on the basis of quantity of instrument information reported by state and local heat produced for generation of electric energy. Accumulated governments (see Note 14).

nuclear fuel amortization (the amortization of the cost of nuclear fuel assemblies in the reactor used in the production h) Restricted Assets: In accordance with bond resolutions, of energy and in the fuel pool for less than six months per related agreements and laws, separate restricted accounts have FERC guidelines) decreased $53.5 million. The decrease was been established. These assets are restricted for specific uses due to the six month post-cooling entry adjustment required including debt service, construction, capital additions and fuel by FERC guidelines adjusting fuel and amortization. purchases, extraordinary operation and maintenance costs, The current period operating expense for Columbia termination, decommissioning, operating reserves, financing, includes a $6.6 million charge from DOE for future spent fuel long-term disability, and workers' compensation claims. They storage and disposal in accordance with the Nuclear Waste are classified as current or non-current assets as appropriate.

Policy Act of 1982 and $33.6 million for amortization of fuel used in the reactor. i) Cash and Investments: For purposes of the Statements of Cash Energy Northwest has completed the Independent Spent Flows, cash includes unrestricted and restricted cash balances Fuel Storage Installation (ISFSI) project, which is a temporary and each business unit maintains its cash and investments.

dry cask storage facility to be used until DOE completes its Short-term highly liquid investments are not considered plan for a national repository. ISFSI will store the spent fuel to be cash equivalents, but are classified as available-for-in commercially available dry storage casks on a concrete sale investments and are stated at fair value with unrealized pad at the Columbia site. No casks were issued from the cask gains and losses reported in investment income (see Note inventory account in FY 2012. Spent fuel is transferred from 3). Energy Northwest resolutions and investment policies the spent fuel pool to the ISFSI periodically to allow for future limit investment authority to obligations of the United States refuelings. Current period costs were $1.7 million for dry cask Treasury, Federal National Mortgage Association and Federal storage costs. Home Loan Banks. Safe keeping agents, custodians, or trustees hold all investments for the benefit of the individual Energy e) Asset Retirement Obligation: Energy Northwest has adopted Northwest business units.

ASC 410, "Asset Retirement and Environmental Obligations."

Energy Northwest 2012 Annual Report j) Accounts Receivable: The percentage of sales method is in Due To/From other business units. Other receivables used to estimate uncollectible accounts. The reserve is then specific to each business unit are recorded in the residing reviewed for adequacy against an aging schedule of accounts business unit.

receivable. Accounts deemed uncollectible are transferred to the provision for uncollectible accounts on a yearly basis. 1) Materials and Supplies: Materials and supplies are valued at Accounts receivable specific to each business unit are recorded cost using the weighted average cost method.

in the residing business unit.

m) Long-Term Liabilities: Consist of obligations related to bonds k) Other Receivables: Other receivables include amounts related payable and the associated premiums/discounts and gains/

to the Internal Service Fund from miscellaneous outstanding losses. Other noncurrent liabilities for Columbia relates to the receivables from other business units which have not yet been dry storage cask activity.

collected. The amounts due to each business unit are reflected Long-Term Liability activity for the year ended June 30, 2012 was as follows:

Long-Term Liability (Dollars inThousands)

Beginning Balance Increases Decreases Ending Balance Columbia Revenue bonds payable $ 2,487,355 $ 441,595 $ 487,565 $ 2,441,385 Unamortized (discount)/premium on bonds - net 92,655 45,639 18,073 120,221 Unamortized gain/(loss) on bond refundings (15,501) 13,711 8,176 (9,966)

Other noncurrent liabilities 14,028 1,757 9 15,776

$ 2,578,537 $ 502,702 $ 513,823 $ 2,567,416 Nuclear Project No.1 Revenue bonds payable 1,573,805 $ 220,775 $ 473,520 1,321,060 Unamortized (discount)/premium on bonds - net 55,641 22,536 21,887 56,290 Unamortized gain/(loss) on bond refundings (7,111) 6,208 2,711 (3,614)

$ 1,622,335 $ 249,519 $ 498,118 $ 1,373,736 Nuclear Project No.3 Revenue bonds payable 1,495,480 $ 159,850 $ 259,925 S 1,395,405 Unamortized (discount)/premium on bonds -net 53,430 22,723 22,912 53,241 Unamortized gain/(loss) on bond refundings (1,224) 3,727 3,477 (974)

$ 1,547,686 $ 186,300 $ 286,314 $ 1,447,672 Nine Canyon Revenue bonds payable $ 136,505 $ 13,750 $ 19,300 $ 130,955 Unamortized (discount)/premium on bonds - net 4,155 1,340 752 4,743 Unamortized gain/(loss) on bond refundings (290) (11) (279)

$ 140,660 $ 14,800 $ 20,041 $ 135,419

Powering a clean energy future n) Debt Premium, Discount and Expense: Original issue and This program, authorized under section 1212 of the Energy reacquired bond premiums, discounts and expenses relating Policy Act of 1992, provides financial incentive payments for to the bonds are amortized over the terms of the respective electricity produced and sold by new qualifying renewable bond issues using the bonds outstanding method which energy generation facilities. Nine Canyon did not record a approximates the effective interest method. In accordance receivable for FY 2012 REPI funding as no funds are anticipated with GASB Statement No. 23, "Accounting and Financial to be disbursed to Energy Northwest under this program.

Reporting for Refundings of Debt Reported by Proprietary The payment stream from Nine Canyon participants and the Activities," losses on debt refundings have been deferred and anticipated REPI funding were projected to cover the total amortized as a component of interest expense over the shorter costs over the purchase agreement. Permanent shortfalls in of the remaining life of the old or new debt. REPI funding for the Nine Canyon project led to a revised rate plan to incorporate the impact of this shortfall over the life o) Revenue Recognition: Energy Northwest accounts for of the project. The current rate schedule for the Nine Canyon expenses on an accrual basis, and recovers, through various participants covers total estimated project costs occurring in agreements, actual cash requirements for operations and FY 2012 and estimated total cost recovery projections out to debt service for Columbia, Packwood, Nuclear Project No. 1 the 2030 proposed end date.

and Nuclear Project No. 3. For these business units, Energy Northwest recognizes revenues equal to expenses for each q) Compensated Absences: Employees earn leave in accordance period. No net revenue or loss is recognized, and no net assets with length of service. Energy Northwest accrues the cost are accumulated. The difference between cumulative billings of personal leave in the year when earned. The liability for received and cumulative expenses is recorded as either billings unpaid leave benefits and related payroll taxes was $19.8 in excess of costs (deferred credit) or as costs in excess of million at June 30, 2012 and is recorded as a current liability.

billings (deferred debit), as appropriate. Such amounts will be settled during future operating periods (see Note 6). r) Hse of Estimates: The preparation of Energy Northwest Energy Northwest accounts for revenues and expenses financial statements in conformity with GAAP requires on an accrual basis for the remaining business units. The management to make estimates and assumptions that difference between cumulative revenues and cumulative directly affect the reported amounts of assets and liabilities, expenses is recognized as net revenue or loss and included in disclosures of contingent assets and liabilities at the date of Net Assets for each period. the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results p) Capital Contribution: Renewable Energy Performance could differ from these estimates. Certain incurred expenses Incentive (REPI) payments enable Nine Canyon to receive and revenues are allocated to the business units based on funds based on generation as it applies to the REPI bill. REPI specific allocation methods that management considers to be was created as part of the Energy Policy Act of 1992 to promote reasonable.

increases in the generation and utilization of electricity from renewable energy sources and to further the advances of renewable energy technologies.

Energy Northwest 2012 Annual Report Note 2 - Utility Plant Utility plant activity for the year ended June 30, 2012 was as follows:

Utility plant activity (Dollars inThousands)

Beginning Balance Increases Decreases Ending Balance Columbia Generation $ 3,561,999 $ 229,624 $ (297) $ 3,791,326 Decommissioning 32,469 (18,213) 14,256 Construction Work-in-Progress 185,801 104,376 (229,624) 60,553 Accumulated Depreciation and Decommissioning (2,370,557) (72,895) 1,967 (2,441,485)

Utility Plant, net * $ 1,409,712 $ 261,105 $ (246,167) $ 1,424,650 Packwood Generation $ 13,625 $ $ $ 13,625 Accumulated Depreciation (12,716) (120) 72 (12,764)

Utility Plant, net $ 909 $ (120) $ 72 $ 861 Business Development General $ 2,065 $ 151 $ (42) $ 2,174 Construction Work-in-Progress 151 (151)

Accumulated Depreciation (862) (165) 34 (993)

Utility Plant, net $ 1,203 $ 137 $ (159) $ 1,181 Nine Canyon Generation $ 133,586 $ 77 $ (18) $ 133,645 Decommissioning 861 861 Construction Work-in-Progress 77 (77)

Accumulated Depreciation and Decommissioning (40,572) (6,842) 42 (47,372)

Utility Plant, net $ 93,875 $ (6,688) $ (53) $ 87,134 Internal Service Fund General $ 48,961 $ 176 $ (727) $ 48,410 Construction Work-in-Progress 176 (176)

Accumulated Depreciation (35,091) (2,230) 727 (36,594)

Utility Plant, net $ 13,870 $ (1,878) $ (176) $ 11,816

• Does not include Nuclear FuelAmount of $342 million, net of amortization.

54 Powering a clean energy future Note 3 - Deposits And Investments As of June 30, 2012, Energy Northwest had the following unrealized gains and losses on investments available for sale:

Available-For-Sale Investments (Dollars in Thousands)

Amortized Cost Unrealized Gains Unrealized Losses Fair Value (1)(2)

Columbia $ 61,787 $ 24 $ $ 61,811 Packwood 985 (1) 984 Nuclear Project No. 1 193,491 193,491 Nuclear Project No. 3 36,939 36,939 Business Development Fund 4,505 (1) 4,504 Internal Service Fund 25,650 12 (5): 25,657 Nine Canyon Wind 20,589 3 (1) 20,591 (1)Allinvestments are inU.S.Government backed securities including U.S.Government agencies and treasury bills.

(2)Themajority of investments have maturities of less than I year. Approximately $5.8 million have a maturity beyond one year with the longest maturity being June 13,2014.

Themajority of these maturities ($5.1million) reside inthe Internal Service Fund with the remainder ($0.7 million) residing with Nine Canyon Wind Project.

Interest rate risk: In accordance with its investment policy, non-interest bearing deposits are covered by collateral held in Energy Northwest manages its exposure to declines in fair values a multiple financial institution collateral pool administered by by limiting investments to those with maturities designated in the Washington state Treasurer's Local Government Investment specific bond resolutions. Pool (PDPC). Under state law, public depositories under the Credit risk: Energy Northwest's investment policy restricts PDPC may be assessed on a prorated basis if the pool's collateral investments to debt securities and obligations of the U.S. Treasury, is insufficient to cover a loss. All deposits are insured by collateral U.S. government agencies Federal National Mortgage Association held in the multiple financial institution collateral pool. State and the Federal Home Loan Banks, certificates of deposit and law requires deposits may only be made with institutions that are other evidences of deposit at financial institutions qualified by approved by the PDPC.

the Washington Public Deposit Protection Commission (PDPC),

and general obligation debt of state and local governments and Note 4 - Other Deferred Charges and Deferred Credits public authorities recognized with one of the three highest credit ratings (AAA, AA+, AA, or equivalent). This investment policy is Other deferred charges of $3.7 million relate to the Packwood more restrictive than the state law. relicensing effort. Other deferred credits of $0.1 million for Concentration of credit risk: Energy Northwest's investment Nine Canyon consist of turbine elevator purchases that will be policy does not specifically address concentration of credit risk. completed in FY 2013.

An individual authorized security or obligation can receive up to 100 percent of the authorized investment amount; there are no Note 5 - Long-Term Debt individual concentration limits.

Custodial credit risk, deposits: For a deposit, this is the risk Each Energy Northwest business unit is financed separately.

that in the event of bank failure, Energy Northwest's deposits may The resolutions of Energy Northwest authorizing issuance of not be returned to it. Energy Northwest's interest bearing accounts revenue bonds for each business unit provide that such bonds and certificates of deposits are covered up to $250,000 by Federal are payable from the revenues of that business unit. All bonds Depository Insurance (FDIC) while non-interest bearing deposits issued under resolutions Nos. 769, 775 and 640 for Nuclear are entirely covered by FDIC and if necessary, all interest and Projects Nos. 1, 3 and Columbia, respectively, have the same

Energy Northwest 2012 Annual Report priority of payment within the business unit (the "prior lien The Bond Proceeds, Weighted Average Coupon Interest Rates, bonds"). All bonds issued under resolutions Nos. 835, 838 and Net Accounting Loss, and Total Defeased Bonds for 2012-A, 2012-1042 (the "electric revenue bonds") for Nuclear Projects Nos. 1, B, 2012-C, and 2012 are presented in the following tables:

3 and Columbia, respectively, are subordinate to the prior lien bonds and have the same subordinated priority of payment Bond Proceeds (dollars in millions) within the business unit. Nine Canyon's bonds were authorized 2012 2012A 2012B 2012C Total Project 1 $ $ 170.43 $ 48.75 $ 24.10 $ 243.28 by the following resolutions: Resolution No. 1214 (2001 Bonds),

CGS 486.85 - - 486.85 Resolution No. 1299 (2003 Bonds), Resolution No. 1376 (2005 Project 3 75.36 35.04 61.64 172.04 Bonds) and Resolution No.1482 (2006 Bonds). Nine Canyon 15.09 - - - 15.09 During the year ended June 30, 2012, Energy Northwest issued, Total $ 15.09 $ 732.64 $ 83.79 $ 85.74 $ 917.26 for Columbia, Nuclear Project 1 and Nuclear Project 3, the Series 2012-A bonds. For Nuclear Project No. 1 and Nuclear Project Weighted Average Coupon Interest Rate No. 3 Series 2012-B and, 2012-C were also issued. The Series for Refunded Bonds 2012-A, 2012-B, and 2012-C bonds issued are fixed rate bonds 2012 2012A 2012B 2012C Project 1 5.79% 5.50% 5.50%

with a weighted average coupon interest rate ranging from 1.26 CGS 5.51%

percent to 5.0 percent. These transactions resulted in a net gain Project 3 6.00% 5.50% 5.50%

for accounting purposes of $1.84 million. Nine Canyon 4.91%

During fiscal year 2012 Nine Canyon issued Series 2012 Total 4.91% 5.63% 5.50% 5.50%

bonds. The Series 2012 are fixed rate bonds with an average weighted coupon interest rate ranging from 2.0 to 5.0 percent. Weighted Average Coupon Interest Rate This transaction resulted in a net loss for accounting purpose of for New Bonds

$0.3 million. 2012 2012A 20128 2012C Project 1 5.00% 5.00% 1.26%

The Series 2012-A bonds issued for Nuclear Project No. 1, CGS 5.00%

Nuclear Project No. 3, and Columbia are tax-exempt fixed-rate Project 3 5.00% 4.52% 1.66%

bonds that refunded certain electric revenue bonds as well as Nine Canyon 4.08%

additional Columbia Prior Lien bonds. Total 4.08% 5.00% 4.80% 1.55%

The Series 2012-B bonds issued for Nuclear Project No. 1 and Nuclear Project No. 3 are tax exempt, fixed-rate bonds that Net Accounting Loss (dollars in millions) advance refunded certain electric revenue bonds as well as pay 2012 2012A 2012B 2012C Total Project 1 $ - $ 1.42 $ (1.15) $ (0.55) $ (0.28) for a portion of the costs of issuance related to the 2012-B bonds.

CGS 2.30 2.30 The Series 2012-C bonds issued for Nuclear Project No. I and Project 3 1.43 (0.59) (1.02) (0.18)

Nuclear Project No. 3 are taxable fixed-rate bonds that advance Nine Canyon (0.29) - (0.29) refunded certain electric revenue bonds as well as to pay for a Total $ (0.29) $ 5.15 $ (1.74) $ (1.57) $ 1.55 portion of the costs of issuance related to the 2012-C bonds.

The Series 2012 bonds issued for Nine Canyon are tax exempt Total Defeased ($ in millions) fixed-rate bonds that refunded prior Nine Canyon Project bonds 2012 2012A 2012B 2012C Total Project 1 $ 170.44 $ 44.87 $ 22.18 $ 237.49 and were issued to pay for the costs of issuance related to the 2012 CGS 486.86 - 486.86 bonds.

Project 3 75.36 32.27 56.76 164.39 Nine Canyon 14.73 14.73 Total $ 14.73 $ 732.66 $ 77.14 $ 78.94 $ 903.47

Powering a clean energy future Energy Northwest did not issue or refund any bonds associated statements No. 7 and 23. In FY 2012 defeasements included $170.4 with Packwood during FY 2012. million, $84.8 million, and $547.5 million, for Nuclear Projects Energy Northwest also defeased certain revenue bonds by Nos. 1 and 3, and Columbia respectively. Nine Canyon defeased placing the net proceeds from the refunding bonds in irrevocable bonds totaled $14.7 million.

trusts to provide for all required future debt service payments on Outstanding principal on revenue and refunding bonds for the the refunded bonds until their dates of redemption. Accordingly, various business units as of June 30, 2012, and future debt service the trust account assets and liability for the defeased bonds are requirements for these bonds are presented in the following tables:

not included in the financial statements in accordance with GASB Columbia Generating Revenue and Refunding Bonds Nuclear Project No. 1 Refunding Revenue Bonds (dollars in thousands) (dollars in thousands)

Serial or Term Serial or Term Series Coupon Rate (%) Maturities Amount Series Coupon Rate (%) Maturities Amount 2003A 5.50 7-1-2015 $ 81,090 1989B 7.125 7-1-2016 $ 41,070 2003F 5.00-5.25 7-1-13/2018 23,710 2002A 5.50-5.75 7-1-13/2017 171,420 2004A 5.25 7-1-17/2018 129,260 2002B 6.00 7-1-2017 8,580 20048 5.50 7-1-2013 12,715 2003A 5.50 7-1-13/2014 174,400 2004C 5.25 7-1-13/2018 15,045 2004A 5.25 7-1-2013 62,485 2005A 5.00 7-1-15/2018 114,985 2004B 5.50 7-1-2013 1,135 2005C 4.64-4.74 7-1-13/2015 42,885 2005A 5.00 7-1-13/2015 72,175 2006A 5.00 7-1-20/2024 434,210 2006A 5.00 7-1-12/2017 130,560 2006C 5.00 7-1-20/2024 62,200 2007A 5.00 7-1-13/2017 51,730 2006D 5.80 7-1-2023 3,425 2007B 5.07-5.10 7-1-12/2013 6,740 2007A 5.00 7-1-13/2018 77,575 2007C 5.00 7-1-13/2017 219,020 2007B 5.07-5.33 7-1-12/2021 10,665 2008A 5.00-5.25 7-1-13/2017 230,535 2007D 5.00 7-1-21/2024 35,080 2008D 5.00 7-1-12/2017 53,510 2008A 5.00-5.25 7-1-14/2018 110,935 2009A 3.25-5.00 7-1-14/2015 48,905 2008B 5.95 7-1-20/2021 12,025 20098 4.59 7-1-2014 515 2008C 5.00-5.25 7-1-21/2024 37,240 2010A 2.50-5.00 7-1-12/2017 63,535 2009A 3.00-5.00 7-1-14/2018 116,425 2012A 5.00 7-1-13/2017 155,390 2009B 4.59-6.80 7-1-14/2024 18,515 2012B 5.00 7-1-2017 41,285 2009C 4.25-5.00 7-1-20/2024 69,170 2012C 1.26 7-1-2015 24,100 20108 3.75-4.25 7-1-20/2024 16,005 2010C 4.52-5.12 7-1-20/2024 75,770 Revenue bonds payable $ 1,557,090 2010D 5.61-5.71 7-1-23/2024 155,805 Estimated fair value at June 30, 2012 $ 1,721,874 (B) 2011A 3.00-5.00 7-1-13/2023 311,245 2011B 4.19-5.19 7-1-19/2024 29,920 (B) The estimatedfair value shown has been reported to meet the disclosurerequirenents of the AccountingStandards Codification(ASC)820 and does not purportto represent the amounts at which these obfigationswouldbe settled.

2011C 3.55 7-1-2019 4,600 2012A 5.00 7-1 -18/2021 441,240 Revenue bonds payable $ 2,441,740 Estimated fair value at June 30, 2012 $ 2,863,608 (e)

(B) The estimated fairnalueshown has been reported to meet the disclosurerequirementsof the couatintgStandards Codidication(ASC)820 and does not purport to represent the amounts at which these obligationswould be settled.

Energy Northwest 2012 Annual Report j7 Nuclear Project No. 3 Refunding Revenue Bonds Nine Canyon Wind Project Revenue (dollars in thousands) and Refunding Bonds(dotlars inthousands)

Serial or Term Series Coupon Rate (%) Maturities Amount Serial or Term Series Coupon Rate (%) Maturities Amount 1989A (A) 7-1-12/2014 $ 4,382 2003 4.00 7-1-2012 $ 995 19898 (A) 7-1-12/2014 13,323 2005 4.50-5.00 7-1-12/2023 51,645 7.125 7-1-2016 76,145 2006 4.50-5.00 7-1-12/2030 69,140 89,468 2012 2.00-5.00 7-1-13/2023 13,750 1993C (A) 7-1-13/2018 23,962 2003A 5.50 7-1-12/2013 102,890 Revenue bonds payable $ 135,530 2004A 5.25 7-1-14/2016 83,835 Estimated fair value at June 30, 2012 $ 144,138 (B) 2004B 5.50 7-1-2013 1,515 2005A 5.00 7-1-13/2015 129,265 (B) Theestimated fair oalueshown has been reported to meet the disclosurerequirementsof the AccountingStandards Codification(ASCQ820 and does not purport to represent the amounts at whichthese obligationswould be settled.

2006A 5.00 7-1-16/2018 39,445 2007A 4.50-5.00 7-1-13/2018 84,465 2007B 5.07 7-1-2012 1,725 Total Bonds Payable $ 5,625,305 2007C 5.00 7-1-12/2018 61,085 Estimated Fair Value at June 30,2012 $ 6,419,401 2008A 5.25 7-1-2018 13,790 2008D 5.00 7-1-12/2017 38,370 2009A 5.00-5.25 7-1-14/2018 116,055 2009B 4.59 7-1-2014 970 2010A 5.00 7-1-16/2018 279,980 20108 5.00 7-1-2016 29,865 2011A 4.00-5.00 7-1-2018 92,285 2012A 5.00 7-1-2018 67,885 2012B 3.00-5.00 7-1 -16/2017 30,330 2012C 1.26-1.74 7-1-15/2016 61,635 Compound interest bonds accretion 137,743 Revenue bonds payable $ 1,490,945 Estimated fair value at June 30, 2012 $ 1,689,781 (B)

(A)CompoundInterest Bonds (B) Theestimatedfair value shown has been reported to meet the disclosurerequirementsof the AccountingStandards Codification(ASC)820 and does not purport to represent the amounts at whichthese obligationswould be settled.

Powering a clean energy future Debt Service Requirements as of June 30, 2012 (in thousands):

Columbia Generating Station Nuclear Project No. 1 Fiscal Year*** Principal Interest Total Fiscal Year*** Principal Interest Total Total 6/30/2012 Balance:* $ 355 $ 65,783 $ 66,138 6/30/2012 Balance:* $ 236,030 $ 42,019 $ 278,049 2013 40,785 122,800 163,585 2013 273,055 66,372 339,427 2014 83,410 120,848 204,258 2014 332,100 52,401 384,501 2015-2017 406,285 324,065 730,350 2015 191,430 35,443 226,873 2018-2022 1,289,505 359,824 1,649,329 2016 239,385 27,026 266,411 2023-2024 621,400 49,331 670,731 2017 285,090 14,117 299,207

$ 2,441,740 $ 1,042,651 $ 3,484,391 $ 1,557,090 $ 237,379 $ 1,794,469

Principaland Interest due July2. 2012. Principaland Interest d July ie 2, 2012.

Fiscalyear for this report indicates the cashfunding requirementyear. **Fiscalyear for this reportindicates the cash funding requiremnentyear.

Nuclear Project No. 3 Nine Canyon Wind Project Fiscal Year*** Principal Interest Total Fiscal Year** Principal Interest Total 6/30/2012 Balance:' $ 69,132 $ 60,138 $ 129,270 6/30/2012 Balance:' $ 4,575 $ 3,025 7,600 2013 131,875 96,804 228,679 2013 6,835 6,291 13,126 2014 124,704 88,738 213,442 2014-2017 31,135 21,438 52,573 2015 129,795 60,487 190,283 2018-2021 37,415 15,251 52,666 2016 247,499 56,838 304,337 2022-2025 30,175 7,805 37,980 2017 177,617 45,124 222,741 2026-2029 19,855 3,305 23,160 2018 472,580 32,625 505,205 2030 5,540 250 5,790

$ 135,530 $ 57,364 $ 192,894 Adjustment 137,743 (137,743)

Fiscalyear for this report indicates the cash fundingrequirementyear

$ 1,490,945 $ 303,012 $ 1,793,956 Principaland Interestdue July 2, 2012.

Adjustmentfor CompoundInterest Bondsaccretion; CompoundInterest Bondsare rflected at their face amount less discounton the balance sheet Fiscalyear for this report indicates the cash funding requirementyear.

Note 6 - Net Billing Security - Nuclear Projects Nos. 1 and 3 and Columbia and notwithstanding the suspension, interruption, interference, The participants have purchased all of the capability of Nuclear reduction or curtailment of the projects' output.

Projects Nos. 1 and 3 and Columbia. BPA has in turn acquired the On May 13, 1994, Energy Northwest's Board of Directors entire capability from the participants under contracts referred adopted resolutions terminating Nuclear Projects Nos. 1 and 3.

to as net-billing agreements. Under the net-billing agreements The Nuclear Projects Nos. 1 and 3 project agreements and the for each of the business units, participants are obligated to pay net-billing agreements, except for certain sections which relate Energy Northwest a pro-rata share of the total annual costs only to billing processes and accrued liabilities and obligations of the respective projects, including debt service on bonds under the net-billing agreements, ended upon termination of relating to each business unit. BPA is then obligated to reduce the projects. Energy Northwest entered into an agreement with amounts from participants under BPA power sales agreements BPA to provide for continuation of the present budget approval, by the same amount. The net-billing agreements provide that billing and payment processes. With respect to Nuclear Project participants and BPA are obligated to make such payments No. 3, the ownership agreement among Energy Northwest and whether or not the projects are completed, operable or operating private companies was terminated in FY 1999. (See Note 13)

Energy Northwest 2012 Annual Report Security - Packwood Lake Hydroelectric Project GASB statements No. 25 and No. 27.

The Packwood participants and Snohomish PUD have a Any information obtained from the DRS is the responsibility power sales agreement that became effective Oct. 1, 2008 with of the state of Washington. PricewaterhouseCoopers LLP (PwC),

an end date of Sept. 30, 2011. Under the agreement, Snohomish independent auditors for Energy Northwest, has not audited PUD purchased all of the output directly. The power purchase or examined any of the information available from the DRS; agreement (PPA) with Snohomish provided a predetermined accordingly, PwC does not express an opinion or any other form rate for all firm delivery, per the contract schedule and the Mid- of assurance with respect thereto.

Columbia (Mid-C) based rate for all firm deliveries above firm, or secondary power. Packwood was obligated to supply a specified Public Employees' Retirement System (PERS) amount of power. If power production did not supply the Plans 1, 2, and 3 required amount of power, Packwood was required to provide any The legislature established PERS in 1947. Membership in the shortfall by purchasing power on the open market. Packwood was system includes: elected officials; state employees; employees not required to purchase power on the open market in IFY 2012 of the supreme, appeals, and superior courts (other than judges to meet the requirements of this contract. Conversely, if there was currently in the judicial retirement system); employees of excess capacity per the PPA with Snohomish PUD, Packwood legislative committees; community and technical colleges, college would sell the excess on the open market for additional revenues and university employees not participating in higher education to be included as part of the PPA with the Packwood participants. retirement programs; judges of district and municipal courts; With the Snohomish PUD contract expiration, the power and employees of local governments. PERS retirement benefit produced by Packwood reverted back to the 12 member utilities. provisions are established in chapters 41.34 and 41.40 RCW and The member utilities pay the annual costs, including any debt may be amended only by the state legislature.

service, of Packwood and are obligated to pay these annual PERS is a cost-sharing multiple-employer retirement system costs whether or not Packwood is operational. The Packwood comprised of three separate plans for membership purposes:

participants also share project revenue to the extent that the Plans I and 2 are defined benefit plans and Plan 3 is a defined amounts exceed project costs. benefit plan with a defined contribution component.

PERS members who joined the system by Sept. 30, 1977 are Note 7 - Pension Plans Plan 1 members. Those who joined on or after Oct. 1, 1977 and by either, Feb. 28, 2002 for state and higher education Substantially all of Energy Northwest full-time and qualifying employees, or Aug. 31, 2002 for local government employees, are part-time employees participate in one of the following statewide Plan 2 members unless they exercised an option to transfer their retirement systems administered by the Washington State membership to Plan 3. PERS members joining the system on or Department of Retirement Systems, under cost-sharing multiple- after March 1, 2002 for state and higher education employees, employer public employee defined benefit retirement plans. The or Sept. 1, 2002 for local government employees have the Department of Retirement Systems (DRS), a department within irrevocable option of choosing membership in either PERS Plan the primary government of the state of Washington, issues a 2 or PERS Plan 3. The option must be exercised within 90 days publicly available comprehensive annual financial report (CAFR) of employment. An employee is reported in Plan 2 until a choice that includes financial statements and required supplementary is made. Employees who fail to choose within 90 days default to information for each plan. The DRS CAFR may be obtained by PERS Plan 3. Notwithstanding, PERS Plan 2 and Plan 3 members writing to: Department of Retirement Systems, Communications may opt out of plan membership if terminally ill, with less than Unit, P.O. Box 48380, Olympia, WA 98504-8380; or it may five years to live.

be downloaded from the DRS website at www.drs.wa.gov. The PERS Plan 1 and Plan 2 defined benefit retirement benefits following disclosures are made pursuant to GASB statements are financed from a combination of investment earnings and No. 27, Accounting for Pensions by State and Local Government employer and employee contributions.

Employers and No. 50, Pension Disclosures, an amendment of PERS Plan 1 members are vested after the completion of

Powering a clean energy future five years of eligible service. Plan I members are eligible for There are 1,197 participating employers in PERS. Membership retirement after 30 years of service, or at the age of 60 with five in PERS consisted of the following as of the latest actuarial years of service, or at the age of 55 with 25 years of service. The valuation date for the plans of June 30, 2010:

monthly benefit is 2 percent of the average final compensation (AFC) per year of service. (AFC is the monthly average of the 24 Retirees and Beneficiaries Receiving Benefits 76,899 Terminated Plan Members Entitled to 28,860 consecutive highest-paid service credit months.) The retirement But Not Yet Receiving Benefits benefit may not exceed 60 percent of AFC. The monthly benefit Active Plan Members Vested 105,521 is subject to a minimum for PERS Plan 1 retirees who have 25 Active Plan Members Non-vested 51,005 Total 262,285 years of service and have been retired 20 years, or who have 20 years of service and have been retired 25 years. Plan 1 members retiring from inactive status prior to the age of 65 may receive Funding Policy actuarially reduced benefits. If a survivor option is chosen, the Each biennium, the state Pension Funding Council adopts benefit is further reduced. A cost-of living allowance (COLA) was PERS Plan 1 employer contribution rates, PERS Plan 2 employer granted at age 66 based upon years of service times the COLA and employee contribution rates, and PERS Plan 3 employer amount. This benefit was eliminated by the legislature, effective contribution rates. Employee contribution rates for Plan I July 1, 2011. Plan 1 members may elect to receive an optional are established by statute at 6 percent for state agencies and COLA that provides an automatic annual adjustment based on local government unit employees, and at 7.5 percent for state the Consumer Price Index. The adjustment is capped at 3 percent government elected officials. The employer and employee annually. To offset the cost of this annual adjustment, the benefit contribution rates for Plan 2 and the employer contribution is reduced. rate for Plan 3 are developed by the Office of the State Actuary PERS Plan 2 members are vested after the completion of five to fully fund Plan 2 and the defined benefit portion of Plan 3.

years of eligible service. Plan 2 members are eligible for normal All employers are required to contribute at the level established retirement at the age of 65 with five years of service. The monthly by the legislature. Under PERS Plan 3, employer contributions benefit is 2 percent of the AFC per year of service. (AFC is the finance the defined benefit portion of the plan and member monthly average of the 60 consecutive highest-paid service contributions finance the defined contribution portion. The months.) Plan 3 employee contribution rates range from 5 percent to PERS Plan 2 members who have at least 20 years of service 15 percent based on member choice. Two of the options are credit and are 55 years of age or older are eligible for early graduated rates dependent on the employee's age. As a result of retirement with a reduced benefit. The benefit is reduced by an the implementation of the Judicial Benefit Multiplier Program in early retirement factor (ERF) that varies according to age, for each January 2007, a second tier of employer and employee rates was year before age 65. developed to fund, along with investment earnings, the increased PERS Plan 3 has a dual benefit structure. Employer contributions retirement benefits of those justices and judges who participate finance a defined benefit component and member contributions in the program.

finance a defined contribution component. The defined benefit The methods used to determine the contribution requirements portion provides a monthly benefit that is 1 percent of the are established under state statute in accordance with chapters AFC per year of service. (AFC is the monthly average of the 60 41.40 and 41.45 RCW.

consecutive highest-paid service months.)

Effective June 7, 2006, PERS Plan 3 members are vested in the defined benefit portion of their plan after 10 years of service; or after five years of service, if 12 months of that service are earned after age 44; or after five service credit years earned in PERS Plan 2 prior to June 1, 2003. Plan 3 members are immediately vested in the defined contribution portion of their plan.

Energy Northwest 2012 Annual Report The required contribution rates expressed as a percentage of Plan 2, and Plan 3. There are 66 retirees who remain participants current-year covered payroll, as of Dec. 31, 2011, are as follows: in the insurance program. In 1994, Energy Northwest's Executive Board approved provisions which continued the life insurance benefit to retirees at 25 percent of the premium for employees Employer* 7.25%** 7.25%** 7.25%***

who retire prior to Jan. 1, 1995, and charged the full 100 percent Employee 6.00%**** 4.64%0 .*.

premium to employees who retired after Dec. 31, 1994. The life

• Theemployer rates include the employer administrative expense fee currently set at 0.16%. insurance benefit is equal to the employee's annual rate of salary at The employer rate for state elected officials is 10.80% for Plan t and 7.25% for Plan 2 and Plan 3.

Plan 3 defined benefit portion only. retirement for non-bargaining employees retiring prior to Jan. 1, Theemployee rate for state elected officials is 7.50% for Plan 1 and 4.64% for Plan 2.

• • • • • Variable from 5.0% minimum to 15.0% maximum based on rate selected bythe PERS3 member. 1995. The life insurance benefit has a maximum limit of $10,000 Both Energy Northwest and the employees made the required for retirees after Dec. 31, 1994. The cost of coverage for retirees contributions. Energy Northwest's required contributions for the remained unchanged for FY 2012 and was $2.82 per $1,000 of years ending June 30 were as follows: coverage. Employees who retired prior to Jan. 1, 1995, contribute

$.58 cents per $1,000 of coverage while Energy Northwest pays f% Awt&1; the remainder; retirees after Dec. 31, 1994, pay 100 percent of 2012 $124,071 $9,773,209 $ 4,710,819 the cost coverage. Premiums are paid to the insurer on a current 2011 $184,863 $7,921,762 $4,281,077 2010 $214,117 period basis. At the time each employee retired, Energy Northwest

$ 7,238,997 $3,971,410 accrued an estimated liability for the actuarial value of the future premium. Energy Northwest revises the liability for the actuarial Note 8 - Deferred Compensation Plans value of estimated future premiums, net of retiree contributions.

The total liability recorded at June 30, 2012, was $0.6 million for Energy Northwest provides a 401(k) deferred compensation these benefits.

plan (401(k) plan), and a 457 deferred compensation plan. During FY 2012, pension costs for Energy Northwest employees Both plans are defined contribution plans that were established and post-employment life insurance benefit costs for retirees to provide a means for investing savings by employees for were calculated and allocated to each business unit based on retirement purposes. All permanent, full-time employees are direct labor dollars. This allocation basis resulted in the following eligible to enroll in the plans. Participants are immediately percentages by business unit for FY 2012 for this and other vested in their contributions and direct the investment of their allocated costs; Columbia at 94 percent; Business Development contribution. Each participant may elect to contribute pre-tax at 4 percent; and Project 1, Nine Canyon, Packwood and Project annual compensation, subject to current Internal Revenue Service 3 receiving the residual amount of 2 percent.

limitations.

For the 401(k) plan, Energy Northwest may elect to make Note 10 - Insurance an employer matching contribution for each of its employees who is a participant during the plan year. The amount of Nuclear Licensing and Insurance such an employer match shall be 50 percent of the maximum Energy Northwest is a licensee of the Nuclear Regulatory salary deferral percentage. During FY 2012 Energy Northwest Commission and is subject to routine licensing and user fees, contributed $2.9 million in employer matching funds while to retrospective premiums for nuclear liability insurance, and to employees contributed $10.2 million for FY 2012. license modification, suspension, or revocation or civil penalties in the event of violations of various regulatory and license Note 9 - Other Employment Benefits - Post-Employment requirements.

Federal law under the Price Anderson Act currently limits In addition to the pension benefits available through PERS, public liability claims from a nuclear incident. As of June 30, Energy Northwest offers post-employment life insurance benefits 2012, the current limit was $12.6 billion and is subject to change to retirees who are eligible to receive pensions under PERS Plan 1, to account for the effects of inflation and changes in the number

Powering a clean energy future of licensed reactors. As required by law, Energy Northwest has Energy Northwest has identified legal obligations to retire purchased the maximum commercial insurance available of $375 generating plant assets at the following business units: Columbia, million, which is the primary layer of protection. The remaining Nuclear Project No. 1 and Nine Canyon. Decommissioning and balance is covered by the industry's retrospective rating plan site restoration requirements for Columbia and Nuclear Project that uses deferred premium charges to every reactor licensee if No. 1 are governed by the NRC regulations and site certification a nuclear incident at any licensed reactor in the United States agreements between Energy Northwest and the state of results in claims that exceed the individual licensee's primary Washington and regulations adopted by the Washington Energy insurance layer. The current maximum deferred premium for Facility Site Evaluation Council (EFSEC) and a lease agreement each nuclear incident is $117.5 million per reactor, but not more with the DOE. (See Notes 1 and 13) Additionally, there are than $17.5 million per reactor may be charged in any one year for separate lease agreements for land located at Nine Canyon. Leases each incident. Nuclear property damage and decontamination at these locations are considered operating leases and expenses liability insurance requirements are met through a combination for FY 2012 were $38.3 thousand for Columbia, $35.0 thousand of commercial nuclear insurance policies purchased by Energy for Nuclear Project No. 1 and $647.1 thousand for the Nine Northwest and BPA. The total amount of insurance purchased Canyon project. The leases for all three locations are projected is currently $2.8 billion. The deductible for this coverage is $5 to remain steady throughout the term of each operating project.

million per occurrence. Five-year total lease costs are estimated at $3.6 million.

As of June 30, 2012, Columbia has a capital decommissioning Note 11 - Asset Retirement Obligation (ARO) net asset value of zero and an accumulated liability of $118.7 million for the generating plant, and for the ISFSI a net asset Energy Northwest adopted ASC 410 on July 1, 2002. This value of $0.6 million and an accumulated liability of $1.6 standard requires an entity to recognize the fair value of a liability million. Columbia's adjusted net asset value decreased $17.7 of an ARO for legal obligations related to the dismantlement and million reducing the new asset retirement cost below the net restoration costs associated with the retirement of tangible long- asset value. The adjustment of $1.6 million was recorded as lived assets, such as nuclear decommissioning and site restoration other non-operating expense (loss) due to asset revaluation. The liabilities, in the period in which it is incurred. Upon initial adjustments to Columbia and the ISFSI were associated with the recognition of the AROs that are measurable, the probability renewal of the plant's operating license to 2043 by the NRC in weighted future cash flows for the associated retirement costs May 2012.

are discounted using a credit-adjusted-risk-free rate, and are Restoration costs for Nuclear Project No. 1 in FY 2012 of recognized as both a liability and as an increase in the capitalized $0.2 million combined with the current year accretion expense carrying amount of the related long-lived assets. Capitalized asset of $0.6 million and downward revision in future restoration retirement costs are depreciated over the life of the related asset estimates of $0.2 million resulted in the small increase to with accretion of the ARO liability classified as an operating the ARO of $0.6 million. Nuclear Project No. 1 has a capital expense on the statement of operations and net assets each decommissioning net asset value of zero and an accumulated period. Upon settlement of the liability, an entity either settles liability of $16.4 million.

the obligation for its recorded amount or incurs a gain or loss if Under the current agreement, Nine Canyon has the obligation the actual costs differ from the recorded amount. However, with to remove the generation facilities upon expiration of the lease regard to the net-billed projects, BPA is obligated to provide for agreement if requested by the lessors. The Nine Canyon Wind the entire cost of decommissioning and site restoration; therefore, Project recorded the related original ARO in FY 2003 for Phase I any gain or loss recognized upon settlement of the ARO results in and II. Phase III began commercial operation in FY 2008 and the an adjustment to either the billings in excess of costs (liability) or original ARO was adjusted to reflect the change in scenario for the costs in excess of billings (asset), as appropriate, as no net revenue retirement obligation, with current lease agreements reflecting a or loss is recognized, and no net assets are accumulated for the 2030 expiration date. As of June 30, 2012, Nine Canyon has a net-billed projects. capital decommissioning net asset value of $0.6 million and an

Energy Northwest 2012 Annual Report accumulated liability of $1.2 million. reactor or share of a reactor it owns. This reporting requirement Packwood's obligation has not been calculated because the began March 31, 1999, and reports are required every two years time frame and extent of the obligation was considered under this thereafter. Energy Northwest submitted its most recent report to statement as indeterminate. As a result, no reasonable estimate the NRC in March 2011.

of the ARO obligation can be made. An ARO will be required to Energy Northwest's current estimate of Columbia's be recorded if circumstances change. Management believes that decommissioning costs in FY 2011 dollars is $463.5 million these assets will be used in utility operations for the foreseeable (Columbia - $459.7 million and ISFSI - $3.8 million). This future. estimate, which is updated biannually, is based on the NRC The following table describes the changes to Energy Northwest's minimum amount required to demonstrate reasonable financial ARO liabilities for the year that ended June 30, 2012: assurance for a boiling water reactor with the power level of Columbia.

Asset Retirement Obligation (inmillions) Site restoration requirements for Columbia are governed by the site certification agreements between Energy Northwest and Columbia Generating Station the state of Washington and by regulations adopted by the EFSEC.

Balance at June 30, 2011 $ 129.66 Current year accretion expense 6.78 Energy Northwest submitted a site restoration plan for Columbia Revision infuture estimates (17.74) that was approved by the EFSEC on June 12, 1995. Energy ARO at June 30, 2012 $ 118.70 Northwest's current estimate of Columbia's site restoration costs is $96.4 million in constant dollars (based on the 2011 study)

ISFSI and is updated biannually along with the decommissioning Balance at June 30, 2011 $ 1.94 Current year accretion expense 0.10 estimate. Both decommissioning and site restoration estimates Revision infuture estimates (0.47) (based on 2011 study) are used as the basis for establishing ARO at June 30, 2012 $ 1.57 a funding plan that includes escalation and interest earnings until decommissioning activities occur. Payments to the Nuclear Project No. 1 decommissioning and site restoration funds have been made Balance at June 30, 2011 $ 15.84 Less: Restoration costs incurred 0.22 since January 1985. The fair value of cash and investment Current year accretion expense 0.57 securities in the decommissioning and site restoration funds as of Revision in future restoration estimates (0.23)

June 30, 2012, totaled approximately $173.6 million and $28.4 ARO at June 30, 2012  :$ 16A40 million, respectively. Since September 1996, these amounts have Nine Canyon Wind Project been held in an irrevocable trust that recognizes asset retirement Balance at June 30, 2011 $ 1.19 obligations according to the fair value of the dismantlement and Current year accretion expense 0.05 restoration costs of certain Energy Northwest assets. The trustee is ARO at June 30, 2012 $ 1.24 a domestic U.S. bank that certifies the funds for use when needed to retire the asset. The trust is funded by BPA ratepayers and Note 12 - Decommissioning and Site Restoration managed by BPA in accordance with NRC requirements and site certification agreements; the balances in these external trust funds The NRC has issued rules to provide guidance to licensees of are not reflected on Energy Northwest's balance sheet.

operating nuclear plants on providing financial assurance for Energy Northwest established a decommissioning and site decommissioning plants at the end of each plant's operating life restoration plan for the ISFSI in 1997. Beginning in FY 2003, (See Note 11 for Columbia ARO). In September 1998, the NRC an annual contribution is made to the Energy Northwest approved and published its "Final Rule on Financial Assurance Decommissioning Fund. These contributions are held by Energy Requirements for Decommissioning Power Reactors." As provided Northwest and not held in trust by BPA. The fair market value in this rule, each power reactor licensee is required to report to of cash and investments as of June 30, 2012, is $1.0 million.

the NRC the status of its decommissioning funding for each These contributions will occur through FY 2044; cash payments

Powering a clean energy future will begin for decommissioning and site restoration in FY 2045 are governed by site certification agreements between Energy with equal installments for five years totaling $2.06 million in Northwest and the state of Washington and regulations adopted constant dollars based on the 1997 study. by EFSEC, and a lease agreement with DOE. Energy Northwest submitted a site restoration plan for Nuclear Project No. 1 Note 13 - Commitments And Contingencies to EFSEC on March 8, 1995, which complied with EFSEC requirements to remove the assets and restore the sites by Nuclear Project No. 1 Termination demolition, burial, entombment, or other techniques such that Since the Nuclear Project No.1 termination, Energy the sites pose minimal hazard to the public. EFSEC approved Northwest has been planning for the demolition of Nuclear Energy Northwest's site restoration plan on June 12, 1995. In its Project No. 1 and restoration of the site, recognizing the fact approval, EFSEC recognized that there is uncertainty associated that there is no market for the sale of the project in its entirety, with Energy Northwest's proposed plan. Accordingly, EFSEC's and to-date any viable alternative use has not been found. The conditional approval provides for additional reviews once the final level of demolition and restoration will be in accordance details of the plan are finalized. A new plan with additional with agreements discussed below under "Nuclear Project No. 1 details was submitted in FY 2003. This submittal was used to Site Restoration." calculate the ARO discussed in Note 11.

Nuclear Project No. 3 Termination Business Development Fund Interest in In June 1994, the Nuclear Project No. 3 Owners Committee Northwest Open Access Network voted unanimously to terminate the project. In 1995, a The Business Development Fund is a member of the group from Grays Harbor County, Wash., formed the Satsop Northwest Open Access Network (NoaNet). Members formed Redevelopment Project (SRP). The SRP introduced legislation NoaNet pursuant to an Interlocal Cooperation Agreement for with the state of Washington under Senate Bill No. 6427, which the development and efficient use by the members and others of passed and was signed by the governor of the state of Washington a communication network in conjunction with BPA.

on March 7, 1996. The legislation enables local governments The Business Development Fund has a 7.38 percent interest and Energy Northwest to negotiate an arrangement allowing in NoaNet with a potential mandate of an additional 25 percent such local governments to assume an interest in the site on step-up possible for a maximum 9.23 percent. NoaNet has which Nuclear Project No. 3 exists for economic development $11.6 million in network revenue bonds and note payables by transferring ownership of all or a portion of the site to local outstanding, based on their Dec. 30, 2011 audited financial government entities. This legislation also provides for the local statements. The members are obligated to pay the principal government entities to assume regulatory responsibilities for site and interest on the bonds when due in the event and to the restoration requirements and control of water rights. In February extent that NoaNet's Gross Revenue (after payment of costs of 1999, Energy Northwest entered into a transfer agreement with Maintenance and Operation) is insufficient for this purpose.

the SRP to transfer the real and personal property at the site of The maximum principal share (based on step-up potential)

Nuclear Project No. 3. The SRP also agreed to assume regulatory that the Business Development Fund could be required to responsibility for site restoration. Therefore, Energy Northwest pay is $1.1 million. The Business Development Fund is not is no longer responsible to the state of Washington and EFSEC obligated to reimburse losses of NoaNet unless an assessment for any site restoration costs. is made to NoaNet's members based on a two-thirds vote of the membership. In FY 2012 the Business Development Fund Nuclear Project No. 1 Site Restoration was not required to contribute to NoaNet. Financial statements Site restoration requirements for Nuclear Project No. 1 for NoaNet may be obtained by writing to: Northwest Open

Energy Northwest 2012 Annual Report Access Network, NoaNet Headquarters, 5802 Overlook Ave. NE, experienced a significant delay in the completion of R-20.

Tacoma, WA 98422. Any information obtained from NoaNet is The planned outage extended past the fiscal year-end and was the responsibility of NoaNet. PwC has not audited or examined completed September of 2011. R-20 was planned for 72 days any information available from NoaNet; accordingly, PwC does and lasted 174 days. On Oct. 21, 2011, the contractor for the not express an opinion or any other form of assurance with majority of the condenser work for R-20 filed a claim against respect thereto. Energy Northwest for additional costs incurred in connection with the extended outage in the amount of $50 million. The Other Litigation and Commitments parties agreed to resolve their dispute by mediation. On April Energy Northwest v. United States of America filed in U.S. 30 - May 1, 2012, the parties met and through the services of Court of Federal Claims in January 2004 (Cause No. 04-0010C). a professional mediator resolved the dispute. The settlement This is an action for partial breach of contract and breach of terms were approved by Energy Northwest's Executive Board implied covenant of good faith and fair dealing brought by in an open public meeting on May 10, 2012. Under the terms Energy Northwest against the United States (Department of of the settlement, Energy Northwest paid the contractor the Energy, "DOE") for damages through Aug. 31, 2006, for DOE's amount of $18.4 million plus Washington State sales tax for a failure to meet its legal obligations to accept and dispose of spent total amount of $19.9 million. In exchange for the payment, nuclear fuel and high-level radioactive waste per the Standard the contractor provided Energy Northwest with a complete and Contract. After litigation at the trial court and court of appeals final release of all claims. The Court is expected to dismiss the of Energy Northwest's claim in the amount of $56.8 million, on lawsuit with prejudice on or before Oct. 12, 2012.

July 8, 2011, DOE and Energy Northwest filed a Stipulation for Energy Northwest is involved in other various claims, Entry of Final Judgment in Favor of Plaintiff Energy Northwest legal actions and contractual commitments and in certain and that same day, the Court of Federal Claims entered Final claims and contracts arising in the normal course of business.

Judgment in the amount of $48.7 million which was received Although some suits, claims and commitments are significant on Aug. 29, 2011. The settlement amount is shown as Other in amount, final disposition is not determinable. In the opinion Income and Expenses - Gain on DOE settlement on the of management, the outcome of such litigation, claims or Statement of Revenues, Expenses and Changes in Net Assets. commitments will not have a material adverse effect on the Energy Northwest vs. United States of America filed in U.S. financial positions of the business units or Energy Northwest as Court of Federal Claims in July 2011 (Cause No. 11-447C-EJD). a whole. The future annual cost of the business units, however, This is the second action for partial breach of contract brought may either be increased or decreased as a result of the outcome by Energy Northwest against the United States (Department of these matters.

of Energy, "DOE") for damages ranging between Sept. 1, 2006 through July 2012, for DOE's continuing failure to meet its legal Note 14- Derivative Instruments obligations to accept and dispose of spent nuclear fuel and high-level radioactive waste per the Standard Contract. Energy GASB Statement No. 53, "Accounting and Reporting for Northwest has submitted a preliminary amount for damages Derivative Instruments" was adopted in FY 2010. Energy but outcome of the litigation as far as award and outcome is Northwest's policy is to review and apply as appropriate the unknown at this time. normal purchase and normal sales exception under GASB No. 53.

Babcock & Wilcox Nuclear Power Generation Group, Inc., Energy Northwest has reviewed various contractual arrangements n/k/a Babcock &Wilcox Nuclear Energy, Inc. v. Energy Northwest to determine applicability of this statement. Purchases and sales filed in U.S. District Court, Eastern District of Washington in of nuclear fuel and components that require physical delivery October 2011 (Cause No. CV-11-5149-EFS). Energy Northwest and are expected to be used and/or sold in the normal course of

Powering a clean energy future business are generally considered normal purchases and normal currently valued at $0.1 million. Changes in the fair value of the sales. These transactions are excluded under GASB No. 53 and call options are classified as non-operating revenue and expenses therefore are not required to be recorded at fair value in the - investment income on the Statements of Revenues, Expenses financial statements. Certain contracts for power options were and Changes in Net Assets.

evaluated and the following contract did not meet the exclusion for normal purchase and normal sale:

The Business Development Fund had a power sales contract subject to the provisions of GASB 53. Call options associated with the contract had a notional amount of 50 MWh. The fair value of the power sales option contract is based on the futures price curve for the Mid-Columbia Intercontinental Exchange for electricity and the Sumas index for natural gas. This contract has an end date of June 2013. Assets associated with the call options are classified on the Balance Sheet as current derivative and are Current Debt Ratings (Unaudited)

Nine Canyon Rating Energy Northwest (Long-Term) Net-Billed Rating Phase I&II Phase III Fitch, Inc. AA A- A-Moodys Investors Service, Inc. (Moodys) Aal A2 A2 Standard and Poor's Ratings Services (S & P) AA- A- A

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