LIC-05-0034, Omaha Public Power District'S 2004 Annual Financial Report

Omaha Public Power District'S 2004 Annual Financial Report

ML051040361
Person / Time
Site:	Fort Calhoun
Issue date:	04/11/2004
From:	Herman J Omaha Public Power District
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
LIC-05-0034
Download: ML051040361 (49)

Text

Omaha Public Power District 444 South 16th Street Afall Omaha NIE 68102-2247 April 11, 2004 LIC-05-0034 U. S. Nuclear Regulatory Commission ATTN.: Document Control Desk Washington, DC 20555

Reference:

Docket No. 50-285

SUBJECT:

2004 Annual Financial Report In accordance with 10 CFR 50.71 (b), enclosed please find one copy of the Omaha Public Power District's 2004 Annual Report.

If you should have any questions, please contact Tom Matthews at (402) 533-6938. No commitments are made to the NRC in this letter.

Sincerely, Herman anager - Nuclear Licensing JBH/mle

Enclosure:

Omaha Public Power District's 2004 Annual Report.

c: B. S. Mallett, NRC Regional Administrator, Region IV A. B. Wang, NRC Project Manager J. D. Hanna, NRC Senior Resident Inspector 00o Emplopment with Equal Opportunity 4171

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,Contentsc.

Servcei Area Map.....2 Chair and CEO Message......................3

=ard f Directo rs

~Seniio'r'Managemnent................. .5

-Operations eview 6

...Maniagiemfent's Discussion a~nd`Analysis'................. 14 Report ofManagement. . 26

-' .- - - .. .4.,. , .2..; . o S.... nu .. . . . . . .. . . . . . .

Ifidependent Audit o27 BalancenSheets I .28 --:-

Statements of Revenues, Expenses and Changes i Euty......30 StatementsrofCashpl of Cas Flow ........................

Notes to FinancialEOness St n.. . ts ag ....... 32 Electric System Revenue Bonidsusanig4

-Statistics ........................ ..... ..... 44 Investor Relations and Corpreie'Officers' . 45 Frmthe left, CesarRosaesr.

Linmanidn knd

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• Served at Retail A Served at Wholesale oh Powe Station

• OPPD Headquarters Ail ~Fort Ca houSlaft Nuclear plant, 476 megawatts Elk CRY N"0MM3v Landfill-gas plant, 3 megawatts Coal & natural-gas plant, 663 megawatts plnt, nOi 118 megawatts Wind turbine,.- egatts Oil & natural-gas plant, 314 megawatts Natural-gas plant, 320 megawatts Colplant, 646 megawatts Coal plant, 663 megawatts (2009 completion date)

OPPD is a publicly owned, business-managed electric utility that serves more customers than any other electric utility in Nebraska.

Three base-load power plants - North Omaha Station and Nebraska City Station, both coal- Z fired, and Fort Calhoun Nuclear Station - provide, the majority of the power used by the 719,000 people in OPPD's 5,000-square-mile service territory in eastern Nebraska. I OPPD's base-load plants are augmented by three peaking plants and two renewable energy facilities, a landfill-gas plant and a wind turbine facility. Anew 663-megawatt coal-fired plant, Nebraska City Station Unit 2, is expected to begi operation in 2009.

-Chairand CEO Message

.-Life is full of curves. Business is, too. Understanding this and preparing for the inevitable twists and turns associated with providing power to more than 700,000 Nebraskans have been key to OPPD's success for many years. In 2004, OPPD's focus remained on the population and economic growth curves within our territory, the increasing demand curve, the generation required to meet it and the corresponding financial challenges and opportunities.

-Despite uncharacteristically mild summer temperatures, OPPD posted strong 2004 financial results; Off-system sales set a record with annual net revenues of

$109.5 millionwhich contributed to operating revenues of $566.3 million. Eletric energy sales for the year totaled 12.7 billion kilowatt-hours.

Cost-control measures that netted millions in savings and the first general rate

, increase in 12 years were key factors in OPPD receiving bond ratings of AA from' Standard &Poor's and Aa2 from Moody's. Despite the rate increase, OPPD's rates once again remained more than 20 percent below the national average.

-A company record for caring through United Way donations, a 100-percent score for complying with the critical reliability regulations of the Mid-Continent Area Power Pool, and a fourth consecutive award for highest customer satisfaction with P nC W E

--residential electric service from J.D. Power and Associates are a few of the many 2004 or d Chi An Gares

' accomplishments of which OPPD employees are proud.

How has OPPD built a tradition of performing ahead of the curve? Much of the credit can be traced to our six core values:

safety, our main value, accountability, commitment to customers, excellence, teamwork and family orientation.These values are the foundation on which'all business decisions are based and the drivers' of our bottom-line success.

Undoubtedly, the coming years will be exciting as OPPD enters a dynamic phase of upgrades and expansion. We do so

. ith confidence and pride. On behalf of OPPD leadership, we thank the tremendous individuals who have worked to bring OPPD to its current position and pledge our commitment to bondholders,[customer-owners and coworkers to apply maximum effort toexceed expectations'and keep our company ahead of the curve.

-W. Gy ates A-;nne L uire

&2iei'ident and Ch ief Execuive Oficer 'Chairof the Board A'-4,

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Front, forn tie left:  :- Back, from the left:.

.DelD. Weber' John K.Green Vice Chair of the Board Secretary-Chancellor Emeritus,"University of Nebraska Attorney at Law at umana . f.t f  : .

Geoffrey C.Hall John R.Thompson Board Member Board Member.. Attorney at Law Land Developer . - '.

Michael J. Cavanaugh Anne L.McGuire, - Board Member .

.Chair of the Board Police Lieutenant,' City'of Omaha (Retired)

Nurse Educator: - Real Estate Investor - Manager Frederick J. Ulrich -- -:. N.P. Dodge Jr.

Treasurer Board Member Farmer, Cattle Feeder- President Chairman of the Board

N.P. Dodge Company, .

4 2004 OPPD Annual Revorl,

Senior Management Frotit,from the left: £ Back, from the left:

Charles N. Eldred Ross T. Ridenoure Vice President, Vice President Chief Financial Officer Timothyj. Burke IV.Gary Gates Vice President President, Chief Executive Officer Dale F.Widoe Vice President Adrian J. Minks Vice President Roger L. Sorenson

-Vice President 2004 OPPI Annual Report 5

Ahead 0of the. cirve..

OPPD's'service territory is a growing, Capiu ideas ':

thriving region with a matching thirst for Facin, g$1.6 billion in additional capital' energy. To meet future demand, capital e'xpendi tures, thermindset of OPPD's spending will reach a historic high of financia I team was'far from "business approximately $1.6 billion during the - as usual 'in 2004. Enterprise risk-next five years. Major upcoming capital manage ment personnel identified,-:

expenditures include"the construction quantifi ed and prioritized risks throughout of Nebraska Cit Station Unit 2,a the coin pany on a scale and depth'greater.

663-megawatt coal-fired plant with : -- than at any time in OPPD's history.

state-of-the-art multi-pollution control Other team members focused on the .

equipment. Major system replacements prioritiz;ation of capital projects. Specific and upgrades are also planned for Fort prioritizeation goals included funding-Calhoun StationOPPD's nuclear power -non-pov ver supply capital projects with plant, which will allow it to provide power internall ly generated funds andiensuring to Nebraskans until 2033 and beyond. that cosl1-cutting measures don't Besides planning the most prudent ways negative ely impact critical business factors.:'-'

to fund and finance 'capital projects, OPPD OPPD 'slong-standing record of financial.

ispursuing a holistic financial approach strength served as a reminder to current

that includes company-wide cost-reduction employeees that the keys to long-term

-initiatives, aswell as capital prioritization financia I success are sound financial and enterprise risk-management programs. plannin, gand management.

GroWing in sophisticationc ,`- ,

Glistening riverfron t headquarters for the Gallup Organization, a new downtown home for Union Pacific and the sprawling Qwest Center and Arena are a few of the new additions that are making Omaha s metropolitanlandscape more metropolitan Five o Fortune a 50comanishea c .heddquarter within OPPD s service territory;'and 35 'mo manufacturmg plants lperate or service centers here OPPD isproud to serve their

,;'power needsmaU tlite photo by PaickDceytonehouseoiffor I' ;j. ,

us-t aS planned

-Our employees are partners inn the

-cost-managementprocess. They W hat-S bies t-for the familly -r :3 <-- 'ii~

<One f 2004's ifficult cost-cuttng'measures in the consoltiono uinderstand the bottom line is. the transmission'and distribution wrkcenters. As part of the'c'nsolidation,'the

..a , . ise- .O.PP.D; Irvington Centerfclosed, an'd its workers and. workload transferred to three otherf" ---< "

important because OPPD'sfinncial \ a'aservice rmetropitan centers.-'..:'..3 strength affects our livelihood. buit Ceinterwas neh horn'to many people who hadworked there for years. Some' -

. hom sin the area or had moved to be closer to work," said Vice President'--.8 They also zinderstand the process J Tim Burke, w- heids-th&eCust6omer Operatio'ns business unit.

includes mnking touigh'decisions." 'Al ongwith manylpersonal sacrificeAthere was:

.'..a great amount of work and adaptation

- Vice President and CFO involved with the consolidation.': -

aCharles N. Eldred -It was a tough decision to make and a challen'ging process to undtqake;_but our people

-r~eally rose to' the occasion."

"Saviings from this con-solidatioji a-re estimlated.,

. t$850,00 per year.

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Ahead of-thecudrte.

Tsunamis andterrosm. Consider the by using methane gas, a bpro'du t weight those words carry'today comparedI '--county landfill. i; to a few years ago. We are living and Elk City,' the "waste to watts" station - I...

working inunpredictable times. An event one of the largestirefiewable energy fad]ies

..occurs and, seemingly, in'the blink of an inNebraska -produced 26,739 megawal eye, the-world changes. The'September 11 . hours of electricity in 2004, enough to attacks prompted even stronger security

• measures and training at all OPPD

-facilities,-especially at the nuclear facity,i power approximately 2,000 average hon ror a year. That's a significant contrbuti to OPPD's renewable energy mix..

oI Invisibe Fort'CalhounStation'--.'.-

- : --^n Asapublic - - =- ....OPPD :: .: .- As "hard efficencies

.;-. power'company, faces distinct challenges and obligations A ha cy f a .-i copy' .fades and lgital techr ~es h-I

'.involving change. At all times, we needS ogy advances, OPPDisanid keeping pace an

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to protect our facilities and the energy they

-' ' mooving v efficiency service.

In 200 sul to te uh-undreds d of othousanids ua of . OPPD .min began installing wireless: network

.r .:." -. -supply whothedeend to on pow' ; j ust a's they its service centers, making work space

.-- ;. -people

.-- who deed on power, ]s ste ------

peopled.safer and more efficient. . -

depend on fo -_ Regional safety also will improve due to ]

________________ e~new 800 mezaheitz radio system design ed to seamlessly link OPPD with emergen

.-response organizations. And the ground-work has' been laid to give OPPD's field personnel access to real-time customer-'

information through Mobility, an adva 'n mobile computing system that wi l improve efficiencyjand lower the cost 'of customer service aiid  :

'service-restoiatioi.work.-

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Above, Energy Marketer Curt Wiliverding and shelter. We're also diligently pursuing markets excess poiver. OPPD has embarked on0 emerging technologies in order to serve the' 7 historicalprojects at Fort Calhoun Station. public at thi highest level.'

Among the many taking part in these efforts are, at right, nuclearpersonnel Terri Hennan, Sudesh Astrong energy mix -

Gambhi, Ron Undajonr, LaTonya Bennett and Adiverse energy mix means stability and Ken Henry. flexibility.That's why OPPD's energy

-portfolio includes coal, natural gas, nuclea:

.and a variet of renewables, including' Valley Station, a wind turbine facility, and Elk City Station, which'generates power 2

Whreeritflw z . 7,-I D F~uel cells are very quiet and have low T U.S.S Depatment o emissions. In the fltuhre, they may be installation and performance testing o f two fuel cell systems'at Offutt Air Force Base,'. used to supply power for something as

-home of the United States Strategic Commiid-

.OPPD installed and now.: opeate's anPd aintains the fuel 'clls; 1which pioduce large as a power plant or as small as a elec'tricity chemically, by converting natural g'as orother fuel into hydrogen,'then ,>. smoke detector."

i-co'mbining that with oxygen'.':Since ioc'mbustion isihvolved'in the generation processIfuel cellsare' w irtuallygemission-free; ' '

Vice President Adrian Minks OPPD's'experience in the operation and maintenance.of the'200-kilowatt fuel cell,>

[ at the 60,000-square-foot Lied Jungle in Omaha si Henry Doorly Zoo led to its being chosen to participate in the Offutt project.

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uProtctinsozr woi rid S OPPD's primary purpose isa noble one: facilities improve their ene'y efficiency Our nuclear divisions have had a

_rto provide people the power they'need to as well. -

p~reach their goals and live satisfying lives. Continuous com'missioning is an on- Particularlyhigh number of employees fulfilling that responsibility, we seek - going process that resolves energy.system called to dutty overseas. As a company, opportunities to serve not just the people, 'problems, improves comfort, optimizes t-but also their environment. That's'why we energy use and identifies retrofits for ' we view this not as an imposition, but Jhelp residential customers and businesses existing buildings and plant facilities. Since s an honor. It's a source ofpride."

@conserve energy. That's 'why we restore : its implementation' in 2003, continuous prairie grassland and create wetlands. And

• commissioning has saved Nebraska ' ' - Vice President Ross Ridenoure that's why we're involved with solar, 'wind businesses hundreds of thousands of X yand methane gas power, along with many dollars hand has-the ptential to 'save'them' other alternative energy and conservation millions; For its efforts, OPPD receiVes' the

.projects - . =benefits of reduced powr&demands and-To the people at OPPD who spend their strengthened bu'siness partnerships.

days teaching others to plant healthy trees :- l ine or build efficient homes, and to all OPPD Help o 7 emloyes, ho ive n te sae . Any questions you have

$environment as our customers, these.' aoteeg, edte 0'efforts seem perfectly, natural. his way :He is, .fter all -

OPPD's Energy.Advsr

.The win-win of . available to help cus

'continuous commissioning;-- tomers solve energy g After it helped fourbuildings achieve pr blem"s well beyon AEnergy Star status in 2004 througih the, thescope o yia u Rebuild America program, OPPD didn't :tomer serice questions

,stop.Through Continuous Commission-' 'This free service provides r ingsM, a program developed in conjunction ,'extravalue to ustomers and with the University of Nebraska.- Lincoln,; uhelps fulfill OPPD's pledge to -

SOPPD helped other customers with large' be "your energy partr" Emie Parra,manager of Planning &Analysis, Lthle bee anktebidE nag, C-D' k t Id :0_Z3-..

ain 00Ea- ";.D',r'.-i* - f

'trnmed to OPPDmid-year after spending L ttepant ontte prari 5 months of active duty in Iraq.

j Discoverers Lewis and Clark could not have imagined af uture where they could look' across a-field of prairie gra'ss and see a nuclear ptowerplant in'the background But thanks to the environmental efforts of OPPD and the'U.S Fish and Wildlife Servce, those passing by Fort Calhoun Station can glimpse into the past by enjoying the beauty of the 30-acre natural grassland,irestored to look much 'as'it did 200 years ago W d cation' branches; ot , -.  ; i - ' - -

Called'~a"utilitarian beauty_,by the Omaha World-ld, OPPD's'arboretum'spreads gSacross 26 public acres overed by more than 1,000:trees and shrubs from more than z 200 species.'Thearbor'etum includes an outdoor classroom aand various educational Adisplay'and demonstration areas 'including' a'simulated power line'construction area, where people can learn how'to plant "the right trees in theright places.

"To my'knowledge, no other'utility in the country has an'arboretum like'this said valed holinOPPD r supe'rvissorwho helped the 'aibret'6'r'fo avision 'to a lu d 'cOimmufiity~rfesou~rce...', .' ;I  ;,. P..'

1"The 'public enjoys and us'es the'pa'rk,' and we hope'the educ'atio6 it 'provides."

S increases 'otir territory'fsreliability safety beauty and conservation efforts.'

2004 OPPD Annuail Reporl 11

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It Arolling safety demonstration, paint- Reading, writing and radials "Notcoming to work doesn't even

,,splattered overalls and a checkered flag - Year one involved 12 high schools, two all tools OPPD used in 2004 to reach rallies and 13 student-built electric vehicles, enter my mind. I feel blessed to have customers and communities. . a some of which reached top speeds of what I have. I want to do my best.'

The RESPECT trailer hit the streets to 17 miles per hour. Year five involved more remind audiences that electric'safety is t than 60 schools, eight rallies and nearly - Employee Charlie Hembertt, everyone's conhern.:Along with sharing .', 100 vehicles, some of which reached top on working 23 years with no sick days safety tips, OPPD field employees presented >speeds of more than 35 miles per hour.

' emonstrations that reinforce how impor-< --:, OPPD's Power Drive program has grown Making inroads on diversity tant electric safety isin their profession.; ~ to become a statewide high school tradition OPPD is proud of its commitment to twelfth year,'a su'per crew" of .'-and one of the top programs of its type in diversity, including its affiliation with PPD, painters gave up a weekend to 4-i;tte country a shining example of cooper- INROADS, a national career development faceliftthe home 'of a neighbor in 'ation between business and education. organization that places talented youth in Jiieed.:And the checkered flags again' Hundreds of Power Drive students have business and industry, preparing them for

< tv'ed winning electric vehicles aaoss learned not just about physics, engineering corporate and community leadership.

hefinish line during'the rallies of- and energy, but also about teamwork, OPPD provided opportunities for six Power Drive. . .. perseverance and effort as its own reward. INROADS participants in 2004 and 28 total EThese activities demon- In addition, two participants each year since 1997. From this pool of college stu-

'<strate an idea ingrained 'I receive scholarships to assist them toward dents majoring in marketing, engineering, E

i the'OPPD culture, a career in automotive technology, computer science, business, accounting and that much of the power "'electronics, engineering or physics. other fields, several have been hired and are we provide has little to - contributing to OPPD's success.

w E .A . . do with ge ectriity .. i

~ H onored by o~thers; OP Dgoe ~fiull ,circle

'D."uring- the fall review by the Mid-Continent Ar~ea Poiwer Pool (MAPP),"ani orglanization create~d to

-safeguard the region's bulk electric system, independent auditors scored OPPD a perfect 100 percent for compliance with reliability regujations. OPPD managesp ore than 13,000 miles of electric lines in its 5,000-sq'uare-mile serviceterritory.'-"

Four times for tre I E-aaThe National Arbor Day Foundation, for the fourth-consecutive year, designatedOPPDas a-q Tree Line'USA Utility. I addition, n Tree City USAj th Nebraska Forest Service,

--the Nebraska Community Forestry Council and the Nebraska Statewide . . = . _

EIArboretum honored OPPD with their Utility' Aar'dforE A force for. growth

-.OPPD) received the Power in'the Partnership Award __

fothe Nebraska Diplomats, a statewide economic growt organization Ara businesses co iasat c the a la 11entl lEt of inexpensive, reliable power as a major reason for their expansion, relocatio'n or con-struction

-For he fourth year ina row, OPPD hlas received an awardfor T:D "HighestCustomner Satisfaction With ResidentialElectr!cServwe.,

Poier and Associates 2004 Eletic UnlyResid basedPow on a total of25,657 consume the sd vepw-jdpowercom I The responses.

eni'alCustmerSatsfaction StidyiMStu es, top entl21 Cus-d reiw elcic omais eensk d n S -

2004 OPPO Annual Reman 13

-- MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW OPPD isa fully integrated electric utility serving a 5,000-square-mile, 13-county region in eastern Nebraska. All corporate powers of OPPD are vested in a Board of Directors consisting of eight members representing specific areas of the service territory. OPPD generates revenues from a mix of retail sales, off-system sales and other sales of products and services. The economy of the service territory is expanding, and deregulation in Nebraska does not appear to be imminent at this time.

Corporate headquarters is located in Omaha, Nebraska, with generating plants, service centers and customer service offices X4 strategically located throughout the service territory.

Public power is a critical element in the energy future of this nation. Public power companies are directly accountable to the people they serve - not to private stockholders. Across the country, publicly owned utilities, like OPPD, continue to lead the way by providing reliable, low-cost energy with responsive service to their customer-owners. To ensure OPPD's customers reap the many benefits of public power, OPPD capitalizes on strong strategic planning, effective risk management practices and sound financial policies and business practices.

Due to diligent planning and cost-control efforts, OPPD has successfully held rates well below the national average. In 2004, a modest 3.1% general rate increase was implemented, the first in more than a decade. Even with this increase, OPPD's rates remain well below the national average. OPPD plans to continue to control costs and maximize the utilization of assets to maintain its price advantage.

As OPPD prepares for future energy needs for its customer-owners, it has several major construction projects under way, including the construction of the Nebraska City Station Unit 2 and the life-extension capital projects for the Fort Calhoun Station. With the significant capital expenditures devoted to these two generating plants over the next several years, it is critical to control costs and manage these projects to achieve the operating plan. Because of these projects, OPPD has implemented a capital prioritization process which provides additional perspective, oversight and control of OPPD's project management process. The process allocates financial resources efficiently while managing risks within a framework of solid, ethical business practices. With the magnitude of OPPD's planned capital expenditures program, it iscritical to efficiently allocate resources to projects that are economically sound and support OPPD's strategic objectives.

In order to manage risk, OPPD implemented an Enterprise Risk Management (ERM) program in 2004. ERM is a framework developed for identifying, quantifying, prioritizing and managing the significant risks of the company. By identifying and managing risk, OPPD can choose to eliminate or minimize the potential impact of risks or choose to accept and manage the risks. Being aware of the potential risks facing the company and managing them to support OPPD's strategic objectives and goals are essential elements of the ERM program.

Additional financial governance policies and procedures have been and continue to be implemented at OPPD to comply with the spirit of the Sarbanes-Oxley Act (Act) to ensure continued public trust in OPPD and to protect the interests of all of its stakeholders. As a public utility, OPPD is not required to comply with the Act, but the application of these requirements isa sound business practice and will be pursued where applicable.

-S Specific performance measures addressing safety, customer satisfaction and cost containment were established using a balanced scorecard approach to align employees around a consistent, understandable vision. Thanks to the contributions and teamwork of OPPD's employees, all of the corporate measures were exceeded for 2004. This success translates into benefits for OPPD's customer-owners and supports its main thing of exceeding customer expectations. As "your energy partner," OPPD will continue to work with its customer-owners to meet their energy needs reliably, affordably and enthusiastically. OPPD is committed to excellence and staying aheadof the curve.

The following unaudited Management's Discussion and Analysis should be read in conjunction with the financial statements and related notes. This document contains forward-looking statements based on OPPD's current plans.

14 2004 OPPO Annual Report

FINANCIAL POSITION AND RESULTS OF OPERATIONS The following summarizes OPPD's financial position at December 31 (inthousands).

Cnildussd h12bsC SMUt 2004 2003 Current Assets $ 251,107 $ 243,655 Capital Assets 1,991,543 1,913,721 Other Long-Term Assets 4555 471,163 Total Assets $2,698,055 $2,628,539 Current Liabilities $ 195,019 $ 159,792 Long-Term Liabilities 1,219,058 1,209,613 Total Liabilities 1,414,077 1,369,405 Equity 1,283,978 1,259,134 Total Liabilities and Equity $2,698,055 $2,628,539 The following summarizes OPPD's operating results for the years ended December 31 (inthousands).

Spera1 ng Results 2004 2003 2002 Operating Revenues $566,315 $573,074 $545,653 Operating Expenses (507,340) (507,040) (437,403)

Operating Income 58,975 66,034 108,250 Other Income 10,995 5,230 12,380 Interest Expense (45,126) (45,386) (40,009)

Net Income $ 24,844 $ 25,878 $ 80,621 Accounting Policy Changes Prior to 2004, off-system sales revenues included the total revenues from joint marketing activities, and purchased power ex-pense included the cost of the energy purchased for resale and the other utilities' share of profits from joint marketing activities.

Effective in 2004, only the profit from joint marketing activities is reported in off-system sales revenues, and purchased power expense includes only the expense related to OPPD's operations. There was no impact on net income from this change. Off-system sales revenues and purchased power expense were reclassified for 2003 and 2002 to conform to the 2004 presentation.

Payments received from customers for construction costs or contributions in aid of construction (CIAC) reduce the cost of utility plant assets. CIAC isrecorded as other income and offset by an expense in the same amount representing the recovery of plant costs. There was no impact on net income from this change. The income and related expense for CIAC were reclassified for 2003 and 2002 to conform to the 2004 presentation.

In 2002, OPPD completed a depreciation study which was implemented in 2003. In connection with the implementation of revised depreciation rates in 2003, OPPD changed its cost capitalization policies. The primary effect of these changes was to accelerate the recovery of these costs to the period in which they were incurred, rather than to defer recovery to future years.

These changes included a reduction in the level of support costs being allocated to utility plant and an increase in the size of property units and the thresholds for capital expenditures.

Operating Revenues The following chart, left, illustrates the composition of OPPD's operating revenues (inmillions). The following chart, right, illustrates the percentage share of revenues by customer class for 2004. Other revenues include proceeds from the sale of a bankruptcy claim, connection charges, customers' forfeited discounts, rent from electric property and transmission wheeling fees.

Operating Revenues Operating Revenues - 2004

$600 Commercial Industrial fug 0, _ 29%14%

$400 Street &Highway Lighting

$200 2%

l t _Off-System Residential 18%

2004 2003 2002 34% Other 3%

Eletail Sales NOft-System Sales

• Other Revenues 2004 OPPo Annual Report 15 'C-0o2 is

2004 Compared to 2003 Total operating revenues were $566,315,000 for 2004, a decrease of $6,759,000 or 1.2% from 2003 operating revenues of

$573,074,000.

• Operating revenues from retail sales were reduced for additions to the Debt Retirement Reserve of $55,000,000 and

$35,000,000 for 2004 and 2003, respectively. The decrease in 2004 total operating revenues was primarily due to the larger addition to the Debt Retirement Reserve.

• Prior to the reductions for the Debt Retirement Reserve, revenues from retail sales were $496,450,000 for 2004, an increase of $8,712,000 or 1.8% over 2003 revenues of $487,738,000. The increase in retail sales revenues was primarily due to the implementation of a 3.1% general rate increase on January 1,2004. The gain in revenues from the general rate increase was partially offset by a reduction in residential energy sales.

• Revenues from off-system sales were $109,523,000 for 2004, an increase of $728,000 or 0.7% over 2003 revenues of

$108,795,000. The increase in revenues was due mainly to higher wholesale market prices.

• Other electric revenues were $15,342,000 for 2004, an increase of $3,801,000 or 32.9% over 2003 revenues of $11,541,000.

The increase was due mainly to the sale of a bankruptcy claim.

2003 Compared to 2002 Total operating revenues were $573,074,000 for 2003, an increase of $27,421,000 or 5.0% over 2002 operating revenues of

$545,653,000.

• Operating revenues from retail sales were reduced for additions to the Debt Retirement Reserve of $35,000,000 for 2003 and to the Rate Stabilization Reserve of $10,500,000 for 2002.

• Prior to the reductions for the Debt Retirement Reserve and Rate Stabilization Reserve, revenues from retail sales were

$487,738,000 for 2003, an increase of $8,827,000 or 1.8% over 2002 revenues of $478,911,000. The increase in retail sales was due mainly to a 3.2% increase in energy sales to retail customers.

• Revenues from off-system sales were $108,795,000 for 2003, an increase of $42,910,000 or 65.1% over 2002 revenues of

$65,885,000. The increase in revenues was due to a combination of greater energy sales and higher wholesale market prices.

Operating Expenses The following chart, left, illustrates the composition of OPPD's operating expenses (inmillions). The following chart, right, illustrates the percentage share of operating expenses by expense classification for 2004.

Operating Expenses Operating Expenses -2004 Customer &Sales

$600 -- e-6%

$60 Transmission & Administrative &General

$400 K_-Distribution  %

6% Maintenance

$200 Fuel 17% Depreciation 1717 17%

2004 2003 2002 Production Payme nts in Lieu 18% Purchased of Taxes

• Operations &

• Depreciation

• Payments in Lieu Power 4%

Maintenance of Taxes 6%

2004 Compared to 2003 Total operating expenses were $507,340,000 for 2004, a slight increase over 2003 operating expenses of $507,040,000.

• Fuel expense decreased $2,525,000 from 2003 primarily due to a larger share of nuclear generation to total generation in 2004, as nuclear fuel costs less than fossil fuels. Nuclear generation was lower in 2003 due to the production outage.

• Purchased power expense decreased $4,468,000 from 2003 due mainly to additional purchases required in 2003 for the production outage at the Fort Calhoun Station. Amajor planned production outage began in February 2005 at the Fort Calhoun Station.

• Production expense increased $3,745,000 over last year mainly because of additional operation expenses related to the increased generation and costs incurred for production outages.

• Transmission expense was $2,536,000 lower than in 2003 due to the write-off in 2003 of deferred charges related to OPPD's participation in the formation of a for-profit transmission company and lower transmission wheeling fees as a result of the decrease in purchased power.

16 2004 OPPr Annual Report I

• Administrative and general expense was $6,323,000 higher than in 2003 primarily due to increased employer funding requirements for the retirement plan. Effective with the 2004 actuarial valuation, the investment return (discount rate) assumption was reduced from 8.5% to 8.4% and ad-hoc cost-of-living increases granted by the Board of Directors to retirees and beneficiaries are expensed in the year granted.

a Maintenance expense decreased $3,272,000 from 2003 primarily due to higher maintenance costs at the Fort Calhoun Station in 2003 related to the production outage and a reduction in expenditures for tree trimming resulting from favorable contract negotiations.

2003 Compared to 2002 Total operating expenses were $507,040,000 for 2003, an increase of $69,637,000 or 15.9% over 2002 operating expenses of

$437,403,000.

• Fuel expense increased $11,668,000 over 2002 due to a combination of increased generation, higher natural gas prices and greater consumption of fossil fuels. The Fort Calhoun Station had a production outage in 2003.

a Purchased power expense was $7,370,000 higher than in 2002 due to additional purchases required in 2003 for the production outage at the Fort Calhoun Station.

• Production expense increased $6,878,000 over 2002 due mainly to additional costs related to increased generation and the Fort Calhoun Station production outage completed in 2003.

XTransmission expense was $2,892,000 higher than in 2002 partly due to awrite-off of deferred charges related to OPPD's participation in the formation of a for-profit transmission company which was disbanded in 2003.

• Customer service and information expense was $7,479,000 higher than in 2002 due to the write-off of prior years' costs for the customer energy conservation program and a change in accounting policy in 2003 to expense these costs as they are incurred.

• Administrative and general expense was $19,676,000 higher than in 2002 primarily due to increased employer contributions required for the retirement plan and increased health insurance costs.

• Maintenance expense increased $6,355,000 over 2002 due to additional production outage costs and changes in the capitalization policy.

• Depreciation and amortization expense increased $5,833,000 over 2002 due to the inclusion of amortization expense for intangible assets and depreciation on the new Cass County Station.

Other Income Other income was $10,995,000 in 2004, an increase of $5,765,000 over 2003 other income of $5,230,000. In 2003, costs of

$6,225,000 related to the Fort Calhoun Station power uprate project were charged to expense because the project was cancelled due to revised load forecasts and the planned construction of the Nebraska City Station Unit 2.

OPPD offers a variety of products and services, which provide value both to the customer and OPPD. These offerings include such products as Performance Contracting, Energy Information Services, Residential and Commercial Surge Protection, Energy Solutions and Ground Source Heat Pumps. Offering these products and services is in line with OPPD's Strategic Plan and provides opportunities to build strong relationships with its customers by helping them efficiently meet their energy needs.

• Income from products and services was $1,012,000 for 2004, an increase of $578,000 over 2003 income of $434,000.

This was primarily due to greater revenues from sales of Energy Solutions products and marketing contract activities.

• Income from products and services was $434,000 for 2003, an increase of $92,000 over 2002 income of $342,000.

Interest ExWense Interest expense was $45,126,000 for 2004, a slight decrease from 2003 interest expense of $45,386,000, due to a decrease in interest expense on revenue bonds as aresult of the lower principal balance. This decrease was partially offset by an increase in interest expense for commercial paper.

Interest expense was $45,386,000 for 2003, an increase of $5,377,000 or 13.4% over 2002 interest expense of $40,009,000.

The increase was due to a combination of increased long-term debt and the accelerated amortization of losses on extinguished debt. In 2003, OPPD made a decision to accelerate the write-off of certain costs related to losses on extinguished debt by charging these costs to expense over three years rather than over the life of the issues. These costs relate to bonds that have been repaid with operating funds that are no longer on OPPD's balance sheet.

Net Income Net income for 2004, 2003 and 2002, prior to revenue reductions for the Debt Retirement Reserve and Rate Stabilization Reserve, was $79,844,000, $60,878,000 and $91,121,000, respectively. Operating Revenues reported for 2004, 2003 and 2002 were reduced by $55,000,000, $35,000,000 and $10,500,000, respectively, for additions made to the Debt Retirement Reserve (2004 and 2003) and the Rate Stabilization Reserve (2002).

2004 OPPD Annual Report 17

Number of Customers OPPD has a stable customer base, which continues to grow at a steady rate. The economy of OPPD's service territory is expanding, which is expected to support continued growth of OPPD's customer base.

• OPPD served an average of 315,868 customers in 2004, an increase of 6,153 or 2.0% over the average number of customers for 2003 of 309,715.

• OPPD served an average of 309,715 customers in 2003, an increase of 4,679 or 1.5% over the average number of customers for 2002 of 305,036.

The following table shows the average number of customers by customer class.

Nner u Custners 2004 03 2002 Residential1 275,854 270,579 266,464 Commerciall 39,482 38,525 37,807 Industrial1 135 127 117 Street and Highway Lighting2 352 436 594 Off-System 45 48 54 Total 315,868 309,715 305,036 l The number of customers was based on the number of premises or points of service.

2 The number of customers was based on the number of accounts for these unmetered services. The reduction does not represent a loss of customers, but was due to a consolidation of accounts to facilitate customer billing.

Cents per kWh OPPD is sensitive to the rates it charges and strives to maximize the public power advantage of low-cost energy for its customers.

a Residential customers paid an average of 6.95, 6.73 and 6.81 cents per kWh in 2004, 2003 and 2002, respectively. The national average residential cents per kWh according to the Energy Information Administration, U.S. Department of Energy, was 8.97 for 2004 (preliminary year-to-date as of November 30) and 8.70 and 8.46 cents per kWh for 2003 and 2002, respectively.

a Retail customers paid an average of 5.48, 5.39 and 5.46 cents per kWh in 2004, 2003 and 2002, respectively. The national average retail cents per kWh according to the Energy Information Administration, U.S. Department of Energy, was 7.59 for 2004 (preliminary year-to-date as of November 30) and 7.42 and 7.21 cents per kWh for 2003 and 2002, respectively. The following charts show OPPD's average residential and retail cents per kWh compared to the national average.

Average Residential Cents per kWh Average Retail Cents per kWh 2004 2003 2002 2004 2003 2002 U OPPD U National Average U OPPD U National Average OPPD implemented a 3.1% general rate increase effective January 1, 2004, to help fund the capital program. This was OPPD's first rate increase since January 1992. Even with this increase, OPPD's rates continue to remain well below the national average.

18 2004 OPPO Annual Report C c

CASH AND LIQUIDITY OPPD has a high degree of liquidity as a result of maintaining strong credit ratings, utilizing its Commercial Paper Program, executing additional credit agreements, implementing cost-containment programs and investing in projects that provide returns in excess of OPPD's cost of capital.

OPPD relies on bond offerings as a significant source of liquidity for capital requirements not provided for with cash from operations. OPPD's ability to obtain required capital at low rates will be critical in executing its overall business plan to support the significant planned capital program expenditures.

Financing Afinancing plan has been developed to fund OPPD's capital program expenditures. This plan identifies the optimal debt mix to ensure liquidity needs are met and OPPD's strong financial position is maintained at the lowest cost possible. OPPD plans to issue revenue bonds in 2005. The proceeds will be used for corporate purposes of OPPD, including reimbursing previously incurred capital expenditures, paying the costs and expenses incurred in the issuance of the bonds and depositing an amount in the Reserve Account as required by Resolution No. 1788.

In January 2005, OPPD executed a $350,000,000 Revolving Credit Agreement (RCA) with JPMorgan Chase Bank, N.A.,

as Agent. The RCA is a facility that allows for revolving loans during a five-year period from January 3, 2005, through December 31, 2009, which may be converted to term loans of up to three years. The facility allows OPPD to draw as needed, subject to customary conditions, to support its capital program. Atotal of six banks (including three banks with offices in Omaha) are part of the facility. No amounts are currently outstanding under the RCA.

In February 2005, OPPD executed a one-year $100,000,000 Fixed Rate Promissory Note with JPMorgan Chase Bank, N.A.,

with an optional one-year renewal. The Note is an uncommitted line of credit that OPPD can access as needed to support its capital program. No amounts are currently outstanding under the Note.

OPPD did not issue any additional debt in 2004. In May 2003, OPPD issued $140,000,000 of bonds, which were sold at interest rates ranging from 1.40% to 4.75%, depending on the term. The proceeds from the sale of the bonds were used for the capital program, which included expenditures for the completion of the Cass County Station.

The following chart, left, illustrates OPPD's debt mix (in millions). The following chart, right, shows OPPD's declining amount of current indebtedness (in millions) and indicates OPPD has sufficient capacity to issue debt to fund the construction of the Nebraska City Station Unit 2 and the life-extension capital projects for the Fort Calhoun Station.

Debt Mix Electric SstemRvenue Bonds Outstanding and Annual Debt Service

$1,000___

$800 $800-

$600

$400 $400

$200 2004 2003 2002 ,1' ,s 1

• Electric Revenue Minibonds and Subordinated Obligation

• Electric Revenue Notes - Commercial Paper Series

• Electric System Revenue Bonds 2004 OPPO Annual Report 19

Ratings OPPD's excellent bond ratings allow it to borrow funds at low rates. Both quantitative (financial strength) and qualitative (business and operating characteristics) factors are considered by the bond-rating agencies in establishing a company's credit rating. The ratings received from Standard &Poor's Rating Services (S&P) and Moody's Investors Service (Moody's),

independent bond-rating agencies for the latest Electric System Revenue Bond issue, were among the highest ratings given to public power districts and indicate the agencies' assessment of OPPD's strong ability to pay interest and principal on its debt.

The following ratings at December 31, 2004, are indicative of OPPD's solid financial strength.

Electric System Commercial Revenue Bonds Minibonds' Paper S&P AA AAA A-1+

Moody's Aa2 Aaa P-1 Paytnent of tihe principal and interest on tihe Minibonds Mien tlne isinsured by afinancial naranty bond insnrance policy.

Cash Flows OPPD experienced a net decrease in cash of $9,288,000 for 2004, a net increase in cash of $24,531,000 for 2003 and a net decrease in cash of $18,780,000 for 2002. The following table illustrates the cash flows by activities for the years ended December 31 (inthousands).

Cashnows . 2004 2003 2002 Cash Flows from Operating Activities $227,038 $193,303 $183,361 Cash Flows from Capital and Financing Activities (257,402) (126,443) (183,128)

Cash Flows from Investing Activities 21,076 (42,329) (19,013)

Increase (Decrease) in Cash and Cash Equivalents $ (9,288) $ 24,531 5(18,780)

Cash flows from operating activities consist of transactions involving changes incurrent assets, current liabilities and other transactions that affect operating income.

• Cash flows for 2004 increased $33,735,000 over 2003 primarily due to an increase incash receipts for retail operating revenues and a decrease incash payments for operating expenses. Cash payments for operating expenses were lower in 2004 than 2003 because of the production outage at the Fort Calhoun Station in2003.

• Cash flows for 2003 increased $9,942,000 over 2002 primarily due to an increase incash receipts for off-system sales revenues. This change was partially offset by an increase incash payments to suppliers for operating expenses because of the production outage at the Fort Calhoun Station.

Cash flows from capital and related financing activities consist of transactions involving long-term debt and the acquisition and construction of capital assets.

• Cash flows used for 2004 increased $130,959,000 over 2003. Most of this variance was due to $140,000,000 inproceeds from the issuance of revenue bonds in2003. The remaining variance was due to fewer payments in 2004 for capital assets and nuclear fuel.

• Cash flows used for 2003 decreased $56,685,000 from 2002 due mainly to less payments in2003 for capital assets. This was primarily due to more construction expenditures in2002 for the Cass County Station than in 2003.

Cash flows from investing activities consist of transactions involving purchases and maturities of investment securities and interest income.

• Cash flows for 2004 increased $63,405,000 over 2003 due to lower purchases of investment securities in2004.

• Cash flows used for 2003 increased $23,316,000 over 2002 due to more purchases of investment securities for special purpose funds.

20 2004 OPPO Annual Renort

Debt Service Coverage OPPD is required by its bond covenants to maintain a debt service coverage of 1.40 times. The following table reflects the calculation of debt service coverage, indicating OPPD's solid ability to make required debt service payments (inthousands).

-effti-fi 7ove- g 7 Operating revenuesI $566,315 $573,074 $545,653 Operation and maintenance expenses (401,778) (404,040) (339,750)

Payments in lieu of taxes (18,591) (18,067) (18,553)

Net operating revenues 145,946 150,967 187,350 Investment income of related reserve fund 1,093 1,049 1,411 Net receipts $147,039 $152,016 $188,761 Total debt service 2 $ 86,975 $ 78,839 $ 74,688 Debt service coverage 1.69 1.92 2.52 Operatingrevenues ivere reduced by $55,000,000 and $35,000,000 for additions to the Debt Retirement Reserve for 2004 and 2003, respectively. Operatingrevenues were reduced by $10,500,000 for additions to the Rate Stabilization Reserve for 2002.

2 Total debt service for Resolution No. 1788 Bonds isaccruedon a calendar-yearbasis similar to the computation of net receipts. Interest finded from bond proceeds, when applicable, isnot included in total debt service.

Debt Ratio The debt ratio isa measure of financial solvency and represents the share of OPPD's debt to its total capitalization (debt and equity). OPPD's debt ratio was 41.0% and 42.7% as of December 31, 2004 and 2003, respectively. The 2004 debt ratio was more favorable than 2003 due to a decrease in debt from principal repayments and the additional equity from 2004 net income.

Retirement Plan OPPD has a defined benefit Retirement Plan (Plan). Under this type of plan, the employee's benefit payments are calculated using a specific formula outlined in the Plan and are based on an employee's age, length of service and covered payroll.

To ensure funds will be available to pay future benefits, the pension actuary projects Plan assets and the liability for future benefits. The actuary uses this information to determine the current annual amount that must be contributed by employees and OPPD in order to meet projected Plan benefits. Aportion of this annual required contribution is paid by participating OPPD employees, who contribute 4.0% of their covered payroll to the Plan with the remaining portion paid by OPPD.

Prior to 2004, the Plan's funding policy was based on the Employee Retirement Income Security Act (ERISA) minimum contribution amount. The use of ERISA's funding policy can result in large annual differences in funding requirements; whereas, the use of a funding policy consistent with governmental accounting standards results in more stable annual funding requirements. OPPD's Plan is a governmental plan and is not subject to the ERISA minimum funding requirements.

Effective January 1, 2004, the funding policy was changed to follow governmental accounting standards rather than ERISA to reduce the volatility of annual pension contributions.

For the past four years, changes were made to the assumptions used in the actuarial valuations. These assumptions were consistent with market conditions. The assumption used for the investment return (discount rate) has decreased annually to 8.4% in 2004 from 9.0% in 2001. Even with these changes in assumptions, OPPD's funding for the Plan still exceeded the present value of accrued plan benefits based on the valuation as of January 1,2004.

OPPD contributed $22,907,000, $17,505,000 and $5,625,000 in the years 2004, 2003 and 2002, respectively. OPPD has budgeted $24,900,000 for employer Plan contributions in 2005. The net assets of the Plan available for benefits increased to

$549,264,000 at December 31, 2004, from $508,132,000 at December 31, 2003, due to additional contributions and favorable market conditions.

Risk Management Practices Negotiating power marketing and fuel purchase activities are within the normal course of OPPD's business. Risks associated with power marketing and fuel contracting transactions are identified, quantified and managed within a risk management control framework that is consistent with OPPD's overall tolerance for risk. Fuel expense represents a significant portion of OPPD's generation costs and affects its ability to market competitively priced power. ARisk Management Committee is responsible for identifying, measuring and mitigating various risk exposures. Periodic reports are made to the Board of Directors regarding these activities. Inaddition, OPPD has implemented an Enterprise Risk Management program intended to identify, quantify, prioritize and manage significant risks of the company.

2004 DPPD Annual Report 21

OPPD competes in the wholesale marketplace with other electric utilities and power marketers for off-system sales. To successfully compete, OPPD must be able to offer energy at competitive prices and obtain transmission services. Energy market prices may fluctuate substantially in a short period of time due to changes in the demand and supply of electricity. In the energy trading and marketing business, it isanticipated that these operations will continue to experience competition. In addition, there are other risks, such as counterparty credit risks, which are monitored closely on an ongoing basis.

ADebt Retirement Reserve was established in 2003 to help manage the long-term risks associated with the significant additional capital expenditures and related debt issuances planned in future years. OPPD will use this funded reserve to meet future challenges in retiring debt and maintaining adequate debt service coverage ratios. An additional $55,000,000 was reserved in 2004, which brought the balance to $90,000,000 at December 31, 2004.

ARate Stabilization Reserve was established in 1999 to help OPPD maintain stable customer electric rates. This funded reserve isintended to minimize the impact on rates from significant unforeseen occurrences, such as major storm damage or the unscheduled outage of a major generating unit during a period of high replacement power costs. The most recent addition to the reserve was $10,500,000 in 2002. This reserve balance was $32,000,000 at December 31, 2004.

OPPD promotes solid, ethical business practices and the highest standards in the reporting and disclosure of financial information. The Sarbanes-Oxley Act (Act) is intended to strengthen corporate governance of publicly traded companies. One of the most significant requirements of the Act pertains to management's documentation and assessment of internal controls.

OPPD management is conducting an assessment of internal controls for significant business processes that impact financial reporting. This assessment includes documenting procedures, risks and controls for these processes and assessing the effectiveness and operation of the internal controls. Inaddition, OPPD has contracted with a third-party vendor to provide a process for the receipt and retention of employee concerns regarding accounting and auditing matters.

Other Reserves OPPD also maintains other reserves to recognize potential liabilities that arise in the normal course of business.

• The Unicollectible Receivables Resenre is established for estimated bad debts from both retail and off-system sales. Accounts receivable isreported net of this reserve.

• The Workers' Compensation and Public Liability Resenes are established for the estimated liability for current workers' compensation and public liability cases.

• The Incurred but not Presented Resene isan insurance reserve that isrequired by law since OPPD isself-insured for health care costs. The reserve isbased on health insurance claims that have been incurred but not yet presented for payment.

CAPITAL RESOURCES Generating Capability OPPD owns and operates eight generating stations, Capabilltv [NW] %of Total seven of which have a maximum summer net Coal capability of 2,540.5 MW. (The net capability of the Nebraska City Station 646.0 Valley Station wind turbine isnot accredited.) North Omaha Station 534.2 Additionally, OPPD operates leased generation of Subtotal Coal 1,180.2 46.3 6.6 MW for a total capability of 2,547.1 MW. OPPD's Nuclear power requirements are provided from these Fort Calhoun Station 476.0 18.7 generating stations, from leased generation and from purchases of power. The table, right, illustrates the OlN/aturall Gas diverse fuel mix and maximum summer net accredited Cass County Station 320.0 capability (inMNWV) of OPPD's generating facilities. Jones Street Station 118.4 North Omaha Station 128.6 i Sarpy County Station 314.3 Subtotal Oil/Natural Gas 881.3 34.6 Other Elk City Station (landfill-gas) 3.0 0.1 Leased Generation L 6.6 0.3 Total 2,547.1 100.0 22 2004 UPPO Annual Report

The following chart, left, illustrates OPPD's growing system peak load for the past three years, along with a projection for 2005 (inMW), indicating that these increasing loads can be met by current generating capability. The 2003 increase in generating capability was due to the completion of the Cass County Station. The following chart, right, represents the diversity of OPPD's generating capability by fuel type (inMW).

Generating Capability and System Peak Load INWI Generating Capability 1MW) 2,600 2,500 3,000 2,400 2,500 2,300 2,000 2,200 1,500 2,100 1,000 2,000 500 1,900 2005 2004 2003 2002 ECoal

• Nuclear

• Oil/Natural Gas

• Generating Capability

• Peak Load Capital Program OPPD continually evaluates electric system requirements and makes long-range recommendations for capital expenditures necessary to serve the growing load requirements with a reliable and economical power supply. The following table shows OPPD's actual capital program expenditures for 2004, 2003 and 2002 and projected expenditures for 2005 and 2006 (in millions). OPPD finances its capital program with revenues from operations, financing proceeds, investment income and cash on hand.

rjleeted ALthal WaIt Pogrum 2006 2005 2004 2003 2002 Transmission and distribution plant $ 54.6 $ 44.8 $ 51.8 $ 57.4 $ 83.2 General plant 15.4 20.0 23.8 39.6 22.1 Production plant 56.9 38.2 32.1 37.5 58.0 Additional power supply 391.2 204.1 58.4 37.4 70.1 Total $518.1 $307.1 $166.1 $171.9 $233.4 Additional power supply expenditures include a second coal-fired power plant at the Nebraska City Station site and the life-extension capital projects for the Fort Calhoun Station.

a OPPD iscontinuing progress toward the construction of Nebraska City Station Unit 2.The engineer, procure and construct contract is expected to be addressed by the Board of Directors in April 2005. Construction isscheduled to be completed by May 2009. The Nebraska City Station Unit 2 is expected to have a net capacity of approximately 663 MW.

OPPD plans to utilize half of the plant's capacity. OPPD has secured 40-year contracts with seven public power and municipal utilities for the remaining half. OPPD will own the entire plant and will build, operate and maintain the plant. The projected amounts include 100% of the construction costs for Nebraska City Station Unit 2.Construction costs will be recovered from the participants for their portion of the plant's capacity. These participants are Falls City, Nebraska, Utilities; City of Grand Island, Nebraska, Utilities Department; City of Independence, Missouri, Power &Light Department; Missouri Joint Municipal Electric Utility Commission; Nebraska City, Nebraska, Utilities; Nebraska Public Power District; and Central Minnesota Municipal Power Agency.

• OPPD has continued work on several major modifications related to the life-extension capital projects for the Fort Calhoun Station, including the replacement of the current steam generator and several related projects. The major work is planned to be completed in the scheduled 2006 production outage.

2004 OPPO Annual Report 23 CO0 EE,~

FACTORS AFFECTING OPPO AND THE ELECTRIC UTILITY INDUSTRY GENERALLY OPPD and the electric industry continue to be affected by a number of factors which could impact the competitiveness and financial condition of all electric utilities.

Central Interstate Low-Level Radioactive Waste Compact Under the federal Low-Level Radioactive Waste Policy Act, the state of Nebraska joined the states of Arkansas, Kansas, Louisiana and Oklahoma to form the Compact for the purpose of providing a low-level radioactive waste (LLRW) disposal facility for member states. The Compact created the Central Interstate LLR\V Commission to carry out the goals of the Compact. In 1998, the site-specific license application to the Nebraska Departments of Environmental Quality and Health was denied. Plaintiffs (including OPPD), which are owners and operators of nuclear power generating units within the Compact region, and which have provided funding for the activities of the Commission, filed suit against the state of Nebraska in federal court.

The Commission subsequently, with the court's approval, became a plaintiff with the utilities. Inlate 2001, OPPD withdrew from this lawsuit but has continued to monitor recovery of its share of expenses through the Commission's claim. In 2002, a federal district court awarded the Commission $151,000,000 in damages, including prejudgment interest. The state of Nebraska appealed this judgment. In February 2004, the Eighth Circuit Court of Appeals upheld this judgment. InAugust 2004, the Commission and the State entered into asettlement agreement by which the State agreed to pay the Commission

$140,541,000 in four equal annual installments beginning August 1,2005. OPPD has expended approximately $12,100,000 to fund the activities of the Commission and has notified the Commission of its claim with respect to funds collected by the Commission. However, no agreement has been executed between OPPD and the Commission regarding this settlement.

High-Level Nuclear Waste Repository Under the federal Nuclear Waste Disposal Act of 1982, the federal government assumed responsibility for the permanent disposal of spent nuclear fuel. The Department of Energy facility isnot expected to be operational until at least 2010. OPPD remains responsible for the safe storage of spent nuclear fuel until the federal government takes delivery. In 1994, OPPD completed a re-rack project at the Fort Calhoun Station that will provide spent-fuel storage through 2005. InFebruary 2004, OPPD's Board of Directors approved the purchase of a dry-cask storage system. This new system will provide adequate spent-fuel storage capacity for continued operation of the station to the year 2033. Construction of the dry-cask storage facility isunder way and is planned to be completed in 2005. Ten casks are expected to be loaded with fuel assemblies and stored in the facility in 2006.

Competitive Environment in Nebraska During the 2000 session, the Nebraska Legislature enacted Legislative Bill 901 (L.B. 901), which implemented recommendations to determine whether retail competition would be beneficial for Nebraska ratepayers. L.B. 901 directs the preparation of an annual report for the Governor and Legislature which monitors the conditions in the electric industry that may indicate whether retail competition would be beneficial for Nebraska's citizens. These conditions are as follows:

• Whether a viable regional transmission organization and adequate transmission exist in Nebraska or in a region that includes Nebraska.

• Whether a viable wholesale electricity market exists in a region that includes Nebraska.

• To what extent retail rates have been unbundled in Nebraska.

• Acomparison of Nebraska's wholesale electricity prices to the prices in the region.

• Any other information the Nebraska Power Review Board believes to be beneficial to the Governor, the Legislature and Nebraska's citizens when considering whether retail electric competition would be beneficial.

The conditions have not been met based on the findings from the latest annual report published in October 2004. Four states have suspended or repealed retail choice since January 2001.

-rI 24 2004 OPPOAnnual Report

Environmental Issues OPPD and other electric utilities are subject to numerous current and proposed environmental regulations in the normal course of their business. OPPD continues to both monitor and influence - to the extent possible - the effects of proposed legislation and regulations, some of which could have a material financial effect on OPPD and most electric utilities.

Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates.

These judgments, in and of themselves, could materially impact the financial statements and disclosures based on varying assumptions, which may be appropriate to use. Inaddition, the financial and operating environment also may have a significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even ifthe nature of the accounting policies has not changed.

The following is a list of accounting policies that are significant to the portrayal of OPPD's financial condition and results of operation, and require management's most difficult, subjective or complex judgments. Each of these has a higher likelihood of resulting in materially different reported amounts under different conditions or using different assumptions.

Accounting Policies iudgments/Uncertalnties Affecting Application Regulatory Mechanisms and External regulatory requirements Cost Recovery- (SFAS No. 71) *Anticipated future regulatory decisions and their impact

.I I I . . . ., . I. J.,

i I}

Nuclear Plant Decommissioning . Costs of future decommissioning

• Availability of facilities for waste disposal

• Approved methods for waste disposal=:

• Useful life of nuclear power plant Environmental Issues Retirement Plan s

Approved methods for cleanup Governmental regulations and standards

• Changes due to assumptions used incomputing the actuarial liability, including expected rate II of return on Plan assets -

Unbilled Revenue - Estimates for customer energy use -

Uncollectible Receivables

• Economic conditions affecting customers

SUMMARY

OF THE FINANCIAL STATEMENTS The financial statements, related notes and Management's Discussion and Analysis provide information about OPPD's financial position and activities. The Balance Sheets present OPPD's assets, liabilities and equity as of December 31, 2004 and 2003, with current and long-term portions of assets and liabilities separately identified. The Statements of Revenues, Expenses and Changes in Equity present OPPD's operating results and changes in equity for the three years ended December 31, 2004. The Statements of Cash Flows provide information about the flow of cash within OPPD by activities for the three years ended December 31, 2004. The Notes to Financial Statements provide additional detailed information.

The basic financial statements, notes, and Management's Discussion and Analysis are designed to provide a general overview of OPPD's finances. Questions concerning any of the information provided in this report should be directed to Investor Relations, 402-636-3286.

2004 OPPO Annual Report 25

Report of Management The management of OPPD isresponsible for the preparation of the following financial statements and for their integrity and objectivity. These financial statements conform to generally accepted accounting principles and, where required, include amounts which represent management's best judgments and estimates. The Company's management also prepared the other information in this Annual Report and isresponsible for its accuracy and consistency with the financial statements.

To fulfill its responsibility, management maintains a strong internal control structure, supported by formal policies and procedures that are communicated throughout OPPD. Management also maintains a staff of internal auditors who evaluate the adequacy of and investigate the adherence to these controls, policies and procedures. OPPD is deeply committed to conducting business with integrity, in accordance with the highest ethical standards, and in compliance with all applicable laws, rules and regulations. OPPD has adopted a Code of Ethics for the Senior Executive and Financial Officers and the Controller, stating our responsibilities and standards for professional and

, ethical conduct.

Our independent public accountants have audited the financial statements and have rendered an unqualified opinion as to the statements' fairness of presentation, in all material respects, in conformity with generally accepted accounting principles. During the audit, they obtained an understanding of OPPD's internal control structure and performed tests and other procedures to the extent required by generally accepted auditing standards.

The Board of Directors pursues its oversight with respect to OPPD's financial statements through the Audit Committee, which iscomprised solely of non-management directors. The committee meets periodically with the independent public accountants, internal auditors and management to ensure that all are properly discharging their responsibilities. The committee approves the scope of the annual audit and reviews the recommendations the

• independent public accountants have for improving the internal control structure. The Board of Directors, on the recommendation of the Audit Committee, engages the independent public accountants who have unrestricted access to the Audit Committee.

XV. Gary Gates Charles N.Eldred President and Chief Executive Officer Vice President and Chief Financial Officer 26 2004 OFPD Annual Report

Independent Auditors' Report Board of Directors Omaha Public Power District We have audited the accompanying balance sheets of the Omaha Public Power District (OPPD) as of December 31, 2004 and 2003, and the related statements of revenues, expenses and changes in equity and of cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of OPPD's management. Our responsibility isto express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of OPPD's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures inthe respective financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Inour opinion, such financial statements present fairly, in all material respects, the financial position of the Omaha Public Power District as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

The Management's Discussion and Analysis isnot a required part of the basic financial statements, but is supplementary information required by the Governmental Accounting Standards Board. This supplementary information isthe responsibility of OPPD's management. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit such information, and we do not express an opinion on it.

Inaccordance with GovernmentAuditing Standards, we have also issued our report dated March 17, 2005, on our consideration of OPPD's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report isto describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report isan integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

DELOITTE &TOUCHE LLP Omaha, Nebraska March 17, 2005 2004 OPPO Annual Report 27

l.

Balance Sheets as of December 31,2004 and 2003 ASSETS 2004 2003 (thousands)

UTILITY PLANT - at cost (Note 10)

Electric plant .......................... $...................

3,336,493 $3,196,552 Less accumulated depreciation ........................................ 1,372,366 1,311,130 Electric plant - net ............................................. 1,964,127 1,885,422 Nuclear fuel -at amortized cost ....................................... 27,416 28,299 Total utility plant - net ............................................. 1,991,543 1,913,721 SPECIAL PURPOSE FUNDS -primarily at fair value (Notes 3and 4)

Construction fund............................................. 61,597 117,697 Electric system revenue bond fund -net of current portion ................. 31,435 34,291 Segregated fund -debt retirement ....................... .............. 35,000 Segregated fund -rate stabilization ..................... ............... 32,000 32,000 Segregated fund - other.............................................. 21,241 20,620 Decommissioning funds ............................................. 249,299 240,533 Total special purpose funds ......................................... 430,572 445,141 CURRENT ASSETS Cash and cash equivalents (Note 4).................................... 28,060 37,348 Electric system revenue bond fund -current portion ......... ............. 64,538 56,960 Accounts receivable - net ............................................ 72,907 72,912 Fossil fuels - at average cost .......................................... 18,993 17,804 Materials and supplies -at average cost ................................. 60,410 52,580 Other ............................................. 6,199 6,051 Total current assets................................................ 251,107 243,655 DEFERRED CHARGES (Note 5).24,833 26,022 TOTAL .$2,698,055 $2,628,539 See notes to financial statements 28 2004 OFPD Annual Report

LIABILITIES -. s2004 2OO3 (thousands) -

LONG-TERNI DEBT (Note 2)

Electric system revenue bonds -net of current portion Serial bonds, 1.40% to 5.50% due annually from 2005 to 2024 ............ S 533,290 $ 589,395 Term bonds, 4.25% to 5.50% due annually from 2011 to 2018 ................ 89,920 89,920 Total electric system revenue bonds ........................... 623,210 679,315 Electric revenue notes -commercial paper series ........................... 150,000 150,000 Electric revenue minibonds...................................... 61,612 60,563 Subordinated obligation -net of currrent portion............................ 2,889 3,092 Total .............................................................. 837,711 892,970 Unamortized discounts and premiums .................................... 1,440 1,407 Unamortized loss on refunded debt ........................................ (16,923) (19,260)

Total long-term debt - net............................................ 822,228 875,117 COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)

LIABILITIES PAYABLE FROM SEGREGATED FUNDS (Notes 3 and 9).... 140,558 85,005 CURRENT LIABILITIES .. I1 Electric system revenue bonds -current portion (Note 2)..................... 56,105 46,815 Subordinated obligation -current portion (Note 2) ........................... 204 187 Accounts payable ....................................................... 64,588 57,820 Accrued payments in lieu of taxes ......................................... 17,579 17,190 Accrued interest ........................................................ 14,803 15,654 Accrued payroll ......................................................... 17,678 16,169

-- I Accrued production outage costs .......................................... 17,416 Other ................................................................. 6,646 5,957 Total current liabilities. ...................................... 195,019 159,792 OTHER LIABILITIES Decommissioning costs ............................................. 249,299 240,533 Other (Note 8)................................................... 6,973 8,958 Total other liabilities ............................................ 256,272 249,491 EQUITY Invested in capital assets, net of related debt........................... 1,174,603 1,109,299 Restricted ........................................................ 54,115 45,350 Unrestricted ...................................................... 55,260 104,485 Total equity....................................... 1,283,978 1,259,134 TOTAL .......................................................... $2,698,055 $2,628,539 2004 OPPD Annual Report 29

Statements of Revenues, Expenses and Changes inEquity for the Three Years Ended December 31,2004 2004 2003 2002 (thousands)

OPERATING REVENUES l Realsae.

~~Retail sales ...................................... . . . $ 41450 441,545,73 6,1 $ 452,738 $ 468,411 Off-system sales ..................................... 109,523 108,795 65,885 Other electric revenues ................................... 15,342 11,541 11,357 Total operating revenues ...................... ........ 566,315 573,074 545,653 OPERATING EXPENSES Operations Fuel ......................................... 85,864 88,389 76,721 Purchased power...................................... 29,283 33,751 26,381 Production .91,496 87,751 80,873 Transmission .4,564 7,100 4,208 Distribution .24,237 24,891 21,935 Customer accounts .................................... 15,817 15,119 16,103 l Customer service and information .16,976 16,549 9,070 Administrative and general.............................. 74,061 67,738 48,062 Maintenance . ..................................... 59,480 62,752 56,397 Total operations and maintenance .401,778 404,040 339,750 Depreciation and amortization .86,971 84,933 79,100 Payments in lieu of taxes .18,591 18,067 18,553 Total operating expenses .507,340 507,04 437,403 OPERATING INCOME .58,975 66,034 108,250 OTHER INCOME (EXPENSES)

Contributions in aid of construction ........................ 12,006 8,161 5,716

• Reduction of plant costs recovered through contributions in aid of construction .................................. (12,006) (8,161) (5,716)

Interest income -all funds ................................ 15,768 15,366 17,756 Operating funds -net change in fair value ......... .......... (992) (957) 26 Decommissioning funds -net change in fair value ............. (2,083) (437) 50 Decommissioning interest and change in fair value transfer ..... (8,766) (10,186) (12,364) l Allowances for funds used ................................ 5,340 6,040 5,806

• Products and services - net ................................ 1,012 434 342 i Other -net (Note 12) .................................... 716 (503) 764 Total other income - net ............................. 10,995 5,230 12,380 INTEREST EXPENSE ................................... 45,126 45,386 40,009 NET INCOME ..................................... 24,844 25,878 80,621 EQUITY, BEGINNING OF YEAR .............. ........... 1,259,134 1,233,256 1,152,635 EQUITY, END OF YEAR ............................... S.1,283,978 $1,259,134 $1,233,256 See notes to financial statemnents 30 2004 OPPOAnnual Report

Statements of Cash Flows for Ihe Three Years Ended December 31,2004 2004 2003 2002 (thnoisnds)

I,... ,: , 1-~.... ...

CASH FLOWS FROM OPERATING ACTIVITIES Cash received from retail customers ................................ $517 ',944 $504,626 $497,355 Cash received from off-system customers ............................ 113 ,834 117,149 68,085 Cash paid to operations and maintenance suppliers.................... (243 ,613) (262,665) (238,626)

Cash paid to off-system suppliers.................................. (377,975) (42,346) (28,824)

Cash paid to employees .......................................... (104 ,949) (105,088) (96,390)

Cash paid for in lieu of taxes and other taxes ......................... (18,203) (18,373) (18,239)

Net cash provided from operating activities .......................... 227 ,038 193,303 183,361 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from long-term borrowings.............................. 140,000 146,050 Principal reduction of long-term debt ............................... (47,168) (44,590) (43,968)

Interest paid on long-term debt.................................... (37,481) (34,608) (39,043)

Acquisition and construction of capital assets......................... (160,430) (170,681) (231,596)

Acquisition of nuclear fuel ........................................ (12,323) (16,564) (14,571)

Net cash used for capital and related financing activities................ (257,402) (126,443) (183,128)

CASH FLOWS FROM INVESTING ACTIVITIES Purchase of special purpose funds - investment securities. (418,764) (560,148) (556,807) L -':I Maturities and sales of special purpose funds - investment securities. 444,124 519,045 533,836 Net change in electric system revenue bond fund -current. (7,578) (5,086) (1,027)

Interest income on investments. 3,294 3,860 4,985 Net cash provided from (used for) investing activities. 21,076 (42,329) (19,013)

INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS. (9,288) 24,531 (18,780)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . 37,348 12,817 31,597 ;r- .

CASH AND CASH EQUIVALENTS, END OF YEAR . S28,060 $37,348 $ 12,817 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES Operating income. ...................................... $ 58,975 $66,034 $108,250 Adjustments to reconcile operating income to net cash provided from operating activities Depreciation and amortizaton. 86,971 84,933 79,100 Amortization of nuclear fuel . 13,300 11,582 13,472 Change in other liabilities . 51,541 37,182 6,062 Other . (1,992) 18,513 (10,881)

Changes in current assets and liabilities Accounts receivable. 5 (9,421) (2,722)

Fossil fuels. (1,189) (4,001) (3,046)

Materials and supplies. (7,830) 430 (5,198)

Accounts payable...................................... 6,768 (1,342) (3,088)

Accrued payments in lieu of taxes. 389 (307) 314 Accrued payroll . 1,509 1,516 1,623 Accrued production outage costs. 17,416 (7,146) (4,645)

Other . 1,175 (4,6703 4,120 Net cash provided from operating activities . $227,038 $193,303 $183,361 See notes to financial statements 2004 OPPO Annual Report 31

Notes to Financial Statements for the Three Years Ended December 31,2004

1. SUMM}(ARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business - The Omaha Public Power District (OPPD), a political subdivision of the state of Nebraska, is a public utility engaged in the generation, transmission and distribution of electric power and energy and other related activities. The Board of Directors is authorized to establish rates. OPPD is generally not liable for federal and state income or ad valorem taxes on property; however, payments in lieu of taxes are made to various local governments.

Basis of Accounting - The financial statements of OPPD are presented in accordance with generally accepted accounting principles for proprietary funds of governmental entities. Accounting records are maintained generally in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and all applicable pronouncements of the Governmental Accounting Standards Board (GASB). In accordance with GASB Statement No. 20, Accounting and FinancialReporting for ProprietaryFunds and Other Governmental Entities That Use ProprietaryFund Accounting, OPPD has elected not to follow the pronouncements of the Financial Accounting Standards Board (FASB) issued after November 30, 1989.

OPPD applies the accounting policies established in Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types ofRegulation (SFAS No. 71). In general, SFAS No. 71 permits an entity with cost-based rates to include costs in a period other than the period in which the costs would be charged to expense by an unregulated entity if it is probable that these costs will be recovered through the rates charged customers.

SEAS No. 71 also permits an entity to defer revenues by recognizing liabilities to cover future expenditures.

If,as a result of changes in regulation or competition, OPPD's ability to recover these assets and liabilities would not be assured, then pursuant to SFAS No. 101, Accounting for the DiscontinuationofApplication of SFAS No. 71 (SEAS No. 101) and SFAS No. 90, Regulated Enterprises- Accounting forAbandomnents and Disallowances of Plant Costs (SEAS No. 90), OPPD would be required to write off or write down such regulatory assets and liabilities, unless some form of transition cost recovery continues through established rates. In addition, OPPD would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets.

Revenue Recognition - Meters are read and bills are rendered on a cycle basis. Revenues earned after meters are read are estimated and accrued as unbilled revenues at the end of each accounting period. Accounts receivable includes $24,166,000 and $25,299,000 in unbilled revenues as of December 31, 2004 and 2003, respectively.

OPPD acts as an agent in the buying and selling of power for other public power utilities through joint marketing agreements and receives an agreed-upon percentage share of the net profits from the energy marketed under these agreements. Prior to 2004, off-system sales revenues included the total revenues from joint marketing activities, and purchased power expense included the cost of the energy purchased for resale and the other utilities' share of profits from joint marketing activities. Effective in 2004, only the profit from joint marketing activities is reported in off-system sales revenues, and purchased power expense includes only the expense related to OPPD's operations. Off-system sales revenues and purchased power expense were reclassified for 2003 and 2002 for this change to conform to the 2004 presentation.

Cash and Cash Equivalents - OPPD considers highly liquid investments of the Revenue Fund purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable - An estimate is made for the reserve for uncollectible accounts, based on an analysis of the aging of accounts receivable and historical write-offs net of recoveries, for retail customers. Additional amounts may be included based on the credit risks of significant parties. Included in the reserve is the greater of S5,000,000 or an estimate based on the previous year's accounts receivable for off-system sales customers. Accounts receivable was reported net of the reserve for uncollectible accounts of $5,565,000 and $5,781,000 as of December 31, 2004 and 2003, respectively.

Utility Plant - The costs of property additions, replacements of units of property and betterments are charged to electric plant. Maintenance and replacement of minor items are charged to operating expenses. Costs of depreciable units of electric plant retired are eliminated from electric plant accounts by charges, less salvage plus removal expenses, to the accumulated depreciation account.

In 2002, OPPD completed a depreciation study which was implemented in 2003. In connection with the 32 2004 OPPI Annual leaort

implementation of new depreciation rates in 2003, OPPD revised its capitalization policy. The primary effect of these changes was to accelerate the recovery of these costs to the period in which they were incurred, rather than to defer recovery to future years. Changes to OPPD's capitalization policy include the establishment of larger property units, the implementation of higher dollar thresholds for capitalization and a reduction in the capitalization of support costs.

Electric plant includes both tangible and intangible assets. Intangible assets include the costs of software and licenses.

In 2003, the Nuclear Regulatory Commission (NRC) approved OPPD's application for license renewal of an additional 20 years for the Fort Calhoun Station until 2033. Accordingly, costs associated with license renewal of $5,824,000 were included as an intangible asset in electric plant in 2003 and will be amortized through the life of the license.

Electric plant includes construction work in progress of $230,745,000 and $142,278,000 as of December 31, 2004 and 2003, respectively. Electric plant activity for 2004 was as follows (in thousands):

2003 Additions Retirements 2004 Electric plant $3,196,552 $170,165 $(30,224) $3,336,493 Nuclear fuel 48,444 12,417 - 60,861 Less accumulated depreciation and amortization 1,331,275 104,779 (30,243) 1,405,811 Total $1,913,721 $ 77,803 $ 19 $1,991,543 Allowances for funds used, approximating OPPD's current weighted average cost of debt, are capitalized as a component of the cost of utility plant. These allowances were computed at 4.1%, 4.1% and 3.2% for both construction work in progress and nuclear fuel for the years ended December 31, 2004, 2003 and 2002, respectively.

Contributions in Aid of Construction (CIAC) - OPPD receives payments from customers for construction costs, primarily relating to the expansion of OPPD's distribution facilities. OPPD follows FERC guidelines in the recording of CIAC, which directs that utility plant assets are reduced by the amount of contributions received toward the construction of utility plant. In order to comply with GASB Statement No. 33, Accounting and FinancialReporting for Nonexchange Transactions, while continuing to follow FERC guidelines, CIAC is recorded as other income and offset by an expense in the same amount representing the recovery of plant costs. The income and related expense for CIAC were reclassified for 2003 and 2002 to conform to the 2004 presentation.

Depreciation and Amortization - Depreciation for most assets is computed on the straight-line basis at rates based on the estimated useful lives of the various classes of property. Depreciation expense has averaged approximately 2.9%, 3.0% and 3.0% of depreciable property for the years ended December 31, 2004, 2003 and 2002, respectively. New depreciation rates were implemented in 2003 in accordance with the recommendations from the latest depreciation study.

Amortization of nuclear fuel is based upon the cost thereof, which is prorated by fuel assembly in accordance with the thermal energy that each assembly produces.

Intangible assets are amortized over their expected useful life. Amortization of intangible assets included with depreciation and amortization expense in the financial statements was $3,015,000 and $2,496,000 for the years ended December 31, 2004 and 2003, respectively. Prior to 2003, intangible assets were amortized to various accounts.

The amount of amortization to various accounts was $2,825,000 for the year ended December 31, 2002.

In 2004, OPPD's Board of Directors approved a change in the depreciation estimate for Fort Calhoun production plant assets to 2043, which is 10 years beyond the term of Fort Calhoun Station's current license. Aregulatory asset was established for the difference in depreciation expense resulting from the use of the estimated economic life of the asset versus the license term. The reduction in depreciation expense will be recorded each year as a regulatory asset in deferred charges until 2033. The regulatory asset will be reduced through the recognition of depreciation expense over the assets' remaining economic life in the years 2034 through 2043. This regulatory asset was $4,423,000 as of December 31, 2004.

Nuclear Fuel Disposal Costs - Permanent disposal of spent nuclear fuel is the responsibility of the Federal Government under an agreement entered into with the United States Department of Energy (DOE). Under the agreement, OPPD is subject to a fee of one mill per kilowatt-hour on net electricity generated and sold from the Fort Calhoun Station. The spent nuclear fuel disposal costs are included in OPPD's nuclear fuel amortization and are 2004 OPPO Annual Report 33

Notes to Financial Statements for the Three Years Ended December 31,2004 collected from customers as part of fuel costs. Nuclear fuel disposal costs were $3,489,000, $3,748,000 and

$3,629,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

OPPD's contract required the Federal Government to begin accepting high-level nuclear waste by January 1998; however, the DOE's facility is not expected to be operational until at least 2010. In May 1998, the U.S. Court of Appeals confirmed the DOE's statutory obligation to accept spent fuel by 1998, but rejected the request that a move-fuel order be issued. In March 2001, OPPD along with a number of other utilities filed suit against the DOE in the United States Court of Federal Claims alleging breach of contract.

In February 2004, OPPD's Board of Directors approved the purchase of a dry-cask storage system. This new system will provide adequate spent-fuel storage capacity for continued operation of the Fort Calhoun Station to the year 2033. Construction of the dry-cask storage facility is under way and is planned to be completed in 2005.

Nuclear Decommissioning - OPPD's Board of Directors has approved the collection of nuclear decommissioning costs based on an independent engineering study of the costs to decommission the Fort Calhoun Station. The decommissioning estimates (which exceed the NRC's minimum funding requirements) totaled $503,492,000,

$465,332,000 and $400,445,000 for the fiscal years ending June 30, 2005, 2004 and 2003, respectively. The 20-year license renewal was reflected in the estimates for the fiscal years ending June 30, 2005 and 2004. Currently, a funding surplus is projected in the year 2055, which is the expected final year for decommissioning expenditures based on the current license life. However, as this projection is for the distant future and the decommissioning estimate is highly sensitive to changes in cost estimates, inflation rates and fund earnings projections, no changes have been made to the funding status. No funding was necessary for decommissioning expense for each of the fiscal years ending June 30, 2005, 2004 and 2003.

Regulatory Assets and Liabilities - OPPD is regulated by Nebraska State Law and the NRC. As a result, OPPD is subject to the provisions of SFAS No. 71. Under this statement, regulatory assets are deferred expenses which are expected to be recovered over some future period, and regulatory liabilities are reductions in earnings (or costs recovered) to cover future expenditures.

Regulatory assets, which are included in deferred charges (Note 5), consist of deferred depreciation expense for Fort Calhoun's production assets, deferred customer energy conservation costs and unamortized loss on extinguished debt. In 2004, OPPD's Board of Directors approved a change in the depreciation estimate for Fort Calhoun production plant assets to 2043, which is 10 years beyond the term of the current license. The balance of deferred depreciation expense was $4,423,000 as of December 31, 2004. In2003, OPPD's Board of Directors approved the write-off of deferred expenditures for customer energy conservation programs and unamortized loss on extinguished debt over a three-year period. The balance of deferred expenditures for customer energy conservation programs was $4,279,000 and $8,557,000 as of December 31, 2004 and 2003, respectively. The balance of unamortized loss on extinguished debt, included in deferred financing costs, was $4,548,000 and

$9,095,000 as of December 31, 2004 and 2003, respectively.

Regulatory liabilities, which are primarily included in liabilities payable from segregated funds, consist of reserves for debt retirement, rate stabilization and uncollectible accounts from off-system sales. The Debt Retirement Reserve was established for the retirement of outstanding debt and to help maintain debt service coverage ratios at appropriate levels. The Rate Stabilization Reserve was established to help maintain stability in OPPD's long-term rate structure. The reserve for

[I uncollectible accounts from off-system sales, which is included as a reduction to accounts receivable, was established to recognize a loss contingency for bad debts from off-system sales customers. Retail sales were reduced for the establishment of and/or addition to regulatory liabilities reserves by $55,000,000, $35,000,000 and $10,500,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The balance of the Debt Retirement Reserve was $90,000,000 and

$35,000,000 as of December 31, 2004 and 2003, respectively. The balance of the Rate Stabilization Reserve was $32,000,000 as of December 31, 2004 and 2003. The balance of the reserve for uncollectible accounts from off-system sales was $5,000,000 as of December 31, 2004 and 2003.

Accrued Production Outage Costs - For major planned production outages, estimated incremental operations and maintenance expenses of $5,000,000 or more are accrued prior to the outage. A major planned production

1 outage began in February 2005 at the Fort Calhoun Station. The balance of accrued production outage costs was

$17,416,000 short-term at December 31, 2004, and $2,398,000 long-term at December 31, 2003.

34 2004 OPPD Annual Report

Natural Gas Inventories and Contracts - Natural gas is one of the fuels used by OPPD in the generation of electricity. Prior to the placement of the Cass County Station in commercial operation in 2003, natural gas for all of OPPD's generation needs was obtained from a local distribution company (LDC). OPPD is not able to use a LDC for fuel purchases for this station. As a result, natural gas inventories are maintained for the Cass County Station, and the weighted average cost of natural gas consumed is used to expense natural gas from inventories.

OPPD is exposed to market price fluctuations on its purchases of natural gas. To protect itself, OPPD enters into futures contracts and purchases options to manage the risk of volatility in the market price of gas on anticipated purchase transactions. Gains or losses on futures contracts are offset against the cost of natural gas. As a result of hedging contracts and the exercise of options, there was a reduction in fuel expense of $670,000 and $28,000 for the years ended December 31, 2004 and 2003, respectively. OPPD did not enter into any natural gas hedging contracts for 2002.

At December 31, 2004, OPPD had outstanding natural gas futures contracts and options. The futures contracts are with the New York Mercantile Exchange and are based on the notional amount of 300,000 mmBtu of natural gas. These contracts will expire in the months of July and August of 2006 through 2008 and had an unrealized loss of $86,000 based on quoted market prices at December 31, 2004. The options were purchased from Tenaska Marketing Ventures for $195,000 and are for the right, but not the obligation, to buy 300,000 mmBtu of natural gas (150,000 mmBtu per month) for July and August 2005 at a contract price of $6.90 adjusted by the actual basis plus $0.10 per mmBtu. The fair market value of these options based on quoted market prices was $129,000 at December 31, 2004.

Equity - Equity is reported in three separate components on the Balance Sheets. Invested in capital assets, net of related debt, is the equity share attributable to net utility plant assets reduced by outstanding related debt. Restricted equity represents net assets with usage restraints imposed by law or through debt covenants. Unrestricted equity represents net assets that are neither restricted nor invested in capital assets.

Fair Value of financial Instruments - Unless otherwise specified, the carrying amount of financial instruments approximates their fair value.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements - OPPD implemented GASB Statement No. 40, Depositand Investment Risk Disclosure, in 2004, one year earlier than required by GASB. This statement amends Statement No. 3, Deposits with FinancialInstitutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements, and requires the disclosure of information on interest rate risks, credit risks and investment policies. These disclosures are in Note 4.

In November 2003, GASB issued Statement No. 42, Accounting and FinancialReportingfor Impairment of CapitalAssets and InsuranceRecoveries. This statement requires the effects of capital asset impairments to be recorded in the financial statements when the impairment occurs. Guidance is also provided for the appropriate treatment of insurance recoveries. This statement is effective for fiscal years beginning after December 15, 2004, and will be implemented by OPPD in 2005. This guidance is not expected to impact financial results.

InJune 2004, GASB issued Statement No. 45, Accounting and FinancialReporting by Employers for Postemployment Benefits Other Than Pensions. This statement requires the accounting for the annual cost of other postemployment benefits and the related outstanding liability using an actuarial approach similar to pensions. OPPD currently recognizes this expense on a pay-as-you-go basis. OPPD has not completed its assessment of the impact of the adoption of this statement, which is required in 2007. However, it is expected this accounting change will increase expense and result in an additional liability on the balance sheet.

Reclassifications - Certain amounts in the prior year's financial statements have been reclassified to conform to the 2004 presentation. These reclassifications had no effect on net income.

2004 OPPrAnnual BePort 35

1.

Notes to Financial Statements for the Three Years Ended December 31,2004

2. LONG-TERIM DEBT OPPD utilizes proceeds of debt issues primarily in financing its construction program. Long-term debt activity, including the current portion, for 2004 was as follows (in thousands):

2003 Additions Reductions 2004 Electric system revenue bonds $726,130 S - S(46,815) S679,315 Electric revenue notes - commercial paper series 150,000 - - 150,000 Electric revenue minibonds 60,563 1,216 (167) 61,612 Subordinated obligation 3,29- (186) 3,093 Total $939,972 S1,216 $(47,168) S894,020 Electric System Revenue Bonds - Electric System Revenue Bond payments are as follows (in thousands):

Principal Interest OPPD's bond indenture provides for certain restrictions, the 0 $most significant of which are:

Additional bonds may not be issued unless estimated net i2006 58,200 27,637 receipts (as defined) for each future year will equal or exceed 2007 57,140 25,004 1.4 times the debt service on all bonds outstanding, including 2008 56,620 22,362 the additional bonds being issued or to be issued in the case of 2009 32,450 20,279 a power plant (as defined) being financed in increments.

2010-2014 197,830 74,983 In any three-year period, at least 7.5% of general business

_ ,2015-2019 155,970 28,315 income (as defined) must be spent for replacements, renewals 2020-2024 65,000 7,995 or additions to the electric system. Any deficiency isto be

_ Tspent within two years thereafter for such purposes or, if not so spent, is to be used for bond retirements in advance of maturity.

The average borrowing rates were 4.6%, 4.6% and 4.9% for the years ended December 31, 2004, 2003 and 2002, respectively.

The following Electric System Revenue Bonds, with outstanding principal amounts of $231,855,000 and $238,725,000 as of December 31, 2004 and 2003, respectively, were legally defeased: 1986 Series A,1992 Series Band 1993 Series B Term Bonds. The 1993 Series C 2017 Term and 1993 Series D2013 and 2016 Term Bonds were called in 2003. Defeased bonds are funded by Government securities deposited by OPPD in irrevocable escrow accounts. Accordingly, the bonds and the related Government securities escrow accounts have been removed from OPPD's balance sheets.

Electric Revenue Notes - Commercial Paper Series - OPPD has a Commercial Paper Program supported by a credit agreement for $150,000,000 which expires on October 1,2007. OPPD intends to refinance this obligation before its expiration on a long-term basis. The average borrowing rates were 1.2%, 1.0% and 1.4% for the years ended December 31, 2004, 2003 and 2002, respectively.

Revolving Credit Agreement - In January 2005, OPPD executed a $350,000,000 Revolving Credit Agreement (RCA) with JPMorgan Chase Bank, N.A., as Agent. The RCA is a facility that allows for revolving loans during a five-year

• period from January 3, 2005, through December 31, 2009, which may be converted to term loans of up to three years.

The facility allows OPPD to draw as needed, subject to customary conditions, to support its capital program. Atotal of six banks (including three banks with offices in Omaha) are part of the facility. No amounts are currently outstanding under the RCA.

Promissory Note - In February 2005, OPPD executed a one-year $100,000,000 Fixed Rate Promissory Note (Note) with JPMorgan Chase Bank, N.A., with an optional one-year renewal. The Note is an uncommitted line of credit that OPPD can access as needed to support its capital program. No amounts are currently outstanding under the Note.

36 2004 OPPD Annual Report

Electric Revenue Minibonds - The minibonds consist of current interest-bearing and capital appreciation minibonds, which are payable on a -2004 2003 -

parity with OPPD's Electric Revenue Principal -

Notes - Commercial Paper Series, both of 1992 minibonds, due 2007 (6.00%o) $ 9,192 $ 9,252:

which are subordinated to the Electric 1993 minibonds, due 2008 (5.35%) 9,327 I .9,353 System Revenue Bonds. The outstanding 1994 minibonds, due 2009 (5.95%) -9,532 9,560 balances at December 31 were as shown 2001 minibonds, due 2021 (5.05%) 24,855' 24907' Z-Subtotal . 52,906- - 53,072 at right (inthousands): Accreted interest on capital appreciation minibonds . 7,491 Total - $61,612 $60,563 Subordinated Obligation - The subordinated obligation is payable in annual installments of $481,815, including interest at 9.0%, through 2014.

Fair Value Disclosure - The aggregate 2004 - '2003 carrying amount and fair value of OPPD's Cri F Carr.'ng - Fair long-term debt, including current portion, Amount Value ' Amount . Value at December 31 were as shown at right (in thousands): $895,460 ;' $936,748 $941,379 2 $990,520 The estimated fair value amounts were determined using rates that are currently available for issuance of debt with similar credit ratings and maturities. As market interest rates decline in relation to the issuer's outstanding debt, the fair value of outstanding debt financial instruments with fixed interest rates and maturities will tend to rise.

Conversely, as market interest rates increase, the fair value of outstanding debt financial instruments will tend to decline. Fair value will normally approximate carrying amount as the debt financial instrument nears its maturity Il _

l_

! Bed date. The use of different market assumptions may have an effect on the estimated fair value amount. Accordingly, ir N-l _ '-..

the estimates presented herein are not necessarily indicative of the amounts that bondholders could realize in a current market exchange. 4I' SD .

sX,,(

3. SPECIAL PURPOSE FUNDS E

Special purpose funds of OPPD are as follows: E '""hi.'

Construction Fund - This fund is to be used for capital improvements, additions and betterments to and _.

extensions of OPPD's electric system, or for payment of principal and interest on Electric System Revenue Bonds. in Electric System Revenue Bond Fund - This fund is to be used for the retirement of revenue bonds and the .,..^

r .^. ,s payment of the related interest. SH; '_' A; t g _;-

Segregated Fund - Debt Retirement - This fund is to be used for the retirement of outstanding debt and to help  ;--'i',

maintain debt service coverage ratios at appropriate levels. The balance was $35,000,000 as of December 31, 2004. '. r "

In January 2005, an additional $55,000,000 was funded, which brought the balance to $90,000,000. .

Segregated Fund - Rate Stabilization - This fund is to be used to help stabilize rates over future periods ,0,'_1 through the transfer of funds to operations as necessary for significant unforeseen occurrences, such as major storm

E-- 1 damage or unscheduled outages. The balance of the Rate Stabilization Fund was $32,000,000 as of December 31, 2004 and 2003. ' -'1

, ax, *,

Segregated Fund - Other - This fund represents K '. - 2004 -2003: .< s assets held for payment of customer deposits, A. . 1 refundable advances, certain other liabilities and funds lSegregated Fund - self-insurance $ 5,488 $ 6,363'. A,.... .-. !

Segregated Fund - other V 15,753; 14,257 Fs I set aside as part of OPPD's self-insured health insurance plans (see Note 9). The balances of the funds at Total $21,241- $20,620: An.!

b ' > 0; ; ' ;*777= ,i ,3 December 31 were as shown at right (in thousands):

Decommissioning Funds - These funds are for the cost to decommission the Fort Calhoun Station when its A, t:'

operating license expires. The Decommissioning Funds are held by outside trustees in compliance with the decommissioning funding plans approved by OPPD's Board of Directors (see Note 1). The 1990 Plan was established in accordance with NRC regulations, for the purpose of discharging OPPD's obligation to decommission the Fort Calhoun Station. The 1992 Plan was established to retain funds in excess of NRC minimum funding requirements 2004 OPPD Annual RePort 37

Notes to Financial Statements for the Three Years Ended December 31,2004 based on an independent engineering study 2004 2003 which indicated that decommissioning costs Decommissioning Trust - 1990 Plan $191,218 $184,611 would exceed the NRC minimum requirements. Decommissioning Trust - 1992 Plan 58,081 55,922 The balances of the funds at December 31 were Total $249,299 $240,533 as shown at right (in thousands):

4. DEPOSITS AND INVESTMENTS Investments - OPPD has investments Weighted Average in Cash Equivalents and Special Investment Type Fair Value Maturity (Years)

Purpose Funds. Fair values were Money markets $ 570 0.1 determined based on quotes received U.S. agencies 414,270 1.5 from the trustees' market valuation Corporate bonds 1,645 4.0 service. The weighted average maturity Mutual funds 103658 was based on the face value for Total $520,143 investments. As of December 31, 2004, OPPD investments were as shown at Portfolio weighted average maturity 1.3 right (inthousands):

I Interest Rate Risk - OPPD's investment in relatively short-term securities, as evidenced by its portfolio weighted average maturity of 1.3 years at December 31, 2004, reduces interest rate risk. In addition, OPPD is a buy-and-hold I investor, which minimizes interest rate risk.

Credit Risk - OPPD's investment policy is to comply with OPPD's bond covenants and Nebraska state statutes for governmental entities, which limit investments to investment grade fixed income obligations. The weighted average credit quality of the investments held by OPPD at December 31, 2004, was rated AAA by Standard &Poor's Rating Services and Aaa by Moody's Investors Service.

Custodial Credit Risk - OPPD's bank deposits were entirely insured or collateralized with securities held by OPPD or by its agent in OPPD's name at December 31, 2004. OPPD delivers all of its investment securities under I' contractual trust agreements.

5. DEFERRED CHARGES I The composition of deferred 2004 2003 charges at December 31 was as Deferred financing costs $ 7,408 $12,318 Deferred customer energy conservation costs 4,279 8,557 shown at right (in thousands): Deferred depreciation expense 4,423 Other 8,723 5,147 Total $24,833 $26,022

6. RETIREMENT PLAN Plan Description - Substantially all employees are covered by OPPD's Retirement Plan (Plan). It is a single-employer defined benefit plan which provides retirement and death benefits to Plan members and beneficiaries.

Generally, employees at the normal retirement age of 65 are entitled to annual pension benefits equal to 2.25% of their average compensation (as defined) times years of credited service (as defined). The Plan was established and may be amended under the direction of OPPD's Board of Directors and is administered by OPPD.

Funding Policy - Employees contribute 4.0% of their covered payroll to the Plan. OPPD is obligated to contribute the balance of the funds needed on an actuarially determined basis.

Prior to January 1,2004, the Plan's funding policy was based on the Employee Retirement Income Security Act (ERISA) minimum contribution amount. The Plan is a governmental plan as defined in Internal Revenue Code (IRC) Section 414(d), and as such the Plan is not subject to the ERISA minimum funding requirements as defined in IRC Section 412. The continued use of ERISA funding standards would result in volatile contributions to the Plan 38 2004 OPPD Annual Report

(

whereas the use of funding policies within the parameters of GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, would result in more stable contributions to the Plan. Accordingly, on January 1, 2004, OPPD discontinued the use of ERISA standards and adopted a new funding policy within the parameters of GASB Statement No. 27.

GASB Statement No. 27 requires employers to follow an actuarial approach for the accounting and reporting of the annual cost of pension benefits and the related outstanding liability. This approach requires paying to a pension plan an amount that is expected to be sufficient, if invested now, to finance the benefits of employees during their retirement. Pension benefits are a part of the compensation that employees earn each year, even though these -

benefits are not paid until after employment has ended. Therefore, the cost of these future benefits is recognized while the employee is still working.

With the change in the Plan's funding policy, the valuation cost method was changed from the Attained Age Frozen Initial Liability (AAFIL) method to the Entry Age Normal (EAN) method. The EAN method is one of the acceptable methods under GASB Statement No. 27. The previous valuation cost method did not compute the Actuarial Accrued Liability (AAL). Accordingly, the Present Value of Accrued Plan Benefits (PVAPB) was disclosed instead of the AAL.

The PVAPB isthe present value of benefits based on compensation and service to that date. That is, the amount the Plan owed participants if the Plan were frozen on the valuation date. Whereas, the AAL is the present value of retirement benefits, adjusted for assumptions for future increases in compensation and service, attributable to past accounting periods.

To maintain consistency in disclosure with prior years, the PVAPB is presented in the table below based on the actuarial valuation as of January 1:

Present Value of Over Funded PVAPB

[

Actuarial Value Accrued Plan Over as a Percentage of of Assets Benefits (PVAPB) Funded PVAPB Funded Ratio Covered Payroll Covered Payroll (a) { l) (alb) f (

(thousands) (thousands) 2004 $545,565 $515,351 $ 30,214 105.9% $145,094 20.8%

2003 $519,723 $476,951 $ 42,772 109.0% $136,488 31.3%

2002 $544,184 $425,267 $118,917 128.0% $126,587 93.9%

The AAL, calculated using the EAN method, as of January 1, 2004, is presented in the table below. The funded ratio using the AAL was lower than from using the PVAPB because the AAL method assumes future compensation and service increases. The annual contributions to the Plan consist of the cost for the current period plus a portion of the unfunded accrued liability. The Plan information as of January 1 based on the actuarial valuation using the EAN method was as follows:

Unfunded UAL Actuarial Value Actuarial Accrued Accrued Percentage of of Assets LHability (AAL) Liability (UAL) Funded Ratio Covered Payroll Covered Payroll (a) (a)La&b) ( a)d (thousands) (thousands) 2004 $545,565 $658,260 $112,695 82.9% $145,094 77.7%

Annual Pension Cost - The annual pension cost and required contribution by OPPD was $22,907,000,

$17,505,000 and $5,625,000 for the years ended December 31, 2004, 2003 and 2002, respectively. There was no net pension obligation as of December 31, 2004, 2003 and 2002. Plan contributions by OPPD employees were

$5,832,000, $5,704,000 and $5,483,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

The actuarial assumptions used in the valuation are shown in the following table. The investment return assumption was reduced from 8.50% to 8.40% (net of administrative expenses) with the valuation effective January 1,2004.

The actuarial value of plan assets was determined using a method which smooths the effect of short-term volatility 2004 OPPrAnnual RePort 39

Notes to Financial Statements for the Three Years Ended December 31,2004 in the market value of investments over approximately five years. Cost-of-living adjustments are provided to retirees and beneficiaries at the discretion of the Board of Directors. Effective January 1,2004, ad-hoc cost-of-living increases granted to retirees and beneficiaries are amortized in the year authorized by the Board of Directors. Except for the liability associated with cost-of-living increases, the unfunded actuarial accrued liability is amortized on a level basis (closed group) over 15 years.

2004 2003 2002 Investment return (discount rate) 8.40% 8.50% 8.75%

Average rate of compensation increase 5.20% 5.20% 5.20%

Ad-hoc cost-of-living adjustment 1.25% 1.25% 2.00%

Audited financial statements for the Plan may be reviewed by contacting the Pension Administrator at OPPD's Corporate Headquarters, Omaha, Nebraska.

OPPD provides for other employee benefit obligations to allow certain current and former employees to retain the benefits to which they would have been entitled under OPPD's Plan except for federally mandated limits and to provide supplemental pension benefits. The related pension expense, fund balance and employee benefit obligation were not material for each of the three years ended December 31, 2004.

7. SUPPLEMENTAL RETIREMENT SAVIN'GS PLANS OPPD sponsors a Defined Contribution Supplemental Retirement Savings Plan - 401(k) and a Defined Contribution Supplemental Retirement Savings Plan - 457. Both Plans cover all full-time employees and allow contributions by employees that are partially matched by OPPD. Each of these Plan's assets and income are held in an external trust account in the employee's name. In 2004, the employer maximum annual match on employee contributions decreased from $4,000 to $3,000. OPPD's matching share of contributions was $5,601,000, $6,581,000 and

$6,258,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

8. OTHER LIABILITIES 2004 2003 The composition of other liabilities at December 31 Nuclear enrichment fee $1,523 $2,997 was as shown at right (in thousands): Other insurance reserves 2,914 1,573 Deferred revenues 1,684 1,572 Accrued production outage costs - 2,398 Other 852 418 Total 56,73 $8,958

9. SELF-INSURANCE HEALTH PROGRAM AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS OPPD provides employee health care and life insurance benefits to substantially all active and retired employees. An Administrative Services Only (ASO) Health Insurance Program is used to account for the health insurance claims.

With respect to the ASO program, reserves sufficient to satisfy both statutory and OPPD-directed requirements have been established to provide risk protection (see Note 3). Additionally, private insurance covering claims in excess of 120% of expected levels has been purchased. Health care expenses (reduced by premium payments from participants) were $24,540,000, $24,967,000 and S18,072,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The claim payments during those years did not exceed 120% of the expected claims levels. As of December 31, 2004, 2,299 active employees, 21 employees on long-term disability and 1,068 retirees and beneficiaries had health care coverage through OPPD. The total cost of life and long-term disability insurance was

$2,238,000, $2,788,000 and $3,771,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Health care and life insurance benefits provided to retirees and their dependents are considered other post-employment benefits (OPEB). Currently, the cost of these benefits is charged to expense as the cash outlays are made. As stated in Note 1, in June 2004, GASB issued Statement No. 45, Accounting and FinancialReporting by Employers for Posteimplo)MnentBenefits Other Than Pensions (OPEB). The new standard will require OPPD to report the annual cost and the outstanding liability for OPEB based on an actuarial valuation beginning in 2007. OPPD has not completed its assessment of the impact of the adoption of this statement. However, the new standard is expected to result in a larger annual expense and an additional liability for OPPD.

40 2004 OPPO Annual Report

10. COMMITMENTS OPPD's obligation for the uncompleted portion of construction contracts was approximately $248,834,000 at December 31, 2004.

OPPD has power sales commitments which extend through 2027 of $45,971,000. OPPD has power purchase commitments which extend through 2020 of $39,341,000.

OPPD entered into 40-year Participation Power Agreements (PPAs) with seven public power and municipal utilities (the Participants) for the sale of 50% of the 663-MW net capacity of the planned Nebraska City Station Unit 2. The Participants have agreed to purchase their respective shares of the output on a "take-or-pay" basis even if the power is not available, delivered to or taken by the Participant. The Participants are subject to a step-up provision, whereby in the event of a Participant default, the remaining Participants are obligated to pay a share of any deficit in funds resulting from the default.

OPPD entered into a PPA with the Nebraska Public Power District (NPPD) to purchase a 16.8% share, or approximately 10 MW, of a 59.4-MW wind-turbine facility to be constructed by NPPD near Ainsworth, Nebraska.

OPPD is obligated, on a 'take-or-pay" basis, under the PPA to make payments for purchased power even if the power is not available, delivered to or taken by OPPD. In the event another power purchaser defaults, OPPD is obligated, through a step-up provision, to pay a share of any deficit in funds resulting from the default. OPPD's commitment through 2025 under the PPA is $27,392,000.

OPPD has coal supply contracts which extend through 2008 with minimum future payments of $95,110,000. OPPD also has coal transportation contracts which extend through 2008 with minimum future payments of $93,800,000.

These contracts are subject to price escalation adjustments.

Contracts for the conversion of nuclear fuel are in effect through 2005 with estimated future payments of $257,000, and contracts for the enrichment of nuclear fuel are in effect through 2008 with estimated future payments of

$24,400,000. Additionally, OPPD has contracts through 2006 for the fabrication of nuclear fuel assemblies with estimated future payments of $3,911,000.

11. CONTINGENCIES Under the provisions of the Price-Anderson Act, OPPD and all other licensed nuclear power plant operators could each be assessed for claims and legal costs in the event of a nuclear incident in amounts not to exceed a total of

$100,590,000 per reactor per incident with a maximum of $10,000,000 per incident in any one calendar year. These amounts are subject to adjustment every five years in accordance with the Consumer Price Index.

OPPD is engaged in routine litigation incidental to the conduct of its business and, in the opinion of Management, based upon the advice of its General Counsel, the aggregate amounts recoverable from OPPD, taking into account amounts provided in the financial statements, are not significant.

12. OTHER -NET In 2003, $6,225,000 of expenses was reported in Other - Net for costs to initiate the process to obtain authorization from the NRC for the option to move forward with a major uprate to Fort Calhoun Station's accredited output. These costs were written-off to expense since the uprate was not pursued because OPPD will be able to meet its energy needs with other sources of generation.

2004 OPPI Annual lleport 41

Electric System Revenue Bonds Outstanding as of December 31,2004 [in thousandsl 1993 ISSUE 1993 ISSUE 1993 ISSUE 1993 ISSUE 1993 ISSUE SERIES A SERIES B SERIES C SERIES D SERIES E Maturity Date Interest Interest Interest Interest Interest February 1 Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount 2005 5.30 18,780 5.10 5,710 4.80 7,110 4.50 10,360 2006 5.40 20,150 5.20 5,710 4.90 7,280 4.60 10,930 2007 5.50 21,330 5.30 6,230 5.00 10,080 2008 5.40 9,340 5.40 13,230 5.10 11,000 2009 5.40 14,020 2010 5.50 14,860 2011 5.50* 15,750 2012 5.50* 16,700 2013 5.50* 17,700 2014 5.50* 18,770 2015 I 2020 v2021 2022 2023 l 2024 Total Outstanding 60,260 26,990 111,030 35,470 21,290 Bonds Redeemed to 12/31/04 124,440 137,210 63,330 166,930 83,810 Original Issue 184,700 164,200 174,360 202,400 105,100

• Term Bonds

• The 1986 Series AIssue was defeased to maturity with final maturity on February 1,2015. *The 1993 Series BTerm Bonds were defeased to maturity with final maturity on February 1,2017.

• The 1992 Series BIssue was defeased to maturity %ith final maturity on February 1,2017. OPPD has expressly and absolutely retained its right to call and redeem these bonds.

42 2004 OPPD Annual ReWorn

1998 ISSUE 2002 ISSUE .2002 ISSUE-.~~,-~ 2003 ISSUE

..SERIES A SERIES A SERIES B- SERIES A Total:

Principal- Annualized ntesIneetInterest I Interest Maturities'Db Rate 'Amount Rate Amount .Rate Arfibiot Rate Amount February 1 Service 4.10 7,145 1.40 7,000 56,105 87,205 4.0 7,130 1.80 7,000 58,200 83,753 3.45 12,500 2.25 7,000 571080,586 4.0 16,050." 2.65 7,0005620 1 5,7 4.50 -11,430 2.95 7,000 32450 53,379`

4.50 1 1,970 3.25 7,000 33,830 ' 53,303 4.50 12,590 3.55 7,000 35,340: 64,708, 4.30 12,500 4.50 ~-13,270" 5.00~.13,9901 5.00 14,730 4.25 35)410' 4.538,20 3.70 3.80 3.0 4.00 4.25*

7,000 7,000 7000 7,000 7,000 49,470 3,952535 40,500 42,410 45200 53,745 52,404

.53,314 60,034 f

5.02500 4.25 -22,360 4.25* 7,000 :54,360 14,934 4.25* 7,000 7,000 10,506 4.35 7,000 1 ,000 :10,202 4.45 7,000 -7,000 9,891 K

-4.55 7,000 7,000 '37,074 5.20 30,000 . 4.65 7,0 7000 10,319 4.70 7,000 7007,360:

4.75 7,000 - 7,000 - 611 14,275 80,000 190,000 140,000 679,315 851,570 35,725 I 611,445

.50,000 80,000 190,000 140,000 1,290,760, 2004 OPPO Annualflenort 43

Statistics 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Total Utility Plant (at year end)

(inthousands of dollars) 3,363,909 3,224,851 3,081,073 2,876,799 2,735,437 2,621,444 2,455,004 2,360,495 2,309,733 2,235,631 Bonded Indebtedness (at year end)

(inthousands of dollars) ... 679,315 726,130 631,135 577,010 637,235 696,040 745,630 813,860 761,020 947,390 Operating Revenues (in thousands of dollars) i Residential .............. 211,913 208,426 214,447 202,984 196,923 188,187 192,481 183,178 170,021 171,687 Commercial .............. 180,867 176,664 177,063 176,145 166,441 161,901 159,844 157,406 150,388 145,096 Industrial .............. 90,987 85,406 75,946 76,197 75,976 76,513 79,359 76,806 75,016 73,395 StreetandHighwayLighting 13,817 13,156 12,723 12,589 12,270 11,936 11,687 11,356 10,937 8,577 Off-System Sales ....... 109,523 108,795 65,885 91,045 110,300 78,741 62,550 44,484 39,908 29,170

!I Accrued Unbilled Revenues (1,134) 4,086 (1,268) 104 2,541 1,650 282 1,554 (161) 998 Provision for Rate Stabilization - - (10,500) (5,000) (11,500) (5,000) - - - -

Provision for Debt Retirement (55,000) (35,000) - - - - - - - -

r! Other Electric Revenues ... 15,342 11,541 11,357 14,731 14,238 9,802 8,747 9,169 7,413 6,424 I Total ................ 566,315 573,074 545,653 568,795 567,189 523,730 514,950 483,953 453,522 435,347 Operation &Maintenance

3 Expenses (in thousands of dollars).. 401,778 404,040 339,750 353,767 345,378 329,323 306,864 283,307 278,251 261,981 Payments in Lieu of Taxes (inthousands of dollars).. 18,591 18,067 18,553 18,234 17,645 16,852 16,638 16,447 15,499 15,263 Net Operating Revenues before Depreciation and Decommissioning (inthousands of dollars).. 145,946 150,967 187,350 196,794 204,166 177,555 191,448 184,199 159,772 158,103

\et Income (in thousands of dollars).. 24,844 25,878 80,621 69,867 70,850 49,014 63,993 47,152 39,339 47,835 Energy Sales (in megawatt-hours)

Residential .............. 3,054,576 3,079,589 3,151,895 3,065,377 2,880,289 2,718,585 2,796,585 2,688,951 2,577,624 2,571,881 Commercial ..... 3,285,896 3,264,369 3,272,028 3,279,890 3,097,835 3,014,202 2,971,390 2,894,595 2,787,471 2,657,948 Industrial ..... 2,630,038 2,561,569 2,290,368 2,302,311 2,287,966 2,304,441 2,443,625 2,323,253 2,305,328 2,124,023 Street and Highway Lighting 83,817 82,845 81,593 82,775 81,268 80,868 80,286 79,572 78,710 79,732 Off-System Sales ..... 3,646,043 3,775,362 3,273,359 3,952,632 4,208,943 3,318,409 3,105,942 2,544,508 2,492,385 1,855,154 Accrued Unbilled Mlrh ... 6,890 61,165 (23,697) (5,268) 52,739 23,168 9,369 54,222 7,358 23,161 Total ............ 12,707,260 12,824,899 12,045,546 12,677,717 12,609,040 11,459,673 11,407,197 10,585,101 10,248,876 9,311,899 Number of Customers (average per year)

Residential .............. 275,854 270,579 266,464 261,286 256,541 251,057 245,890 241,626 237,584 233,879 Commercial .............. 39,482 38,525 37,807 37,008 36,088 35,553 34,932 34,555 33,993 33,137 Industrial .............. 135 127 117 116 110 105 103 99 99 97 Street and Highway Lighting 352 436 594 555 543 560 567 551 555 542 Other Electric Utilities ...... 45 48 54 49 49 45 40 36 34 31 Total .............. 315,868 309,715 305,036 299,014 293,331 287,320 281,532 276,867 272,265 267,686 Cents Per kt'4h (average)

Residential .6.95 6.73 6.81 6.63 6.84 6.94 6.89 6.80 6.60 6.68 Commercial .5.76 5.69 5.41 5.38 5.37 5.37 5.38 5.42 5.39 5.47 Industrial .3.40 3.39 3.32 3.32 3.32 3.32 3.24 3.29 3.25 3.43 Retail .5.48 5.39 5.46 5.36 5.41 5.40 5.34 5.35 5.24 5.36 Generating Capability (at year end)

(in megawatts) .............. 2,547.1 2,547.1 2,227.1 2,211.6 2,209.6 2,100.0 2,089.5 2,067.0 2,033.1 1,924.2 System Peak Load (in megawatts) .. 8......2,143.8 2,144.8 2,037.4 1,994.1 1,976.9 1,965.6 1,914.0 1,851.8 1,813.9 1,827.9 Net System Requirements (in megawatt-hours)

Generated .... 12,235,044 12,000,873 11,428,893 11,516,924 11,760,938 10,724,976 10,679,310 9,698,231 9,260,923 9,073,968 Purchased and Net Interchanged ............ (2,716,242) (2,557,981) (2,122,701) (2,557,704) (2,833,243) (2,190,252) ...........................

(1,960,844) (1,281,496) (1,096,996) (1,206,817)

Net ...... 9,518,802 9,442,892 9,306,192 8,959,220 8,927,695 8,534,724 8,718,466 8,416,735 8,163,927 7,867,151 Certainamounts have been reclassified to conform with the 2004 presentation.

44 2004 OPPO Annual Report

(OPPD Investor Relations . Other OPPD Debtholders You may contact OPPD with OrrD Corporate Officers Corporate Headquarte Anne L. MfcGuire Energy Plaza questions about other OPPD debt at Chair of the Board 444 South 16th Street Mall the following address and telephone Omaha, NE 68102-2247 number: Del D. Weber Finance& Capital Management Vice Chairof the Board Trustee l.P.Morgan Trust Company Omaha PublicPower District Frederick J. Ulrich Chicago, Illinois 444 South 16th Street Mall Treasurer Omaha, NE 68102-2247 Paying Agents e-mail: finfo(aoppd.com John K. Green J.P. Morgan Trust Company 402-636-2000 Secretary Chicago, Illinois New York, New York The Trustee and Paying Agent on W. Gary Gates OPPD's Senior Lien Debt is J.P. President, Wells FargoBank, NA. ChiefExecutive Officer Omaha, Nebraska Morgan Trust Company. You may contact J.P. Morgan Trust Company Charles N. Eldred General Counsel directly at the following address and Vice President, Fraser, Stryker, Meusey, Olson, Boyer & telephone number:

Bloch, P.C. ChiefFinancialOfficer Omaha, Nebraska J.P. Morgan Trust Company Assistant Treasurer Attn: Corporate Trust Operations Assistant Secretary OPPD Minibonds 227 West Monroe, 26th Floor TimothyJ. Burke OPPD is the Paying Agent, Transfer Chicago, IL 60606 Vice President Agent and Registrar on OPPD's Investor Relations Minibonds. OPPD Minibond 800-275-2048 Adrian J. Minks Administration provides information Vice President and assistance to Minibond holders Available Financial Information In compliance with Securities and Ross T. Ridenoure .. -. .

regarding: Vice President

• Interest Payments Interest on Current Interest-Bearing Exchange Commission Rule 15c2-12, information regarding OPPD is Roger L. Sorenson j i

available at any nationally recognized Vice President v _

Minibonds is paid on April 1 and s _

municipal security information l _...-

October 1 of each year. Dale F. Widoe l l E X,.-

repository. Copies of its most recent

• Ownership Transfer annual reports, interim reports and Vice President l A, Minibond Transfer Information official statements also are available Ei, -

Forms can be obtained via upon request at finfo@oppd.com or 9111- f 1111-: 0. S?

www.oppd.com or by contacting the through the following address:

Minibond Administrator, listed E X,,

below. Omaha Public PowerDistrict .

- ,5 FinanceDivision .

• OptionalEarly Redemption 444 South 16th Street Mall x -:

• Replacement of Lost Minibond Omaha, NE 68102-2247 Certificate , t.)

Financial information in the annual Please contact the Minibond report also is available at e . -. F Administrator to request a Minibond www.oppd.com :e,,,.M.

Transfer Information Form or to X - ....

..: In .:

change your Minibond holder a-: \

address. You may contact the Minibond Administrator via e-mail at minibondsCoppd.com, at OPPD's website www.oppd.com (click on W7ho We Are, FinancialInformation and Minibonds) or through the following address and telephone numbers:

Minibond Administrator Finance & CapitalManagement 4 Omaha Public PowerDistrict 444 South 16th Street Mall Omaha, NE 68102-2247 Omaha, Nebraska area 402-636-3286 § Outstate Nebraska 800-428-5584 Line Technician Lloyd Williams Jr. replaces an insulatoron a line in Washington Conty

I nivi VI I