ML110210194

2010 Annual Financial Report

ML110210194
Person / Time
Site:	Columbia
Issue date:	01/14/2011
From:	Gregoire D Energy Northwest
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
G02-11-007
Download: ML110210194 (73)

Text

Donald W. Gregoire

/",' *£ENERGY Acting Manager, Regulatory Affairs P.O. Box 968, Mail Drop PE20 NRichland, WA 99352-0968 Ph. 509-377-8616 F. 509-377-4317 dwgregoire @energy-northwest.com January 14, 2011 10 CFR 50.71(b)

G02-11-007 U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555-0001

Subject:

COLUMBIA GENERATING STATION, DOCKET 50-397 2010 ANNUAL FINANCIAL REPORT

Dear Sir or Madam:

In accordance with 10 CFR 50.71 (b), enclosed is a copy of the Energy Northwest 2010 Annual Report for the subject facility.

There are no commitments contained in this letter or its enclosure. Should you have any questions, please call Kyle Christianson at (509) 377-4315.

Respectfully DW Gregoire Acting Manager, Regulatory Affairs

Enclosure:

As stated cc: NRC RIV Regional Administrator w/o NRC NRR Project Manager w/o NRC Sr. Resident Inspector - 988C w/o RN Sherman - BPA/1399 w/o WA Horin -Winston & Strawn w/o t

1957*

A MESSAGE TO OUR STAKEHOLDERS Fiscal Year 2010 was a year of challenge, commitment The past fiscal year also saw us submit our application to and transition fbr our Energy Northwest team. the Nuclear Regulatory Commission for a 20-year extension We continued our legacy of providing affordable and to Columbia's current 40-year operating license. Approval environmentally responsible power to Northwest ratepayers allows the plant to continue providing low-cost, carbon-free despite recurring equipment and performance challenges energy to the region through 2043, an especially important at Columbia Generating Station. In overcoming these contribution since output from the federal hydropower system challenges, we are committed to improving plant performance is now fully committed.

through individual and team professional excellence. Fiscal 2010 concluded the distinguished 14-plus year Meanwhile, we made progress in establishing additional career of Vic Parrish as Energy Northwest's CEO. His renewable resources for our members. Our established leadership guided our team to the largest membership base Nine Canyon Wind and Packwood Lake Hydroelectric in our history, established us as a low-carbon power generator projects also continued their history of excellent performance. focused on renewable energy, and helped us achieve Despite operational challenges at Columbia, our team ISO: 14001 environmental certification. His contributions excelled in reducing operating costs and saving ratepayer will continue to pay dividends.

dollars. We ended the year $6.9 million under budget, Our Energy Northwest team emerged from the challenges underscoring the value Energy Northwest brings to the and accomplishments of fiscal 2010 stronger and more region's ratepayers. committed. Their dedication reaffirms our belief that our We were also successful in our legal action against the most valuable and enduring strength will always be our U.S. Department of Energy to recover nearly $57 million people.

spent to build and license a used fuel storage site adjacent to We are privileged to lead this team as we deliver reliable, Columbia. This site provides safe and secure temporary dry affordable and environmentally responsible power for our storage until the used fuel can be recycled and reused, member utilities and Northwest ratepayers.

or transported to a permanent federal repository. The ruling is currently under appeal. Respectfully, Some of our challenges in operating Columbia are Sid Morrison Mark Reddemann 1 I

lx 1fv tt rd Boalr~m (111hcf, lxcctlt-1",

c 1,c associated with the plant's condenser, which converts steam from the reactor back into water t6 be reused. This major awk component will be replaced during the biennial refueling outage that begins in April 2011. The plant will be shut down for more than 70 days, the longest refueling outage in Columbia's history. The new condenser will improve plant reliability and efficiency while increasing power production by approximately 12-megawatts.

_J 3

April 12, 1982: 2010 (Left to Right):

Board Bill 2 passes in both the Washington state House and Senate. As Tom Casey, Jack Janda, Sid Morrison, Dan Gunkel, written, the bill requires that six members of the 11 -member executive Edward E.(Ted) Coates, Kathleen Vaughn, Tim Sheldon, board be outside members, three appointed by the board of directors and Bill Gordon, Dave Remington, Lawrence Kenney three by the governor. The executive board sets the policies that govern Not pictured: KC, Golden the operations of the organization and maintains three committees that meet monthly to hear presentations and make recommendations to the full board: administrative and public responsibility; audit, legal and

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

A LEGACY OF COMMITMENT

3 BOARD OFDRETR 1956: 1957: 1958:

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

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

2010 (Left to Right):

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Aug. 14, 1972: March 15,1973: Dec. 25, 1983:

While long-term performance has been strong, shutdown occurred in November 2009 when a turbine control the plant had power production challenges during fiscal year oil system failed.

2010 which took the plant offline several times to deal with Significant improvements are under way as we strengthen non-safety-related equipment problems. The first shutdown human performance and recover from inadequate equipment was caused by an electrical bus duct failure and subsequent maintenance and insufficient upgrades. During the fiscal year, repairs in August 2009. This was followed in September Columbia reduced power to repair plant equipment. This 2009 with a shutdown and maintenance outage to implement included work on a main condenser leak, an inboard main further repairs to the electrical bus duct connections. Another steam isolation valve, two emergency diesel generators, two

RIHLND WAS. HAS SAEL PRDUE RELIABLE AFFRABLE Dec. 13, 1984: 1991: July 30, 2006: Jan. 19,2010:

condensate booster pumps, and a heater drain control system. Department-level excellence plans will also drive the The challenges have driven a renewed commitment and individual behaviors and accountability necessary for implementation of plans to focus on equipment reliability improved plant performance.

as part of the Pride in Performance initiative. The Pride in r n the last half of the fiscal year, the plant's performance Performance initiative and excellence plans are centered improved and no plant shutdowns occurred.

around five focus areas, or ROLES: radiological safety, Additionally, preparations are on track for Columbia's outage and forced outage excellence, leadership effectiveness, largest-scope refueling outage in 2011.

equipment reliability, and safety and human performance.

COLUMBIA FILES FOR OPERATING LICENSE RENEWAL On Jan. 19, 2010, 1 The application was the culmination of a three- information fro im the NRC. The first were received near the year effort by the Energy Northwest team. The application end of fiscal 20 10.

is more than 2,200 pages long and has two parts: safety In fiscal 201 1, the process continues with regional and environmental. The commission formally accepted the inspections by the NRC in October and November; the application in March 2010. issuance of the draft supplemental environmental impact As part of the process, the commission sent three audit statement and safety evaluation report; and a meeting teams to Columbia during the fourth quarter of fiscal with the comm ission's Advisory Committee on Reactor year 2010 to evaluate the accuracy and completeness of Safeguards.

the application. The three audits, scoping and screening, aging management review/aging management programs and environmental, resulted in requests for additional Columbia is designed to safely produce electricity for decades beyond the license of 40 years. The initial 40-year license, granted to all U.S. nuclear power plants, was specified by Congress under the Atomic Energy Act of 1954. The license term was not based on safety, technical or environmental factors but rather on financing considerations - this was the typical amortization period for an electric power plant.

P A 0 A 0-14 Eneig .,d' 2{-I

PAK OOD HAS PRDUE 4,578 MEAWATTHU OF ELCRCT SIC COMECAL OPERATO BEA IN 194 In March 2010, the 27.5-megawatt Packwood Lake Hydroelectric Project celebrated the 50th anniversary of its initial 50-year license. The Packwood project produces the lowest-cost energy in the Energy Northwest portfolio, including wind and solar.

A

'A Packwood's fiscal year 2010 capacity factor was 37.8 percent with a generation total of 86,065 megawatt-hours. This is down 14 percent from fiscal 2009 primarily due to less rainfall and lower snowfall accumulation in the Cascade mountains.

Snohomish County Public Utility District purchases the plant's output.

Throughout the year, the project attained 100 percent availability, due in large part to the dedicated team of Aug. 28, 2004: November 2004:

P ~i~ )od Iii operations and supplemental support employees who performed tI)~Itt~, [

b .r~ dod ~t:~t preventative maintenance and identified and corrected small

~ther to c~ o~r:

<o:i:e to ~l~o issues before they could lead to forced outages.

Project managers also submitted a final re-licensing application. The project was granted a continuance to operate under the existing license for a year-to-year basis until the new license is issued.

In fall 2007, a large landslide damaged the pipeline supports.

The repair costs were nearly $1 million. During fiscal 2010, the project was denied on its second and final appeal to recover costs from the Federal Emergency Management Agency for these repairs. The costs will be paid from operating margins from electricity sales on the secondary market over the next two years.

I I

June 2001: April 2002: May 30, 2002:

W I H T E B L U F F I

I

It is the epitome of clean energy. From sunrise to sunset, the photovoltaic panels of White Bluftf Solar Station harness the sun's light and convert it into power.

White Bluffs produced 47,035 net kilowatt-hours of this first-of-its-kind generating plant in the Northwest.

electricity during fiscal year 2010. With a rating of 38.7 White Bluffs continues to generate interest from innovators kilowatts direct current, the 242-panel demonstration within utility, solar and academic communities. While the project is located at the Industrial Development Complex project has experienced some individual panel failures, the near Columbia Generating Station. supplier has replaced them at no charge as part of the Energy Northwest provided the leadership to develop 10 -year warranty.

Energy Northwest has developed a facilities leasing business at the Industrial Development Complex, located just east of Columbia Generating Station. This program includes leasing the existing out-lying buildings fbr warehouse and office space, power block fhcilities, and land for tiaure use within the IDC boundaries.

V Fiscal year 2010 proved to be a positive year at IDC. IDC also reached a milestone with the completion The original budgeted revenue was $890,000. This would of the asset recovery program. This program liquidates have resulted in a net margin loss of $28,000. The actual unused equipment originally intended for use at one of the revenue for the year came to $1.23 million, which resulted unfinished reactor sites. The turbine, generator and exciter in a net gain of $163,000. The increased revenue aids in were sold in 2007. The purchaser completed removal of reducing fixed costs for the site, which are the responsibility this equipment in October 2009. It was a large demolition of the Bonneville Power Administration. This also provides project, and was completed safely and on time. This the financial ability to continue on-site restoration efforts completes all salvage operations related to the asset recovery and prepare additional structures for potential lease. program.

2009:

The overall IDC strategy is to maintain the leasing business line. The major focus is to secure an anchor tenant, or tenants, for long-term occupancy of the facilities. As the leasing program expands, the site infrastructure will need to be improved, making the site more attractive to other potential tenants and business opportunities. In addition, maintaining the site will also aid in efforts to complete studies on potential new power generation projects at IDC.

0 P E R A T 1 0 N S

& MAINTENANCE SERVICES 0ý Energy Northwest continued maintenance Utility District 3. The nominal station output is 5.4 net services for Olympic View Generating Station during fiscal megawatts. The plant is designed to be operated remotely, year 2010, ensuring the two 2.8-megawatt generating units, depending on load requirements.

powered by natural gas-fired reciprocating engines, remain Energy Northwest also provided craft support for Seattle in operating condition. Operations and Maintenance City Light's Boundary Hydroelectric Project. Located on Services has performed these services full time for the the Pend Oreille River in northeastern Washington, the station since 2001. dam supplies more than one-third of Seattle City Light's Olympic View is owned by Mason County Public power.

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3

• The Applied-ProCess Engineering Laboratory Located in the heart of the Tri-Cities Research District

-of Energy Northwest's continuing commitment Innovation Partnership Zone, APEL is the "launch pad" to l6cal economic development. By re-purposing an office to leverage regional technological expertise into early stage building into a laboratory, office and light manufacturing entrepreneurial ventures. By creating an environment rental space, APEL fills a community need for rich with resources and potential partners, APEL fosters entrepreneurial starter space, as well as provides suitable collaboration in innovation and commercialization.

environments for controlled testing of advanced processes. In 2010, InnovaTek, a long-time tenant, graduated to APEL is supported and sponsored by major institutions new facilities at the Port of Benton, having reached a level including Energy Northwest, the Port of Benton, the of sustainable operations. Wind Tower Energy Company Department of Energy, Washington State University is a new APEL client that hopes to have the same level Ti-Cities, Pacific Northwest National Laboratory and the of success. WindTEC's patented technology uses wind Tri-Cities Industrial Development Council. tunnel velocity accelerator principles to "multiply" the 22 Energy Northwest 2010 Annual Report

N Li

,TS FOR 7 CONI LLL"U I LI:) I IIIN IOCESSES]

wind, allowing a turbine system to operate at both higher one laboratory with a closed-loop e and lower wind speeds to maximize electricity generation. water savings of about 1.6 millio WindTEC awaits final testing of a complete, integrated Lighting replacement in the 28-foot high unit to commence commercial sales. long-life, energy-efficient fixtures and bull Like the clean energy businesses it incubates, APEL an immediate reduction in utility costs. A I the is doing its part for the environment. A necessary roof lighting replacement from the city of Ric] ed to replacement project for APEL provided an opportunity the savings. Rounding out the program w% s for to select a material that improves the insulation of the lighting in areas seldom active at night, a aiion laboratory's roof with a beneficial impact on heating/ system, and migration of invoicing and d, cooling energy consumption. Anchor tenant Pacific retention to electronic files.

Northwest National Laboratory worked with APEL to replace a single-pass process water cooling system in

February 1999:

C LA I A T S o,;,The Energy Northwest Calibration Services Laboratory The multi-disciplined laboratory performs calibrations Accreditation on-site assessment process and the laboratory in virtually every aspect of metrology; including torque, was officially re-accredited. This status provides assurance force, pressure, mass, dimensional, electrical, electronic, to customers that calibration activities are in compliance temperature, humidity, flow, vibration and light. with International Standard ANS/ISO/IEC 17025, which Over the years, the laboratory's move into performing designates the requirements for competence of laboratory work in the commercial sector has enhanced the quality of testing and calibration. The lab was first accredited in work and the capabilities and technical expertise of the staff. January 2009. This current accreditation is valid through This has proved a great benefit, not only to the commercial January 2011.

customers, but for the laboratory's primary customer, Columbia Generating Station.

Those improvements were a major factor in securing a new multi-year contract with Bechtel National. The contract provides Bechtel with calibration services in support of construction activities at the Waste Treatment Plant on the Hanford site, anticipated to be completed in 2019.

Energy Northwest has provided Bechtel with calibration services over the past several years. The quality, timeliness, technical expertise and customer support provided by the laboratory enabled Energy Northwest to compete for the exclusive-provider contract.

In fiscal year 2010 laboratory staff also successfully completed the American Association for Laboratory I

E N V I R O N M E N T A L AND ANALYTICAL SERVICES LABORATORY

- ~ ~ ~ ' In Fiscal 'Year 2010, Lu rgýx Noridiwcst 's Ilmel;1 ~c Al d 1ccc, Ivrv] I 1>SlIV ~ >SW bolrB'Voll>  ;,SII((1~ \I nc

. Ifr t-I:\\c thewin I'l Caithness Shepherds Flat, LLC of Sacramento, Calif., is developing the $2 billion project entirely on private property located in north-central Oregon, just south of the Columbia River.

The wind farm's most recent design has the facility producing 845 megawatts of electricity from 338 turbines.

Environmental monitoring and assessments performcd by laboratory employees included initial vegetative studies; surveys of avian use, raptor nesting and endangered/ threatened!

sensitive species; data compilation; and preparation of summary reports. Monitoring was performed from 2002 through spring of 20 10 at various degrees of frequency and duration.

During this same period, environmental assessments were performed at wind projects located in several western states, including New Mexico, California, Idaho, Oregon and Washington. In addition, commencing in fiscal 2011, the laboratory will be the primary provider for environmental studies at a new Oregon wind facility, juniper Canyon. This project is located along the Washington and Oregon borders, just south of Wallula, Wash.

For more than 15 years, the laboratory, accredited by the Washington state departments of Health and Ecology, has provided chemical analysis and environmental monitoring expertise for utility, municipal and residential customers.

A LEGACY OF I P O W E R G E N E R A T I 0 N P

• Energy Northwest is recognized in the region as an expericnced power goellerationi dTv'l p)i: Ihe a8lercy wv rks with its menmbers to um(iersiaticl arnd anticil)utc their thernial mid crenewable rcso rce n(iecds and idcitifics 1ceioi1nal gciieratiti supply opportunifties to hteveltp appropriate lowv-cost generation th goal is to Thsoerce'.

offer competitive gclwratloni supply o p tiois and solutioni-s to meet uitililt memltiber needs. The process ihicludes ttclhiolog,, evaluattion finilanc('ial aialx sis. site selectioll m11(

acquisition., developmeni t unarketing ancd funcinig, prant permitti 8aid ilfdrastunictiirC interconnection, among other suppoorting services.

There were challenges in developing various projects in fiscal year 2009 due to worsening economic conditions and corresponding lower utility market demand. Some of those same conditions carried over into fiscal 2010, along with dynamic changes in public policy, federal and state tax incentives, utility growth, and regional weather impacts on power supply and pricing.

Having implemented a new approach to seek and acquire investment partners for 75 percent of development costs, Energy Northwest was successful in negotiating unique development and consulting services agreements for several energy generation projects:

Kalama Energy: 346-megawatt Natural Gas Combined-Cycle Plant Radar Ridge: 60 to 80-megawatt Wind Generation Project During fiscal 2010, Pristine Power of Calgary, Alberta, was secured Radar Ridge is the first commercial-sized wind development project as the development partner, and all major preliminary engineering and slated for west of the Cascades. The project has had permitting technical analysis were completed. The permitting processes are moving challenges relating to the Marbled Murrelet, a threatened species of bird.

forward and are scheduled to be completed in early 2011. Significant studies and evaluations verify that the project will have minimal impact on the species. The permitting process is moving ahead and is expected to be completed infiscal 2012.

26 Energy Northwest 2010 Anail Report

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A LEAC ENVIR0 NMENT A Lv100 0FAS STEWA R D S April 2005:

I, 1 Energy Northwest is committed to integrating EMS was recommended environmental stewardship into everything it does. for continued registration after a The agency's environmental stewardship policy is the successful surveillance audit by the registrar.

cornerstone of its environmental management system. This To further establish and enhance its environmental comprehensive program demonstrates commitment and programs, new corporate procedures were developed in its establishes clear expectations for the entire organization. air, water and natural resources programs. Other procedures This means consideration of the environment is integrated in chemical management, pollution prevention, regulated into all aspects of the organization, including its structure, waste, and spill prevention and response programs were resources, responsibilities, planning, practices, procedures revised to further strengthen and institutionalize these and processes. efforts.

Energy Northwest's EMS was designed to meet To better assess the impact on the environment and the rigorous requirements of the globally recognized the effectiveness of the EMS, trends for environmental International Organization for Standardization 14001:2004 performance are established through the use of key standard, with additional emphasis on compliance, pollution performance indicators. These indicators monitor prevention and communication. Energy Northwest's EMS performance in areas such as effluents, emissions, wastes, has been registered to the ISO 14001:2004 standard since compliance, pollution prevention, recycling and chemical April 2005 by NSF International Strategic Registrations, management. In fiscal 2010, success was achieved against an accredited registrar. In March 2010, Energy Northwest's established targets for all environmental goals.

28Ereg Notlvis 2010 Anntial Repor I-I

C 0 M M U N I T Y S E R V I C E 0, Energy Northwest has been a member of the Tri-Cities business community for more than 50 years. As a major non-Hanford employer, the agency strongly believes in the importance of supporting the communities and non-profit agencies where our employees work and live.

From the CEO to the newest employees, Energy Northwest cares about the Tri-Cities community through direct, hands-on involvement.

The agency officially sponsors three vital community organizations: United Way, Head Start and March of Dimes.

United Way Approximately 380 employees donated nearly $130,000 to United Way in 2009. And 42 stepped forward to join the United Way Vintner Club leadership program. These pledges help provide hot meals to elderly neighbors, fund youth developmental programs, provide disaster relief planning for our community and build self-esteem in at-risk youths.

Head Start Energy Northwest employees dressed as Santa and his elves delivered gifts to 387 children at six local schools as part of an annual tradition of supporting the Benton-Franklin Head Start program. This joyous program for underprivileged children offers employees positive community involvement with the warm feeling of giving to those in need.

March of Dimes Energy Northwest's "Power Marchers" team raised $37,876 this year for the March of Dimes. Vic Parrish, former CEO, was the Top Adult Walker for the 2010 event, leading the team of 97 Power Marchers who turned out for the spring event that helps support neo-natal birth centers and local families in need.

ILI, FINANCIAL DATA

& INFORMATION 31

MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING Energy Northwest management is responsible for Energy Northwest maintains an ongoing internal preparing the accompanying financial statements and for auditing program that provides for independent their integrity. They were prepared in accordance with assessment of the effectiveness of internal controls, and generally accepted accounting principles applied on a for recommendations of possible improvements thereto.

consistent basis, and include amounts that are based on In addition, PricewaterhouseCoopers LLP has considered management's best estimates and judgments. the internal control structure in order to determine their The financial statements have been audited by auditing procedures for the purpose of expressing an PricewaterhouseCoopers LLP, Energy Northwest's opinion on the financial statements. Management has independent auditors. Management has made available considered recommendations made by the internal auditor to PricewaterhouseCoopers LLP all financial records and and PricewaterhouseCoopers LLP concerning the control related data, and believes that all representations made to procedures and has taken appropriate action to respond to PricewaterhouseCoopers LLP during its audit were valid the recommendations. Management believes that, as of and appropriate. June 30, 2010, internal control procedures are adequate.

Management has established and maintains internal control procedures that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, M.E. Reddemann A.E. Mouncer and the prevention and detection of fraudulent financial Chief Executive Officer Vice President, reporting. These control procedures provide appropriate Corporate Services/

division of responsibility and are documented by written General Counsel/CFO policies and procedures.

AUDIT, LEGAL AND FINANCE COMMITTEE CHAIRMAN'S LETTER The Executive Board's Audit, Legal and Finance The Committee met regularly with Energy Northwest's Committee (Committee) is composed of six independent internal auditor and convened periodic meetings with the directors. Members of the Committee are Chairman Larry independent auditors to discuss the results of their audit, Kenney, K.C. Golden, Bill Gordon,JackJanda, Dave their evaluations of Energy Northwest's internal controls, Remington, Kathy Vaughn and Sid Morrison, ex-officio. and the overall quality of Energy Northwest's financial The Committee held 11 meetings during the fiscal year reporting. The meetings were designed to facilitate any endedJune 30, 2010. private communications with the Committee desired by the The Committee oversees Energy Northwest's financial internal auditor or independent auditors.

reporting process on behalf of the executive board. In fulfilling its responsibilities, the Committee discussed with the internal auditor and the independent auditors the overall scope and specific plans for their respective audits, and Larry Kenney reviewed Energy Northwest's financial statements and the Chairman, adequacy of Energy Northwest's internal controls. Audit, Legal and Finance Committee 32 Energy Northwest 2010 Annual Report

REPORT OF INDEPENDENT AUDITORS To the Executive Board of Energy Northwest:

In our opinion, the financial statements of the business-type activities of Energy Northwest (the "Company"), including the Columbia Generating Station, Packwood Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear Project No. 3, the Business Development Fund, the Nine Canyon Wind Project, and the Internal Service Fund which collectively comprise the Company's balance sheets, statements of revenues, expenses and changes in net assets, and of cash flows, present fairly, in all material respects, the respective financial position of the business-type activities of the Company atJune 30, 2010, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express opinions on these financial statements based on our audit.

We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

The Management's Discussion and Analysis listed in the table of contents is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Portland, Oregon September 23, 2010 2010 FINANCIAL DATA & INFORMATION 33

ENERGY NORTHWEST MANAGEMENT'S DISCUSSION & ANALYSIS Energy Northwest is a municipal corporation and joint operating agency of the State of Washington.

Each Energy Northwest business unit is financed and accounted for separately from all other current or future business assets. The following discussion and analysis is organized by business unit. The management discussion and analysis of the financial performance and activity is provided as an introduction and to aid in comparing the basic financial statements for the fiscal year (FY) ended June 30, 2010, with the basic financial statements for the FY endedJune 30, 2009.

Energy Northwest has adopted accounting policies and Management's Discussion and Analysis-for State and Local principles that are in accordance with Generally Accepted Governments."

Accounting Principles (GAAP) in the United States of The financial statements for Energy Northwest include America. Energy Northwest's records are maintained as the Balance Sheets, Statements of Revenues, Expenses, and prescribed by the Governmental Accounting Standards Changes in Net Assets, Statements of Cash Flows for each Board (GASB) and, when not in conflict with GASB of the business units, and Notes to Financial Statements.

pronouncements, accounting standards prescribed by the The Balance Sheets present the financial position Financial Accounting Standards Board (FASB). (See Note of each business unit on an accrual basis. The Balance 1 to the Financial Statements.) EffectiveJuly 1, 2009, the Sheets report financial information about construction FASB issued the Accounting Standards Codification (ASC). work in progress, the amount of resources and obligations, The ASC does not change GAAP and does not have an restricted accounts and due to/from balances for each effect on the Energy Northwest's financial position or results business unit. (See Note I to the Financial Statements.)

of operation. Technical references to GAAP included in The Statements of Revenues, Expenses, and Changes this report are provided under the new ASC structure. in Net Assets provide financial information relating to all Because each business unit is financed and accounted for expenses, revenues and equity that reflect the results of separately, the following section on financial performance each business unit and its related activities over the course is discussed by business unit to aid in analysis of assessing of the Fiscal Year. The financial information provided aids the financial position of each individual business unit. For in benchmarking activities, conducting comparisons to comparative purposes only, the table on the following page evaluate progress, and determining whether the business represents a memorandum total only for Energy Northwest, unit has successfully recovered its costs.

as a whole, for FY 2010 and FY 2009 in accordance The Statements of Cash Flows reflect cash receipts and with GASB No. 34, "Basic Financial Statements-and disbursements and net changes resulting from operating, 34 Energy Northwest 2010 Annual Report

COMBINED FINANCIAL INFORMATION June 30, 2010 and 2009 (dollars in thousands) 2009 2010 Change Assets Current Assets $ 187,671 $ 189,918 $ 2,247 Restricted Assets Special Funds 104,325 93,454 (10,871)

Debt Service Funds 279,241 421,110 141,869 Net Plant 1,497,182 1,485,233 (11,949)

Nuclear Fuel 222,927 196,379 (26,548)

Deferred Charges 4,455,067 4,306,114 (148,953)

TOTAL ASSETS $ 6,746,413 $ 6,692,208 $ (54,205).

Current Liabilities $ 243,042 $ 374,924 $ 131,882 Restricted Liabilities Special Funds 135,373 141,811 6,438 Debt Service Funds 137,293 145,396 8,103 Long-Term Debt 6,226,186 6,022,980 (203,206)

Other Long-Term Liabilities 10,597 12,373 1,776 Deferred Credits 6,179 6,020 (159)

Net Assets (12,257) (11,296) 961 TOTAL LIABILITIES & NETASSETS $ 6,746,413 $ 6,692,208 $ (54,205)

Operating Revenues $ 545,775 $ 475,985 $ (69,790)

Operating Expenses 428,946 360,876 (68,070)

Net Operating Revenues 116,829 115,109 (1,720)

Other Income and Expense (119,870) (113,498) 6,372 (Distribution)/Contribution 829 (650) (1,479)

Beginning Net Assets (10,045) (12,257) (2,212)

ENDING NETASSETS 5 (12,257):i $ (11,296): $ 961 financing and investment activities. The Statements of balances and activities, material risks, commitments and Cash Flows provide insight into what generates cash, where obligations, and subsequent events, if applicable.

the cash comes from, and purpose of cash activity. The basic financial statements of each business unit The Notes to Financial Statements present disclosures along with the notes to the financial statements and the that contribute to the understanding of the material management discussion and analysis should be used to presented in the financial statements. This includes, but provide an overview of Energy Northwest's financial is not limited to, Schedule of Outstanding Long-Term performance. Questions concerning any of the information Debt and Debt Service Requirements (See Note 5 to the provided in this report should be addressed to Energy Financial Statements), accounting policies, significant Northwest at PO Box 968, Richland, WA, 99352.

2010 FINANCIAL DATA & INFORMATION 35

COLUMBIA GENERATING STATION The Columbia Generating Station (Columbia) is year to year depending on various factors such as refueling wholly owned by Energy Northwest and its Participants outages and other planned activities. The cost of power and operated by Energy Northwest. The plant is a was lower in FY 2010 due to the off cycle refueling period 1,150-megawatt electric (MWe, Design Electric Rating, which equates to higher generation but costs were higher net) boiling water nuclear power plant located on the and generation lower than anticipated due to the outages Department of Energy's (DOE) Hanford Site north of and down powers in the first two quarters of FY 2010.

Richland, Washington.

Columbia produced 8,124 gigawatt-hours (GWh) of Balance Sheet Analysis electricity in FY 2010, as compared to 7,725 GWh of The net decrease to Plant in Service (Plant) and electricity in FY 2009, which included economic dispatch Construction Work In Progress (CWIP) from FY 2009 to of 119 and 15 GWh respectively. Generation increased FY 2010 (excluding nuclear fuel) was $5.4 million. The 5.2 percent from FY 2009 due to the off year cycle of the additions to Plant/CWIP of $64.8 million were offset by two-year refueling and maintenance outage. Generation an increase to Accumulated Depreciation of $70.2 million was lower than anticipated for a non-outage year due to an resulting in the net decrease to Plant. The additions to electrical fire impacting August and September generation Plant for FY 2010 were captured in six major projects:

along with down powers in October and November to allow Main Condenser Replacement, Software Programs, for valve and hydraulic leak repairs Cooling Tower Fill Replacement, Security Upgrades, Columbia's cost performance is measured by the cost of Radio Obsolescence, and Service Water Pump and Motor power indicator. The cost of power for FY 2010 was 3.74 Overhaul. These projects resulted in 73 percent of the cents per kilowatt-hour (kWh) as compared with 4.94 cents additions to Plant. The remaining 27 percent of additions per kWh in FY 2009. The industry cost of power fluctuates were made up of 143 separate projects.

Columbia Generating Station Columbia Generating Station Net Generation - GWhrs Cost of Power - Cents / kWh 10,000 ....... 5.00 ................... 4,9 4.

95944 9636 8,124 8,016 8,000 [ 7,725' 4.00 3.774_ 3.69 6,000 [ 3.00 1 2.75 2.12 4,000 2.00 2,000 1.00 0 0.00 FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 36 Energy Northwest 2010 Annual Report

Nuclear fuel, net of accumulated amortization, balances in these external trust funds are not reflected on decreased $26.5 million from FY 2009 to $196.4 million Energy Northwest's Balance Sheet. Relicensing activities for FY 2010. During FY 2010 Columbia incurred $13.6 for Columbia accounted for $4.5 million of the increase.

million in capitalized fuel purchases of which $9.2 million Columbia was issued a standard 40-year operating license was reclassified during FY 2010 as expensed fuel litigation by the Nuclear Regulatory Commission (NRC) in 1983.

costs for a net increase to capitalized fuel purchases of $4.4 OnJanuary 19, 2010, Energy Northwest submitted million. There was a bi-annual adjustment of fuel and an application to the NRC to renew the license for an amortization for the removal of fuel assemblies related to additional 20 years, thus continuing operations to 2043.

the maintenance and refueling outage in FY 2009 (R-19). The estimated duration of the license renewal process The adjustment of $53.5 million represents the original is 20 to 24 months from acceptance of the application.

cost of the fuel assemblies removed and those that are The accumulated decommissioning and site restoration past the required six month cooling period per the Federal accrued costs are not currently billed to Bonneville Power Energy Regulatory Commission (FERC) guidelines. The Administration (BPA). BPA holds and manages a trust adjustment and capital activity was off set by a decrease of fund for the purpose of funding decommissioning and site

$22.6 million in current year amortization. restoration. (See Note 12 to the Financial Statements.)

Current assets increased $13.6 million in FY 2010 to Current Liabilities increased $13 1.3 million in FY 2010

$152.7 million. The main cause of this increase was from to $218.6 million mostly due to the increase of $118.4 an increase to materials and supplies of $12.4 million. million in current maturities of long-term debt. Other The remaining change was due to vendor invoice timing increases of $12.9 million were year end incurred cost related to year end obligations along with inter business unit timing issues.

activity incurred which amounted to approximately $1.2 Restricted Liabilities (Special Funds and Debt Service) million. increased $4.5 million in FY 2010 to $195.6 million due to The Restricted Assets Special Funds decreased $7.3 bond activity.

million to $77.9 million in FY 2010 due to the FY 2010 Long-Term Debt decreased $75.7 million in FY bond financing plan and schedule of construction costs for 2010 from $2.5 billion to $2.4 billion, excluding current these funds in FY 2010. maturities, due to current maturities of debt combined with The Debt Service Funds increased $119.1 million in FY refunding results of the FY 2010 bond Issue. In FY 2010, 2010 to $200.0 million. The increase was created due to new debt was issued for various Columbia construction restructuring and funding activities as a result of the bond projects, conversion of variable rate debt to fixed, and sale. extension of some maturing debt.

Deferred Charges decreased $31.6 million in FY 2010 Other long-term liabilities increased $1.8 million in FY from $853.3 million to $821.7 million. Components of 2010 to $12.4 million related to nuclear fuel cask activity.

this decrease were changes in Costs in Excess of Billings, related to the net effect of payment of current maturities Statement of Operations Analysis and refunding activity related to available debt of $35.0 Columbia is a net-billed project. Energy Northwest million. There was also a slight decrease to unamortized recognizes revenues equal to expense for each period on debt expense of $1.1 million due to refunding activity. The net-billed projects. No net revenue or loss is recognized and 2010 FINANCIAL DATA & INFORMATION 37

no equity is accumulated. requirements, increases to related benefit programs and Operating expenses decreased $69.2 million from FY regulatory requirements. Depreciation and amortization 2009 to $334.4 million due to less activity related to the decreased $1.2 million with an increase to decommissioning off cycle year of the two year refueling and maintenance costs of $0.3 million accounting for the remainder of the program. Operations and Maintenance costs decreased change.

$83.0 million which is attributable to the off cycle year. Other Income and Expenses decreased $2.4 million The decrease in operations and maintenance costs from FY 2009 to $113.7 million net expenses in FY 2010.

were offset by increases to generation fuel, taxes and Expenses associated with bond activity decreased $3.5 administrative and general expenses. Fuel costs and disposal million but were offset by lower investment income of $1.5 increased $8.6 million with generation taxes increasing $0.6 million, due to market conditions. The remaining decrease million. Both of these increases were directly related to was due to increased net revenues of $0.4 million associated generation activity Administrative and general expenses with inter-business unit services.

increased $5.5 million; which was driven by staffing Columbia's total operating revenue decreased from

$519.8 million in FY 2009 to $448.1 million in FY 2010.

The decrease of $71.7 million was due to the off cycle Columbia Generating Station Operating Expenses year of the two year refueling and maintenance program Total Operating Costs ýdofiathouand Other Income / Expenses and the related effect of the net billing agreement on total

$450,000 revenue.

$400,000 Columbia continued to incur costs as a result of the FY 2008 (February) wind storm that damaged

$350,000 siding on the Reactor Building and Turbine Generator

$300,000 Building. Columbia had submitted an insurance claim for

$250,000 reimbursement of the $14.4 million incurred due to wind

$200,000 damage. Columbia incurred costs of $5.0 million for the

$150,000 deductible and $7.7 million of the claim was covered by the insurer, which was paid directly to BPA in FY 2009.

$100,000 Columbia submitted an additional claim in FY 2010 for

$50,000

$9.0 million. The insurer has agreed to cover $6.3 million 0

FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 of the claim and will be paid directly to BPA as part of the final claim submittal.

38 Energy Northwest 2010 Annual Report

PACKWOOD LAKE HYDROELECTRIC PROJECT The Packwood Lake Hydroelectric Project (Packwood) other operating costs. The FY 2010 cost of power increase is wholly owned and operated by Energy Northwest. of 12.3 percent was a result of lower than anticipated Packwood consists of a diversion structure at Packwood generation.

Lake and a powerhouse located near the town of Packwood, Washington. The water is carried from the lake to the Balance Sheet Analysis powerhouse through a five-mile long buried tunnel and Total assets decreased $0.7 miffion from FY 2009, with drops nearly 1,800 feet in elevation. Packwood produced the major driver being the decrease to restricted assets from 86.07 GWh of electricity in FY 2010 versus 99.34 GWh in $0.8 million to $0 reflecting the elimination of the letter FY 2009. The 13.4 percent decrease in generation can be of credit established for the Packwood flood of FY 2008.

attributed to lower water availability than the previous year. The impact of this elimination was offset by an increase FY 2010 was near the 30 year average of 87 GWh while FY to relicensing of $0.1 million and net participant and 2009 was the 12th highest generation year on record. receivable activity of $0.2 million along with an increase In November 2006, Lewis County was declared a disaster to accumulated depreciation of $0.1 million. Significant area because of torrential rain and flooding. Packwood changes to total liabilities were a result of the letter of credit incurred expenditures of $1.0 million in FY 2008 to install elimination and timing of year-end cost recognition.

improvements. Packwood applied for grant assistance but Packwood has incurred $3.7 million in relicensing costs was denied and all subsequent appeals expired in FY 2010. through FY 2010. These costs are shown as Deferred A bank line of credit was established for $1.3 million in FY Charges on the Balance Sheet. Packwood has been 2008 while grant acceptance was being resolved and has operating under a 50-year license issued by the Federal since been closed with the expiration of any grant receipt Energy Regulatory Commission (FERC), which expired on possibilities. February 28, 2010. Energy Northwest submitted the Final Packwood's cost performance is measured by the cost of License Application (FLA) for renewal of the operating power indicator. The cost of power for FY 2010 was $1.82 license to FERC on February 22, 2008. On March 4, 2010, cents/kWh as compared to $1.62 cents/kWh in FY 2009. FERC issued a one-year extension to operate under the The cost of power fluctuates year-to-year depending on original license. FERC can continue issuing annual license various factors such as outage, maintenance, generation and extensions until a new operating license is received.

Packwood Lake Hydroelectric Project Packwood Lake Hydroelectric Project Net Generation - GWhrs Cost of Power - Cents / kWh 99.34 100 -97.80- 4.00 3.87 "

rn_

86.07 85.22 3.50 80 7-. .77.47- 77]

3.00 2.50 60 2.00 1.82' 1.61 40 1.50 1.00 20 1....' ....

0.50 0 0.00 FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 FY 2010 FY 2009 FY 2008 FY 2007 FY2006 2010 FINANCIAL DATA & INFORMATION 39

Statement of Operations Analysis The agreement with Packwood participants obligates them to pay annual costs and to receive excess revenues. Packwood Lake Hydroelectric Project (See Note 1 to the Financial Statements.) Accordingly, Total Operating Costs dollr ,,mthouands)

$3,200 Energy Northwest recognizes revenues equal to expenses

$2,900 for each period. No net revenue or loss is recognized and no Operating Expenses

$2,600 equity is accumulated. Other Income / Expenses Operating expenses decreased $0. 1 million from FY $2,300 2009 amounts. Most costs remained steady from FY 2009 $2,000 to FY 2010; the major change in cost was a reduction of $1,700 purchased power costs of $0.1 million, which reflected the $1,400 favorable timing of runoff and available generation to meet $1,100 minimum supply requirements. $800 Packwood is obligated to supply a specified amount $500 of power hourly, known as Priority Firm Energy (PFE). $200 The amount varies monthly based on historical average -100 IFY2010 FY 2009 IFY2008 FY 2007 FY 2006 generation. If the project can not deliver PFE, replacement power must be purchased on the spot market. Electrical energy from Packwood is currently sold directly to Snohomish PUD who purchases all of the output the participants of the project. (See Note 6 to the Financial directly. The power purchase agreement (PPA) provides a Statements.)

predetermined rate for all firm delivery, per the contract Other Income and Expenses increased from a net loss schedule and the Mid-Columbia (Mid-C) based rate for any of $28k in FY 2009 to a net loss of $15k in FY 2010. The deliveries above firm, or secondary power. Conversely, if $13k decrease in net loss was due to decreased borrowing there is excess capacity per the PPA with Snohomish PUD, expenses of $28k offset by lower investment earnings of Energy Northwest sells the excess on the open market for $15k in FY 2010.

additional revenues to be included as part of the PPA with 40 Energy Northwest 2010 Annual Report

NUCLEAR PROJECT NO. 1 Energy Northwest wholly owns Nuclear Project No. 1. term debt was offset by the $35.4 million increase in the Nuclear Project No. 1, a 1,250-MWe plant, was placed in current long-term debt per the debt maturity schedule.

extended construction delay status in 1982, when it was 65 The remaining change of $2.3 million was related to year-percent complete. On May 13, 1994, Energy Northwest's end timing of planned expenses and effects of net billing board of directors adopted a resolution terminating operations.

Nuclear Project No. 1. All funding requirements are net-billed obligations of Nuclear Project No. 1. Termination Statement of Operations Analysis expenses and debt service costs comprise the activity on Other Income and Expenses showed a net decrease Nuclear Project No. 1 and are net-billed. to costs of $11.4 million from $97.6 million in FY 2010 to $86.2 million in FY 2010. Investment revenue Balance Sheet Analysis decreased $0.4 million due to market conditions. The Long-term debt decreased $86.0 million from $1.885 lower investment revenue was offset by lower bond-related billion in FY 2009 to $1.799 billion in FY 2010 as a result expenses of $11.8 million. Costs for plant preservation and of maturing debt per schedule. The decrease in long- decommissioning were steady from FY 2009 to FY 2010.

NUCLEAR PROJECT NO. 3 Nuclear Project No. 3, a 1,240-MWe plant, was placed billion in FY 2009 to $1.681 billion in FY 2010, as a result in extended construction delay status in 1983, when it of refunding all variable rate debt and a portion of the was 75 percent complete. On May 13, 1994, Energy fixed rate maturing debt. Current maturities decreased Northwest's board of directors adopted a resolution $27.2 as a result of debt restructuring with net billing terminating Nuclear Project No. 3. Energy Northwest is no impacts related to debt related refunding and maturity longer responsible for any site restoration costs as they were entries of $14.3 million accounting for the net decrease of transferred with the assets to the Satsop Redevelopment $50.2 million.

Project. The debt service-related activities remain and are net-billed. (See Note 13 to the Financial Statements.) Statement of Operations Analysis Overall expenses decreased $11.4 million from FY 2010 Balance Sheet Analysis related to bond activity. The change in investment income Long-term debt decreased $37.3 million from $1.718 of $0.4 million was due to market conditions.

2010 FINANCIAL DATA & INFORMATION 41

BUSINESS DEVELOPMENT FUND Energy Northwest was created to enable Washington Statement of Operations Analysis public power utilities and municipalities to build and Operating Revenues in FY 2010 totaled $10.6 million as operate generation projects. The Business Development compared to FY 2009 revenues of $8.7 million, an increase Fund (BDF) was created by Executive Board Resolution of $1.9 million. The majority of the increase was in two No. 1006 in April 1997, for the purpose of holding, sectors, Generation and General Services. Generation administering, disbursing, and accounting for Energy projects received $1.0 million on the Kalama and Grays Northwest costs and revenues generated from engaging in Harbor projects. General Services had a $0.9 million new energy business opportunities. increase from FY 2009 due to the Rattlesnake relocation The BDF is managed as an enterprise fund. Four project.

business lines have been created within the fund: General Other Income and Expenses increased $2.2 million from Services and Facilities, Generation, Professional Services, $2.3 million in net revenues in FY 2009 to $4.5 million and Business Unit Support. Each line may have one or in FY 2010 with the major drivers being a $1.4 million more programs that are managed as a unique business settlement from a power sales agreement and $1.1 million activity for amounts associated with power sales options (see note

14) offset by a decrease of $0.3 million in miscellaneous Balance Sheet Analysis reimbursements.

Total assets increased $3.8 million from $5.7 million The Business Development Fund receives contributions in FY 2009 to $9.5 million in FY 2010. The increase to from the Internal Service Fund to cover cash needs during current assets of $2.4 million was due to current funding of startup periods. Initial startup costs are not expected to be operations, mainly due to generation sector development paid back and are shown as contributions. As an operating activities, an increase to other deferred charges of $1.0 business unit, requests can be made to fund incurred million for power option derivatives (see note 14) and an operating expenses. In FY 2010, the Business Development increase to plant of $0.4 million due to calibration and Fund received contributions (transfers) of $2.5 million, in environmental laboratory equipment purchases. Liabilities FY 2009 there were no contributions (transfers).

decreased $0.9 million from FY 2009 to FY 2010 due to operating activity. Net Assets increased $4.7 million from

$3.2 million in FY 2009 to $7.9 million in FY 2010 due to generation project revenue realization, increased gross margin on calibration services, $1.1 million associated with power options and a $2.5 million contribution from the Internal Service Fund.

42 Energy Northwest 2010 Annual Report

NINE CANYON WIND PROJECT The Nine Canyon Wind Project (Nine Canyon) is wholly $7.88 cents/kWh as compared to $7.79 cents/kWh in FY owned and operated by Energy Northwest. Nine Canyon 2009. The cost of power fluctuates year to year depending is located in the Horse Heaven Hills area southwest of on various factors such as wind totals and unplanned Kennewick, Washington. Electricity generated by Nine maintenance. The slight increase of 1.2 percent in cost of Canyon is purchased by Pacific Northwest Public Utility power was due to lower than forecasted generation in FY Districts (purchasers). Each purchaser of Phase I has 2010.

signed a 28-year power purchase agreement with Energy Northwest; each purchaser of Phase II has signed a 27-year Nine Canyon Wind Project Net Generation - GWhrs power purchase agreement; and each purchaser of Phase 250 237 33 ...........

III has signed a 23-year power purchase agreement. The 226.73 22b6.2 agreements are part of the 2nd Amended and Restated Nine 200 1' Canyon Wind Project Power Purchase Agreement which now has an agreement end date of 2030. Nine Canyon 156.71 158.34 is connected to the Bonneville Power Administration 150 r- - F-7.

transmission grid via a substation and transmission lines constructed by Benton County Public Utility District. 100 Phase I of Nine Canyon, which began commercial operation in September 2002, consists of 37 wind turbines, 50 each with a maximum generating capacity of approximately 1.3 MW, for an aggregate generating capacity of 48.1 MW.

0 Phase II of Nine Canyon, which was declared operational FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 in December 2003, includes 12 wind turbines, each with a maximum generating capacity of 1.3 MW for an aggregate generating capacity of approximately 15.6 MW. Phase III of Nine Canyon Wind Project Cost of Power - Cents / kWh Nine Canyon, which was declared operational in May 2008, 10.00 1*

includes 14 wind turbines, each with a maximum generating capacity of 2.3 MW, for an aggregate generating capacity of 7.88 8.20 8.00 " *.79.

32.2 MW. The total Nine Canyon generating capability is 7.30 95.9 MW, enough energy for approximately 39,000 average 6.05 6.00 homes.

Nine Canyon produced 226.73 GWh of electricity in FY 2010 versus 226.27 GWh in FY 2009 with similar wind 4.00 conditions from the previous year and no major component outages experienced in FY 2010. 2.00 Nine Canyon's cost performance is measured by the cost of power indicator. The cost of power for FY 2010 was 0.00 FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 2010 FINANCIAL DATA & INFORMATION 43

Balance Sheet Analysis to participants offset by a decrease in REPI revenue of $0.8 Total Assets increased $1.8 million from $131.2 million in million. There was an increase in operating expenses of FY 2009 to $133.0 million in FY 2010. Major drivers for the $0.6 million from $11.4 million in FY 2009 to $12.0 million change in assets was an increase of $6.4 million in restricted in FY 2010. Increased operating expenses were mainly due assets related to principal maturities related to the debt to higher BPA scheduling/firming charges discussed above.

service schedule, increases to cash and investments of $1.8 Other Income and Expenses decreased $1.8 million million which was offset by increases to net plant of $6.4 from $6.3 million in net expenses FY 2009 to $4.5 million million. There was an overall increase to liabilities of $2.5 in FY 2010 with the major driver being a $2.0 million million with a decrease to long-term debt of $4.5 million, settlement received for bearing replacement on Phase I increases to current debt maturities of $4.0 million, accrued and II. Investment income associated with bond funds debt-related interest of $3.5 million, with the remaining decreased $0.4 million due to market conditions with lower decrease of $0.5 million due to timing and operating bond-related expenses of $0.2 million accounting for the activities. The decrease in Net Assets was $0.7 million in remainder of other revenues and expenses. Net losses FY 2010 as compared to $1.2 million in FY 2009. The of $0.7 million for FY 2010 continued the trend from decline experienced in previous years is continuing, though previous years. This trend is reflected in the declining Net the trend is consistent with the rate stabilization approach Assets balance. However, results are improved over the loss for Nine Canyon planning. The original plan anticipated reported for FY 2009 of $2.0 million. A declining net asset operating at a loss in the early years and gradually increasing balance is expected in future years until bond principal the rate charged to the purchasers to avoid a large rate payments exceed annual depreciation requirements.

increase after the REPI expires. The REPI incentive expires In previous years Energy Northwest has accrued, as 10 years from the initial operation startup date for each income (contribution) from DOE, REPI payments that phase. Reserves that were established are used to facilitate enable Nine Canyon to receive funds based on generation this plan. The rate plan in FY 2008 was revised to account as it applies to the REPI bill. REPI was created to promote for the shortfall experienced in the REPI funding and to increases in the generation and utilization of electricity from provide a new rate scenario out to the 2030 project end date. renewable energy sources and to further the advances of Energy Northwest did not receive REPI funding in FY 2010 renewable energy technologies.

and is not anticipating future REPI incentives. This program, authorized under Section 1212 of the Energy Policy Act of 1992, provides financial incentive Statement of Operations Analysis payments for electricity produced and sold by new Operating Revenues increased $0.2 million from $15.6 qualifying renewable energy generation facilities. Nine million in FY 2009 to $15.8 million in FY 2010. The project Canyon did not receive funding for FY 2010. The payment received revenue from the billing of the purchasers at an stream from Nine Canyon participants and the REPI average rate of $66.81 per MWh for FY 2010, as compared receipts were projected to cover the total costs over the to $68.62 per MWh for FY 2009, which is reflective of purchase agreement. Continued shortfalls in REPI funding the implementation of the revised rate plan in FY 2008 to for the Nine Canyon project led to a revised rate plan to account for REPI funding shortfalls and costs of operations. incorporate the impact of this shortfall over the life of the Generation was relatively similar to FY 2009. The slight project. The billing rates for the Nine Canyon participants increase in operating revenues was due to higher BPA increased 69 percent and 80 percent for Phase I and Phase scheduling/firming costs of $0.6 million, which are invoiced II participants respectively in FY 2008 in order to cover total 44 Energy Northwest 2010 Annual Report

Nine Canyon Wind Project project costs, projected out to the 2030 proposed project Operating Expenses Total Operating Costs tl ,o.

,..... Other Income / Expenses end date. The increases for FY 2008 were a change from the

$12,000 previous plan where a 3 percent increase each year over the

$11,000 life of the project was projected. Going forward, the increase

$10,000 or decrease in rates will be based on cash requirements of

$9,000 debt repayment and the cost of operations. Phase III started

$8,000 with an initial planning rate of $49.82 per MWh which will

$7,000 increase at 3 percent per year for three years. In year six (FY

$6,000

$5,000 2013), the rate will increase to a rate that will be stabilized

$4,000 over the life of the project. Possible adjustments may be

$3,000 necessary to future rates depending on operating costs and

$2,000 REPI, similar to Phase I and II.

$1,000 II I 0 . . ..

FY 2010 FY 2009 FY 2008 FY 2007 FY 2006 INTERNAL SERVICE FUND The Internal Service Fund (1SF) (formerly the General in net plant due to depreciation of $0.5 million, and 6) an Fund) was established in May 1957. The Internal Service increase to operational activities of $0.4 million.

Fund provides services to the other funds. This fund The net decrease in Net Assets and Liabilities is due to accounts for the central procurement of certain common decreases in Accounts Payable and Payroll-related liabilities goods and services for the business units on a cost of $7.8 million dtic to year-end timing, a decrease to Sales reimbursement basis. (See Note 1 to Financial Statements.) Tax Payable of $4.8 million, due to off-cycle year fuel activity and a $0.3 million decrease to bearer bond activity.

Balance Sheet Analysis The remaining change is due to a decrease in incentive fee Total Assets for FY 2010 decreased $16.1 million from of $3.1 million and a $0.1 million decrease to Net Assets.

$53.7 million in FY 2009 to $37.6 million in FY 2010. The six major items for the change were 1) a decrease of $13.4 Statement of Operations Analysis million to Cash for anticipated year-end check and warrant Net Revenues for FY 2010 decreased $144k from FY redemption, 2) a decrease in performance fee of $3.2 million 2009. Investment income decreased $102k due to lower for payments to Packwood ($0.7 million) and Business invested balance relating to lower yields. Lease activity Development ($2.5 million), 3) an increase of $0.3 million resulted in a decrease of $45k to revenues. Results from to Personal Time Bank investments and cash, 4) an increase operations resulted in a net increase to costs of $922k of $0.2 million in restricted assets due to maturity schedule with an offsetting change of $925k due to decrease in and escrow requirements processing schedule, 5) a decrease depreciation.

FNANCIAL DATA & ><. 45

BALANCE SHEETS As of June 30, 2010 (dollars in thousands)

ASSETS Columbia Packwood Lake : . Business Generating Hydroelectric Nuclear Project Nuclear Project Development  : Nine Canyon Internal Service 2010 Station Project No.1* No.3* Fund Wind Project Subtotal Fund Combined Total CURRENT ASSETS Cash .$ 16,410 $ 991 . 625 $ 186 $ 1,377 $ 8,363 $ 27,952 $ 5,496 1 33,448 Available-for-sale investments

• 14,543 2,559 = 3,134 4,164 - 24,400 21,623 46,023 Accounts and other receivables 947 422 - . 1,085: 137 2,591 221 2,812 Due from other business units 3,260 47 343 121 134: 29 3,934 Due from other funds

• 11,278 324 38,888 996 51,486 Materials and supplies

• 105,051 1 -! 105,051 105,051 Prepayments and other 1,250 67 - - 53 121 1,491 1,093 2,584 TOTAL CURRENT ASSETS 152,739i 1,527i 3,851 42,329 6,813 9,646 216,905 28,433 189,918 CURRENT RESTRICTED ASSETS NOTE 1)

Special funds Cash 2,420 -. 34 3 - 2,457 234 2,691 Available-for-sale investments 75,146 - 3,286 7,980 - 1,555 87,967 2,460 90,427 Accounts and other receivables 335 ". 1 -- - 336 336 Debt service funds Cash 8,085 - 6,820 5,310 7,557 27,772 27,772 Available-for-sale investments 191,886 - 115,645 74,545 . 11,251 393,327 393,327 Accounts and other receivables ---- -: 11 : 11 -11 TOTAL CURRENT RESTRICTED ASSETS 277,872 125,786 87,838 20,374 511,870 2,694 514,564 NONCURRENT ASSETS Utility Plant (Note 2)

In service 3,620,919 13,647 2,399 134,527 3,771,492 47,505 3,818,997 Not in service 25,253 - - 25,253 25,253 Construction work in progress 146,030 - - - 146,030 146,030 Accumulated depreciation (2,391,614) (12,668) (25,253) (742) (33,771) (2,464,048) (40,999) (2,505,047)

Net Utility Plant 1,375,335 979 - 1,657 100,756 1,478,727 6,506 1,485,233 Nuclear fuel, net of accumulated amortization 196,379 -- - - 196,379 - 196,379 TOTAL NONCURRENT ASSETS 1,571,714 979 -- 1,657 i 100,756 1,675,106 1 6,506 1,681,612 DEFERRED CHARGES Costs in excess of billings

• 798,041 1,800,195 1,662,364 - 4,260,600 4,260,600 Unamortized debt expense 10,917 7,428 7,422 - 2,242 28,009 28,009 Other deferred charges 12,747 3,737 - - 1,021 - 17,505 17,505 TOTAL DEFERRED CHARGES 821,705 3,737 l 1,807,623 1,669,786 1,021 2,242 4,306,114 4,306,114 TOTALASSETS 1$ 2,824,030 i$ 6,243 *$ 1,937,260 1$ 1,799,953 $ 9,491 1$ 133,018 1$ 6,709,995 1$ 37,633 1$ 6,692,208

• Project recorded on a liquidation basis.

The accompanying notes are an integral part of these combined financial statements 46 Energy Northwest 2010 Annual Report

LIABILITIES & NET ASSETS Columbia Packwood Lake Business Generating Hydroelectric

• Nuclear Project Nuclear Project Development Nine Canyon Internal Service 2010 Station Project No.1 No.3* Fund Wind Project Subtotal Fund Combined Total CURRENT LIABILITIES Current maturities of long-term debt $ 140,790 $ - $ 75,505 $ 44,050 $ $ 3,965 $ 264,310 $ -. $ 264,310 Accounts payable and accrued expenses 48,941 249 148 106 1,565 680 51,689 29,106 80,795 Due to Participants 28,906 913 29,819 - 29,819 Due to other funds Due to other business units - .- - *- . 3,934 TOTAL CURRENT LIABILITIES 218,637 1,162 75,653 44,156 - 1,565 4,645 345,818 33,040 374,924 LIABILITIES- PAYABLE FROM CURRENT RESTRICTED ASSETS (NOTE 1)

Special funds Accounts payable and accrued expenses 125,142 15,295 1,140 141,577 - 234 141,811 Due to other funds 11,272 321 4,983 996 17,572, Debt service funds Accrued interest payable 59,175 46,957 35,783: 3,481 145,396 145,396 Due to other funds 6 -" 3 33,905 - - 33,914 TOTAL CURRENT RESTRICTED LIABILITIES 195,595 62,576 74,671 5,617 338,459 234 287,207 LONG-TERM DEBT (NOTE 5)

Revenue bonds payable 2,327,455 - 1,739,835 . 1,637,715 140,765 5,845,770 5,845,770 Unamortized (discount)/

premium on bonds - net 78,202 71,488 47,646 4,633 201,969 201,969 Unamortized loss on bond refundings (8,232). - (12,292) (4,235) - (24,759) - (24,759)

TOTAL LONG-TERM DEBT 2,397,425 - 1,799,031 1 1,681,126 - i 145,398 6,022,980 " 6,022,980 OTHER LONG-TERM LIABILITIES 12,373 12,373 -i 12,373 DEFERRED CREDITS Billings in excess of cost - 5,081 5,081 5,081 Advances from Members and others 706 706 Other deferred credits S

- -229 229 4 233 TOTAL DEFERRED CREDITS S5,081" - 229i 5,310 710 6,020 NET ASSETS Invested in capital assets, net of related debt - - 1,657 (46,365): (44,708) 6,505 (38,203)

Restricted, net - 14,529 14,529 2,460 16,989 Unrestricted, net 6,269 8,965 1S,234 (5,316) 9,918 NET ASSETS " -: - " 7,926 (22,871): (114,945) 3,649 (11,296):

TOTAL LIABILITIES 2,824,030 6,243 1,937,260 1,799,953 1,565 155,889 6,724,940 i 33,984 6,703,504 TOTAL LIABILITIES AND $ 2,824,030 i 6,243 $ 1,937,260 $ 1,799,953 $ 9,491 $ 133,018 $ 6,709,995 $ 37,633 $ 6,692,208 NET ASSETS. ----

• Project recorded on a liquidation basis.

The accompanying notes are an integral part of these combined financial statements 2010 FINANCIAL DATA & INFORMATION 47

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS As of June 30, 2010 (dollars in thousands)

Columbia Packwood Lake Business Generating Hydroelectric Nuclear Project Nuclear Project Development Nine Canyon Internal Service 2010 Station Project No.1* No.3* Fund Wind Project Subtotal Fund Combined Total OPERATING REVENUES $ 448,075 $ 1,535 $ $ - $ 10,618 $ 15,757 $ 475,985 $ - $ 475,985 OPERATING EXPENSES Nuclear fuel 35,433 35,433 35,433 Spent fuel disposal fee 7,655 7,655 7,655 Decommissioning 6,766 78 6,844 6,844 Depreciation and amortization 75,883 53 173 6,789 82,898 82,898 Operations and maintenance 172,390 1,282 12,739 5,076 191,487 191,487 Other power supply expense 21 - 21 21 Administrative & general 32,583 146 34 32,763 32,763 Generation tax 3,344181 49 3,775 3,775 TOTAL OPERATING EXPENSES 334,418 1,520 12,912 12,026 360,876 360,876 NET OPERATING REVENUES 113,657 15 (2,294): 3,731 115,109 115,109 OTHER INCOME AND EXPENSE Other 1,298 - 86,187 76,060 3,448 2,000 168,993 69,564 169,107 Investment income 475 4 58 85 1,092 220 1,934 47 1,934 Interest expense and discount amortization (115,430) (19) (84,406) (74,049) (6,700) (280,604) (280,604)

Plant preservation and termination costs - (1,313) (2,096) (3,409) (3,409)

Depreciation and amortization (4) (4) (1,802) (4)

Decommissioning (522) (522) - (522)

Services to other business units --- -(67,695) -

TOTAL OTHER INCOME AND EXPENSE (113,657)i (15): " r 4,540 (4,480):: (113,612)r 114 (113,498).

Changes in Net Assets 2,246 (749) 1,497 114 1,611 (DISTRIBUTION)/CONTRIBUTION 2,500 - 2,500 (3,150) (650)

TOTAL NET ASSETS, BEGINNING OF YEAR 3,180 (22,122) (18,942) 6,685 (12,257)

TOTAL NET ASSETS, ENDOFYEAR A$ -

$ $ -$ 7,926 $ (22,871)i$ (14,945)i$ 3,649 i$ (11,296)

• Project recorded on a liquidation basis.

The accompanying notes are an integral part of these combined financial statements 48 Energy Northwest 2010 Annual Report

STATEMENTS OF CASH FLOWS As of June 30, 2010 (dollars in thousands)

Columbia Packwood Lake Business Generating Hydroelectric Nuclear Project Nuclear Project Development Nine Canyon Internal Service 2010 Station Project No.1* No.3* Fund Wind Project Fund Combined Total CASH FLOWS FROM OPERATING AND OTHER ACTIVITIES Operating revenue receipts $ 491,466 $ 1,087 $ - $ - $ 7,827 $ 16,457 $ $516,837 Cash payments for operating expenses (221,557) (951) (6,071) (5,696) (234,275)

Other revenue receipts 167,085 113,833 1,383 2,000 284,301 Cash payments for preservation, termination expense (317) (44) (361)

Cash payments for services (14,920) (14,920)

Net cash provided/l(used) by operating and other activities 269,909 136 166,768 i 113,789 1 3,139i 12,761 (14,920) 551,582 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from bond refundings 91,171 77,512 355,467 524,150 Refunded bond escrow requirement (16,005) (77,790) (357,079) (450,874)

Payment for bond issuance and financing costs (549) (818) (2,203) (2) (37) - (3,609)

Payment for capital items (67,596) (16)- (459) (376) (1,457) (69,904)

Receipts from sales of plant assets 18 (31) (13)

Nuclear fuel acquisitions (13,541) (13,541)

Interest paid on revenue bonds (125,098) (94,020) (95,635) (3,481) (318,234)

Principal paid on revenue bond maturities (22,282) (2)' (40,155) (38,345) - (100,784)

Escrow refund I - 4 I: LU Net cash provided/(used) by capital and related financing activities (153,899)i (18)i (135,249)) (137,780)i (461)i (3,925): (1,457): (432,789)

CASH FLOWS FROM NON-CAPITAL FINANCE ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities (819,117) (850) (387,266) (272,903) (5,866) (25,138) (32,658) (1,543,798)

Sales of investment securities 713,639 850 362,832 301,856 4,195 31,408 35,292 1,450,072 Interest on investments 516 4 145 197 10 594 14 1,480 Net cash provided/(used) by investing activities (104,962)i 4 (24,289)i 29,150 i (1,661)i 6,864i 2,648: (92,246)

NET INCREASE (DECREASE) IN CASH 11,048 122 7,230 5,159 1,017 15,700 (13,729) 26,547 CASH AT JUNE 30, 2009 15,867 869 249 340 360 220 19,459 37,364 CASH AT JUNE 30, 2010 (NOTE B) ($ 26,915 i$ 991 $S 7,479 5$,499 $ 1,377 i$ 15,920 $ 5,730 $ 63,911

• Project recorded on a liquidation basis.

The accompanying notes are an integral part of these combined financial statements 2010 FINANCIAL DATA & INFORMATION 49

STATEMENTS OF CASH FLOWS (Cont'd)

As of June 30, 2010 (dollars in thousands)

Columbia Packwood Lake : Business  :

Generating Hydroelectric - Nuclear Project Nuclear Project Development Nine Canyon Internal Service 2010 Station Project No.1* No.3* Fund Wind Project Fund Combined Total RECONCILIATION OF NET OPERATING REVENUES TO NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net operating revenues $ 113,657 1$ 15 $ $5 $ (2,294) $ 3,731 $ $ 115,109 Adjustments to reconcile net operating revenues to cash provided by operating activities:

Depreciation and amortization 109,613 55 102 6,773 116,543 Decommissioning 6,766 -" 33 6,799 Other 1,804 18 2,066 48 3,936 Change in operating assets and liabilities:

Deferred charges/costs in excess of billings 43,680 (45) - 43,635 Accounts receivable (595) (159) (577) 829 (502)

Materials and supplies (12,422) - (12,422)

Prepaid and other assets 580. 13 (112). 481 Due from/to other business units, funds and Participants 1,030 889 (553)- 1,366 Accounts payable 6,826 (791) (930) 12 5,117 Other revenue receipts 167,085 - 113,833 3,883 2,000 286,801 Cash payments for preservation, termination expense (317) (44) (361)

Cash payments for services - -(14,920) (14,920)

Net cash provided (used) by operating and other activities $ 269,909 i$ 136 i$ 166,768 $ 113,789 i$ 3,139i$ 12,761 E$ (14,920) $ 551,582

• Project recorded on a liquidation basis.

The accompanying notes are an integral part of these combined financial statements 50 Energy Northwest 2010 Annual Report

ENERGY NORTHWEST NOTES TO FINANCIAL STATEMENTS NOTE 1 -

SUMMARY

OF OPERATIONS AND to 24 months from acceptance of the application. Costs to SIGNIFICANT ACCOUNTING POLICIES date for Columbia relicensing are $12.7 million.

Energy Northwest, a municipal corporation and joint Energy Northwest also operates the Packwood Lake operating agency of the State of Washington, was organized Hydroelectric Project (Packwood), a 27.5-MWe generating in 1957 to finance, acquire, construct and operate facilities plant completed in 1964. Packwood has been operating for the generation and transmission of electric power. under a 50-year license issued by the Federal Energy Membership consists of 23 public utility districts and Regulatory Commission (FERC), which expired on February 5 municipalities. All members own and operate electric 28, 20 10. Energy Northwest submitted the Final License systems within the State of Washington. Application (FLA) for renewal of the operating license to Energy Northwest is exempt from federal income tax and FERC on February 22, 2008. On March 4, 2010, FERC has no taxing authority. issued a one-year extension to operate under the original Energy Northwest maintains seven business units. Each license. Annual extensions for the current license can be unit is financed and accounted for separately from all other issued by FERC for the continued operations of Packwood current or future business units. until the new operating license is issued by FERC. FERC is All electrical energy produced by Energy Northwest awaiting issuance of the National Oceanic and Atmospheric net-billed business units is ultimately delivered to electrical Administration's (NOAA) Biological Opinion (BO), after distribution facilities owned and operated by Bonneville which FERC will complete the final license renewal Power Administration (BPA) as part of the Federal documentation for Packwood. Costs incurred to date for Columbia River Power System. BPA in turn distributes relicensing are $3.7 million.

the electricity to electric utility systems throughout the The electric power produced by Packwood is sold to 12 Northwest, including participants in Energy Northwest's project participant utilities which pay the costs of Packwood, business units, for ultimate distribution to consumers. including the debt service on Packwood revenue bonds.

Participants in Energy Northwest's net-billed business units The Packwood participants are obligated to pay annual consist of public utilities and rural electric cooperatives costs of Packwood including debt service, whether or not located in the western United States who have entered into Packwood is operable, until the outstanding bonds are paid net-billing agreements with Energy Northwest and BPA for or provisions are made for bond retirement, in accordance participation in one or more of Energy Northwest's business with the requirements of bond resolution. The participants units. BPA is obligated by law to establish rates for electric share Packwood revenue as well.

power which will recover the cost of electric energy acquired In 2002, Packwood and its participants entered into a from Energy Northwest and other sources, as well as BPAs Power Sales Agreement with Benton and Franklin PUDs other costs (see Note 6). to guarantee a specified level of power generation from the Energy Northwest operates the Columbia Generating Packwood project. This agreement ended in October 2008.

Station (Columbia), a 1,150-MWe (Design Electric Rating, In October 2008, Packwood entered into a new Power Sales net) generating plant completed in 1984. Energy Northwest Agreement with Snohomish PUD to purchase the entire has obtained all permits and licenses required to operate project output (see Note 6). This contract will be extended Columbia, including a Nuclear Regulatory Commission in fall of 2010 and continue until the fall of 2011. The (NRC) operating license that expires in December 2023. Packwood participants will then assume the responsibility to OnJanuary 19, 2010, Energy Northwest submitted purchase their respective shares in the fall of 2011, or they an application to the NRC to renew the license for an can re-assign their shares to other participants.

additional 20 years, thus continuing operations until 2043. Nuclear Project No. 1, a 1,250-MWe plant, was placed The estimated duration of the license renewal process is 20 in extended construction delay status in 1982, when it 2010 FINANCIAL DATA & INFORMATION 51

was 65 percent complete. Nuclear Project No. 3, a 1,240- is the accepted standard-setting body for establishing MWe plant, was placed in extended construction delay governmental accounting and financial reporting status in 1983, when it was 75 percent complete. On May principles. Energy Northwest has applied all applicable 13, 1994, Energy Northwest's board of directors adopted GASB pronouncements and elected to apply Financial resolutions terminating Nuclear Projects Nos. 1 and 3. All Accounting Standards Board (FASB) standards except funding requirements remain as net-billed obligations of for those conflicting with or in contradiction to GASB Nuclear Projects Nos. 1 and 3. Energy Northwest wholly pronouncements. EffectiveJuly 1, 2009, the FASB owns Nuclear Project No. 1. Energy Northwest is no longer issued the Accounting Standards Codification (ASC).

responsible for site restoration costs for Nuclear Project No. The ASC does not change GAAP and does not have

3. (See Note 13) an effect on the Energy Northwest's financial position The Business Development Fund was established in April or results of operation. Technical references to GAAP 1997 to pursue and develop new energy related business included in this report are provided under the new opportunities. There are four main business lines associated ASC structure. The accounting and reporting policies with this business unit: General Services and Facilities, of Energy Northwest are regulated by the Washington Generation, Professional Services, and Business Unit State Auditor's Office and are based on the Uniform Support. System of Accounts prescribed for public utilities Nine Canyon was established inJanuary 2001 for the and licensees by FERC. Energy Northwest uses the purpose of exploring and establishing a wind energy full accrual basis of accounting where revenues are project. Phase I of the project was completed in FY 2003 recognized when earned and expenses are recognized and Phase II was completed in FY 2004. Phase I and II when incurred. Revenues and expenses related to combined capacity is approximately 63.7 MWe. Phase III Energy Northwest's operations are considered to be was completed in FY 2008 adding an additional 14 wind operating revenues and expenses; while revenues and turbines to the Nine Canyon Wind Project and adding an expenses related to capital, financing and investing aggregate capacity of 32.2 MWe. The total number of activities are considered to be other income and turbines at Nine Canyon is 63 and the total capacity is 95.9 expenses. Separate funds and book of accounts MVwe. are maintained for each business unit. Payment of The Internal Service Fund was established in May 1957. obligations of one business unit with funds of another It is currently used to account for the central procurement business unit is prohibited, and would constitute of certain common goods and services for the business units violation of bond resolution covenants. (See Note 5) on a cost reimbursement basis. Energy Northwest maintains an Internal Service Energy Northwest's fiscal year begins on July 1 and ends Fund for centralized control and accounting of certain on June 30. In preparing these financial statements, the capital assets such as data processing equipment, Company has evaluated events and transactions for potential and for payment and accounting of internal recognition or disclosure through October 30, 2010, the services, payroll, benefits, administrative and general date the financial statements were issued. expenses, and certain contracted services on a cost reimbursement basis. Certain assets in the Internal The following is a summary of the more significant Service Fund are also owned by this Fund and operated policies: for the benefit of other projects. Depreciation relating to capital assets is charged to the appropriate business a) Basis of Accounting and Presentation: The units based upon assets held by each project.

accounting policies of Energy Northwest conform Liabilities of the Internal Service Fund represent to GAAP applicable to governmental units. The accrued payroll, vacation pay, employee benefits, and Governmental Accounting Standards Board (GASB) common accounts payable which have been charged 52 Energy Northwest 2010 Annual Report

directly or indirectly to business units and will be unless it represents a major retirement. When operating funded by the business units when paid. Net amounts plant assets are retired, their original cost together with owed to, or from, Energy Northwest business units are removal costs, less salvage, is charged to accumulated recorded as Current Liabilities-Due to other business depreciation.

units, or as Current Assets-Due from other business The utility plant and net assets of Nuclear Projects units on the Internal Service Fund Balance Sheet. Nos. 1 and 3 have been reduced to their estimated net The Combined Total column on the financial realizable values due to termination. A write-down statements is for presentation only as each Energy of Nuclear Projects Nos. 1 and 3 was recorded in FY Northwest business unit is financed and accounted 1995 and included in Cost in Excess of Billings. Interest for separately from all other current and future expense, termination expenses and asset disposition business units. The FY 2010 Combined Total includes costs for Nuclear Projects Nos. 1 and 3 have been eliminations for transactions between business units charged to operations.

as required in Statement No. 34, "Basic Financial Statements and Management's Discussion and Analysis c) Allowance for Funds Used During Construction for State and Local Governments," of the GASB. (AFUDC): For financing not related to a Capital Pursuant to GASB Statement No. 20, 'Accounting Facility, Energy Northwest analyzes the gross interest and Financial Reporting for Proprietary Funds and expense relating to the cost of the bond sale, taking Other Governmental Entities That Use Proprietary into account interest earnings and draws for purchase Fund Accounting," Energy Northwest has elected or construction reimbursements for the purpose of to apply all FASB standards, except for those that analyzing impact to the recording of capitalized conflict with, or contradict, GASB pronouncements. interest. However, if estimated costs are more than Specifically, GASB No. 7, 'Advance Refundings inconsequential, an adjustment is made to allocate Resulting in Defeasance of Debt," and GASB No. 23, capitalized interest to the appropriate plant account.

'Accounting and Financial Reporting for Refundings Interest costs capitalized for FY 2010 totaled $1.2 of Debt Reported by Proprietary Activities," conflict million and related to Columbia.

with ASC 860, "Transfers and Servicing". As such, the guidance under GASB No. 7 and No. 23 is followed. d) Nuclear Fuel: Energy Northwest has various Such guidance governs the accounting for bond agreements for uranium concentrates, conversion, defeasances and refundings. and enrichment to provide for short-term enriched uranium product and long-term enrichment services.

b) Utility Plant and Depreciation: Utility plant is These contracts do not obligate Energy Northwest to recorded at original cost which includes both direct costs purchase fuel components in excess of the requirements of construction or acquisition and indirect costs. of operations. All expenditures related to the initial Property, plant, and equipment are depreciated using purchase of nuclear fuel for Columbia, including the straight-line method over the following estimated interest, were capitalized and carried at cost. When the useful lives: fuel is placed in the reactor; the fuel cost is amortized to operating expense on the basis of quantity of heat Buildings and Improvements 20 - 60 years produced for generation of electric energy. Accumulated Generation Plant 40 years nuclear fuel amortization (the amortization of the cost Transportation Equipment 6 - 9 years of nuclear fuel assemblies in the reactor used in the General Plant and Equipment 3 - 15 years production of energy and in the fuel pool for less than six months per FERC guidelines) is $53.5 million as of Group rates are used for assets and, accordingly, no June 30, 2010. Fees for disposal of fuel in the reactor gain or loss is recorded on the disposition of an asset 2010 FINANCIAL DATA & INFORMATION 53

are being expensed as part of the fuel cost. restoration funds for Columbia and monies are being Energy Northwest has a contract with the U.S. deposited each year in accordance with an established Department of Energy (DOE) that requires the DOE to funding plan. (See Note 12) accept tide and dispose of spent nuclear fuel (reference of the use of spent fuel is due to the DOE contract and g) Derivative Instruments: InJune 2008, GASB issued current court proceedings. Used fuel is the preferred Statement No. 53, 'Accounting and Financial Reporting term by Energy Northwest.) Although the courts have for Derivative Instruments." Statement No. 53 provides ruled that DOE had the obligation to accept title to a comprehensive framework for the measurement, spent nuclear fuel byJanuary 31, 1998, currently, there recognition and disclosure of derivative instrument is no known date established when DOE will fulfill this transactions for the purpose of enhancing the usefulness legal obligation and begin accepting spent nuclear fuel. and comparability of derivative instrument information Energy Northwest sought damages and an opinion was reported by state and local governments. GASB issued awarding 100 percent of the claim; however, Statement No. 53 is effective for FY 2010. (See Note 14) the DOE has appealed the opinion (see Note 13). h) Restricted Assets: In accordance with bond Spent nuclear fuel litigation costs of $9.4 million were resolutions, related agreements and laws, separate expensed as a result of the DOE opinion rendered. restricted accounts have been established. These The current period operating expense for Columbia assets are restricted for specific uses including debt includes a $7.7 million charge from the DOE for future service, construction, capital additions and fuel spent fuel storage and disposal in accordance with the purchases, extraordinary operation and maintenance Nuclear Waste Policy Act of 1982. costs, termination, decommissioning, operating Energy Northwest has completed the Independent reserves, financing, long-term disability, and workers' Spent Fuel Storage Installation (ISFSI) project, which is compensation claims. They are classified as current or a temporary dry cask storage until the DOE completes non-current assets as appropriate.

its plan for a national repository. ISFSI will store the spent fuel in commercially available dry storage casks i) Cash and Investments: For purposes of the on a concrete pad at the Columbia site. No casks were Statement of Cash Flows, cash includes unrestricted and issued from the cask inventory account in FY 2010. restricted cash balances and each business unit maintains Spent fuel is transferred from the spent fuel pool to the its cash and investments. Short-term highly liquid ISFSI periodically to allow for future refuelings. Current investments are not considered to be cash equivalents, period costs include $33.6 million for nuclear fuel and but are classified as available-for-sale investments and

$1.2 million for dry cask storage costs. are stated at fair value with unrealized gains and losses reported in investment income. (See Note 3) Energy e) Asset Retirement Obligation: Energy Northwest Northwest resolutions and investment policies limit has adopted ASC 410, 'Asset Retirement and investment authority to obligations of the United States Environmental Obligations". This standard requires Treasury, Federal National Mortgage Association Energy Northwest to recognize the fair value of a and Federal Home Loan Banks. Safe keeping agents, liability associated with the retirement of a long-lived custodians, or trustees hold all investments for the benefit asset, such as: Columbia Generating Station, Nuclear of the individual Energy Northwest business units.

Project No. 1, and Nine Canyon, in the period in which it is incurred. (See Note 11) j) Accounts Receivable: The percentage of sales method is used to estimate uncollectible accounts.

Decommissioning and Site Restoration: Energy The reserve is then reviewed for adequacy against Northwest established decommissioning and site an aging schedule of accounts receivable. Accounts 54 Energy Northwest 2010 Annual Report

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

receivable specific to each business unit are recorded in the residing business unit. m) Long-Term Liabilities: Consist of obligations related to bonds payable and the associated premiums/

k) Other Receivables: Other receivables include discounts and gains/losses. Other noncurrent liabilities amounts related to the Internal Service Fund from for Columbia relates to the dry storage cask activity.

miscellaneous outstanding receivables from other business units which have not yet been collected. The Long-Term Liability activity for the year ended amounts due to each business unit are reflected in the June 30, 2010 was as follows:

Due To/From other business unit's account. Other receivables specific to each business unit are recorded in the residing business unit.

LONG-TERM LIABILITIES (dollars in thousands)

Beginning Balance Increases Decreases Ending Balance Columbia Generating Station Revenue bonds payable $ 2,392,382 $91,775 $156,702 $2,327,455 Unamortized (discount)Ipremium on bonds- net 91,995 112 13,905 78,202 Unamortized gain/(Iloss) on bond refundings (11,339) 3,129 1 22 (8,232)

Other noncurrent liabilities 10,597 1,776 12,373 Current portion 22,375 140,790 22,375 140,790 i$ 2,506,010 1$ 237,582 $ 193,004 $ 2,550,5BB Nuclear Project No.1 Revenue bonds payable $ 1,821,165 $ 71,965 $ 153,295 $ 1,739,835 Unamortized (discount)/premium on bonds - net 81,365 5,819 15,696 71,488 Unamortized gain/(loss) on bond refundings (17,641) 5,349 (12,292)

Current portion

• 40,155 75,505 40,155 75,505

$ 1,925,044 $ 158,638 $ 209,146 $ 1,874,536 Nuclear Project No.3 Revenue bonds payable $1,729,005 $309,845 $401,135 $1,637,715 Unamortized (discount)/premium on bonds - net * (2,548): 50,378 184 47,646 Unamortized gain/(Ioss) on bond refundings (8,054) 3,854 35 (4,235)

Current portion

• 71,280 44,050 71,280 44,050

$ 1,789,683 $ 408,127 $ 472,634 $ 1,725,176 Nine Canyon Wind Project Revenue bonds payable *$ 144,730$ $ 3,965 * $ 140,765 Unamortized (discount)/premium on bonds- net 5,126 493 4,633 Current portion - 3,965 3,965

$ 149,856 :$ 3,965 :$ 4,458 $ 149,363 2010 FINANCIAL DATA & INFORMATION 55

n) Debt Premium, Discount and Expense: Original energy sources and to further the advances of renewable issue and reacquired bond premiums, discounts and energy technologies.

expenses relating to the bonds are amortized over This program, authorized under section 1212 of the the terms of the respective bond issues using the Energy Policy Act of 1992, provides financial incentive bonds outstanding method which approximates the payments for electricity produced and sold by new effective interest method. In accordance with GASB qualifying renewable energy generation facilities. Nine Statement No. 23, 'Accounting and Financial Reporting Canyon did not record a receivable for FY 2010 REPI for Refundings of Debt Reported by Proprietary funding as no funds are anticipated to be disbursed to Activities", losses on debt refundings have been deferred Energy Northwest under this program. The payment and amortized as a component of interest expense stream from Nine Canyon participants and the over the shorter of the remaining life of the old or new anticipated REPI receipts were projected to cover the debt. The Balance Sheet includes the original deferred total costs over the purchase agreement. Permanent amount less recognized amortization expense and is shortfalls in REPI funding for the Nine Canyon project included as a reduction to the new debt. led to a revised rate plan to incorporate the impact of this shortfall over the life of the project. The rate o) Revenue Recognition: Energy Northwest accounts schedule for the Nine Canyon participants covers total for expenses on an accrual basis, and recovers, through project costs occurring in FY 2010 and projections out various agreements, actual cash requirements for to the 2030 proposed end date.

operations and debt service for Columbia, Packwood, Nuclear Project No. 1 and Nuclear Project No. 3. For q) Compensated Absences: Employees earn leave in these business units, Energy Northwest recognizes accordance with length of service. Energy Northwest revenues equal to expenses for each period. No accrues the cost of personal leave in the year when net revenue or loss is recognized, and no equity earned. The liability for unpaid leave benefits and accumulated. The difference between cumulative related payroll taxes was $19.0 million atJune 30, 2010, billings received and cumulative expenses is recorded and is recorded as a current liability as either billings in excess of costs (deferred credit) or as costs in excess of billings (deferred debit), as r) Use of Estimates: The preparation of Energy appropriate. Such amounts will be settled during future Northwest financial statements in conformity with operating periods. (See Note 6) GAAP requires management to make estimates and Energy Northwest accounts for revenues and assumptions that directly affect the reported amounts expenses on an accrual basis for the remaining business of assets and liabilities, disclosures of contingent assets units. The difference between cumulative revenues and and liabilities at the date of the financial statements, and cumulative expenses is recognized as net revenue or the reported amounts of revenue and expenses during losses and included in Net Assets for each period. the reporting period. Actual results could differ from these estimates. Certain incurred expenses and revenues p) Capital Contribution: Energy Northwest has are allocated to the business units based on specific accrued through FY 2009, as income (contribution) allocation methods that management considers to be from the DOE, Renewable Energy Performance reasonable.

Incentive (REPI) payments that enable Nine Canyon to receive funds based on generation as it applies to the REPI bill. REPI was created as part of the Energy Policy Act of 1992 to promote increases in the generation and utilization of electricity from renewable 56 Energy Northwest 2010 Annual Report

NOTE 2 - UTILITY PLANT Utility plant activity for the year endedJune 30, 2010 was as follows:

UTILITY PLANT ACTIVITY (dollars in thousands).

Beginning Balance Increases Decreases Ending Balance Columbia Generating Station Generation $ 3,577,229 $ 13,545 $ (2,324) $ 3,588,450 Decommissioning 32,469 32,469 Construction Work-in-Progress 92,390 53,640 146,030 Accumulated Depreciation and Decommissioning (2,321,450) (71,881) 1,717 (2,391,614)

Utility Plant, net* $ 1,380,638 $ (4,696): $ (607) $ 1,375,335 Packwood Lake Hydroelectric Project Generation $ 13,642 $ 5 $ - $ 13,647 Accumulated Depreciation (12,542) (126) (12,668)

Utility Plant, net  :$ 1,100 1$ (121) 1$ - i$ 979 Business Development General $ 1,948 $ 451 $ - $ 2,399 Construction Work-in-Progress Accumulated Depreciation (648) (94) (742)

Utility Plant, net $ 1,300 i$ 357 i: " i$ 1,657 Nine Canyon Wind Project Generation $ 133,290 $ 376 $ - 133,666 Decommissioning 861 861 Construction Work-in-Progress i Accumulated Depreciation and Decommissioning (26,965) (6,806) (33,771)

Utility Plant, net $ 107,186 :$ (6,430) : -i$ 100,756 Internal Service Fund General $ 47,475 $ 1,350 $ (1,320) $ 47,505 Construction Work-in-Progress 0 Accumulated Depreciation (40,517) (1,802) 1,320 (40,999)

Utility Plant, net $ 6,958 1$ (452):i$ - i$ 6,506

• Does not include Nuclear Fuel Amount of $196 million, net of amortization.

2010 FINANCIAL DATA & INFORMATION 57

NOTE 3 - DEPOSITS AND INVESTMENTS As of June 30, 2010, Energy Northwest had the following unrealized gains and losses:

AVAILABLE-FOR-SALE-INVESTMENTS (dollars inthousands)

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

Columbia Generating Station i$ 281,518 $ 57 .$ 281,575

+

Packwood Lake Hydroelectric Project 4-Nuclear Project No. 1 121,490 121,490 Nuclear Project No. 3 85,659 85,659 Business Development Fund 4,163 11 4,164 Internal Service Fund 24,011 72 24,083 Nine Canyon Wind Project 12,730 78 (2) 12,806 (I) Al investments are in U.S.Government backed securities including U.S.Government Agencies and Treasury Bills.

(2) Themajority of investments have maturities of less than 1 year. Approximately $11.86 millionhave a maturity beyond 1 year with the longest maturity being December 14, 2012.

Interest rate risk: In accordance with its investment Custodial credit risk, Deposits: For a deposit, policy, Energy Northwest manages its exposure to declines this is the risk that in the event of bank failure, Energy in fair values by limiting investments to those with maturities Northwest's deposits may not be returned to it. Energy designated in specific bond resolutions. Northwest's interest bearing accounts and certificates of deposits are covered up to $250,000 by Federal Depository Credit risk: Energy Northwest's investment policy Insurance (FDIC) while non-interest bearing deposits are restricts investments to debt securities and obligations of the entirely covered by FDIC and if necessary, all interest and U.S.Treasury, U.S. Government agencies Federal National non-interest bearing deposits are covered by collateral held Mortgage Association and the Federal Home Loan Banks, in multiple financial institution collateral pool administered certificates of deposit and other evidences of deposit at by the Washington State Treasurer's Local Government financial institutions qualified by the Washington Public Investment Pool (PDPC). Under state law, public Deposit Protection Commission (PDPC), and general depositories under the PDPC may be assessed on a prorated obligation debt of state and local governments and public basis if the pool's collateral is insufficient to cover a loss. As authorities recognized with one of the three highest credit a result, deposits covered by collateral held in the multiple ratings (AAA, AA+, AA, or equivalent). This investment financial institution collateral pool are considered to be policy is more restrictive than the state law. insured. State law requires deposits may only be made with institutions that are approved by the PDPC.

Concentration of credit risk: Energy Northwest investment policy does not specifically address concentration of credit risk. An individual authorized security or obligation can receive up to 100 percent of the authorized investment amount; there are no individual concentration limits.

58 Energy Northwest 2010 Annual Report

NOTE 4 - OTHERS DEFERRED CHARGES During the year endedJune 30, 2010, Energy Northwest AND DEFERRED CREDITS issued, for Nuclear Projects No. 1 and 3, the Series 2010-A Other deferred charges of $12.7 million and $3.7 million Bonds. The Series 2010-B Bonds were issued for Nuclear relate to the Columbia and Packwood relicensing effort, Projects No. 1 and 3, and Columbia. The Series 20 10-respectively. The Business Development deferred charge of C Bonds were issued for Columbia. The Series 2010-A,

$1.0 million is due to derivative power options. (See Note 2010-B, 2010-C Bonds issued for Nuclear Project No. 1,

14) Deferred Credits of $0.2 million consist of turbine Nuclear Project No. 3, and Columbia are fixed rate bonds elevator purchases for Nine Canyon that will be completed with a weighted average coupon interest rate ranging from in FY 2013. 4.49 percent to 4.86 percent. These transactions resulted in a net gain for accounting purposes of $0.23 million.

NOTE 5 - LONG-TERM DEBT According to GASB No. 23, 'Accounting and Financial Each Energy Northwest business unit is financed Reporting for Refundings of Debt Reported by Proprietary separately. The resolutions of Energy Northwest authorizing Activities," gains and losses on the refundings are deferred issuance of revenue bonds for each business unit provide and amortized over the remaining life of the old debt or the that such bonds are payable from the revenues of that new debt, whichever is shorter.

business unit. All bonds issued under Resolutions Nos. 769, The Series 2010-A Bonds issued for Nuclear Project No.

775 and 640 for Nuclear Projects Nos. 1, 3 and Columbia, 1 and Nuclear Project No. 3 are tax exempt fixed-rate bonds respectively, have the same priority of payment within the that refunded variable rate bonds.

business unit (the "Prior Lien Bonds"). All bonds issued The Series 2010-B Bonds, issued for Nuclear Project under Resolutions Nos. 835, 838 and 1042 (the "Electric No. 1, Nuclear Project No. 3 and Columbia are tax exempt Revenue Bonds") for Nuclear Projects Nos. 1, 3 and fixed-rate bonds that extended debt.

Columbia, respectively, are subordinate to the Prior Lien The Series 2010-C Bonds issued for Columbia are Bonds and have the same subordinated priority of payment taxable fixed-rate Build America Bonds to finance a portion within the business unit. Nine Canyon's bonds were of the cost of certain capital improvements at Columbia.

authorized by the following resolutions: Resolution No. 1214 The Bond Proceeds, Weighted Average Coupon Interest 2001 Bonds, Resolution No. 1299 2003 Bonds, Resolution Rates, Net Accounting Loss, and Total Defeased Bonds for No. 1376 2005 Bonds and Resolution No. 1482 the 2006 2010-A, 2010-B, and 2010-C are presented in the following Bonds. tables:

2010 FINANCIAL DATA & INFORMATION 59

BOND PROCEEDS (dollars in millions) 2010A 2010B 2010C Total Energy Northwest did not issue or refund any bonds Project 1 i$ 76.95 $ 0.83 $ -iS 77.78 associated with Packwood or Nine Canyon for FY 2010.

CGS 1601 75.77 91.78 In prior fiscal years, Energy Northwest also defeased Project 3 322.65 34.43 357.08 certain revenue bonds by placing the net proceeds from Total $ 399.60 $ 51.27 $ 75.77 i 526.64 the refunding bonds in irrevocable trusts to provide for WEIGHTED AVERAGE COUPON INTEREST all required future debt service payments on the refunded RATE FOR REFUNDED BONDS bonds until their dates of redemption. Accordingly, the 2010A 2010B trust account assets and liability for the defeased bonds Total N/A* 5.00%

are not included in the financial statements in accordance

• The 2010A issue refunded variable rate bonds that are not included.

with GASB statements No. 7 and 23. Including the FY 2010 defeasements, $34.4 million, $45.4 million, and WEIGHTED AVERAGE COUPON INTEREST RATE FOR NEW BONDS $43.9 million of defeased bonds were not called or had not 2010A 2010B 2010C matured atiune 30, 2010, for Nuclear Projects Nos. 1 and 3, Total 4.85% 4.49% 4.86% and Columbia respectively.

Outstanding principal on revenue and refunding bonds NET ACCOUNTING LOSS (Gain) ($ in millions) for the various business units as of June 30, 2010, and future 2010A 2010B 2010C Total debt service requirements for these bonds are presented in Project 1 $ (0.12) $ (0.01) $ $ (0.13) the following tables:

CGS 0.00 0.02 0.02 Project 3 (0.52) 0.40 (0.12)

Total $ (0.64) i$ 0.41 i$ $ (0.23)

TOTAL DEFEASED ($ in millions) 2010A 2010B 2010C Total Project 1 $ 76.96 S 0.83 $ $ 77.79 CGS 16.01 16.01 Project 3 322.65 34.43 357.08 Total $ 399.61 $ 51.27 $ $ 450.88 60 Energy Northwest 2010 Annual Report

OUTSTANDING LONG-TERM DEBT As Of June 30, 2010 (dollars In thousands)

COLUMBIA REVENUE AND REFUNDING BONDS NUCLEAR PROJECT NO.1 Serialor Term REFUNDING REVENUE BONDS Series CouponRate(% Maturities Amount Serialor Term 1992A 6.30 7-1-2012 $ 50,000 Series CouponRate1% Maturities Amount 1994A 5.40 7-1-2012 100,200 19898 7.125 7-1-2016 $41,070 2001A 5.00-5.50 7-1-13(2017 186,600 2001 A 4.50-5. 50 7-1-10/2013 76,560 2002A 5.20-5.75 7-1-17/2018 157,260 2002A 5.50-5.75 7-1-13/201 7 248,485 2002 B 5.35-6.00 7-1-2018 123,815 20028 6.00 7-1-2017 101,950 2003A 5.50 7-1-10/2 015 132,970 2003A 5.50 7-1-13(2017 241,455 2003 F 5.00-5.25 7-1-10/2018 33,165 2004A 5.25 7-1-2013 62,485 2004A 5.25 7-1-10/2018 259,680 20048 5.50 7-1-2013 1,135 2004B 5.50 7-1-20 13 12,715 2005A 5.00 7-1-13(20 15 72,175 2004C 5.25 7-1-10/2018 21,275 2006A 5.00 7-1-10/2017 270,490 2005A 5.00 7-1-15/2018 114,985 2007A 5.00 7-1-13/2017 51,730 2005C 4.40-4.74 7-1-10/2 015 80,415 20078 5.07-5.10 7-1-12/20 13 6,740 2006A 5.00 7-1-20/2024 434,210 2007C 5.00 7-1-13/2017 219,020 2006B 5.23 7-1-2011 4,420 2008A 5.00-5.25 7-1-13/2017 230,535 2006C 5.00 7-1-2012024 62,200 2008D 5.00 7-1-10/20 17 70,125 2006D 5.80 7-1-2023 3,425 2009A 3.25-5 .00 7-1-14/2015 48,905 2007A 5.00 7-1-13/2018 77,575 20098 4.59 7-1-2014 515 2007B 5.07-5.33 7-1-12/2021 10,665 201 OA 2.00-5.00 7-1-11/2 017 71,150 20070 5.00 7-1-21/2 024 35,080 20108B 2.00 7-1-2011 815 2008A 5.00-5 .25 7-1-14/2018 110,935 2008B 5.95 7-1-20/2021 12,025 Revenue bonds payable $1,815,340 2008C 5.00-5.2 5 7-1-21/2 024 37,240 Estimated fair value at June 30, 2010 $2,033,472 1(B) 2008D 5.00 7-1-10/2012 111,505 (B)The estimated fair value shown has been reported to meet the disclosure requirements 2009A 3.00-5.00 7-1-14/2018 116,425 of the Accounting Standards Codification (ASC)820 and does not purport to represent the amounts at which these obligations would be settled.

2009B 4.59-6.80 7-1-14/2024 18,515 2009C 4.2 5-5 .00 7-1-20/2024 69,170 20108B 3.75-4.25 7-1-20/2024 16,005 2010C 4.524-5.124 7-1-20/2024 75,770 Revenue bonds payable $ 2,468,245 Estimated fair value at June 30, 2010 $ 2,716,493: (13)

(B)The estimated fair value shown has been reported to meet the disclosure requirements of the Accounting Standards Codification (ASC)820 and does not purport to represent the amounts at which these obligations would be settled.

2010 FINANCIAL DATA & INFORMATION 61

OUTSTANDING LONG-TERM DEBT (Cont'd)

As Of June 30, 2010 (dollars In thousands)

NUCLEAR PROJECT NO.3 NINE CANYON WIND PROJECT REVENUE REFUNDING REVENUE BONDS AND REFUNDING BONDS Serial or Term Serial or Term Series Coupon Rate (%) Maturities Amount Series Coupon Rate (%) Maturities Amount 1989A (A) 7-1-10/2014  :$ 7,633 2003 3.75-5.00 7-1-10/2023 1$ 17,600 1989B (A) 7-1-10/2014 24,513 2005 4.50-5.00 7-1-10/2023

• 57,720 7.125 7-1-2016 76,145 2006 4.50-5.00 7-1-10/2030 *69,410 100,658 1990B * (A) 7-1-2010 2,694 Revenue bonds payable $ 144,730 1993C (A) 7-1-13/2018 23,963 Estimated fair value at June 30, 2010 $ 150,701 (8) 2001A 5.50 7-1-11/2018 139,275 2002B 6.00 7-01-2016 75,360 (B)The estimated fair value shown has been reported to meet the disclosure requirements of the Accounting Standards Codification (ASC) 820 and does not purport to represent the 2003A 5.50 7-1-11/2017 241,915 amounts at which these obligations would be settled.

2004A 5.25 7-1-14/2016 83,835 20048 5.50 7-1-2013 1,515 2005A 5.00 7-1-13/2015 129,265 Total bonds payable i$ 6,110,080 2006A 5.00 7-1-16/2018 39,445 Estimated fair value at June 30, 2010 $ 6,767,536 2007A 4.50-5.00 7-1-13/2018 84,465 2007B 5.07 7-1-2012 1,725 2007C 5.00 7-1-12/2018 61,085 2008A 5.25 7-1-2018 13,790 2008B 3.70 7-1-2010 110 2008D

• 5.00 7-1-11/2017 50,615 2009A 5.00-5.25 7-1-14/2018 116,055 2009B

• 4.59 7-1-2014 970 2010A 5.00 7-1-16/2018 279,980 2010B 5.00 7-1-2016 29,865 Compound interest bonds accretion 197,547 Revenue bonds payable $ 1,681,765 Estimated fair value at June 30, 2010 is 1,866,870 !(8)

(A)Compound Interest Bonds (B)The estimated fair value shown has been reported to meet the disclosure requirements of the Accounting Standards Codification (ASC) 820 and does not purport to represent the amounts at which these obligations would be settled.

62 Energy Northwest 2010 Annual Report

DEBT SERVICE REQUIREMENTS As Of June 30, 2010 (Dollars In Thousands)

COLUMBIA GENERATING STATION NUCLEAR PROJECT NO. 1 Fiscal Year Principal Interest Total FiscalYear Principal Interest Total 6/30/2010 Balance- 140,790 $ 59,175 $ 199,965 6/30/2010 Balance* $ 75,505 $ 46,957 ~$ 122,462 2011 94,395 120,543 214,938 2011 93,045 91,136 184,181 2012 266,810 115,758 382,568 2012 91,495 86,737 178,232 2013 69,090 101,310 170,400 2013 313,770 82,095 . 395,865 2014 113,235 97,837 211,072 2014 368,040 65,788 433,828 2015-2017 518,530 244,133 762,663 2015 191,970 46,787 238,757 201 8-2022 937,755 197,210 1,134,965 2016 326,980 37,197 364,177 2023-2024 327,640 25,013 352,653 2017 354,535 19,372 373,907 2,468,245 $ 960,979 ~$ 3,429,224 ~$ 1,815,340 1$ 476,069 $ 2,291,409 Principalandinterest dueJuly1,2010. PrincipalandInterestdueJuly 1,2010.

NUCLEAR PROJECT NO. 3 NINE CANYON WIND PROJECT Fiscal Year Principal Interest Total FiscalYear Principal Interest Total 6/30/2010 Balance* $ 10,167 $ 69,666 ~$ 79,833 6/30/2010 BalanWe $ 3,965 $ 3,481 $ 7,446 2011 .82,149 101,879 184,028 2011 4,260 6,774 11,034 2012 69,132 98,299 167,431 2012 4,575 6,570 11,145 2013 131,875 102,797 234,672 2013 6,930 6,351 13,281 2014 124,704 94,732 219,436 201 4-2017 31,310 21,873 53,183 2015 151,885 66,481 218,366 2018-2021 37,835 15,445 53,280 2016 . 264,214 61,179 325,393 2022-2025 30,460 7,827 38,287 2017 272,812 46,059 318,871 2026-2029 19,855 3,305 23,160 2018 377,281 28,209 405,490 2030 5,540 249 5,789 5 144,730 i$ 71,875 i$ 216,605 Adjustment **197,546 (197,546)

PrincipalandInterestdueJuly1,2010.

1,681,765 ~$ 471,755 :1$ 2,153,520 Principalandinterest dueJuly1,2010.

Adjustment for Compound Interest Bends Compound accretion; Interest Bends arereflected at their faceamount lessdiscountern thebalance sheet NOTE 6 - NET BILLING a pro-rata share of the total annual costs of the respective projects, including debt service on bonds relating to each Security - Nuclear Projects Nos. 1 and 3 and business unit. BPA is then obligated to reduce amounts Columbia Generating Station from participants under BPA power sales agreements by The participants have purchased all of the capability of the same amount. The net-billing agreements provide that Nuclear Projects Nos. 1 and 3 and Columbia. BPA has in participants and BPA are obligated to make such payments turn acquired the entire capability from the participants whether or not the projects are completed, operable or under contracts referred to as net-billing agreements. operating and notwithstanding the suspension, interruption, Under the net-billing agreements for each of the business interference, reduction or curtailment of the projects' units, participants are obligated to pay Energy Northwest Output.

2010 FINANCIAL DATA & INFORMATION 63

On May 13, 1994, Energy Northwest's Board of the Washington State Department of Retirement Systems, Directors adopted resolutions terminating Nuclear Projects under cost-sharing multiple-employer public employee Nos. 1 and 3. The Nuclear Projects Nos. 1 and 3 project defined benefit and defined contribution retirement agreements and the net-billing agreements, except for plans. The Department of Retirement Systems (DRS), a certain sections which relate only to billing processes and department within the primary government of the State accrued liabilities and obligations under the net-billing of Washington, issues a publicly available comprehensive agreements, ended upon termination of the projects. Energy annual financial report (CAFR) that includes financial Northwest entered into an agreement with BPA to provide statements and required supplementary information for for continuation of the present budget approval, billing and each plan. The DRS CAFR may be obtained by writing payment processes. With respect to Nuclear Project No. 3, to: Department of Retirement Systems, Communications the ownership agreement among Energy Northwest and Unit, PO. Box 48380, Olympia, WA 98504-8380; or it private companies was terminated in FY 1999. (See Note may be downloaded from the DRS website at www.drs.

13) wa.gov. The following disclosures are made pursuant to GASB Statements No. 27, Accounting for Pensions by State Security - Packwood Lake Hydroelectric Project and Local Government Employers and No. 50, Pension The Packwood participants and Snohomish PUD have Disclosures, an Amendment of GASB Statements No. 25 a Power Sales agreement that became effective in October and No. 27.

2008. Under the agreement, Snohomish PUD purchases all of the output directly. The power purchase agreement Public Employees' Retirement System (PERS)

(PPA) provides a predetermined rate for all firm delivery, Plans 1, 2, and 3 per the contract schedule and the Mid-Columbia (Mid-C) PERS is a cost-sharing multiple-employer retirement based rate for all firm deliveries above firm, or secondary system comprised of three separate plans for membership power. Packwood is obligated to supply a specified amount purposes: Plans 1 and 2 are defined benefit plans and Plan of power. If power production does not supply the required 3 is a defined benefit plan with a defined contribution amount of power, Packwood is required to provide component.

any shortfall by purchasing power on the open market Membership in the system includes: elected officials; which resulted in $22k of purchased power in FY 2009. state employees; employees of the Supreme, Appeals, and Conversely, if there is excess capacity per the PPA with Superior courts (other than judges currently in a judicial Snohomish PUD, Packwood sells the excess on the open retirement system); employees of legislative committees; market for additional revenues to be included as part of community and technical colleges, college and university the PPA with the Packwood participants. The Packwood employees not participating in national higher education participants are obligated to pay annual costs of the project retirement programs; judges of district and municipal including debt service, whether or not Packwood is operable, courts; and employees of local governments.

until the outstanding bonds are paid or provisions are made PERS participants who joined the system by September for bond retirement, in accordance with the requirements 30, 1977, are Plan 1 members. Those who joined on or of the bond resolution. The Packwood participants also after October 1, 1977, and by either, February 28, 2002, share project revenue to the extent that the amounts exceed for state and higher education employees, or August 31, project costs. 2002, for local government employees, are Plan 2 members unless they exercise an option to transfer their membership NOTE 7- PENSION PLANS to Plan 3. PERS participants joining the system on or after Substantially all Energy Northwest full-time and March 1, 2002, for state and higher education employees, qualifying part-time employees participate in one of the or September 1, 2002, for local government employees following statewide retirement systems administered by have the irrevocable option of choosing membership in 64 Energy Northwest 2010 Annual Report

either PERS Plan 2 or PERS Plan 3. The option must be actuarial reduction will apply. The benefit is also actuarially exercised within 90 days of employment. An employee reduced to reflect the choice of a survivor option. There is reported in Plan 2 until a choice is made. Employees is no cap on years of service credit; and a cost-of-living who fail to choose within 90 days default to PERS Plan 3. allowance is granted (based on the Consumer Price Index),

Notwithstanding, PERS Plan 2 and Plan 3 members may capped at 3 percent annually.

opt out of plan membership if terminally ill, with less than PERS Plan 3 has a dual benefit structure. Employer five years to live. contributions finance a defined benefit component, and PERS Plan 1 and Plan 2 defined benefit retirement member contributions finance a defined contribution benefits are financed from a combination of investment component. The defined benefit portion provides a benefit earnings and employer and employee contributions. PERS calculated at 1 percent of the AFC per year of service.

retirement benefit provisions are established in state statute (The AFC is based on the greatest compensation during and may be amended only by the State Legislature. any eligible consecutive 60-month period.) Effective PERS Plan 1 members are vested after the completion June 7, 2006, PERS Plan 3 members are vested in the of five years of eligible service. Plan 1 members are eligible defined benefit portion of their plan after ten years of for retirement after 30 years of service, or at the age of 60 service; or after five years of service, if twelve months of with five years of service, or at the age of 55 with 25 years that service are earned after age 44; or after five service of service. The annual benefit is 2 percent of the average credit years earned in PERS Plan 2 prior toJune 1, 2003.

final compensation (AFC) per year of service, capped at 60 Plan 3 members are immediately vested in the defined percent. (The AFC is based on the greatest compensation contribution portion of their plan. Vested Plan 3 members during any 24 eligible consecutive compensation months.) are eligible to retire with full benefits at age 65, or they This annual benefit is subject to a minimum for PERS may retire at age 55 with 10 years of service. PERS Plan 3 Plan 1 retirees who have 25 years of service and have been members who retire prior to the age of 65 receive reduced retired 20 years, or who have 20 years of service and have benefits. If retirement is at age 55 or older with at least been retired 25 years. Plan 1 members who retire from 30 years of service, a 3 percent per year reduction applies; inactive status prior to the age of 65 may receive actuanially otherwise an actuarial reduction will apply. The benefit is reduced benefits. If a survivor option is chosen, the benefit also actuarially reduced to reflect the choice of a survivor is further reduced. A cost-of living allowance (COLA) is option. There is no cap on years of service credit, and Plan granted at age 66 based upon years of service times the 3 provides the same cost-of-living allowance as Plan 2.

COLA amount, which is increased 3 percent annually. Plan The defined contribution portion can be distributed in 1 members may also elect to receive an optional COLA accordance with an option selected by the member, either as that provides an automatic annual adjustment based on a lump sum or pursuant to other options authorized by the the Consumer Price Index. The adjustment is capped Employee Retirement Benefits Board.

at 3 percent annually. To offset the cost of this annual There are 1,192 participating employers in PERS.

adjustment, the benefit is reduced. Membership in PERS consisted of the following as of the PERS Plan 2 members are vested after the completion latest actuarial valuation date for the plans of June 30, 2008:

of five years of eligible service. Plan 2 members may retire at the age of 65 with five years of service with an Retirees and Beneficiaries Receiving Benefits 73,122 allowance of 2 percent of the AFC per year of service. Terminated Plan Members Entitled to But Not Yet Receiving Benefits 27,267 Active Plan Members Vested 105,212 (The AFC is based on the greatest compensation during Active Plan Members Non-vested 56,456 any eligible consecutive 60-month period.) Plan 2 members Total 262,057 who retire prior to the age of 65 receive reduced benefits.

If retirement is at age 55 or older with at least 30 years of service, a 3 percent per year reduction applies; otherwise an 2010 FINANCIAL DATA & INFORMATION 65

PERS Plan 1 PERS Plan 2 PERS Plan 3 Funding Policy 2010 $ 214,117 $ 7,238,997 $ 3,971,410 Each biennium, the state Pension Funding Council 2009 $ 244,531 $ 6,774,304 $ 2,964,075 adopts Plan 1 employer contribution rates, Plan 2 employer 2008 $ 201,971 S 4,313,031 $ 1,702,720 and employee contribution rates, and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by statute at 6 percent for state agencies and NOTE 8 - DEFERRED COMPENSATION PLANS local government unit employees, and at 7.5 percent for state Energy Northwest provides a 401 (k) Deferred government elected officials. The employer and employee Compensation Plan (401(k) Plan), and a 457 Deferred contribution rates for Plan 2 and the employer contribution Compensation Plan. Both plans are defined contribution rate for Plan 3 are developed by the Office of the State plans that were established to provide a means for Actuary to fully fund Plan 2 and the defined benefit portion investing savings by employees for retirement purposes.

of Plan 3. All employers are required to contribute at the All permanent, full-time employees are eligible to enroll level established by the Legislature. Under PERS Plan 3, in the plans. Participants are immediately vested in employer contributions finance the defined benefit portion their contributions and direct the investment of their 4of the plan, and member contributions finance the defined contribution. Each participant may elect to contribute contribution portion. The Employee Retirement Benefits pre-tax annual compensation, subject to current Internal Board sets Plan 3 employee contribution rates. Six rate Revenue Service limitations.

options are available ranging from 5 to 15 percent; two of For the 401 (k) Plan, Energy Northwest may elect to the options are graduated rates dependent on the employee's make an employer matching contribution for each of its age. As a result of the implementation of the Judicial employees who is a participant during the plan year. The Benefit Multiplier Program inJanuary 2007, a second tier amount of such an employer match shall be 50 percent of of employer and employee rates was developed to fund, the maximum salary deferral percentage. During FY 2010 along with investment earnings, the increased retirement Energy Northwest contributed $2.9 million in employer benefits of those justices and judges that participate in the matching funds.

program. The methods used to determine the contribution requirements are established under state statute in NOTE 9 - OTHER EMPLOYMENT BENEFITS accordance with chapters 41.40 and 41.45 RCW - POST-EMPLOYMENT The required contribution rates expressed as a percentage In addition to the pension benefits available through of current-year covered payroll, as of December 31, 2009, PERS, Energy Northwest offers post-employment life are as follows: insurance benefits to retirees who are eligible to receive pensions under PERS Plan 1, Plan 2, and Plan 3. There PERS Plan 1 PERS Plan 2 PERS Plan 3 are 83 retirees that remain participants in the insurance Employer* 5.31%** 5.31%** 5.31%*** program. In 1994, Energy Northwest's Executive Board Employee 6.00%**** 3.90%...*

approved provisions which continued the life insurance

• The employer rates include the employer administrative expense fee currently set benefit to retirees at 25 percent of the premium for at 0.16 percent.

• • The employer rate for state elected officials is 7.89 percent for Plan 1 and 5.31 employees who retire prior toJanuary 1, 1995, and charged percent for Plan 2 and Plan 3.

• • • Plan 3 defined benefit portion only. the full 100 percent premium to employees who retired after The employee rate for state elected officials is 7.50 percent for Plan 1 and 3.90 percent for Plan 2. December 31, 1994. The life insurance benefit is equal to

• Variable from 5.0 percent minimum to 15.0 percent maximum based on rate selected by the PERS 3 member. the employee's annual rate of salary at retirement for non-bargaining employees retiring prior toJanuary 1, 1995. The Both Energy Northwest and the employees made the life insurance benefit has a maximum limit of $10,000 for required contributions. Energy Northwest's required retirees after December 31, 1994. The cost of coverage for contributions for the years endingJune 30 were as follows: retirees remained unchanged for FY 2010 and was $2.82 66 Energy Northwest 2010 Annual Report

per $1,000 of coverage. Employees who retired prior to insurance layer. The current maximum deferred premium January 1, 1995, contribute $.58 per $1,000 of coverage for each nuclear incident is $117.5 million per reactor, but while Energy Northwest pays the remainder; retirees after not more than $17.5 million per reactor may be charged in December 31, 1994, pay 100 percent of the cost coverage. any one year for each incident. Nuclear property damage Premiums are paid to the insurer on a current period basis. and decontamination liability insurance requirements At the time each employee retired, Energy Northwest are met through a combination of commercial nuclear accrued an estimated liability for the actuarial value of the insurance policies purchased by Energy Northwest and BPA.

future premium. Energy Northwest revises the liability for The total amount of insurance purchased is currently $2.8 the actuarial value of estimated future premiums, net of billion. The deductible for this coverage is $5.0 million per retiree contributions. The total liability recorded atJune 30, occurrence.

2010, was $0.7 million for these benefits.

During FY 2010, pension costs for Energy Northwest NOTE 11 - ASSET RETIREMENT OBLIGATION employees and post-employment life insurance benefit costs (ARO) for retirees were calculated and allocated to each business Energy Northwest adopted ASC 410 onJuly 1, 2002.

unit based on direct labor dollars. This allocation basis This standard requires an entity to recognize the fair value resulted in the following percentages by business unit for of a liability of an ARO for legal obligations related to the FY 2010 for this and other allocated costs; Columbia at 94 dismantlement and restoration costs associated with the percent; Business Development at 4 percent; and Project 1, retirement of tangible long-lived assets, such as nuclear Nine Canyon, Packwood and Project 3 receiving the residual decommissioning and site restoration liabilities, in the period amount of 2 percent. in which it is incurred. Upon initial recognition of the AROs that are measurable, the probability weighted future cash NOTE 10. INSURANCE flows for the associated retirement costs are discounted using a credit-adjusted-risk-free rate, and are recognized as both Nuclear Licensing and Insurance a liability and as an increase in the capitalized carrying Energy Northwest is a licensee of the Nuclear Regulatory amount of the related long-lived assets. Capitalized asset Commission and is subject to routine licensing and user fees, retirement costs are depreciated over the life of the related to retrospective premiums for nuclear liability insurance, and asset with accretion of the ARO liability classified as an to license modification, suspension, or revocation or civil operating expense on the statement of operations and Net penalties in the event of violations of various regulatory and Assets each period. Upon settlement of the liability, an license requirements. entity either settles the obligation for its recorded amount Federal law under the Price Anderson Act currently or incurs a gain or loss if the actual costs differ from the limits public liability claims from a nuclear incident. As of recorded amount. However, with regard to the net-billed June 30, 2010, the current limit was $12.6 billion and is projects, BPA is obligated to provide for the entire cost of subject to change to account for the effects of inflation and decommissioning and site restoration; therefore, any gain changes in the number of licensed reactors. As required or loss recognized upon settlement of the ARO results in an by law, Energy Northwest has purchased the maximum adjustment to either the billings in excess of costs (liability) commercial insurance available of $375 million, which is or costs in excess of billings (asset), as appropriate, as no net the primary layer of protection. The remaining balance is revenue or loss is recognized, and no equity is accumulated covered by the industry's retrospective rating plan that uses for the net-billed projects.

deferred premium charges to every reactor licensee if a Energy Northwest has identified legal obligations to nuclear incident at any licensed reactor in the United States retire generating plant assets at the following business results in claims that exceed the individual licensee's primary units: Columbia, Nuclear Project No. I and Nine Canyon.

2010 FINANCIAL DATA & INFORMATION 67

Decommissioning and site restoration requirements for in utility operations for the foreseeable future.

Columbia and Nuclear Project No. I are governed by the The following table describes the changes to Energy NRC regulations and site certification agreements between Northwest's ARO liabilities for the year endedJune 30, Energy Northwest and the State of Washington and 2010:

regulations adopted by the Washington Energy Facility Site ASSET RETIREMENT OBLIGATION (dollars in millions)

Evaluation Council (EFSEC) and a lease agreement with the DOE. (See Notes 1 and 13) Additionally, there are separate Columbia Generating Station lease agreements for land located at Nine Canyon. Leases at Balance At June 30, 2009 $ 117.09 these locations are considered operating leases and expenses Current year accretion expense 6.13 ARO at June 30, 2010 $ 123.22 were $38.3k for Columbia, $35.Ok for Nuclear Project No. 1 and $57 7.6k for the Nine Canyon project.

ISFSI As of June 30, 2010, Columbia has a capital Balance At June 30, 2009 $ 1.76 decommissioning net asset value of $17.1 million and an Current year accretion expense 0.09 accumulated liability of $123.2 million for the generating ARO at June 30, 2010 $ 1.85 plant, and for the ISFSI a net asset value of $1.1 million and Nuclear Project No. 1 an accumulated liability of $1.8 million.

Balance At June 30, 2009 $ 14.77 An adjustment was made in FY 2010 for Nuclear Project Less: Restoration costs incurred 1-.10)

No. 1 to account for costs incurred for decommissioning Current year accretion expense 0.77 and site restoration. Costs incurred in FY 2010 of $0.1 Revision in future restoration estimates (0.14)

ARO at June 30, 2010 '$ 15.30 million combined with the current year accretion expense of $0.8 million and downward revision in future restoration Nine Canyon Wind Project estimates of $0.1 million resulted in a small increase to Balance At June 30, 2009 $ 1.09 the ARO of $0.5 million. Nuclear Project No. 1 has a Current year accretion expense 0.05 capital decommissioning net asset value of zero and an ARO at June 30, 2010 $ 1.14 accumulated liability of $15.3 million.

Under the current agreement, Nine Canyon has NOTE 12 - DECOMMISSIONING AND SITE the obligation to remove the generation facilities upon RESTORATION expiration of the lease agreement if requested by the The NRC has issued rules to provide guidance to lessors. The Nine Canyon Wind Project recorded the related licensees of operating nuclear plants on decommissioning original ARO in FY 2003 for Phase I and II. Phase III the plants at the end of each plant's operating life (See began commercial operation in FY 2008 and the original Note 11 for Columbia ARO). In September 1998, the ARO was adjusted to reflect the change in scenario for NRC approved and published its "Final Rule on Financial the retirement obligation, with current lease agreements Assurance Requirements for Decommissioning Power reflecting a 2030 expiration date. As of June 30, 2010, Nine Reactors." As provided in this rule, each power reactor Canyon has a capital decommissioning net asset value of licensee is required to report to the NRC the status of its

$0.7 million and an accumulated liability of $1.1 million. decommissioning funding for each reactor or share of Packwood's obligation has not been calculated because a reactor it owns. This reporting requirement began on the time frame and extent of the obligation was considered March 31, 1999, and reports are required every two years under this statement as indeterminate. As a result, no thereafter. Energy Northwest submitted its most recent reasonable estimate of the ARO obligation can be made. report to the NRC in March 2009.

An ARO will be required to be recorded if circumstances Energy Northwest's current estimate of Columbia's change. Management believes that these assets will be used decommissioning costs in FY 2009 dollars is $877.0 million 68 Energy Northwest 2010 Annual Report

(Columbia - $872.7 million and ISFSI - $4.3 million). This NOTE 13 - COMMITMENTS AND CONTINGENCIES estimate, which is updated biannually, is based on the NRC minimum amount required to demonstrate reasonable Nuclear Project No. 1 Termination financial assurance for a boiling water reactor with the power Since the Nuclear Project No. 1 termination, Energy level of Columbia. Northwest has been planning for the demolition of Nuclear Site restoration requirements for Columbia are governed Project No. 1 and restoration of the site, recognizing the by the site certification agreements between Energy fact that there is no market for the sale of the project in Northwest and the State of Washington and by regulations its entirety, and to-date no viable alternative use has been adopted by the EFSEC. Energy Northwest submitted a found. The final level of demolition and restoration will site restoration plan for Columbia that was approved by be in accordance with agreements discussed below under the EFSEC onJune 12, 1995. Energy Northwest's current "Nuclear Project No. I Site Restoration."

estimate of Columbia's site restoration costs is $107.1 million in constant dollars (based on the 2009 study) and is updated Nuclear Project No. 3 Termination biannually along with the decommissioning estimate. Both InJune 1994, the Nuclear Project No. 3 Owners decommissioning and site restoration estimates (based Committee voted unanimously to terminate the project.

on 2009 study) are used as the basis for establishing a During 1995, a group from Grays Harbor County, funding plan that includes escalation and interest earnings Washington, formed the Satsop Redevelopment Project until decommissioning activities occur. Payments to the (SRP). The SRP introduced legislation with the State of decommissioning and site restoration funds have been made Washington under Senate Bill No. 6427, which passed and since January 1985. The fair value of cash and investment was signed by the Governor of the State of Washington on securities in the decommissioning and site restoration funds March 7, 1996. The legislation enables local governments as of June 30, 2010, totaled approximately $134.6 million and Energy Northwest to negotiate an arrangement and $20.6 million, respectively Since September 1996, allowing such local governments to assume an interest in these amounts have been held in an irrevocable trust that the site on which Nuclear Project No. 3 exists for economic recognizes asset retirement obligations according to the fair development by transferring ownership of all or a portion value of the dismantlement and restoration costs of certain of the site to local government entities. This legislation Energy Northwest assets. The trustee is a non-U.S. Treasury also provides for the local government entities to assume bank that certifies the funds for use when needed to retire the regulatory responsibilities for site restoration requirements asset. The trust is funded by BPA ratepayers and managed and control of water rights. In February 1999, Energy by BPA in accordance with NRC requirements and site Northwest entered into a transfer agreement with the SRP certification agreements; the balances in these external trust to transfer the real and personal property at the site of funds are not reflected on Energy Northwest's Balance Sheet. Nuclear Project No. 3. The SRP also agreed to assume Energy Northwest established a decommissioning and regulatory responsibility for site restoration. Therefore, site restoration plan for the ISFSI in 1997. Beginning in Energy Northwest is no longer responsible to the State of FY 2003, an annual contribution is made to the Energy Washington and EFSEC for any site restoration costs.

Northwest Decommissioning Fund. These contributions are held by Energy Northwest and not held in trust by BPA. Nuclear Project No. 1 Site Restoration The fair market value of cash and investments as of June 30, Site restoration requirements for Nuclear Project No. 1 2010, is $0.8 million. These contributions will occur through is governed by site certification agreements between Energy FY 2029; cash payments will begin for decommissioning and Northwest and the State of Washington and regulations site restoration in FY 2025 with equal installments for five adopted by EFSEC, and a lease agreement with the DOE.

years totaling $2.06 million in constant dollars based on the Energy Northwest submitted a site restoration plan for 1997 study. Nuclear Project No. I to EFSEC on March 8, 1995, which 2010 FINANCIAL DATA & INFORMATION 69

complied with EFSEC requirements to remove the assets obtained by writing to: Northwest Open Access Network, and restore the sites by demolition, burial, entombment, or NoaNet Headquarters, 5802 Overlook Ave. NE, Tacoma, other techniques such that the sites pose minimal hazard WA 98422. Any information obtained from NoaNet is the to the public. EFSEC approved Energy Northwest's site responsibility of NoaNet. PwC has not audited or examined restoration plan onJune 12, 1995. In its approval, EFSEC any information available from NoaNet; accordingly, PwC recognized that there is uncertainty associated with does not express an opinion or any other form of assurance Energy Northwest's proposed plan. Accordingly, EFSEC's with respect thereto.

conditional approval provides for additional reviews once the details of the plan are finalized. A new plan with Other Litigation and Commitments additional details was submitted in FY 2003. This submittal Energy Northwest v. United States of America filed in was used to calculate the ARO discussed in Note 11. U.S. Court of Federal Claims inJanuary 2004 (Cause No.

04-0010C). This is an action for breach of contract and Business Development Fund Interest in breach of implied covenant of good faith and fair dealing Northwest Open Access Network brought by Energy Northwest against the United States The Business Development Fund is a member of the (Department of Energy, "DOE") for damages for DOE's Northwest Open Access Network (NoaNet). Members failure to meet its legal obligations to accept and dispose formed NoaNet pursuant to an Interlocal Cooperation of spent nuclear fuel and high-level radioactive waste per Agreement for the development and efficient use by the the contract. Energy Northwest's claim is in the amount members and others of a communication network in of $56.8 million. A bench trial was conducted in February conjunction with BPA. 2009. The Court issued its opinion in February 2010, The Business Development Fund has a 7.38 percent awarding Energy Northwest 100 percent of its claim. The interest in NoaNet with a potential mandate of an Government has appealed the trial court's decision. No additional 25 percent step-up possible for a maximum 9.23 time frame has been provided for when the appeal will be percent. NoaNet has $16.4 million in network revenue concluded. Energy Northwest is accounting for this lawsuit bonds and note payables outstanding, based on their as a gain contingency and therefore has not recorded any June 30, 2010, unaudited statements. The members are amounts as receivable within the financial statements.

obligated to pay the principal and interest on the bonds Energy Northwest is involved in other various claims, when due in the event and to the extent that NoaNet's legal actions and contractual commitments and in certain Gross Revenue (after payment of costs of Maintenance claims and contracts arising in the normal course of and Operation) is insufficient for this purpose. The business. Although some suits, claims and commitments are maximum principal share (based on step-up potential) that significant in amount, final disposition is not determinable.

the Business Development Fund could be required to pay In the opinion of management, the outcome of such is $1.7 million. It is important to note that the Business litigation, claims or commitments will not have a material Development Fund is not obligated to reimburse losses of adverse effect on the financial positions of the business units NoaNet unless an assessment is made to NoaNet's members or Energy Northwest as a whole. The future annual cost based on a two-thirds vote of the membership. In FY 2010 of the business units, however, may either be increased or the Business Development Fund contributed $112k to decreased as a result of the outcome of these matters.

NoaNet based on assessments by the NoaNet members.

This equity contribution was reduced to zero at year-end NOTE 14- DERIVATIVE INSTRUMENTS because NoaNet had a negative net equity position of $6.2 GASB Statement No. 53, 'Accounting and Reporting for million as of June 30, 2010. Future equity contributions, Derivative Instruments" was adopted for FY 2010. Energy if any, will be treated the same until NoaNet has a positive Northwest's policy is to review and apply as appropriate equity position. Financial statements for NoaNet may be the normal purchase and normal sales exception under 70 Energy Northwest 2010 Annual Report

GASB No. 53. Energy Northwest has reviewed various was based on the futures price curve for the Mid-Columbia contractual arrangements to determine applicability of Intercontinental Exchange for electricity and the Sumas this statement. Purchases and sales of nuclear fuel and index for natural gas. This contract has an end date of June components that require physical delivery and are expected 2013. Assets associated with the call options are classified on to be used and/or sold in the normal course of business are the Balance Sheet as current assets (prepayments and other generally considered normal purchase and normal sales. for $53K) and deferred charges (other deferred charges)

These transactions are excluded under GASB No. 53 and of $1.0 million for the remainder of the call option value.

therefore are not required to be recorded at fair value in the The measurement of the fair value of the call options financial statements. Certain contracts for power options are classified as non-operating revenue and expenses were evaluated and the following contract did not meet the -investment income on the Statements of Revenues, exclusion for normal purchase and normal sale: Experises and Changes in Net Assets.

Call options valued at $1.1 million with a notional amount of 50 MWh. The fair value of the option contract CURRENT DEBT RATINGS (Unaudited)

Energy Northwest (Long-Term) Net-Billed Rating Nine Canyon Rating Fitch, Inc. AA A-Moodys Investors Service, Inc. (Moodys) Aaa A3 Standard and Poor's Ratings Services (S &P) AA A-2010 FINANCIAL DATA & INFORMATION 71

II.